Practice Exams Flashcards

Question

A customer receives a voting proxy from a broker-dealer for shares owned by the customer and held in street name. The customer returns the proxy but later decides to attend and vote at the shareholder meeting in person. The voting proxy a. deemed, already counted b. once signed not replaced c. rescinded in writer d. revoked, only vote at meeting count

Answer 1

d. revoked, only vote at meeting would count A proxy is automatically revoked if the stockholder attends the shareholder meeting and votes. Additionally, a proxy is revoked if another is executed later.

Answer 2

d. I, III, II, IV For corporate bankruptcies, the liquidation priority is as follows: wages, taxes, secured debtholders, unsecured debtholders (including general creditors), holders of subordinated debt instruments, preferred stockholders, and common stockholders.

Answer 3

a. Roth IRA The Roth IRA has no specific requirement that the participant receive distributions. In all of the other plans, generally, upon reaching age 70 ½, minimum distributions must commence no later than the following April 1.

Answer 4

b. these funds may be loaned from one FRB bank to another Federal funds are the excess amounts above the amount of a bank's deposits required to be held on reserve at the FRMember banks can lend these funds to one another to meet the FRB reserve requirements. These loans are very short term and, in most cases, are utilized overnight.

Answer 5

b. jail sentence A jail sentence is not within the jurisdictional powers of FINRA. However, censure (generally meant to mean public disclosure), fines, suspension of the membership of a member or suspension of the registration of an associated person for a definite period, expulsion of the member (canceling the membership of the member), and the barring of an associated person from association with all members (essentially barring one from the industry) are all sanctions under FINRA’s Code of Procedure. Additionally, imposition of any other fitting sanction is specified. However, this would not include criminal penalties such as a jail sentence.

Answer 6

a. II and III To be considered insider information, a fact must not be known to the general public and must be material, meaning that if it were public, the company could be strongly affected (either positively or negatively). Personal embarrassment to the CEO by itself is not sufficient, and any publication, even in an obscure technical journal, constitutes disclosure to the public.

Answer 7

d. invite PM see show together A gift of tickets to a single event would be permitted under the Conduct Rules. A scenario where a representative of the firm accompanies the guest would fall under the heading of normal business dealings and the requirement that gifts be of no more than $100 in value is waived.

Answer 8

c. call protection Some callable bonds have a feature known as call protection, which essentially limits the issuer from calling them in before a certain date. The length of the call is predetermined, and during this time, the investor knows that the bind cannot be called away.

Answer 9

d. FSLIC Self-regulatory organizations (SROs) function under the SEC's oversight. Each SRO is accountable to the Commission for enforcing federal securities laws, as well as supervising securities practices within an assigned jurisdiction. These include FINRA, MSRB, and the CBOE.

Answer 10

c.A contract must have been signed by the registered person and the firm specifying what commissions are still to be paid. A registered person who has left the industry, whether through retirement or otherwise, is no longer registered and may not receive commissions for any new work from a FINRA member firm. If there are commissions from work done when the person was registered that have not yet been paid, they may be paid, provided that a written contract was signed by both parties specifying precisely what is due. The contract may, but is not required to, direct that continuing commissions be paid to the person’s spouse in the event of the formerly registered person’s death.

Answer 11

c. 25 days For new issues that qualify for listing on an exchange or Nasdaq, the prospectus delivery requirement period in the aftermarket is 25 days. For nonlisted and non-Nasdaq securities, the period is 40 days. If the new issue will be specifically quoted on the OTCBB or the electronic OTC Pink, the period is 90 days.`

Answer 12

c. current maximum allowed by IRS, which will all be deductible if the individual does not exceed income limit While the exact annual contribution limit numbers are not likely to be tested, students should know that for those not covered by a retirement plan at work, the maximum contribution allowed by the IRS would be permitted and can be deducted on one’s tax return. The deduction, however, would be phased out above a certain income level. The catch-up provision only applies to those age 50 or older.

Answer 13

a. short bearish position With no other existing positions, this sale transaction would have to be opening a position. Sell to open a position = short = bearish.

Answer 14

d. III and IV Paying a dividend would reduce the net assets of the fund without reducing the number of shares outstanding, which would reduce the NAV per share. A decline in the market value of the portfolio would have the same effect. Sales and redemptions of shares change the net assets but also change the number of shares outstanding to the same degree, leaving the NAV per share unchanged. Selling securities for a capital gain simply replaces securities in the portfolio with an equivalent amount of cash, leaving the NAV unchanged.

Answer 15

a. adjustment bond, unsecured Income bonds or adjustment bonds are used when a company is reorganizing. The bonds only pay interest if the corporation has enough income to meet the obligations on the debt issue and are therefore unsecured.

Answer 16

d. 8.5% of total investment Though they are almost always much smaller, sales charges for Class A shares may not exceed 8.5% of the money invested. For example, if an investor spends $1,000 for Class A shares, no more than $85 may be charged as a sales load.

Answer 17

c. salary paid to client by employer Non-financial considerations are those for which there is no monetary relationship. Clearly, the client’s salary is one of the most important of the financial considerations.

Answer 18

a. purchasing power risk Inflation can generally be associated with diminished purchasing power—purchasing power risk. During times of inflation, a dollar will not be able to purchase what it had previously in the way of goods and services. Investments such as bonds paying fixed rates of return are negatively impacted during these times.

Answer 19

d. ETF are commissionable Trading on exchanges, ETFs are priced throughout the trading day making them easy to trade and liquid. They can also be bought or sold on margin. The purchase or sale of ETF shares is a commissionable transaction. However, the commissions paid can erode the low expense advantage of ETFs and this would have the greatest impact when trading in and out of ETF shares frequently, or when investing smaller sums of money.

Answer 20

c. convertible Fixed-dollar investments, such as bonds and preferred stock, are subject to inflation risk, which is the risk that the fixed interest or dividend payments will be worth less over time in terms of purchasing power. The ability to convert to common stock, which tends to keep pace with inflation, offsets this risk.

Answer 21

c. partner might jeopardize the limited liability While LPs can vote on overall business objectives, they cannot vote on any day-to-day operational business decisions. A limited partner having any control over the partnership's day-to-day operations could be judged a general partner and lose LP status.

Answer 22

b. at or before time of account approval The options disclosure document (ODD) explains options strategies, risks, and rewards and is designed to provide full and fair disclosure to customers before they begin options trading. It must be provided at or before the time the account is approved.

Answer 23

c. political and currency By having a portfolio made up of only domestically listed U.S. securities, the investor is primarily avoiding political risk and currency risk. Political risk is attributable to political instability, rarely associated with U.S. domestic markets. Currency risk is most prevalent when buying or selling involves a foreign currency that can fluctuate in value against the U.S. dollar. While these 2 are avoided, the investor could still be exposed to each of the other risks listed here.

Answer 24

c. at least one GP and one LP Limited partnerships are required to have at least one general partner and one limited partner.

Answer 25

a. I and III Firms must agree in their membership application that they will comply with all federal securities laws and make payment of dues and assessments when requested. Although qualification exams must be passed by individuals representing the firm, there is nothing requiring the firm itself to do so, nor is attendance at FINRA conferences required.

Answer 26

a. depletion allowances Tax deductions that compensate an oil and gas program for the decreasing supply of the resource after it is taken out of the ground and sold are known as depletion allowances.

Answer 27

b. turn the complaint over to the appropriate supervisor or principal Any representative receiving a written customer complaint is required to turn the complaint over to a supervisor or principal without delay.

Answer 28

b. hold the rights for possible LT capital gain A long-term capital gain would require a holding period of more than 1 year. Rights expire 4 to 6 weeks after issue, so this would not be possible.

Answer 29

d. an unaffiliated shareholder owning 8% of the outstanding shares By virtue of their positions, directors and officers are considered control persons and any stock they own, no matter how little, is considered control stock. To be considered a control person, an unaffiliated person would have to own 10% or more of the voting (outstanding) shares.

Answer 30

a. private (nonpublic) securities offering Public securities offerings must be registered under the Securities Act of 1933. These would include initial public offerings (IPOs), additional public offerings (APOs), and shelf offerings. Issuers choosing to offer securities privately may find relief (are exempt) from the registration provisions of the Securities Act of 1933.

Answer 31

b. ex dividend Declaration, record, and payment dates are determined by the board of directors (BOD), but FINRA, or the exchange, determines the ex-dividend date.

Answer 32

c. give red herring to prospective investors During the cooling-off period, red herrings (preliminary prospectuses) may be distributed and tombstone advertisements may be published. Indications of interest can be taken but are nonbinding on all parties. Sales literature may not be distributed during the cooling-off period.

Answer 33

c. known as a naked short sale and is prohibited In order to open a position with a short sale, the shares to be sold must be borrowed or located to be borrowed first. Not doing so is known as selling short naked (naked short sale) and is prohibited.

Answer 34

a. 4% If a bond pays 2 interest payments of $20 each annually, this means that the total annual interest is $40. Annual interest ($40) divided by par ($1,000) equals the nominal, stated, or coupon yield (0.04 or 4%).

Answer 35

a. short broker dealer The exercise and assignment process is as follows: A long customer notifies its broker-dealer (long broker-deal). The long broker-dealer notifies OCOCC then assigns the short broker-dealer, who will then in turn assign its short customer.

Answer 36

d. breakpoint sale violation In a breakpoint sale, a customer unknowingly buys investment company shares in an amount just under a dollar bracket that would qualify for reduced sales charges. As a result, the registered representative receives a somewhat higher commission but the customer pays higher sales charges, reducing the number of shares purchased and resulting in a higher cost per share.

Answer 37

b. gains gotten from sale of securities Gains gotten from the sale of securities is an example of capital gains for tax purposes. All the others are considered ordinary income.

Answer 38

c. cash or fully paid for marginable securities Margin calls can be met using either cash (100% of the call) or fully paid for marginable securities (twice the amount of the call because securities are only marginable to 50% of their value).

Answer 39

b. capital markets provide intermediate to long term financing The capital market serves as a source of intermediate to long-term financing. The money market, on the other hand, provides short-term financing.

Answer 40

b. II and III Buyers of options pay the premiums for the contracts, and writers (sellers) receive the premiums. If the contract goes unexercised, the buyer loses the premium paid while the seller gets to keep it—a gain.

Answer 41

d. SEC Created under the Securities Exchange Act of 1934, the overriding or primary securities industry regulatory body is the Securities and Exchange Commission (SEC).

Answer 42

b. a suspended broker who recommends the brokers firm for a transaction Foreign nonmember firms and retired brokers (and their spouses in the event of their death) may all receive commissions from a FINRA member firm, provided specific requirements are met in each case. A suspended or expelled person, however, must always be treated like any non-FINRA member or member of the public.

Answer 43

b. semiannually Treasury bonds (T-bonds) and notes (T-notes) pay interest on a semiannual basis.

Answer 44

d. will receive upon redemption of shares The NAV per share of a mutual fund is calculated by dividing the net assets of the fund by the number of shares outstanding. When purchasing Class A shares, NAV plus a sales charge is paid. When redeeming the shares, the investor simply receives NAV. Remember that for purchases and redemptions of mutual fund shares, the next calculated NAV per share is used, a practice known as forward pricing. Therefore, when purchasing or redeeming shares, because mutual funds use forward pricing, the investor can never be certain of the exact price that will be paid or received when entering the order.

Answer 45

d. has the right to purchase 100 shares of underlying stock Equity options buyers have the right to purchase shares of the underlying security. One equity option contract represents 100 shares of the underlying security; therefore, the call owner has the right to purchase 100 shares of the stock.

Answer 46

c. call buyers want the contract to be in the money At expiration for all options (calls and puts), buyers want the contracts to have intrinsic value—therefore, be in the money. Writers, on the other hand, want the contracts to be either at or out of the money and therefore have no intrinsic value.

Answer 47

c. is designed to deter gaining political favor by employing what is commonly known as "pay to play" The rule is designed to deter what is commonly called pay to play. It makes it unlawful for an adviser to receive compensation (fee) for providing advisory services to a government entity for a 2-year period after the adviser makes a political contribution to a public official of a government entity.

Answer 48

c. short term gains are those realized on positions held for 12 months or less Profits on positions held 12 months or less are considered short-term gains. For those positions held longer than 12 months, the gains are considered long term and taxed at a more favorable rate.

Answer 49

d. the 7% shares are like to be called When interest rates fall, callable preferred shares are likely to be called. This allows the issuer to cease the higher dividend payments and reissue shares with lower dividend payments that align more with the current interest-rate environment. With interest rates now at 3%, the issuer would have no desire to issue more 7% shares, nor could they reduce the fixed dividend on these 7% shares. If the shares were convertible, conversion would be at the discretion of the shareholders, not the issuer.

Answer 50

a. not purchase shares of a new issue Persons characterized as restricted persons are prohibited from purchasing shares of new issues in any quantity. If one is already restricted, working for a bank or a BD does not exempt them from the rule.

Answer 51

d. freely transferable Common stock is freely transferable to anyone who wants to buy it or receive it as a gift. In this regard, shareholders have the right to sell or give away their shares without permission of the corporation.

Answer 52

c. the order must be approved by principal prior to entry Each discretionary order must be identified as such at the time it is entered for execution, a principal, officer or a partner of the BD must approve each order promptly and in writing, but not necessarily before order entry, a record must be kept of all transactions including discretionary ones, and as with all trading activity, it is subject to frequent and systematic review by a designated supervisor or manager.

Answer 53

d. emerging economies, but could occur in highly developed ones. While political risk, the potential instability in the political climate of a country or market, is mostly associated with emerging economies, it must be recognized that it can occur even in highly developed ones as well.

Answer 54

c. BD may apply to designated DEA for extension In the event of late margin deposit, requests for extensions are made by the broker-dealer to the firm’s designated examining authority (DEA).

Answer 55

b.Member firms can offer all types of investment products, such as stocks, bonds, mutual funds, options and others, or limit the products they offer to only a few Member firms can offer all types of investment products, such as stocks, bonds, mutual funds, and derivatives like options and others (be full service), or limit the products they offer to only a few. They need not adopt proprietary trading into their business model but can if they wish to. Likewise, they need not accommodate doing business with retail customers if they wish to deal only with other industry professionals, such as institutional investors.

Answer 56

d. short call The greatest potential risk has to do with the maximum loss potential. If the market is rising, the greatest potential risk posed by an option position is a short naked call because the potential maximum loss is unlimited.

Answer 57

c. II and IV Rules prohibit the sale of a new equity issue to other brokers, partners, officers, employees of firms in the syndicate or selling group offering the issue, and their immediate or supported family members. For purposes of this rule, aunts, uncles, and grandparents are not considered immediate family.

Answer 58

b. register with them All SROs, such as FINRA, require member firms and associated persons to be registered with them. Some firms may transact business with other members, or the public, or both. There is no requirement that a member firm be organized as a corporation.

Answer 59

b. name of broker dealer Securities held in street name are registered in the name of the BD, who is the named or nominal owner. The customer remains as the beneficial owner.

Answer 60

d. bond mutual fund may issue bonds A bond mutual fund invests in the bonds of other companies. It may not itself issue bonds or preferred stock. They can only issue common shares. Closed-end companies are much like any other company. They may issue bonds and preferred stock, once they have sold common stock and become a publicly traded company.

Answer 61

d. FRB at discount rate A Federal Reserve Board member bank can increase its reserves by borrowing from the Federal Reserve Bank directly, or it can borrow from another FRB member bank. When borrowing from the FRB directly, a bank will pay the discount rate. When borrowing from another member bank, a bank will pay the federal funds rate.

Answer 62

d. Customer is immediate family member of RR There are two exceptions to the written notice and approval requirement for permitted lending arrangements between customers and RR’s. They are; when both are immediate family members or when the customer is a lending institution and the loan is a standard commercial lending transaction.

Answer 63

b. forward, even split Because the customer ended up owning more shares, the split must have been a forward split. Because the number of shares was increased by an integral factor (3 in this case) the split was an even split. Three shares were received for every one previously owned.

Answer 64

d. willful failure to disclose bankruptcy or unsatisfied lien A willful misstatement or omission made on an application for membership or registration as an associated person is deemed a serious infraction of securities law that would likely lead to a statutory disqualification from the securities industry. The Form U-4 does not ask about motor vehicle fines per se. Felonies have to be disclosed, but not all felonies are statutory disqualifications.

Answer 65

c. I and II States have two ways to register (or blue sky) securities: coordination and qualification. Notice filing is used solely for those securities that are referred to as federal covered, such as those listed on the NYSE, NASDAQ, or any national securities exchange and investment companies registered under the Investment Company Act of 1940. In this case, the states do not have jurisdiction over the registration requirements of these securities. However, the Uniform Securities Act does provide for states requiring a filing of a notice along with a filing fee to sell securities in that state.

Answer 66

c. smaller banks lower lending rates When large money center commercial bank lower the prime rate, the rate charged to their most creditworthy corporate customers, smaller banks will generally follow in order to stay competitive. The discount rate is set by the FRB (not banks), and if the broker call loan rate banks charge is impacted, it would also be lowered (not increased).

Answer 67

b. federal funds rate The federal funds rate is the rate banks charge each other for overnight loans of $1 million or more. With overnight representing the shortest of loans and short-term interest rates being the most volatile, this rate is considered to be the most volatile of all the benchmark interest rates.

Answer 68

c. variable annuities Annuities, variable or fixed, are in most cases acceptable investments appropriate for IRAs.

Answer 69

a. shares may be sold either on an exchange or over the counter Mutual fund shares are redeemable securities. Hence, they do not trade in the secondary market either on exchanges or over the counter. Instead, they may be purchased and redeemed only through the mutual fund company itself.

Answer 70

a. indications of interest before the effective date A preliminary prospectus cannot be distributed before the registration date. Between the registration and effective dates, it is used to solicit or gauge indications of interest. After the effective date, sales can be solicited and a final prospectus would be available and must be used to do so.

Answer 71

a. prison sentence Broker-dealers must comply with SEC rules and regulations when conducting business. A broker-dealer that does not comply is subject to censure, limits on activities, functions, operations, suspension of its registration (or one of its associated person's license to do business), revocation of registration, and/or fines.

Answer 72

d. t-notes While Treasury securities (bills, notes, and bonds) are exempt from Regulation T margin requirements, purchases of them on margin are allowed and would be subject to the firm’s determination of what the initial margin deposit requirement should be.

Answer 73

b. education Although there is a place to disclose certain earned professional designations such as CPA and CFA, there is no requirement to disclose education (degrees or designations). Time spent as a full-time student however would be included in the 10-year employment history.

Answer 74

c. market order When a liquid market exists, buy or sell market orders are executed at the best available price immediately.

Answer 75

c. income program An oil and gas DDP that invests in wells that are already producing is known as an income program. Exploratory programs are drilling new wells in search of new deposits.

Answer 76

b. II and III The bond is offered with a YTM of 8.25%. Because the YTM is higher than the 8% coupon, the bond is trading at discount to par. For discount bonds, the nominal yield is lower than both the current yield and the yield to maturity.

Answer 77

d. nominal yield The coupon on a bond, also known as the "stated or nominal yield" indicates the annual interest paid. For example, a 4% bond pays $40 of interest per year (0.04 × $1,000 par).

Answer 78

c. 200 For any long option (call or put), the maximum loss potential is the premium initially paid—in this case, 2 points ($200).

Answer 79

a. fee based accounts are most suitable for those who do very little trading during the year Fee-based accounts charging a fixed dollar amount or a percentage of assets under management are more suitable for those doing at least a moderate amount of trading. Commission based accounts charging for each transaction on the other hand are better suited for those who do fewer transactions each year. For fee-based accounts full disclosure of what is covered by the annual fee must be made before the account can be opened.

Answer 80

b. SEC Any entity such as a broker-dealer intending to do business with other BDs or customers involving securities must be registered with the Securities and Exchange Commission (SEC).

Answer 81

d. treasury STRIPS When the U.S. government deposits securities with a trustee, against which it issues certificates representing principal payments only, and no regular interest payments, these are known as Treasury STRIPS.

Answer 82

a. a later final maturity within a serial issue of bonds that contains a disproportionately large percentage of the principal amount of the original issue A balloon maturity is generally distinguished from term bonds by the presence of serial maturities in the years immediately preceding the final maturity date. While some of the principal is paid back on the serial dates, the major portion of the principal is paid back on the final maturity date.

Answer 83

c. be unaffected by open market interest rates Though the price of a bond will react to market forces, such as supply and demand, and be interest-rate sensitive (inverse), the coupon is always the same: A fixed percentage of par value established by the issuer when the bond was first issued.

Answer 84

c. introducing / fully disclosed A fully disclosed "introducing" broker-dealer is what the word implies—it introduces its customer's business to a clearing firm. Clearing firms (often called carrying firms or agents) hold funds and securities and settle transactions (clear and process) for their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm's back office.

Answer 85

a. track single stock rather than hypothetical ones Indexes such as the DJIA or the S&P 500 are hypothetical portfolios, not single stocks. While there's no single standard or benchmark, an index can be used as a performance standard one can monitor and therefore judge the performance of a portfolio or investment against. When we refer to the stock market's performance in general, we are most likely referring to the performance of an index or average that tracks stocks or bonds. These benchmarks can serve as an indicator of the overall direction of the market as a whole, or the direction of individual market sectors.

Answer 86

a. I and IV Buying calls is bullish, and buying puts is bearish. Conversely, selling calls is bearish and selling puts is bullish.

Answer 87

c. I and II State laws require that broker-dealers with an office in the state, or those that direct calls into the state or receive calls from the state, be registered in that state. Registered representatives must register in a state if they are residents or if they solicit business in a state.

Answer 88

a. strike price, the price investor can purchase stock at For this contract, 35 is the strike price, which represents the price at which the investor has the right to purchase stock, and 5 represents the $500 premium paid for the contract.

Answer 89

a. pump and dump A form of securities fraud commonly known as “pump and dump” is the act of inflating (pump) the price of an owned stock by perpetrating false and misleading positive rumors, in order to sell the stock at a higher price later. Generally the shares owned are first accumulated at lower prices before the misleading information is doled out to the investing public.

Answer 90

d. should participate in day to day management of partnership General partners have a fiduciary responsibility to manage the partnership in the best interest of the investors (partners). In doing so, they make decisions regarding all day-to-day management of the business. These decisions are, therefore, legally binding on the business. GPs may not, however, borrow money from or compete with the partnership.

Answer 91

b. I and II Offering non-exempt securities (those that must be registered with the SEC) such as common stock to the public requires the registration of the securities under the Securities Act of 1933. The offering must be made by prospectus.

Answer 92

c. funds to pay in full must be available in account before order is entered Purchasing securities in a frozen account is permitted, but the funds to pay for the purchase in full must be available in the account before the order can be entered.

Answer 93

b. put buyer want the contract to be in the money At expiration, put buyers (like call buyers) want the contracts to have intrinsic value and, therefore, to be in the money. Put writers (like call writers) want the contracts to be either at or out of the money and, therefore, have no intrinsic value.

Answer 94

c. pledging customer securities as collateral Hypothecation is agreed to in the margin account agreement. The customer agrees to pledge the securities to be purchased on margin to the broker-dealer so that the broker-dealer can then pledge them to a bank as collateral for the margin loan.

Answer 95

d. interest rates rise Bonds with put features are most likely to be put back to the issuer when interest rates rise. For example, if a bondholder has a bond paying 4% and interest rates have risen to 6%, why settle for a 4% return when prevailing market rates are now up to 4%? Better to put the 4% bond back to the issuer for redemption and then purchase a new bond paying the prevailing higher rate. In this way, put features benefit the issuer.

Answer 96

b. employing firm If a registered representative is to be compensated for a trade done through another firm, the employing firm must run the trade on its own books and see to it that the representative is properly supervised. The firm where the outside trade will take place is, of course, responsible only for the actions of its own registered representatives.

Answer 97

a. common stock Common stockholders are always the last to be paid in the event of a corporate liquidation and, therefore, have the most risk.

Answer 98

b. bullish, hoping stock will rise Call owners have the right to purchase the stock. Being in a position to buy (own) the stock make them bullish. Bulls want stocks to go up.

Answer 99

b. term, serial or balloon The 3 types of maturities that bonds can typically be issued with are term, serial, or balloon maturities. Note that there is no "series" maturity type.

Answer 100

c. increases A $1,000 par value bond purchased at $725 is bought at a discount to par. Whenever a bond is purchased for an amount less than will be received at maturity ($1,000 par), the discount initially paid increases the return. In other words, in addition to receiving the coupon interest payments, the investor will also receive at maturity an additional $275 more than the $725 paid when the bond matures.

Answer 101

d. all have preference over issuers common shares Separate categories of preferred shares may differ in several ways, including dividend rate and profit participation privileges. However, all maintain preference over common stock shares issued.

Answer 102

b. firm reimburses for clerical errors A broker-dealer firm is there to provide a service. It may not enter into guarantees of profits, sharing of risk, or protection from loss for a customer, unless the loss is due specifically to an error by the firm.

Answer 103

c. debenture A debenture is a debt obligation of a corporation backed only by its word and general creditworthiness. Debentures are written promises of the corporation to pay the principal at its due date and interest on a regular basis.

Answer 104

c. depletion Write-offs (deductions) associated with leasing programs are those taken for operating expenses, depreciation of the equipment owned and leased, and interest costs on the loans to purchase the equipment. Depletion, however, is a deduction associated with natural resources programs, such as oil and gas.

Answer 105

c. II and IV A member firm holding stock in street name may vote the shares as it sees fit if the customer does not return the signed proxy statement by the 10th day before the shareholders’ meeting, and if the matters to be voted on are of minor importance. If the matters are of major importance (such as a change in the direction of the business or a merger or acquisition), the shares are simply not voted.

Answer 106

c. term Term bonds are structured so that the principal of the entire issue is all payable on the same date—the maturity date.

Answer 107

d. strike - premium Short puts are bullish. In wanting the stock price to rise, one's risk is that the stock falls in price below the breakeven point. The maximum loss occurs if the stock falls to zero. Therefore, the maximum loss on a short put is equal to the breakeven (strike price minus premium for puts).

Answer 108

b. I and III Rule 144 defines an affiliate as one who is in a control relationship with an issuer. Because the investors' combined ownership is at least 10% of the stock, they are control persons under Rule 144 and in order to sell, the mother must do so in compliance with the rule.

Answer 109

d. stock certificate books Certificate books on the stock issued by the firm must be kept as long as the firm is active. The general ledger and customer ledgers need only be kept for 6 years, and forms U-4 and U-5 regarding the firm’s associated persons need only be kept for 3.

Answer 110

a. the discount at par considered interest received at maturity T-bills are purchased at a discount to par. In this case, it is bought at $9,925, which is a $75 discount to the $10,000 par value to be received at maturity. Debt instruments pay interest not dividends, and the $75 difference between what was paid and what will be received is considered the interest paid on the T-bill at maturity.

Answer 111

b. offering circular Municipal bonds are sold by offering circular, a document similar to a prospectus used in the sale of municipal securities. Because Section 529 plans are state sponsored, they must be sold by offering circular.

Answer 112

d. enactment of, or changes in laws, represent potential legislative risk The enactment of, or changes in, laws represent potential legislative risk, whereas enactment of, or changes in, regulations represent regulatory risk. Political risk is specific to potential political instability associated more with emerging economies.

Answer 113

a. ADR ADRs are a type of equity security that simplify foreign investing for Americans. An ADR is created when common shares are purchased in the foreign company’s home market. These shares are then deposited in a foreign branch of a U.S. bank and a receipt (the ADR) is created. The ADR trades in the U.S and is denominated in U.S. currency. A GNMA is a type of mortgage-backed security. A CMO is a mortgage-backed derivative. A STRIP is a zero-coupon Treasury security.

Answer 114

c. capital gains and income Upon the purchase of a security, the investors may receive dividends or interest, which are forms of income, or they may sell the security for a different price than was paid for it, which represents a capital gain or loss.

Answer 115

c. call buyers have the right to purchase the underlying, and put writers may be obligated to purchase underlying Buyers of options have rights, and writers (sellers) of options may be in an obligatory positon if the buyer exercises the contract. Call buyers have the right to purchase stock, and put buyers have the right to sell stock. Call writers may be obligated to sell the stock, while put writers may be obligated to buy the stock.

Answer 116

c. the difference between the bid price and ask price or offer A quote consists of a bid and an ask price. Dealers post their bid price—the price they are willing to pay for a stock—and their ask price—the price at which they are willing to sell the stock. The spread is the difference between the 2.

Answer 117

d. 1 Rule 144 pertaining to the sale of restricted or control stock allows for the sale of 1% of the outstanding shares or the weekly average of the last 4 weeks' trading volume (whichever is greater), every 90 days

Answer 118

d. debentures Corporate debentures are unsecured bonds backed by the good faith and credit of the issuing corporation; they are not secured by any underlying collateral.

Answer 119

b. whenever new account is opened and annually thereafter Privacy Notifications under Regulation S-P must be provided to customers whenever a new account is opened and annually thereafter.

Answer 120

d. grandparent of restricted Immediate family to a restricted person is a restricted person. This includes parents, in-laws, spouses, siblings, children, or any other individual to whom the person provides material support. Aunts and uncles as well as grandparents are not considered immediate family. If, however, one of these individuals lives in the same household as a restricted person, that individual would be a restricted person.

Answer 121

b. cash settlement If both parties to the trade agree, and if the buyer has the cash on hand and the seller has the securities on hand, trade and settlement can take place on the same day. This is known as cash settlement.

Answer 122

c. half as many shares at twice the original price If a stock price has become too low, for example for listing to continue on an exchange, a corporation may carry out a reverse stock split. In a 1 for 2 reverse split, the price of the stock is doubled, but the number of shares outstanding is halved. Any stock split, forward or reverse, must leave the total value of the outstanding stock unchanged before and after the adjustment.

Answer 123

a. recessions Economists call mild, short-term contractions recessions. Longer, more severe contractions are depressions.

Answer 124

d. The account will be frozen for 90 days and no new transactions can occur unless there is cash or marginable securities in the account before any other purchase is made. As a penalty for freeriding, an account will be frozen for 90 days and no new transactions can occur unless there is cash or marginable securities in the account before any other purchase is made.

Answer 125

c. offer a warrant on stock with each bond Warrants are sometimes offered as “sweeteners” attached to bond issues to improve the marketability of bond. Rights offerings and stock dividends do not apply in this case, and selling the bonds at a discount would be self-defeating because the issuer wouldn’t be able to raise the needed capital.

Answer 126

c. the general partners It is the investors in an LP who are the partners. Only the general partners, however, incur a fiduciary responsibility to run the partnership and use the invested capital in the best interest of all the investors (partners).

Answer 127

d. falling inventories When the economy is contracting, inventories tend to rise (not fall) due to a decreasing demand for goods.

Answer 128

d. II and IV Stock a broker-dealer holds in street name will be the subject of financial reports, proxy statements, and other material generated by the issuer that is important for the investor, the beneficial owner of the stock, to have. Accordingly, the broker-dealer must forward the material to the investor promptly.

Answer 129

b. purchasing power risk Inflation can generally be associated with diminished purchasing power—purchasing power risk. During times of inflation, a dollar will not be able to purchase what it had previously in the way of goods and services. Investments such as bonds paying fixed rates of return are negatively impacted during these times.

Answer 130

d. level load shares Class C mutual fund shares have no sales charge at the time of purchase, but have a percentage of their value withdrawn from the customer's account every quarter. The percentage, which can be as high as 0.75% of the value of the account, never ceases. The charge remains as long as the account does—it remains "level"—hence, the shares are known as level-load shares.

Answer 131

d. secondary market trading While all of these are characteristics of negotiable certificates of deposit issued by banks, it is the ability to trade the CDs in the secondary market that makes them negotiable.

Answer 132

d. commercial paper issued by corporations Corporations issue short-term, unsecured commercial paper, known as promissory notes. The proceeds from these notes are generally used to fund such items as pending accounts receivable and seasonal inventory gluts.

Answer 133

a. 18 months or more, 6 quarters The U.S. Commerce Department defines a depression as a decline in real output of goods and services lasting 18 months or more (6 quarters).

Answer 134

d. treasury strip STRIPS are Treasury bonds with the coupons removed. With no coupons, STRIPS do not make regular interest payments. Instead, they are sold at a deep discount and mature at par value.

Answer 135

b. purchase a put option Purchasing a put is a basic option strategy utilized when one is bearish on a stock. If the stock declines as anticipated, the investor could exercise the right to sell the stock at the strike price and then repurchase it at its lower current market price for a profit. The premium paid to buy the put costs less than the margin required if one were to sell the stock short. Purchasing a call or a call spread are bullish options strategies.

Answer 136

b. 10 years or more Treasury bonds (T-bonds) are the U.S. government's long-term debt instrument having maturities of 10 years and up to 30 years.

Answer 137

c. RR buys and sell same security for customer three times during single day Without further information, it would seem likely that trading the same security 3 times in one day would be viewed as excessive trading. Purchasing the incorrect amount, commingling and front-running are prohibited practices, but are not classified as churning (excessive transactions).

Answer 138

d. market letters The three categories of communications with the public designated by FINRA are retail, correspondence, and institutional. Market letters, as all sales or advertising pieces would, can fall under any of the three communications categories depending on to whom they are sent or made available to, and the number of recipients.

Answer 139

b. the accuracy and adequacy of registration documents is the responsibility of the underwriters While underwriters (broker-dealers and investment bankers) may assist the issuer in preparing and filing the registration statement, the accuracy and adequacy of the registration documents is the responsibility of the issuer. Full disclosure is also made on a number of issues, including but not limited to names and addresses of company officers and a description of how the sale proceeds will be used.

Answer 140

a. reinvestment risk Call risk is the risk that a bond might be called before maturity. Often when this occurs, investors who receive their principal back sooner than anticipated are left to find ways to reinvest that will achieve the same returns—reinvestment risk.

Answer 141

d. margin account Investors who choose to sell short eligible securities must satisfy Federal Reserve Board (FRB) margin requirements to do so. The margin requirement is a deposit of 50% of the sale proceeds in the customer’s margin account.

Answer 142

a. declaration date When a company’s board of directors (BOD) approves a dividend payment it is recognized as the date the dividend was declared; declaration date.

Answer 143

b. mortgage interest paid and depreciation Deductions for real estate programs come primarily from mortgage interest paid on the properties and the depreciation allowable for the properties.

Answer 144

a. an interest payment on a corporate bond Stockholders must receive notice from the issuer in the event of actions to shareholders, chiefly those that are unscheduled or unpredictable. Some examples are stock splits, dividend payments, and rights or warrant offerings. A scheduled interest payment on a corporate bond thus does not require delivery of notice.

Answer 145

c. long 900 shares at 15 The split is a “forward” split, which means the number of shares increases, while the price decreases. At 3:1, the number of shares goes up by a factor of 3 and the price goes down by a factor of one-third (i.e., to one-third of its previous value). The rule is that the total value of the position must remain unchanged before and after the adjustment. In this case, the original position’s value was 300 shares × $45, or $13,500. The new position is valued at 900 × $15, which is also $13,500.

Answer 146

a. carrying firm Carrying firms, also known as clearing firms, execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks such as sending trade confirmations and statements for themselves as well as for other broker-dealers classified as introducing, or fully disclosed firms.

Answer 147

d. churning Excessive trading in a customer’s account to generate commissions rather than to help achieve the customer’s stated investment objectives is an abuse known as churning. This can occur in both discretionary and nondiscretionary accounts

Answer 148

c. II and IV - Multiple purchases during down market - protecting short call option Any action to fix or stabilize the price of a security is pegging. Choice II would keep the price up, which would protect the holder of a long position; this is known as supporting. Choice IV would keep the price down, which would protect the holder of a short call; this is known as capping. Both constitute pegging.

Answer 149

b. an investment that permits both gains and losses to pass through to the investors LPs are investment opportunities that permit the economic consequences of a business to flow or pass through to investors (limited partners). These would include the consequences of both income received and losses incurred.

Answer 150

d. I and IV - buy calls, write puts The investor believes the stock's price will rise and therefore is bullish. Buying calls and writing puts are bullish strategies, while buying puts and writing calls are bearish strategies.

Answer 151

b. introducing / fully disclosed A fully disclosed "introducing" broker-dealer is what the word implies—it introduces its customer's business to a clearing firm. Clearing firms (often called carrying firms or agents) hold funds and securities and settle transactions (clear and process) for their correspondent introducing firms. Essentially, the clearing firm acts as the introducing firm's back office.

Answer 152

d. stagflation Stagflation is the term used to describe the unusual combination of inflation (a rise in prices) and high unemployment (stagnation). This generally occurs when the economy isn't growing (there is a lack of consumer demand and business activity), yet prices for goods are still rising.

Answer 153

c. semiannually and mature at par value Treasury bonds (T-bonds) and notes (T-notes) both pay interest semiannually and mature at par value.

Answer 154

c. secured debt is asset backed, while unsecured debt is not Corporations can issue both secured and unsecured debt securities. Secured debt issues are backed by real assets, while those that are unsecured are simply backed by the issuer's full faith and credit.

Answer 155

d. cash or fully paid for marginable securities Margin calls can be met using either cash (100% of the call) or fully paid for marginable securities (twice the amount of the call because securities are only marginable to 50% of their value).

Answer 156

c. the gift or compensation is preapproved by firms SRO Firms may not distribute gifts, gratuities, or compensation to the employees of other member firms unless the compensation is not conditional on sales or promises of sales, it has the employing member’s prior approval, and the compensation’s total value does not exceed the annual limit of $100 per person. Approval of the self-regulatory body the firm reports to is not a requirement or condition.

Answer 157

d. brokercheck FINRA makes available some key information about firms and representatives through its BrokerCheck service. This is available to anyone by calling the BrokerCheck hotline or online.

Answer 158

a. adjustment bonds Income bonds, also known as adjustment bonds, are used when a company is reorganizing. These bonds allow the issuer to only pay interest if the corporation has enough income to meet the interest payment obligations. This allows the corporation some flexibility while attempting to reorganize and emerge from bankruptcy.

Answer 159

d. bond A bond is best described as a certificate stating a borrower's obligation to pay back a specific amount of money on a specific date to an investor. A bond certificate also states the borrower's obligation to pay the investor a specific rate of interest for the use of the funds.

Answer 160

d. investment adviser under investment adviser act of 1940 Broker-dealers who provide advice for a fee are subject to registration under this 1940 IA Act. Agents of investment advisers must register and pass a qualification examination.

Answer 161

b. 25 capital loss If a security is sold for less than the original purchase price, the difference is called a capital loss. This would apply to both equity and debt securities.

Answer 162

d. II and III Buyers of options pay the premiums for the contracts, and writers (sellers) receive the premiums. If the contract goes unexercised, the buyer loses the premium paid while the seller gets to keep it—a gain.

Answer 163

a. put buyers want the contract to be in the money At expiration, put buyers (like call buyers) want the contracts to have intrinsic value and, therefore, to be in the money. Put writers (like call writers) want the contracts to be either at or out of the money and, therefore, have no intrinsic value.

Answer 164

b. real estate investment trust Though some REITs trade on exchanges and others may not, all REITs are nonexempt securities that must be registered with the SEC.

Answer 165

b. knowledge of activity An associated person cannot work for any business (independent activity) other than his member firm without his employing broker-dealer’s knowledge

Answer 166

b. 2 semiannual checks for 35 each Interest on corporate bonds is paid twice per year, or semiannually. The interest rate reported, however, is an annual rate. Thus a 7% bond would pay 7% of par ($1,000), or $70, per year as 2 semiannual checks for $35 each.

Answer 167

d. entering a closing positon for 500 shares of jkh In order to eliminate a position, long or short, the investor always takes an action opposite that of the one that began (opened) the position. Therefore, we always close the position with a closing order. In the case of a short position, we began with a sale, so we close with a purchase of the same security that was initially sold short—in this case, 500 shares of JKH.

Answer 168

d. raise its prime rate The prime rate and the broker call loan rate are set by banks for loans to corporate customers and broker-dealers, respectively. If the FRB tightens the money supply (makes less money available to lend), banks will need to charge more for loans and will raise their lending rates. The hypothecation process isn’t a rate, but a percentage amount (140% of the debit balance) and will not be impacted by the Fed’s action with the money supply.

Answer 169

a. no load funds Some funds distribute their own shares without using an underwriter and, hence, have no need to levy a sales charge. Because sales charges are also called sales loads, such funds are known as no-load funds.

Answer 170

d. negotiable certificates of deposit A negotiable certificate of deposit is an unsecured money market instrument issued by banks. Negotiable means that it can be traded in the secondary market and unsecured means that it is backed only by a promise to pay—a bank's good faith and credit.

Answer 171

a. 52 Whether long or short the call, the breakeven for a call is found by adding the premium to the strike price. For the call buyer, the contract is profitable above the breakeven. For a call seller, the contract stands to lose money if the price of MNO rises above breakeven.

Answer 172

a. code of procedure The Code of Procedure (COP) describes how member violations of the Conduct Rules will be heard and handled.

Answer 173

c. gains on other securities for positions held at least 12 months are not taxable Investment income, which includes capital gains realized on securities positons, is taxable. Depending on how long a security was held, the gains might be taxable at the investor’s ordinary income tax rate (for short-term gains) or at a more favorable long-term rate if the position was held for longer than 12 months.

Answer 174

b. I and II Control persons are always subject to volume limitations. Nonaffiliates have no volume (or any other restrictions) when selling registered stock. If, however, the shares are restricted, volume limits for nonaffiliates are imposed for 6 months.

Answer 175

b. loses the 300 premium paid The owner (buyer) of the call would have paid 3 ($300) for the contract. If the contract expires unexercised, the owner loses the $300 premium paid.

Answer 176

d. only negotiable CDs are considered money market instruments Banks issue and guarantee certificates of deposit (CDs) with fixed interest rates. Some that can be traded in the secondary market are known as negotiable CDs. Only these negotiable CDs are considered money market instruments.

Answer 177

b. stagnation Economic "stagnation" refers to prolonged periods of slow or little economic growth, unusually accompanied by high unemployment.

Answer 178

c. the firms ROP Initially, a branch office manager (BOM) can approve an options account. However, all options accounts must ultimately be approved by the firms registered options principal (ROP), and done so promptly.

Answer 179

b. sell the stock at the strike price The owner of a put (long) purchased the right to sell (to put) the stock at the strike price to those who are short the option. The exercise of their put is an instruction to assign the writer of the put, meaning the writer (short) must fulfill their obligation to buy the stock at the strike price.

Answer 180

d. proxy solicitation Proxies are permissible to be solicited. The SEC requires a company to give stockholders information about the items to be voted on and allow the SEC to review this information before it sends the proxies to shareholders.

Answer 181

c. a limited partnership Limited partnerships (LPs) pass through to investors (partners) a share in the income, gains, losses, deductions, and tax credits of the business entity.

Answer 182

d. very at reasonable intervals that customer instruction still apply If the BD chooses to hold customer mail, once requested to do so in writing the BD must verify at reasonable intervals that the customer’s instructions still apply. The rule regarding holding customer mail does not require the BD to request or get SEC or FINRA approval and there is no requirement that the customer make additional requests to continue having the BD hold mail.

Answer 183

d. 5 points no intrinsic value When a calls strike price is higher than the underlying stocks value, the call contract is out of the money. In this case, it is out of the money by 5 points (45 – 40). When a contract is out of the money, we say that it has no intrinsic value. We do not use the term "negative" when referring to contracts with no intrinsic value.

Answer 184

d. par value, 1000 The coupon rate on a bond is calculated as a percentage of par value. While par value can be any amount the issuer determines it to be, it is usually $1,000 for bonds and should be assumed to be so, unless it is indicated otherwise.

Answer 185

d. bonus received from employment Earned income is received as the result of participating in trade or business, the generation and/or sale of goods and/or services—in other words, from “work.” The other choices are earnings from investments and are known as portfolio income.

Answer 186

b. I and II Both closed-end funds and ETFs trade in the open market and are priced by supply and demand. Open-end (mutual) funds use forward pricing and generally price only once per day (usually at the end of the trading day). Most hedge funds are organized as private investment partnerships and are considered illiquid. Some have minimum holding requirements known as lock-up provisions, and in that light, their interests do not reliably trade intraday.

Answer 187

b. I and II Capital gains are associated with the sale or exchange of property including securities. The category of capital gain taxation is broken down into long and short-term capital gains. If an asset is sold within one year (12 months or less) of its purchase, the gain is considered to be short-term and taxed at the same rate as the taxpayer’s ordinary income. Therefore, for short term capital gains, the tax rates are the same as the taxpayer’s ordinary income. However, if the asset is held for more than one year, the gain is considered to be a long-term and is taxed at a favorable rate.

Answer 188

b. as low as zero or as high as infinity Any stock's price could move as low as zero or as high as infinity. That movement toward either of those points, and the market attitude of the option position employed (bullish or bearish), determines what the maximum gain, loss, or breakeven point is.

Answer 189

c. in the money by 2 points When a calls strike price is lower than the underlying stocks value, the call contract is in the money. The amount it is in the money is the difference between the 2—2 points (42 – 40).

Answer 190

d. only if it's listed as being restricted from doing so in the corporate charter As long as there are no restrictions against trading on margin in the corporate charter, corporate accounts may trade on margin.

Answer 191

b. two $30 interest payments per year Treasury note (T-note) annual interest is stated as a percentage of par value ($1,000) and is paid in semiannual payments. Therefore, a 6% T-note pays $60 per year in 2 payments of $30 each.

Answer 192

d. all reduce investor returns because they reduce amount of money available for fund to invest Sales loads go to the underwriters or broker-dealers selling the shares for the fund. Therefore, they are subtracted from the dollars invested and in that light reduce possible returns for investors. Management fees and operating expenses are ongoing costs to the fund and, therefore, reduce the dollars that can be invested, again reducing potential returns.

Answer 193

d. a bondholder to a put a bond back to the issuer for redemption at times that will benefit the bondholder A put feature attached to a bond allows a bondholder to put a bond back to the issuer for redemption before maturity. Bondholders will do this when interest rates have risen. For example, if a bondholder has a bond paying 4% and interest rates have risen to 6%, why settle for a 4% return when prevailing market rates are now up to 4%? Better to put the 4% bond back to the issuer for redemption and then purchase a new bond paying the prevailing higher rate. Obviously, the ability to put the bond back to the issuer benefits the bondholder.

Answer 194

d. purchasing power risk Purchasing power or inflation risk is a systematic risk. Capital risk, business risk, and call risk, among others, are nonsystematic risks, those that portfolio diversification can help to reduce.

Answer 195

c. backing away A market maker that does not honor its firm quote is said to be "backing away".

Answer 196

d. at parity The amount that an option is in the money is its intrinsic value (IV). In this case, 2.50 points (45 – 42.50 = 2.50). An option is at parity when the premium equals intrinsic value. The premium of 2.50 equals the contract's 2.50 IV; therefore, the option is at parity.

Answer 197

b. I and IV “Breakpoint sales” is an expression that means those sales that are just below the breakpoint. Allowing a sale to occur in an amount just below a breakpoint can be viewed as an effort by representatives to share in the higher sales charges. Capping is entering sell orders in a stock for the purpose of keeping the stock from rising above a certain price. Usually when this violation is detected it is in conjunction with someone who is short calls to keep the stock from rising above the strike price of calls in an effort to keep the contracts out-of-the-money and thus not likely to be exercised. Both of these violations are inconsistent with just and equitable principles of trade.

Answer 198

d. preferred stock Common and preferred stock are examples of an equity security. Bonds of any type by comparison are certificates of indebtedness—debt instruments

Answer 199

c. issuing general obligation GO bonds A municipality may be limited by statute regarding the amount of GO debt it may incur, thus limiting the GO bonds it can issue.

Answer 200

a. invest in commodities and currencies All the answer selections are applicable to both hedge funds and mutual funds except investing in commodities and currencies. Mutual funds are limited to investing in securities only. While commodities and currencies can be investments, they are not securities.

Answer 201

b. municipal revenue bonds Municipal revenue bonds are issued to finance any municipal facility that charges user fees. These municipal bonds are self-supporting because principal and interest payments are made exclusively from revenues generated by the project for which the debt was issued, such as a water and sewer facility billing the municipalities' customers for usage each month.

Answer 202

a. 3rd Friday of expiration month Listed options contracts expire on the 3rd Friday of the expiration month at 11:59 pm.

Answer 203

a. give one party the right to buy or sell underlying security Options contracts involve 2 parties: buyer and seller. One party (buyer) has the right to either buy or sell the underlying security, while the other party (seller) would have the obligation to fulfill the contra side of the buy or sell transaction.

Answer 204

b. common shares ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when common shares of a foreign issuer are purchased in the foreign company’s home market. These shares are then deposited in a foreign branch of a U.S. bank and a receipt (the ADR) is created. Each ADR may represent one or more shares of foreign-company stock held on deposit.

Answer 205

c. driver of high net worth individuals Registered broker-dealers must have fingerprint records made for most of their employees, including all directors, officers, and partners, those involved in sales and those who handle cash or customer securities. While a clerk handling all incoming mail is likely to be to in a position to handle cash or securities coming to the BD, a driver is not.

Answer 206

b. unlimited Maximum loss for a short call is unlimited. This could occur because the underlying stock can rise to some unlimited number.

Answer 207

d. III and IV Though a customer may be ill-advised, complying with it does not constitute improper use. To lend securities without a signed loan consent agreement does constitute improper use, as does borrowing the client’s funds without permission of the client, no matter how briefly the funds will be held.

Answer 208

b. convertible Convertible preferred shares can be converted into shares of the issuer's common stock. In this light, the value of a convertible preferred stock is linked to the value of the common stock and the convertible preferred share price tends to fluctuate in line with the common

Answer 209

c. III and IV The 2 types of municipal bonds are GOs and revenue bonds. Revenue bonds are not secured by a specific pledge of property; instead they are backed by project revenue. Unlike GO bonds, they are not subject to any statutory debt limits.

Answer 210

d. bonds To raise cash for short-term needs, such as accommodating accounts receivable or inventory needs, corporations would issue commercial paper (also known as prime paper or promissory notes). Bonds should always be associated with long-term debt financing.

Answer 211

c. reinvestment risk The inability to invest proceeds from an investment that had been earning a higher rate of return, at the now current lower rate, is known as reinvestment risk.

Answer 212

b. call risk, lead to reinvestment risk Call risk (the risk that when interest rates fall, issuers will call in existing callable debt) issues often leads to reinvestment risk for the investor. While receiving one's principal back sooner than expected, the investor is now left to reinvest at the now lower yield rates.

Answer 213

a. form U-5 FINRA requires that registered representatives complete both the regulatory and the firm elements of a continuing education program. In addition to satisfying FINRA requirements for registration, each state has its own requirements that must be satisfied before a representative can act in that state. A representative is not required to file a Form U-5. That form is filed by the member firm upon the termination of a registered representative for any reason. A copy will be provided to the departed representative.

Answer 214

d. warrants can be purchased on margin, but rights cannot Warrants are marginable securities, but rights are not.

Answer 215

b. unregulated but must abide by laws that investors be accredited Although hedge funds are unregulated (no SEC registration is required), there are laws requiring that those who purchase shares of hedge funds be accredited investors. That is, they must meet minimum annual income and net worth criteria, as well as have considerable investment knowledge

Answer 216

a. real time quotes are available which can be purchased throughout the day ETFs can be traded (purchased and sold) throughout the trading day. Changing price quotes are available in real time as investors buy and sell. Although ETFs have an NAV that is calculated on the basis of the portfolio holdings, the trading price is determined by supply and demand in the open market, with customers paying commissions (not sales charges).

Answer 217

d. employee of FINRA member engaged in municipal security representative activities such as underwriting and trading As per the Municipal Securities Rulemaking Board (MSRB), a municipal finance professional (MFP) is an associated person of a member firm who is primarily engaged in municipal securities representative activities, including underwriting, sales and trading, or any other activity that involves communications with the public regarding municipals.

Answer 218

b. t bills Money market securities are short-term (1 year or less) securities at the time of issue. Of the choices listed, only Treasury bills meet the short-term criteria at the time of issue.

Answer 219

d. I and II Use of degrees or designations may never be used in a misleading fashion nor can any reference to nonexistent or largely unknown designations be made. The use of designations is permissible so long as the compliance department of the firm has performed due diligence and is satisfied the credentials are bona fide and would be reasonably recognized as true tokens of expertise. Using educational degrees or securities registration licenses is permissible. To say that the representative is approved by FINRA to offer advice to seniors would likely bring heavy sanctions. The promotion of any stock is permissible so long as it is a balanced presentation with disclosure of the potential risks.

Answer 220

c. I and II Systematic risk is the risk that changes in the overall economy will impact securities regardless of the company's business. Examples of that are inflation (purchasing power) risk, interest-rate risk, and market risk. Business risk and regulatory risk are examples of nonsystematic risk, the kind of risk that might be unique to certain businesses or industries.

Answer 221

a. T bills are purchased at discount, T Bonds purchased at percentage of par T-bills are purchased at a discount, while T- bonds and T-note are purchased as a percentage of par. T-notes and T-bonds pay interest semiannually, but interest on T-bills is not paid until maturity (the difference between the discount paid and par value received).

Answer 222

b. reverse split Reverse splits are a way of increasing a company’s share price. In a reverse split, the number of shares outstanding decreases, but the price per share increases. As with all adjustments, a shareholder’s total position in the stock remains unchanged before and after the action.

Answer 223

b. US government and agency bonds Municipal securities are considered second in safety of principal only to U.S. government and agency issues.

Answer 224

a. bond credit rating Trade confirmations are required to include many details about the trade and the securities including, but not limited to, the trade date, description of the security, CUSIP number, commissions (not markups or markdowns) and more. There is no obligation for the firm to print the bond credit rating on the trade confirmation.

Answer 225

d. II and IV While there can be limited and rare exceptions, mutual funds are prohibited from purchasing securities on margin and selling securities short. Both strategies, however, are commonly employed by hedge funds.

Answer 226

a. three years from now New registered representatives are required to sit for the regulatory element as of their second anniversary. Thereafter, they are scheduled each three years. Having just completed her second anniversary regulatory element CE, she will be next scheduled in three years.

Answer 227

c. providing all partnership capital The general partner organizes and manages the partnership and assumes unlimited liability, responsible for paying all partnership debts. While some capital may also be provided by the GPs, it is the limited partners who provide the bulk of the capital.

Answer 228

a. pump and dump One form of securities fraud where an effort is made to push up the price of a stock that is currently owned by soliciting buy orders so that the stock can be sold later at a higher price is known as a pump and dump scheme.

Answer 229

c. treasury notes Treasury notes (T-notes) are the intermediate maturity (2–10 years) government-issued debt instruments. T-bills are short term (less than one year), and T-bonds are long term (10 years or more). Anticipation notes are short-term municipal-issued revenue notes.

Answer 230

a. By buying securities, the FRB puts money into the banking system, expanding the money supply and reducing interest rates. When the FRB buys securities via open-market operations, it is taking securities out of the banking system and putting money into the banking system. This expands the money supply and reduces interest rates. Conversely, when the FRB sells securities via open-market operations, it is putting securities into the banking system and taking money out of the banking system. This contracts the money supply and increases interest rates.

Answer 231

c. bullish on MAS the stock Those who sell put options may be obligated to buy the stock at the strike price if the contract is exercised by the owner. Being in a position to own the stock makes the investor bullish on the stock.

Answer 232

a. until October 7 of the following year The statute of limitations on fraudulent practices, under the Securities Exchange Act of 1934, is 3 years from the event itself, or one year from its discovery, whichever comes sooner.

Answer 233

a. a wash sale, taking the loss is prohibited Quickly repurchasing a security that was just sold for a loss is recognized as having the intention to take advantage of the loss for tax purposes but not lose the income or potential for future gains from the security. This is known as a wash sale and taking the loss is prohibited. For the loss to be allowed, the investor must wait at least 30 days before repurchase. Matched orders, pegging, and supporting are all prohibited activities meant to manipulate stock prices.

Answer 234

c. made by clearing firm Broker-dealers who are self-clearing will make their own extension requests. For those that are not self-clearing, known as introducing broker-dealers, the extension request must be made by the clearing firm.

Answer 235

d. 2% The stated MAS preferred dividend is 4%, participating up to 6%. In this year, when it has been determined that they should receive the full participating dividend, they will receive the additional participating 2%.

Answer 236

c. YTM will be lower than YTC For callable bonds trading at a discount, YTC will be the highest possible yield, higher than YTM, CY, and the coupon (stated or nominal) yield.

Answer 237

c. issuer to call in a bond before maturity at times that will benefit the issuer A call feature attached to a bond allows an issuer to call in a bond before maturity. Issuers will do this when interest rates have fallen. For example, if an issuer has an outstanding bond paying 6% and interest rates have fallen to 4%, why pay out 6% when prevailing market rates are only 4%? Better to call in the 6% bond and reissue a new bond at the current rate of 4%. Obviously, the ability to call in the bond benefits the issuer.

Answer 238

b. diversification Money laundering consists of moving illegally obtained funds into the financial system (placement), concealing its origins by the use of multiple transactions (layering), and then commingling it with legitimate funds in legitimate enterprises (integration). Diversification is an investment principle.

Answer 239

a. I and IV Straight preferred shares have no special features beyond the stated dividend payment. Any missed dividends are not paid to the holder, thus they are noncumulative; missed dividend payments do not accumulate.

Answer 240

c. customer is beneficial owner When securities are held in street name (the name of the broker-dealer), the BD is the named or nominal owner, but the customer is still the beneficial owner retaining all rights of ownership.

Answer 241

b. short call Short calls are bearish. Wanting the stock to go down the risk that the stock price will rise and, in theory, can go to infinity. Therefore, short calls carry unlimited risk. Of the 4 basic options positions, it is the only one with an unlimited loss potential.

Answer 242

a. portfolio securities had to be sold for big capital loss Selling securities out of the portfolio, whether for a gain or a loss, simply replaces the securities with an equivalent amount of cash, leaving the NAV per share unchanged. The other choices involve changes in net assets with no accompanying change in the number of shares outstanding, which would change the NAV per share.

Answer 243

a. option contracts Corporations issue equity securities (stock) and debt securities (bonds and debentures), but they do not issue options. Options are issued by the Options Clearing Corporation (OCC).

Answer 244

d. II and III This split reduced the number of shares, which makes it a reverse split. This investor now owns 400 shares when previously they had 500 shares, which would be expressed as a 4:5 split. Since neither number in the ratio is 1, it is an uneven split.

Answer 245

b. real estate investment trust Real estate investment trusts (REITs) do not require proof of financial status for investment. Limited partnerships and other DPPs can, particularly those that are offered privately (as private placements) as opposed to those that are offered publicly (by public offering).

Answer 246

d. location of any account records the corporation will keep when received Where the corporation keeps its records is of no concern to the broker-dealer. The broker-dealer will keep its own records on the account, in any event. All the other information noted must be ascertained before the account may be opened.

Answer 247

c. keeps the $400 received when call was written The writer (seller) of the call would have received 4 ($400) for the contract when it was written. If the contract expires unexercised, the writer keeps the $400 premium received.

Answer 248

d. sale of control and restricted securities Securities and Exchange Commission Rule 144 regulates the sale of control and restricted securities in the secondary market. The rule stipulates the holding period, quantity limitations, manner of sale, and filing procedures when divesting of control or restricted shares.

Answer 249

d. I and IV FINRA divides private securities transactions into two categories. If the associated person will receive compensation, the rules are more comprehensive requiring approval or disapproval. If approved, the firm must record the transaction on its books and records and supervise as if it were executed on behalf of the member firm. Trades with immediate family members are not included if there is no compensation. In other transactions where there is no compensation, written notice to the employer member is still required.

Answer 250

d. within 30 calendar days A suspicious activity report must be filed with FinCEN within 30 calendar days of the firm becoming aware of the suspicious activity. The suspected parties may not be informed that they are the subject of an SAR.

Answer 251

b. tender offer When a company offers to buy outstanding securities for cash or for cash plus other securities from its stockholders or bondholders this is known as a tender-offer. In contrast, a buyback, sometimes referred to as a repurchase, is when a company buys its own outstanding securities in the open market rather than appealing directly to its investors.

Answer 252

c. noncallable bonds If rates fall, bonds are likely to be called. Therefore, an investor who anticipates that rights might fall soon would look to purchase bonds that are not callable (noncallable). In this way, the investor is assured of receiving the coupon interest payments until maturity.

Answer 253

d. carrying firm Carrying firms, also known as clearing firms, execute trades, clear and settle transactions, take custody of customer funds and securities, and handle all back-office tasks such as sending trade confirmations and statements for themselves as well as for other broker-dealers classified as introducing, or fully disclosed firms.

Answer 254

a. 5 points and has no intrinsic value When a calls strike price is higher than the underlying stocks value, the call contract is out of the money. In this case, it is out of the money by 5 points (45 – 40). When a contract is out of the money, we say that it has no intrinsic value. We do not use the term "negative" when referring to contracts with no intrinsic value.

Answer 255

a. greater than 6.1 For bonds trading at a premium (101), the nominal yield (or coupon) is higher than the basis (YTM). For bonds at a premium, yields from lowest to highest are yield to call, yield to maturity, current yield, and nominal yield.

Answer 256

a. 2 $30 interest payments Treasury note (T-note) annual interest is stated as a percentage of par value ($1,000) and is paid in semiannual payments. Therefore, a 6% T-note pays $60 per year in 2 payments of $30 each.

Answer 257

a. The US dollar buy more goods produced in japan, the Japanese Yen buy fewer goods produced in US The strength of one country's currency against another impacts trade in between the two. The stronger currency (in this case the U.S. dollar) will buy more foreign goods, and the weaker currency (in this case the JY) will buy fewer goods produced in other countries.

Answer 258

d. monetary policy is what the FRB engages in when it attempts to influence the money supply Monetary policy is what the FRB engages in when it attempts to influence the money supply. Fiscal policy refers to governmental budget decisions enacted by the president and Congress to regulate federal spending and taxation, and those decisions impacting deficits and surpluses.

Answer 259

a. negotiable CD Corporations issue unsecured promissory notes known as commercial or prime paper. When a bank issues an unsecured promissory note, it is known as a negotiable certificate of deposit (CD).

Answer 260

a. supply side economic theory Supply-side economics holds that governments should allow market forces to determine prices of all goods. Supply-side adherents judge that the federal government should decrease government spending and taxes. In this way, sellers of goods will price them at a rate that allows them to meet market demand and still sell them profitably.

Answer 261

a. real estate investment trust

Answer 262

b. Treasury STRIPS are backed in full by US government, Treasury Receipts are not Brokerage firms can create and issue a type of bond known as a Treasury receipt from U.S. Treasury notes and bonds. Issued by financial institutions, they are not backed by the U.S. government. However, the Treasury Department has its own version of receipts known as Treasury STRIPS. Issued by the Treasury Department, they are direct debt obligations of the U.S. government.

Answer 263

a. prime rate The prime rate is set by money center banks, not the FRB. The remaining 3 answer choices are the tools available to the FRB to be used to impact the money supply.

Answer 264

c. the filing of fingerprint card with US attorney general A fingerprint card is required to be filed with the U.S. Attorney General to ensure that any criminal past that might result in statutory disqualification from association with a member firm is discovered.

Answer 265

d. slightly above other short term lending rates The broker call loan rate is the rate at which banks lend to broker-dealers for the purpose of lending money for margin loans. This rate is usually slightly above, by a percentage point or so, other short-term lending rates.

Answer 266

c. restricted Restricted securities are those acquired through some means other than a registered public offering. Securities purchased via a private placement are an example. These securities may not be sold (are restricted) until they have been held fully paid for 6 months.

Answer 267

a. borrows money from the business The general partner manages the business and acts as agent for the business for which they may receive compensation. They may not borrow from the partnership because this would be considered a conflict of interest.

Answer 268

d. pre-approval by broker dealer is required Any piece promoting securities services and / or products intended to be received by more than 25 retail customers within any 30 calendar-day period must be pre-approved by a principal before use. Given the intended placements of the piece there is no way to determine the exact number of retail customers who will be exposed to it and within what time frames and therefore it must be regulated as retail communications. It fits neither the definition of correspondence or institutional communications.

Answer 269

b. credit unions Credit unions cannot serve as a depository or clearing facility for securities transactions.

Answer 270

c. contract allowing securities to be pledged for the loan A signed hypothecation agreement permits the pledging of customer securities as collateral for margin loans.

Answer 271

b. bond current yield equals 65/1100 or 5.9% This bond is trading at a premium (110 or $1,100). Given the bond is trading at a premium, the current (stated) yield will be higher than its yield to maturity. A bond's current yield is calculated by dividing its annual interest ($65) by its current (market) price ($1,100), which in this case equals 5.9%

Answer 272

c. mutual funds Neither mutual funds nor new issues can be purchased on margin. However, both may be used as collateral for a margin loan after being held for 30 days. Options are not marginable securities, but equities, bonds, and warrants are.

Answer 273

a. limited partnership interest A disadvantage to limited partnership interests is the lack of liquidity. Of the choices above, direct participation programs such as limited partnership interests are generally deemed illiquid. Whereas municipal debt securities, preferred stock, and REITs are often freely traded in their respective marketplaces.

Answer 274

d. BOD elected by shareholders Most corporations are organized in such a way that their stockholders regularly vote for and elect individuals to a board of directors (BOD) to oversee company business operations.

Answer 275

a. earnings from referred business from existing clients would be eligible for payments Continuing commissions are permitted, but there is no requirement that they be offered. In order for a former registered representative to receive them, the terms must be spelled out in a contract entered into before termination. The contract may call for payment to heirs but cannot provide any compensation for business referred or introduced by an employee after that person ceases to be registered with the member.

Answer 276

d. serial Serial maturity bonds are all issued at one time and mature in successive years. Note that there is no "series" maturity type.

Answer 277

c. debt backed by another company, such as a parent company Guaranteed bonds are backed by a company other than the issuing corporation, such as a parent company. The value of the guarantee is only as good as the strength of the company making that guarantee (good faith and credit) because no physical assets back the bonds. Hence, these are unsecured debt instruments.

Answer 278

d. II and III; Dividend, market value Paying a dividend and suffering market decline both reduce the net assets of the fund without reducing the number of shares; hence, the NAV declines. Purchasing portfolio securities simply replaces portfolio cash with an equivalent value of securities; hence the NAV remains unchanged. Redemption of shares reduces the fund's net assets, but the number of shares declines by an equivalent proportion; hence, the NAV remains unchanged.

Answer 279

a. I, III, II, IV In the event of a corporate liquidation, the order of claims priority would be as follows: taxes (IRS) and wages, all debt instruments (secured first, then unsecured), preferred shareholders, and last of all claims, common shareholders.

Answer 280

a. fund is a no load fund The fund would be expected and required to make statements regarding its diversification status, its expense ratio, and the rate at which it pays its adviser. It definitely may not, however, claim to be a no-load fund if it charges a 12b-1 fee, fees charged to market the fund's shares, of more than 0.25% of net assets.

Answer 281

c. 4,800 Maximum gain for a long put is calculated by subtracting the premium from the strike price (50 − 2 = 48 per share). One contract represents 100 shares, so the buyer's maximum gain is $4,800 (this occurs if the stock becomes worthless).

Answer 282

b. percentage of par value Like Treasury bonds (T-bonds), Treasury notes (T-notes) have interest stated as a percentage of par value. Example: Par value $1,000, with 8% interest, equals $80 interest per year (0.08 × $1,000 = $80).

Answer 283

a. contemporaneous trader Someone who enters into a transaction at the same time as someone else who has and may be acting on inside information is known as a contemporaneous trader. Contemporaneous traders may sue persons who have violated insider trading regulations, and suits may be initiated up to 5 years after the violation has occurred.

Answer 284

c. the bonds are unsecured, the value of the guarantee being as good as the strength of xyz These are guaranteed bonds where the value of the guarantee is only as good as the financial strength (good faith and credit) of the company making the guarantee—in this case, XYZ Corporation. Because these bonds are backed by the good faith and credit of XYZ and not by any tangible asset, they are unsecured debt instruments. Always remember that even though the word "guaranteed" is used to describe such issues, the bonds are unsecured debt.

Answer 285

c. I and IV Breakpoints allow for lower sales charges at or above the designated points—in other words, quantity discounts. A breakpoint sale occurs whenever a purchase is made just below a designated breakpoint amount. Allowing a purchase to occur in an amount just below a breakpoint can be viewed as an effort by representatives to share in the higher sales charges.

Answer 286

d. will have evidence of ownership in book entry form All U.S. government securities no matter what the denomination or amount are delivered, transferred, and have ownership recorded in book-entry form.

Answer 287

c.The value of an ETP is derived from other investment instruments, and it trades on a national securities exchange ETPs are priced so that the value of the product is derived from other investment instruments, such as a commodity, a currency, a share price or an interest rate. ETPs are benchmarked to stocks, commodities or indices. They are marginable and may be sold short.

Answer 288

a. issued at a discount to par, paying interest at maturity T-bills, the shortest-term government-issued securities, are not issued with a stated rate of return. Instead they are issued at a discount to par rather than face value, and they mature at par. The difference between the discounted price paid and the par value received at maturity is considered the interest.

Answer 289

c. stated or nominal yield The coupon rate is also called the stated or nominal yield. It is the rate of interest the issuer has agreed to pay the investor for use of the funds loaned to the issuer.

Answer 290

b. repurchase agreement A repurchase (repo) agreement is one where a financial institution, such as a bank or a broker-dealer, raises cash by temporarily selling some of the securities it holds with an agreement to buy back the securities at a later date at a slightly higher price. Hence, agreement to do a transaction and then reverse the transaction in the future.

Answer 291

c. a disclosure document is required, but not a suitability statement Established customers are exempt from the suitability statement requirement but not from the disclosure requirements when penny stocks are being solicited. An established customer is someone who has held an account with the broker-dealer for at least one year (and has made a deposit of funds or securities); or has made at least three penny stock purchases of different issuers on different days.

Answer 292

c. shareholders must accept the proxy's decision If a shareholder decides not to abide by the decision to assign a proxy to a particular person, the decision can easily be abrogated. The shareholder may still abstain, may vote the shares personally or by mail or online, or may reassign the proxy to another.

Answer 293

a. business, reputation, character, education, experience Before submitting an application to enroll any person with FINRA as a registered representative, a member firm must ascertain the person’s business reputation, character, education, qualifications, and experience. As part of the application process, the member firm must certify that it has made an investigation and that the candidate’s credentials are in order.

Answer 294

b. shareholder can vote by proxy If unable to attend a shareholder meeting, shareholders can vote by an absentee ballot, known as a proxy. Delivery of the proxy can be made online or by mail.

Answer 295

d. on the settlement date of the transaction When securities transactions occur, ownership changes hands between the 2 parties on the settlement date.

Answer 296

d. I and IV The rule on a stock split is that the total value of the stock must be the same before and after the split. Hence, if the number of shares goes up or down, the price per share must go down or up, respectively.

Answer 297

a. II and IV A penny stock is a non-Nasdaq listed (therefore, Bulletin Board or "OTC Pink") stock trading under $5 per share. If a stock is listed on an exchange or listed on Nasdaq, it is not a penny stock, regardless of price.

Answer 298

a. bankers acceptance BAs are widely used in international trade for payments that are due for a future shipment and delivery of goods. For example, a Brazilian shoe manufacturer would receive a BA from a U.S. retailer for a guaranteed future payment when the shoes arrive in the United States. The manufacturer may ship its product knowing that the BA is guaranteed by a commercial bank. BAs are negotiable and freely traded in the money markets at a discount.

Answer 299

a. any shares sold will be subject to volume restrictions if still an affiliate Although held fully paid for 6 months, the sales of these shares would be subject to volume restrictions for as long as this individual is an affiliate. If the individual was not an affiliate, the shares held fully paid for 6 months could now be sold completely unrestricted.

Answer 300

d. a balloon maturity uses elements of both serial and term An issuer can schedule its bond's maturity using elements of both serial and term maturities. This is known as a balloon maturity. The issuer repays part of the bond's principal before the final maturity date, as with a serial maturity, but pays off the major portion of the bond at maturity.

Answer 301

c. sign and return proxy statements by 10th day before the meeting Signing and returning proxy statements to a broker-dealer for stock held in street name is enough to get the shares voted as recommended by the issuer’s management, as long as the broker-dealer receives the statements by the 10th day before a shareholders’ meeting. If the shares are to be voted in some other way, the investor must specify the desired changes.

Answer 302

c. I and IV Both a fixed and variable annuity is an insurance contract designed to provide retirement income. The term annuity refers to a stream of payments guaranteed for a certain period including the life of the annuitant. In the case of a variable annuity, the actual amount to be paid out may or may not be guaranteed, but the stream of payments itself is. Because an annuity can provide an income for life, the contract has a mortality guarantee. Mutual funds and UITs have no such guarantee.

Answer 303

b. be deducted completely in first year of program The deduction allowable for intangible drilling costs associated with oil and gas DPPs is one of the unique tax advantages of these programs. These costs can be deducted completely in the first year of the program instead of over the life of the program.

Answer 304

c. the treasury bill T-bill rate The dividend on an adjustable-rate preferred stock is tied to a particular benchmark interest rate, and the Treasury bill rate is a common benchmark. The CPI, the PPI, and the DJIA are not interest rates.

Answer 305

d. direct payment BABS provide municipal issuers with payments from US Treasury Created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing costs to issuing municipalities and stimulate the economy, Build America Bonds (BABs) are taxable municipal securities. There are two types; "Direct Payment" BABs that provide the municipal issuer with payments from the U.S. Treasury and Tax credit or "Issuer" BABs that provide the bondholder with a federal income tax credit.

Answer 306

b. trading in a customers account considered excessive, and for which no discernible investment purpose is detected Churning is excessive trading for a particular customer's circumstances or exceeding what would normally be considered suitable. This is equally true for both discretionary and nondiscretionary accounts.

Answer 307

d. I and II Systematic risk points to changes in the overall economy. It has an adverse effect on individual securities apart from the company's circumstances. It is generally caused by factors that affect all businesses, such as war, global security threats, or rampant inflation. No matter how diversified a portfolio is, it remains subject to systematic risk. An investor cannot diversify systematic risk away.

Answer 308

c. immediately, subject to rule 144 volume limitations Because the shares were purchased in the open market (already registered), the transaction is not a private placement and there is no required holding period. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations imposed when selling under Rule 144.

Answer 309

c. customer may open both a cash and margin account at the same time Customers may open a cash account, margin account, or any other account so long as the firm supports that type of an account and an authorized principal approves it.

Answer 310

a. debt securities claims are satisfied before equity securities claims In the event of a corporate liquidation, the order of claims priority would be as follows: taxes (IRS) and wages, all debt instruments next (secured first, then unsecured with subordinated debt last), and then equity securities with preferred shareholders paid first, before common shareholders, who are last of all claimants to be satisfied.

Answer 311

b. a new issue IPO at public offering price As restricted persons, officers of broker-dealer firms or other institutional investors are prohibited from purchasing a new issue (IPO) at the public offering price.

Answer 312

c. income Direct participation real estate programs come in 3 types: raw land, new construction, and existing properties. Income is a type of oil and gas program.

Answer 313

a. will be paid back last of all debtholders In the event of a corporate bankruptcy, subordinated debtholders, while having no guarantees of being paid, would come last of all bondholders in the liquidation priority—subordinate.

Answer 314

b. physical custody of funds portfolio cash and securities The services mutual funds offer may include retirement account custodianship, investment plans, check-writing privileges, transfers by telephone or online, withdrawal plans, and a number of other services and privileges. However the Act of 1940 requires that each investment company place portfolio cash and securities with a custodian for safekeeping.

Answer 315

c. federal funds The Federal Reserve Bank (FRB) mandates how much money its member banks must keep on reserve at the FR Any deposits in excess of the required amount are known as federal funds.

Answer 316

d. stockholders A company's net worth (assets – liabilities) belongs to the business owners (its stockholders).

Answer 317

c. customer having the largest short position While OCC can assign exercise notices using only the random-selection basis, a member firm may use any method that is fair and reasonable. The 2 most common methods are first in, first out (FIFO) and random selection.

Answer 318

a. 36 months Account updating must occur at least every 36 months thereafter.

Answer 319

d. regulatory risk Changes in the overall regulatory climate or specific rule changes that impact an individual company's business model can have an effect on the company's performance or ability to operate profitably. Those holding the securities of such companies are exposed to regulatory risk.

Answer 320

a. at the money When an option contract strike price is the same as the underlying stocks current market value, the contract is right at the money. When a contract is right at the money, it has no (zero) intrinsic value.

Answer 321

c. no stated time limit An amended U-5 form must be filed and a copy sent to the affected former employee within 30 days of discovery of the inaccuracy. It does not matter how long it has been since the employee’s termination.

Answer 322

c. premium paid decreases the return A $1,000 par value bond purchased at 102 ($1,020) is bought at a premium to par. Whenever a bond is purchased for an amount greater than will be received at maturity, the premium paid decreases the return. In this case, the additional $20 paid when the bond was initially purchased reduces the overall return from the interest payments received.

Answer 323

b. I and III General partners have unlimited liability, meaning that they can be held personally liable for the partnership's losses and debts. In their role to manage the partnership, they make decisions that are legally binding on the partnership.

Answer 324

b. they may do so with voter approval The amount of GO debt that a municipal government may incur can be limited by state or local statutes to protect taxpayers from excessive taxes. In order to issue bonds that would exceed this borrowing limit voter approval would be needed—that is, the approval of those who would be paying the taxes.

Answer 325

d. warrant A rights certificate is a very short-term security that grants the holder the right to buy the common stock of the company at a price lower than the current market price. A warrant is a long-term security that grants its owner the right to purchase securities from the issuer at a specified price that is higher than the current market price at the time the warrants are issued and at some point, in the future. Note that while the exercise price is higher than the current market value when the warrants are issued, it is hoped that the exercise price will be below current market value when the warrants are eventually exercised.

Answer 326

a. writer Options buyers (purchasers) can be referred to as the owner, holder, or the party who is long the contract. Writers are those who sell the contract.

Answer 327

a. internal memo promotion new product that will be offered to your firms institutional customers only Institutional communications specifically exclude internal communications such as memos. Communications with another member firm, a government entity, such as a municipality or with someone designated to act on behalf of one of your firm's institutional customers, would all fall within the definition of institutional communications.

Answer 328

c. at a discount Bonds are redeemed at par. When a bond is purchased at a discount (less than will be received at the time the bond matures), that discounted amount will increase the overall return of the bond, making it greater than the coupon rate. If the discount bond is called before it matures, the increased return due to the discount purchase would still occur but would now be accelerated.

Answer 329

b.Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve. Revenue bonds are not backed by the full faith and credit of the municipality that issues them. Instead, they are backed by the revenue produced by the project or facility that they support. In that light, the revenue must be large enough to cover the interest and principal payments if those obligations are to be met.

Answer 330

b. over common shareholders A preferred shareholders priority claim on assets is the preferred shareholders priority standing over common shareholders only. Employees of the corporation, debt (bond) holders and other creditors would all have claims on assets settled before preferred shareholders.

Answer 331

d. short puts Long calls or short puts would meet the criteria of being in a position to buy stock, but only sellers of options take in premium (income). Therefore, to meet both criteria, shorting puts would be the only basic option position that might accomplish this.

Answer 332

c. holder form time of purchase until they expire Listed options can be exercised by the holder (owner, buyer, party who is long) from the time of purchase until they expire. Writers (sellers, party who is short) cannot exercise contracts. Instead, writers are assigned when the owners of the contracts exercise them.

Answer 333

c. 6.55% For a bond trading at a premium (102), the ranking of yields from lowest to highest is YTC, YTM, current yield, and nominal yield. Therefore, the YTM for this bond must be less than the nominal yield of 7%.

Answer 334

a. the FDA The act prohibits insiders trading on or communicating nonpublic information. Both the tipper (the person who relays the information) and the tippee (the person who receives the information) are liable, as is anyone who trades on information that they know or should know is not public or who has control over the misuse of this information. In this case, the president of the company who knew of the nonpublic information, traded on it and passed it on, the registered representative who also knew of the information and passed it on, as well as the client who received the information and traded based on it would all be liable under the Act.

Answer 335

c. warrants In order to avoid violating the wash sale rule, investors selling a stock at a loss cannot purchase that same, or substantially identical, security within a 30-day period before or after the sale incurring the loss. Substantially identical would include anything that is exercisable or convertible into the same shares of stock, such as rights, warrants, call options, or a convertible bond. Purchasing the put options would not violate the wash sale rule because these can be exercised to sell the stock, not purchase it.

Answer 336

a. 20 cost base, 8 capital gain The price paid for a security is known as the cost base for the transaction. If the security is later sold for more than the cost base, the difference is a capital gain; if for less, it is a capital loss. This investor paid $20 per share, the cost base. Later, selling the stock for $28, the investor made an $8 capital gain per share. Of the total $28 price of the security, upon sale, $20 could also be called return of capital.

Answer 337

a. 30 calendar days If a customer notifies a member firm of a change in account information, such as a change in address, marital status, or investment objective, the firm must amend the account information and send it to the customer for confirmation within 30 calendar days.

Answer 338

c. both must pay principal as it comes due All bonds must pay principal when due. Income bonds, however, are not required to pay interest when due unless the earnings of the issuer are deemed to be sufficient and the board of directors declares that interest payments be made.

Answer 339

d. The SEC has classified them as a type of open-end fund, and they have operating costs and expenses that are lower than most mutual funds. The SEC has classified exchange-traded funds as a type of open-end fund but not a mutual fund. ETFs traditionally have operating costs and expenses that are lower than most mutual funds because they do not have to purchase and sell holdings within the portfolio to accommodate investors purchasing shares or redeeming shares, as is the case with mutual funds.

Answer 340

a. II and IV, Hardship withdrawals, Loans Against IRAs have no provisions for either hardship withdrawals or loans. Both IRAs and 401(k) plans offer tax deferral on the earnings, and although the amount is larger with the 401(k), they both offer the catch-up provision for those who are age 50 or older.

Answer 341

c. a loan consent form Allowing one’s securities to be loaned to others who want to borrow them for the purpose of selling them short would entail signing a loan consent form. This is optional and need not be signed to open a margin account or any other.

Answer 342

d. both investors have maximum loss potential that is limited to the premium paid All options are a 2-party contract. One investor's maximum loss potential is the other's maximum gain potential. Therefore, for each of the parties, the MG is different and the ML is different. Only buyers have a ML potential limited to the premium paid. And, finally, remember that the BE is always the same for both parties. The put buyer, who is bearish, wants the underlying stock price below the BE, while the put writer, who is bullish, wants the underlying stock price above the BE.

Answer 343

C. GNMA The Government National Mortgage Association (GNMA) is a government-owned corporation that supports the Department of Housing and Urban Development. Ginnie Maes are the only agency securities backed by the full faith and credit of the federal government.

Answer 344

b. back end load shares Class B mutual fund shares are bought with no sales charge at the time of purchase. The sales charge is paid instead at the time of redemption, or at the "back end." Hence, they are known as back-end load shares. For this type of share, the sales charge percentage is reduced each year of ownership, typically becoming zero after 5 years. At this time, they convert to Class A shares.

Answer 345

c. life insurance Equities (stocks), bonds, currencies, and derivative products like options can be offered and traded in the financial markets. Insurance is not an asset that can be traded in the financial markets.

Answer 346

c. long calls, short calls, long puts, short puts The 4 basic options transactions are either buying or selling calls and puts. Hence, long calls, short calls, long puts, short puts. Remember that in options terminology, selling, shorting and writing all represent the same transaction.

Answer 347

d. preferred shares Both common and preferred shares are equity securities. Each of the other choices represents a debt instrument.

Answer 348

a. the writer and receives the premium The party who is short an option contract is the seller of the contract. This party is known as the writer of the contract and receives the premium when the contract is sold. Buyers have the right to exercise—that is what they are paying the premium for—and when exercise occurs, the sellers of the contract are obligated to fulfill the terms of the contract.

Answer 349

b. 2,000 For the first trade in a newly opened margin account, there must be at least $2,000 in equity. The rule is as follows: transaction greater than $4,000, deposit 50%; between $2,000 and $4,000, deposit $2,000; and if the transaction is less than $2,000, deposit 100% of the purchase price. In this case, the transaction was between $2,000 and $4,000, and so a deposit of $2,000 is required.

Answer 350

a. 180 days Applicable to the first 2 attempts, if an individual fails to pass a FINRA qualification exam, a 30-day waiting period before the next attempt can be made is imposed. An unsuccessful 3rd attempt requires a 180-day waiting period.

Answer 351

b. a lower coupon than similar bonds without the feature When bonds are issued with features that benefit the bondholder, such as a put feature, the issuer can generally pay a slightly lower coupon rate of interest. This is because the put feature compensates the holder in another way, aside from the coupon rate.

Answer 352

c. interest payment Interest payments are paid to bond holders but not on common stock. Common shareholders may receive dividends if declared by the board of directors. They may also expect to vote on certain critical issues facing the company such as its leadership. Common shareholders have a liability limited to the amount invested.

Answer 353

a. obtain written representation that the buyer is not a restricted person When receiving an order to buy a new equity issue, a member must obtain a written representation that purchasers are in compliance with rules regarding sales of new issues to restricted persons (i.e., they are not restricted persons).

Answer 354

c. subject to volume restrictions within any 90 day period Rule 144 stipulates that after holding restricted stock fully paid for 6 months, an affiliate may begin selling shares but is subject to volume restrictions within any 90-day period.

Answer 355

d. a repurchase agreement APOs (additional public offerings), IPOs (initial public offerings), and SPOs (subsequent public offerings) all result in funds going to the issuer and are, therefore, issuer transactions. A REPO is a money market instrument where money changes hands between the buyer and the seller.

Answer 356

c. settlement plus 2 additional business days The rule requires that the call be met within 2 business days of the settlement date, referred to as S + 2. If regular way settlement was T + 2, adding 2 additional business days to the trade date would be T + 4.

Answer 357

b. income can be derived from rents received for the properties For real estate DPPs, both income and capital growth are possible. Income comes from the property rents received, and capital growth would come from the appreciation of the properties.

Answer 358

a. 1 year or less Money market debt instruments typically have maturities of 1 year or less. Generally, securities with maturities of 1 year to 10 years are considered intermediate term and those with 10 years or more to maturity are long term.

Answer 359

c. municipal general obligation bonds Municipal general obligation (GOs) bonds require voter approval because the debt service for these bonds (principal and interest payments) is funded by the taxes collected by the municipal issuer. Voters pay these taxes.

Answer 360

c. spouses are included in the invitation with travel expenses paid for FINRA deems payment or reimbursement by sponsors in connection with meetings held to train or educate representatives acceptable as long as certain requirements are met. These would include, but are not limited to, the following: the representative obtains the member firm’s prior permission to attend, the location of the meeting is appropriate to the purpose of the meeting, there is no payment or reimbursement for a guest (e.g., a spouse) of the representative attending the meeting, and there is no payment or reimbursement for certain expenses incurred in connection with meetings, such as golf outings.

Answer 361

D) initiated for the purpose of encouraging the purchase of, or investment in property, goods, or services Administered by the Federal Communications Commission (FCC) the Telephone Consumer Protection Act of 1991 (TCPA) defines a telephone solicitation as any telephone call initiated for the purpose of encouraging the purchase of, or investment in property, goods, or services. This would include products and services offered in the securities industry by BDs.

Answer 362

c. forward, uneven split Because the split resulted in the investor owning more shares, it was a forward split. Because the ratio of shares owned before and after the split was 2:3 (400:600 in this case), the split was an uneven split. for these always determine ratio, if 1 to x then even

Answer 363

b. wrap account Wrap accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. A wrap account can be a cash or margin account and like any other be approved for option trading.

Answer 364

d. I and III Because ETFs usually track an index, the operating expense ratios are generally lower than that of open-end companies. But that advantage can be canceled out by the commission charges when purchasing and selling an ETF. An open-end investment company must redeem shares at the NAV per share; with ETFs, pricing is based on supply and demand, making it possible to receive less than NAV. One cannot purchase open-end shares on margin, but ETFs can be.

Answer 365

b. Treasury Receipts Brokerage firms can create a type of bond known as a Treasury receipt from U.S. Treasury notes and bonds placed in trust at a bank. They then sell separate receipts against the principal and coupon payments the notes and bonds represent.

Answer 366

d. has 2 types of partners LPs have 2 types of partners: general and limited. There must be at least one of each. It is the general partner who is responsible for running the partnership entity.

Answer 367

a. III and IV not expense to fund, compensate underwriter and sales Sales charges are not among the standard business expenses of a mutual fund and may not be considered part of them. They are intended to compensate the underwriter and broker-dealers and their sales representatives who sell the fund shares to the public, and are thus expenses to the investor, not to the fund.

Answer 368

c. an effort to spread market rumors in an attempt to manipulate the stock This is an example of potential market manipulation by spreading rumors. Regulators have issued alerts to warn investors about fraudsters who may attempt to manipulate share prices by spreading false or misleading information about stocks. This is often done through social media platforms where large numbers of people can be contacted.

Answer 369

c. price of issuers stock Bond prices can be impacted by the usual market forces that impact securities in general, such as supply and demand. Additionally bond prices, they have an inverse relationship to interest rates.

Answer 370

a. buying puts A put buyer is a bearish investor because she anticipates the market to fall. The put is exercised only if the market price of the stock falls below the strike price. identify if bullish (price up) or bearish (price down)

Answer 371

a. all or none In an all-or-none (AON) underwriting, the issuing company has determined that it wants the underwriter to sell all of the shares required to raise all of the capital needed or cancel the underwriting. Because of the uncertainty over the outcome of an AON offering, any funds collected from investors during the offering period must be held in escrow pending final disposition of the underwriting.

Answer 372

d. fixed UIT A fixed unit investment trust (UIT) typically has bonds in its portfolio that mature on a specific date. Before that date, the trust buys and redeems units of beneficial ownership in the portfolio. When the bonds mature and pay off, the trust distributes the remaining interest and principal to the current unit holders and dissolves.

Answer 373

c. A trusted contact person if one was named can be contacted and a temporary hold on disbursements from the account can be administered. If the member firm reasonably believes that financial exploitation has occurred, is occurring, has been attempted or will be attempted, it can place a temporary hold on disbursements of funds or securities and contact a trusted contact person if one was named.

Answer 374

a. that payments will continue for the life of the annuitant The mortality guarantee of a variable annuity, which the insurance company assumes as part of mortality risk, insures that payments will continue for the life of the annuitant. It does not guarantee the size of the payments.

Answer 375

a. be exercised This is exactly what most put option buyers are looking for. They want the stock to go down. Because the market price of the stock declining would cause the option to be in the money, the investor would either exercise the option or sell it.

Answer 376

b. serial A serial bond issue schedules portions of the principal to mature at intervals over a period of years until the entire principal balance has been repaid.

Answer 377

b. a foreign nonmember firm , provided it agrees to abide by FINRA rules With exceptions, FINRA member firms may not pay commissions or grant selling concessions to any person or firm not a member of FINRA. One exception to this is a foreign firm, thus not eligible for FINRA membership. Such a firm may receive commissions or concessions, provided it agrees in writing to abide by FINRA rules and regulations.

Answer 378

d. flow through of profits and losses of partnership to individual limited partners Understanding the flow-through concept is critical with DPPs. Only DPPs allow flow-through of losses.

Answer 379

b. general obligation and revenue bonds Two categories of municipal securities are general obligation (GO) bonds and revenue bonds.

Answer 380

a. a hostile takeover with IDNIC the target company A hostile takeover is accomplished when the buyer (SKRAM) goes directly to the target (IDNIC) company's shareholders bypassing the board of directors or management.

Answer 381

d. once every 12 months A rollover involves actually withdrawing funds from one account for reinvestment in another. The investor thus has constructive receipt of the money and could be liable for taxes on any growth or earnings withdrawn if the rollover is not completed. The rollover procedure, when completed, protects from tax liability but may only be done once every 12 months.

Answer 382

b. fully paid for marginable securities totaling $6,400 in market value When meeting a Regulation T margin call with cash, 100% of the call must be deposited—in this case, $3,200. If using fully paid for marginable securities to meet the call, a deposit totaling twice the amount of the call must be made—in this case, $6,400. This is because securities are only marginable to 50% of their value.

Answer 383

b. expansion, peak, contraction, trough (EPCT) The correct order for the stages of a business cycle is expansion followed by a peak, then a contraction that ends in a trough. The cycle then repeats. Note that because this order represents a cycle, the correct answer has no set starting point or ending point, as long as the stages are shown in the right order.

Answer 384

c. front end load shares Class A mutual fund shares have their sales charge paid at the time of purchase, or at the "front end." Hence, they are known as front-end load shares.

Answer 385

d. FinCEN The USA PATRIOT Act requires firms to report to Financial Crimes Enforcement Network (FinCEN) when there is an event, transaction, or series of events or transactions that appear to be questionable.

Answer 386

b. The representative’s expertise must be considered part of the contributions to the account A registered representative may share in gains and losses with a customer, provided written permission is first obtained from the representative’s principal, the investments take place in a joint account, and the representative’s share of the gains and losses is proportional to the representative’s share of the investment funds. The representative’s knowledge and expertise may not be considered part of the representative’s contribution, only what proportion of the investment funds the representative has contributed.

Answer 387

c. local government investment pools Local government investment pools (LGIPs) are established by states to provide other government entities within its borders such as cities, counties, school districts or other state agencies with a short-term investment vehicle to invest funds.

Answer 388

d. I and II, custodial and IRA Certain accounts, such as IRAs, corporate retirement accounts, and custodial accounts, must be opened as cash accounts as opposed to margin accounts. For individual accounts, joint accounts, and corporate and partnership accounts, there is no such requirement, though the final decision on them is up to the broker-dealer carrying the account.

Answer 389

c. I and III Revenue bonds are designed to be self-supporting. They are backed by the revenue derived from the project funded by the bonds. Because they are not backed by property taxes, voter approval is not required. GO bonds however are backed by taxes, such as ad valorem (property) taxes, and therefore voter approval is generally required. With GO bonds, there is a debt ceiling or limit imposed on the issuer as well. Because they are backed by taxes, the issuer is limited as to how much can be issued. They generally have a higher rating than the same issuer's revenue bonds.

Answer 390

c. order will be automatically canceled All GTC orders if unexecuted will be automatically canceled on the last business day of April and the last business day of October. If the customer wishes to have the order continue working beyond that date, it must be reentered after the automatic cancellation.

Answer 391

b. Friday, july 5 Regular way settlement for a stock trade is T + 2 (trade date plus 2 business days). This would normally make settlement for this transaction Thursday July 4, but because July 4 is not a business day (national holiday), regular way settlement would have to be Friday, July 5.

Answer 392

a. freely transferable interest With no secondary market trading, one of the greatest disadvantages of a limited partnership is that an investor's partnership interest in one is generally not considered to be freely transferrable. The pass-through of gains and losses, all tax consequences, and the individual partners being responsible for reporting to the IRS are all characteristics of LPs.

Answer 393

a. should be less than that of the real estate it is backed by Mortgage bond issues represent the amount the issuer is borrowing that is backed by its real estate assets. Just as with a home mortgage, the amount borrowed shouldn't exceed the value of the property. Hence, the issue's total value should be less than that of the real estate by which it is backed. Backed by real property, these are secured debt instruments.

Answer 394

c. Allowing a former RR to keep a securities license with your firm, even though no business is expected to transpire Allowing a former RR to keep a securities license with a firm even though no business is expected to transpire is known as “parking” a license and is a prohibited practice. A member has up to 30 days to file a copy of Form U-5 after the termination of an employee. Receiving a complimentary dinner at a seminar presented by a mutual fund sponsor can be permitted but must be in a location that is considered appropriate to the purpose of the meeting. A private securities transaction with an immediate family member is permissible as long as there is no compensation.

Answer 395

d. backed by real estate and therefore considered secured An investor holding a corporate-issued mortgage bond is holding the mortgage paper as the debt security. These mortgage bonds are backed by real estate, like all mortgage paper, and are therefore considered secured debt instruments.

Answer 396

b. I and III A registered representative may share in profits and losses with a customer if the customer gives consent and the principal gives permission in writing. The trades must be done in a joint account, and the representative must share in both profits and losses to the extent of his proportional investment in the account. The proportion requirement is waived if the customer is a family member of the representative.

Answer 397

b. 56 weeks Though the maximum maturity for T-bills is subject to change, they are always short-term instruments—that is, one year or less—and are typically issued with maturities of 4 weeks, 13 weeks, 26 weeks, and at times, 52 weeks.

Answer 398

a. random selection basis The OCC assigns exercise notices to short broker-dealers (those with customers who are short) using a random-selection basis only. Broker-dealers, however, may then assign exercise notices to their short customers on a random basis, on a first in, first out (FIFO) basis, or any other method that is fair and reasonable.

Answer 399

c. callable With callable preferred stock, to compensate for the possibility that the shares may be called, the issuer pays a higher dividend than with straight preferred. Cumulative and convertible preferred have positive characteristics that would justify a lower fixed dividend than straight.

Answer 400

c. credit and hypothecation agreement Opening a margin account requires that the customer sign the credit agreement and the hypothecation agreement. The loan consent form (agreement) is optional. While the risk disclosure document must be received and attested to as read by signing the credit agreement, it need not be signed.

Answer 401

a. are issued at a discount without stated interest rate Treasury bills are always issued at a discount, without a stated interest rate. Because of their short-term maturities, they have the lowest interest-rate risk for Treasury securities, not the highest. They are issued with maturities of 4, 13, 26, and 52 weeks.

Answer 402

b. price of bond move higher Prices of bonds trading in the secondary market have an inverse relationship to interest rates. As interest rates rise in the marketplace, the prices of bonds trading in the secondary market will fall, and as interest rates fall in the marketplace, the prices of bonds trading in the secondary market will rise. Once the coupon rate is established by the issuer, it remains unchanged throughout the life of the bond.

Answer 403

d. address of securities issuer When making cold calls, the caller must disclose his name and the name of the member broker-dealer, the telephone number or address at which the caller may be contacted, and that the purpose of the call is to solicit the purchase of securities. When securities of any issuer are mentioned in such a call, there is no requirement to disclose the address of the issuer.

Answer 404

c. income bonds Income bonds pay interest only if earnings are sufficient and the payments to be made are declared by the board of directors. This is not true of any of the other fixed-income securities listed (debentures, subordinated debentures, or convertible bonds).

Answer 405

a. a form of private investment company, unregulated Hedge funds are considered to be a form of private investment company. They do not come under the Investment Company Act of 1940 as mutual funds do, and they do not require SEC registration. They are, therefore, considered unregulated.

Answer 406

d. t bills The investor's time frame for needing the funds (within 12 months) and low-risk objective are the key factors to consider. With such a short time horizon, any equity investment involves too much risk, as does an investment in a high-yield bond fund (higher the yield, greater the risk to attain it). Of the choices, T-bills are the shortest fixed term and are issued by the U.S. government, entailing little to no risk.

Answer 407

a. the broker dealer on behalf of short selling customer Meeting the location requirements and the borrowing of securities is done by the back office of the broker-dealer on behalf of the short-selling customer. Meeting these requirements is not something the short-selling customer would undertake without a broker-dealer.

Answer 408

c. a percentage of par value Like Treasury notes (T-notes), Treasury bonds (T-bonds) have interest stated as a percentage of par value. Example: Par value $1,000, with 4% interest equals $40 interest per year (0.04 × $1,000 = $40).

Answer 409

a. IV, III, II , I Creditors are paid first in a liquidation, with priority given to the secured lenders before general lenders; limited partners are paid first of the partners, with general partners last to be paid.

Answer 410

b. II and IV Penny stock rules only apply to solicited transactions, and it is required that the penny stock disclosure document be provided before any transactions in those securities may take place. However, a signed suitability statement (different than the risk disclosure) is not required for established customers. Statements of account activity must be provided monthly when an account holds penny stocks.

Answer 411

b. 1 day or 270 days Commercial paper is issued by corporations to meet short-term cash needs. A form of money market instrument, it can have maturities as short as 1 day (literally overnight) or as long as 270 days (9 months).

Answer 412

a. stock dividends A stock dividend is payment of additional shares of the issuer to the stockholder rather than payment of cash. The price of the stock is adjusted so that the total value of the outstanding stock is the same before and after the dividend is paid. Stock dividends are thus not taxable.

Answer 413

b. customers position in real estate Investment strategy refers to information that can lead to suitable recommendations for a customer’s investments in securities. Though many invest in assets that are not securities, such as real estate or art, not being securities, the term investment strategy does not apply to these assets.

Answer 414

c. mix customers funds and securities with their own Carrying firms can do trade executions, clear and settle transactions, and handle all back-office tasks, such as sending trade confirmations and statements. While they can take custody of customer funds and securities, they may not commingle them with those belonging to the firm. Abiding by the rule is known as segregating customer funds and securities.

Answer 415

d. adjustable rate Adjustable-rate preferred dividends are tied to benchmark interest rates, such as Treasury securities. As these rates fluctuate up and down, so do the dividends on the adjustable shares.

Answer 416

d. US treasury department It is the U.S. Treasury Department that determines the types and quantities of government securities to be issued each week in order to accommodate budgetary needs. At the time of issue, the Federal Reserve Board acts as the Treasury Departments agent.

Answer 417

a. in no circumstances can registration be transferred from one firm to another Transferring a registration from one member firm to another is not permitted. Should a person resign or be terminated, the member firm must file a Form U-5 with the Central Registration Depository (CRD) within 30 days of the termination date. A Form U-4 must then be filed by the new employer with all of the form’s information requirements met.

Answer 418

d. rights are short term, warrants are long term Stock rights, also known as preemptive rights or subscription rights, are issued to current stockholders in the event more stock is to be sold. This allows them to purchase the new stock at below the current market price for a period of 4 to 6 weeks before the stock is offered to the public. Hence, they are short term. Warrants may be issued at any time and allow the holder to purchase the stock at a price above the current market, for a period of typically 2 years or more. Hence, they are long term. The hope with warrants, of course, is that the market price will rise above the exercise price before the warrant expires.

Answer 419

B. I, II, IV, III Discount = Nominal, Current Yield, YTM, YTC The bond is trading at a discount. The lowest of all yields for a discount bond is the nominal or stated yield (coupon rate), which is a fixed percentage of par. Next would be the current yield and then yield to maturity. The highest possible return to the owner of a bond purchased at a discount would occur if the bond were called before maturity, because less time must elapse for the investor to receive the discount.

Answer 420

b. communications with the public The Uniform Practice Code (UPC) established uniform trade practices and other guidelines for broker-dealers to follow when they do business with other member firms, including transaction settlement, good delivery, ex-dates, trade confirmations, and don’t know (DK) procedures.

Answer 421

d. backing away Failure to honor a quote stated as firm is a rules violation called backing away.

Answer 422

d. listed option settle on the next business day after the trade date (T+1) Listed options settle on the next business day after the trade date (T+1). Whether long or short a call option contract is deemed in-the-money when the market price of the stock is above the strike price by any amount. However, an option that is in-the-money may not necessarily be profitable. For example, if a call option were purchased at 3 but in-the-money by 2, there would be a loss of 1 if the option were closed (sold) at or near expiry.

Answer 423

b. $50 annual interest until maturity The coupon represents the annual rate of interest payable. A bond with a 5% coupon will pay $50 interest annually (5% × $1,000 par value = $50).

Answer 424

b. II and III Costs for items that will have some salvage value at the end of the program are considered tangible drilling costs. These items, such as equipment, can be depreciated and written off over the life of the program.

Answer 425

b. 4 With noncumulative preferred stock, missed or skipped dividends need not be paid or made up. However, in order to pay common shareholders in any year, preferred shareholders must receive their full dividend for that year. While it can be paid in one annual payment, quarterly, or however the board approves it to be paid, the total in this case would be $4.00. 4% × $100 par value = $4.00.

Answer 426

b. REIT and corporate equity Real estate investment trusts (REITs) are nonexempt securities subject to the registration and new issue disclosure provisions of the Securities Act of 1933. Agency issues, U.S. government issues, and municipal securities are exempt.

Answer 427

b. investor is established customer Established customers are exempt from the penny stock suitability statement requirement. An established customer is someone who has held an account with the broker-dealer for at least one year (and has made a deposit of funds or securities); or has made three purchases of qualifying penny stocks that occurred on separate days and involved different issuers. No one is exempt from the risk disclosure requirements.

Answer 428

d. ii and iii Political contributions may never be used to procure or enhance business.

Answer 429

b. 5 years residency, 10 years employment history Information required on Form U-4 includes name, address, any aliases, 5-year residency history, and 10-year employment history.

Answer 430

b. the partnership entity is not responsible for paying taxes on gains. Both gains and losses from an LP flow through to the individual partners. Gains are taxable, and any taxes due are the responsibility of the individual partners, not the partnership entity.

Answer 431

c. limited liability and voting rights Common stockholders enjoy limited liability in that they can only lose what was invested. They are in no way responsible for any debt of the corporation. Voting rights are one of the key benefits for common shareholders.

Answer 432

b. dividends The distribution of profits to shareholders would generally be in the form of dividends to be received at the discretion of the board of directors (BOD). Bonds and warrants are other types of securities a company might issue, while options are a derivative product that would not be issued by the company.

Answer 433

a. an initial purchase is followed by a sale later, at a higher price In a reverse repurchase (repo) agreement a dealer agrees to buy securities from an investor and sell them back later at a higher price. In other words, the reverse of a repo agreement.

Answer 434

a. II and III Yield to call (YTC) calculations reflect the early redemption date and consequent acceleration of the discount gain if the bond was originally purchased at a discount (less than what will be received at maturity), or the accelerated premium loss if the bond was originally purchased at a premium discount (more than what will be received at maturity).

Answer 435

c. bills represent short term issues Securities issued by the U.S. federal government, the shortest term to the longest term are bills, notes, and bonds.

Answer 436

b. at, or out of the money If a contract has no (zero) intrinsic value, it can only be either at or out of the money. Anytime a contract has intrinsic value, it is in the money by that amount.

Answer 437

b. be able to access a full prospectus no later than confirmation of sale A mutual fund investor may base a decision to purchase solely upon studying the summary prospectus. If so, a full prospectus must be made available for delivery no later than receipt of confirmation of sale. In this case, online delivery of the full prospectus is permissible.

Answer 438

c. I and III - residual claim to assets - audited financial report Common stockholders of publicly traded companies have a residual claim to assets of a corporation at dissolution and are entitled to receive an annual report containing audited financial statements. The board of directors would vote to pay a dividend.

Answer 439

d. 30 days Any changes such as a change in address require filing an amended Form U-4 with the Central Registration Depository (CRD) no later than 30 days after the member becomes aware of the changes. If the amendment to the form involved a likely statutory disqualification, an amended form must be filed within 10 business days.

Answer 440

c. a loan to the issuing company Purchasers of bonds have essentially given the issuer a loan for which they will receive repayment plus interest.

Answer 441

d. Treasury STRIPS treasury strips do not make regular interest payments Treasury STRIPS have the coupons removed and therefore do not make regular interest payments. Each of the remaining answer choices pays interest on a semiannual basis.

Answer 442

d. II and IV - avoids probate - beneficiary changes The transfer on death (TOD) designation allows the account holder to name a specific beneficiary (or beneficiaries) to receive the account’s assets upon death. Those named persons may be changed whenever the account holder wishes. Although this designation allows the account to bypasses probate, it does not avoid estate taxes. TOD has nothing to do with giving investment discretion.

Answer 443

d. comply with associations rules and regulations Application for FINRA membership carries the applying firm’s specific agreement to comply with the association’s rules and regulations, comply with federal securities law, and pay dues and assessments to FINRA.

Answer 444

d. maturity date The date that the principal amount of a loan is due to be paid back to an investor is known as the maturity date.

Answer 445

c. filed to FinCEN as required by USA patriot act Suspicious activity reports (SARs) are filed to the Financial Crimes Enforcement Network (FinCEN) as required by the USA PATRIOT Act.

Answer 446

c. how sales charges and related expenses are paid Individual mutual funds are often available to investors as Class A, Class B, or Class C, and there are other classes varying from fund to fund. The share class determines when and how the sales charge is paid. Class A shares have it paid when the shares are purchased, Class B shares have it paid when the shares are redeemed, and Class C shares have a small charge removed from the investor's account every quarter.

Answer 447

d. FRB Acting as an agent for the U.S. Treasury Department and under the direction of the Federal Open Market Committee (FOMC), the Federal Reserve Board (FRB) engages in open-market operations buying and selling Treasury securities: T-bills, notes, and bonds.

Answer 448

b. fixed and stated as a percentage of its par value A preferred stock's annual dividend payment is its fixed rate of return, unlike that of common shares where the dividend is subject to variation.

Answer 449

b. 43.5 For any option to be trading at parity, its premium (3.5) must be equal to the amount the contract is in the money (its intrinsic value). For this contract to be in the money by 3.5 points (have an intrinsic value of 3.5), the stock must be trading at 43.5.

Answer 450

d. 5.6% Current yield is determined by dividing annual interest (coupon) payment by the current market price of the bond ($50 / $900 = 5.6%). Years to maturity is not a factor in calculating current yield.

Answer 451

b. at least 3 separate penny stock purchases Under penny stock rules, investors are established customers if they have deposited funds or securities in an account for at least 1 year before the penny stock transaction, or have purchased at least 3 different penny stocks from the same broker-dealer.

Answer 452

d. under the automatic reinvestment privilege A mutual fund investor may receive up to 5 payments during the year: 4 dividend distributions and a long-term capital gains distribution. The investor may choose to have the payments automatically reinvested in the fund rather than distributed to them. In this case, the shares are purchased with no sales charge. Note that choosing to reinvest does not limit the investor's tax liability. The investor will still have to pay income tax on the dividend distributions and capital gains tax on the capital gains distribution, because the investor is considered to have enjoyed constructive receipt of the payments.

Answer 453

d. borrowers obligation to repay the amount it borrowed plus interest When an investor lends money to an entity, the certificate evidencing the loan is known as a bond. This certificate represents the borrower's obligation to pay the investor back the amount it borrowed plus interest.

Answer 454

b. carry no guarantee of payment in any amount While the potential to share in the company's profits by receiving dividends is considered one of the benefits of equity ownership, one of the risks is the possibility of dividend income decreasing or ceasing entirely. Dividends are not guaranteed in any way.

Answer 455

d. choose which properties the partnership should buy or sell All of these are rights of the LP, except choosing the assets to be purchased for the partnership. This is a function of the general partner (GP).

Answer 456

a. I and II Generally speaking, a broker-dealer firm has the customer sign a binding arbitration agreement before opening the account. In the absence of such an agreement, if a dispute cannot otherwise be resolved, the dispute can go to arbitration if the customer wishes it so.

Answer 457

b. annually by principal of firm Business continuity plans (BCPs) are required to be reviewed annually by a principal of the firm.

Answer 458

a. OCC The investor who is long will notify the broker-dealer to exercise. The broker-dealer will then notify Options Clearing Corporation (OCC).

Answer 459

a. IRA Of those listed, only qualified retirement accounts, such as IRAs, prohibit the use of margin. As long as the use of margin is not listed as being restricted, it is allowed in both corporate and partnership accounts, and as long as the use of margin is specifically listed as being allowed, a fiduciary account may do so.

Answer 460

c. the firm lends the customers securities without a consent agreement The Conduct rules permit several types of lending arrangements. Among them; an immediate family relationship exists between the representative and the customer, the customer is in the business of lending money, the customer and the representatives are both registered persons with the same firm, the customer and the representative have a personal relationship or a business relationship outside the broker-customer relationship. Lending securities for use in short sales can only be done with a signed consent agreement from the customer.

Answer 461

b. bills, notes, bonds Securities issued by the U.S. federal government are classified as bills, notes, and bonds that distinguish each issue's term to maturity (short, intermediate, and long term).

Answer 462

b. Wednesday December 5 Options transactions settle on the next business day after the trade date, T + 1. In this case, an option transaction occurring on Tuesday, December 4, would settle on Wednesday, December 5.

Answer 463

a. exchange traded fund Expenses tend to be lower than those of mutual funds, and the management fee is low as well. Remember that the portfolio is designed to track an index, and just as the securities contained in the index are change infrequently, so are the securities in the fund portfolio.

Answer 464

B. I and IV - exempt from suitability - not exempt from disclosure An established customer is one who has effected a non-penny securities transaction or made a deposit of funds or securities into the account at least 1 year before the proposed penny stock trade or has made 3 purchases of penny stocks on 3 separate days involving 3 separate issues. Established customers are exempt from the suitability statement required but are subject to the disclosure rules.

Answer 465

b. A corporate shareholder cannot be forced to liquidate personal assets during a corporate bankruptcy During a bankruptcy dissolution process, a corporate shareholder cannot be forced to liquidate personal assets during a corporate bankruptcy. Corporate shareholders have limited liability, risking only what was invested. By contrast, a partner or a sole proprietor risks not only any amount invested but also personal assets should the business not be able to pay off its obligations.

Answer 466

a. protection of principal investment While common shareholders could realize potential capital appreciation, current income via dividend declarations and a potential hedge against inflation, protection of the initial investment is not guaranteed. Common shareholders have limited liability, meaning that while they cannot lose more than was initially invested, they could still lose all of it.

Answer 467

b. performance of the separate account A key feature of the variable annuity is that the premium is invested into the insurance company's separate account rather than the general account. It is the performance of the separate account that provides the annuity's investment return each month. There are no guarantees as to the separate account performance or return each month.

Answer 468

c. investors may never purchase shares in these trust on an exchange or OTC This is a REIT. REIT shares can trade on exchanges or over the counter (OTC). Owners of these shares may receive dividend distributions and have capital gains pass through to them for tax purposes as well. REITS, organized as trusts, are not investment companies (open- or closed-end funds). Shares in REITs are equity securities.

Answer 469

a. both may offer an unlimited number of shares in a continuous public offering The key difference between open-end investment companies and closed-ends is the fact that new shares are continuously being offered and are unlimited in number for open-end companies. In the case of the closed-end, the number of shares is fixed and once the IPO is over, the only way to acquire shares is in the secondary market. Both types of funds may operate as regulated investment companies and avoid taxation, both may choose to be diversified or not, and both offer a wide variety of investment objectives.

Answer 470

d. II and III A put feature on a bond benefits the bondholder. Once the bond becomes puttable, its holder has the right to put it back to the issuer at par. At this point, the bondholder is insulated from rate risk (the risk that rates will rise, putting downward pressure on bond prices). Once puttable, the bond will not trade below par. Issuers will likely call bonds if rates fall. The issuer can issue new bonds at a lower rate and use the proceeds to call in the original bond.

Answer 471

c. all long positions will be exercised Exercising any long position is up to the customer and is not something agreed to in the options agreement. Signing the options agreement is, however, affirmation that the options disclosure document has been read, that all risks associated with options trading as outlined in the ODD are understood, and that all rules and regulations regarding options trading will be abided by.

Answer 472

a. the amount by which a bank exceeds its required deposits to be held on reserve at the FRB The Federal Reserve Bank (FRB) mandates how much money its member banks must keep on reserve at the FRAny deposits in excess of the required amount are known as federal funds.

Answer 473

c. a bondholders to convert a debt instrument into securities that give the investor ownership rights Corporate bonds with convertible features allow the bondholders to convert the debt obligation they hold into shares of stock. Stock gives the holders an equity position in the company with ownership rights.

Answer 474

b. government assisted housing and historic rehabilitation properties For partners in a real estate programs, tax credits would come primarily from programs concentrating on properties designated for government-assisted housing or historic rehabilitation. These are credits offered by the federal government.

Answer 475

c. no voting or preemptive rights Preferred shareholders have no voting rights, nor do they have preemptive rights, which is the right to maintain the same percentage ownership in the corporation should additional shares be issued.

Answer 476

b. regulatory risk Changes in the regulatory climate or specific rules that might impact how a company operates or its ability to do so profitably are recognized as regulatory risk.

Answer 477

c. .01 Unless specific instructions are given by the customer not to do so, options contracts will be automatically exercised at expiration if they are in the money by at least 0.01.

Answer 478

b. are both priced as a percentage of par Both Treasury notes and bonds are priced as a percentage of par. Interest on these is paid semiannually. Comparatively, T-bills are priced at a discount to par with the interest not paid until maturity (the difference between the discount paid and par value received).

Answer 479

a. intermediate term debt securities with maturities of 2-10 years Treasury notes (T-notes) are U.S. government-issued intermediate-term debt securities having maturities of 2–10 years.

Answer 480

b. diversification will not eliminate it Systematic risk is the risk that changes in the overall economy will have an adverse effect on individual securities, regardless of the company's circumstances. Understanding what it is, is to know that no amount of diversification will eliminate it completely. While one might be able to mitigate it somewhat, one cannot diversify away systematic risk.

Answer 481

a. market maker BDs who incorporate proprietary trading into their business model are known as market makers. As a market maker the BD trades in their own account attempting to profit. A firm making markets may be a carrying firm or a fully disclosed firm. Commissionable transactions are those done by brokers for customer accounts, not proprietary trades.

Answer 482

c. out of the money This put option has a zero intrinsic value and is therefore out of the money by the 15 points difference by which the market price exceeds the strike price. A put option has intrinsic value or is in the money when the current market price of the underlying asset is less than the exercise price (in this example, $60).

Answer 483

c. collateral trust bonds A corporation can deposit securities it owns into a trust to be used as collateral to back its debt issues. When this is done, the securities issued are known as collateral trust bonds.

Answer 484

b. declared, increased, reduced, or suspended by the BOD Common dividends may be declared, increased, reduced, or suspended at the discretion of the board of directors (BOD). Shareholders have no vote on these dividend matters.

Answer 485

c. the CEO of the chemical firm In this scenario, the tipper was the research scientist and the tippee was the investor. They certainly may be held liable. The registered representative (and his firm) may be held liable if it can be shown they had knowledge that insider information was being used. As offered in this question scenario, there is no reason given to think the CEO of the chemical firm was involved.

Answer 486

b. a subordinated debenture has a claim that is junior to all other debt but senior to preferred stock Subordinated debt (usually debentures) have a junior claim to all other debt issues but, like all debt, is senior to the claims of all equity holders, both preferred and common.

Answer 487

c. to make day to day business decisions Limited partners (LPs) have a number of rights, among them, to vote on business objectives, to inspect all books and records, and if the GPs are not acting in their best interest, to sue them. Making day-to-day business decisions is the responsibility of the GPs, and if an LP were to do so, they could lose their standing as an LP.

Answer 488

d. 10% If the beneficial interests of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue.

Answer 489

d. buyers pay the premium for the right to exercise the contract Buyers pay option contract premiums, and the sellers of the contract receive those premiums. The premium is paid by the buyer for the right to exercise the contract.

Answer 490

d. any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period Correspondence can be written or electronic. It can be targeted at either account holders or non-account holders of the broker/dealer. The criteria that makes the communication correspondence is that it is distributed to 25 or fewer retail customers within any 30 calendar-day period.

Answer 491

c. cash Index and foreign currency options are cash settled. Instead of shares of stock being delivered as a result of the exercise, cash must be delivered by the party assigned (short the contract). This is because delivering all of the components of an index is not possible and delivering foreign currency would require exchanging one currency for another, and possibly having banking relationships abroad. Settling in cash (U.S. dollars) facilitates the exercise and assignment process much easier for U.S. investors.

Answer 492

a. those persons who own 5% or more of the total beneficial interest of a company's common stock Control securities are those owned by directors, officers, or persons (which include corporations, trusts, etc.) who own or control 10% or more of the issuer's equity securities. Those persons who own 5% or more of the total beneficial interest of a company's common stock are not deemed control persons under this rule.

Answer 493

b. no holding period, but volume limits always apply Control stock would be registered shares held by an affiliate. There is no holding period, but there will always be volume limits for as long as the individual is an affiliate.

Answer 494

b 7300 The maximum potential gain for put owners is the option's strike price (75) less the amount of the premium paid (2)—in this case, 73. Note that this is the same as the contract's BE point. Remember that put owners are bearish and want to see the stock fall in price. A stock's price can potentially fall to zero; therefore, from the BE to zero (73 points) is the most that can be gained.

Answer 495

c. salary or bonuses are earned income, interest and dividends are investment income While someone’s salary or bonus would be earned income, investment income is that which is earned from one’s investments. Sometimes called portfolio income, it would include dividends, interest, and capital gains derived from the sale of securities.

Answer 496

b. semiannually Treasury notes (T-notes) and bonds (T-bonds) pay interest on a semiannual basis.

Answer 497

a. FDIC In addition to U.S. Treasury securities, the U.S. Congress authorizes certain agencies of the federal government to issue debt securities. These would include, GNMA, FNMA and FHLM. The Federal Deposit Insurance Corporation (FDIC) does not issues securities but is set up to insure bank deposits in the event of bank failure.

Answer 498

b. I and IV Investors who can only invest relatively small amounts of money can nevertheless purchase interest in many different securities through investment companies. By the same token, they also gain access to increased purchasing power by pooling their investments with others.

Answer 499

d. sales practice code FINRA publishes the Conduct Rules, the Uniform Practice Code, the Code of Procedure, and the Code of Arbitration Procedure to regulate employee conduct and reportable events. There is no Sales Practice Code.

Answer 500

b. regulation s-p Safeguard requirements such as securing desktop and laptop computers and encrypting email to protect customer information is an obligation of financial institutions under Regulation S-P.

Answer 501

a. II and III A quote always represents the bid and an ask (offer) price. Investors pay the current ask price when purchasing (21.15) and receive the current bid price when selling (21). The spread is the difference between the bid and the ask price—in this quote, 0.15.

Answer 502

b. 4 times a year Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last 4 weeks' trading volume with each Form 144 filing. The filing is good for 90 days (3 months), which would allow for as many as 4 filings per year.

Answer 503

b. 3 business days, free of charge Requests for an SAI must be complied with within 3 business days free of charge.

Answer 504

b. ETS are senior, unsecured debt securities issued by a bank or financial institution Exchange-traded notes (ETNs) are senior, unsecured debt securities issued by a bank or financial institution. They are backed only by the good faith and credit of the issuer. The notes track the performance of a particular market index but do not represent ownership in a pool of securities the way share ownership of a fund does. ETNs are bond like with a stated maturity date but do not pay interest and offer no principal protection. ETN investors receive cash payments linked to the performance of its underlying index less management fees when the note matures.

Answer 505

b. Treasury Receipts Treasury receipts are issued by broker-dealers, and they are backed by the good faith and credit of those that issue them. Treasury STRIPS are the U.S. Treasury Department's version of these, and therefore they are backed in full by the U.S. government. Treasury bills, notes, and bonds are backed in full by the U.S. government.

Answer 506

a. short stock Bullish, anticipating that the security’s price will rise, is associated with owning the security—having a long position. Therefore, owning securities that can be converted into the stock, such as being long calls, rights, or warrants, would also be considered bullish positions.

Answer 507

d. currently 50%, unchanged unless changed at anytime by FRB The Regulation T initial margin requirement is currently 50%. While it has been so for many decades, it can be changed by the Federal Reserve Board anytime it deems appropriate to do so.

Answer 508

b. collateral trust bond Collateral trust bonds are backed by a portfolio of other securities; mortgage bonds are backed by real estate. Equipment trust certificates are backed by equipment. Debentures are backed only by the company's promise to pay (good faith and credit).

Answer 509

a. systematic risk Systematic risk is the risk that changes in the overall economy will have an adverse effect on individual securities regardless of the company's circumstances. Common causes that can impact all securities or investments might be war, global security threats, and inflation.

Answer 510

d. a negotiable CD Corporations issue unsecured promissory notes known as commercial or prime paper. When a bank issues an unsecured promissory note, it is known as a negotiable certificate of deposit (CD).

Answer 511

b. market risk and current income risk In owning common shares, the investor stands to lose current income through dividend reduction or suspension (current income risk), as well as capital loss, should the market price decline (market risk).

Answer 512

b. III and IV Persons who own stock in a company are considered owners; thus, both common and preferred shareholders have ownership (equity) in a corporation. Mortgage bonds and debentures are 2 types of debt securities offered by corporations. Debtholders are creditors of the corporation, not owners.

Answer 513

c. the strike price, the price the investor can sell stock at For this put contract, 15 is the strike price, which represents the price at which the investor has the right to sell stock, and 5 represents the $500 premium paid for the contract.

Answer 514

d. weekly Treasury bills (T-bills) are issued (auctioned) by the U.S. Treasury weekly.

Answer 515

c. a higher coupon than similar bonds without the feature When bonds are issued with features that benefit the issuer, such as a call feature, the issuer generally will need to pay a slightly higher coupon rate of interest to make the bond attractive to new investors.

Answer 516

d. the bank secrecy act The Bank Secrecy Act requires, among other things, that transactions in currency amounting to more than $10,000 in a single day be reported on a Currency Transaction Report, CTR (Form 112). By keeping deposits under $10,000, the depositor might be engaging in one of the many forms of structuring. That is, structuring deposits in such a way so as to avoid the reporting requirements.

Answer 517

b. the issuing broker dealer Treasury receipts are issued by broker-dealers. Although Treasury securities (T-notes and bonds) are held in trust at a bank and collateralize the Treasury receipts, unlike Treasury securities backed by the U.S. government, these Treasury receipts can only be backed by their issuer, the issuing broker-dealer.

Answer 518

b. REIT Real estate investment trusts (REITs) are not investment companies such as UITs and management companies (both open and closed-end).

Answer 519

d. typically issued by banks Commercial paper is short-term unsecured debt issued by corporations having very good credit ratings. With a maximum 270-day maturity, it is considered a money market instrument.

Answer 520

a. it is made available between the registration date and the effective date The preliminary prospectus (red herring) is a prospecting tool used to gauge indications of interest. It is made available to those who request it between the registration date and the effective date (cooling-off period). Receiving it is not a commitment to purchase shares and making it available is not a commitment to sell shares to the recipient. No final price would be found on a preliminary prospectus.

Answer 521

a. being highly liquid Money market securities have short-term maturities. With little time left to default, they are considered to be highly liquid and, therefore, relatively safe. Safety or less risk equates to lower returns. Typically issued at a discount and maturing at face value, they generally make no regular interest payments. The difference between the discounted purchase price and the face value received at maturity represents their return.

Answer 522

a. II and IV Equity REITs typically hold commercial property rather than residential property. Mortgage REITs hold mortgages on commercial property, and hybrid REITs do both. Dividend disbursements, as well as capital gains distributions, can be made to shareholders.

Answer 523

b. II and IV Non-securities-related misdemeanor convictions (such as a driving infraction) do not have to be reported on an applicant’s Form U-4 when applying for registration. Securities- or money-related misdemeanors and felony convictions within the past 10 years must be reported. These will automatically disqualify an applicant from registering (statutory disqualification).

Answer 524

b. stock certificate book The stock certificate book, also known as the stock book or stock ledger, is a permanent record of a corporation’s capital stock and is to be held for the life of the corporation. The general ledger and customer account records are kept for 6 years; written customer complaints are kept for 4 years.

Answer 525

d. tax deductions and credits For real estate programs, both deductions (from mortgage interest expenses and depreciation) and credits (for certain types of programs) are potential benefits. Depletion and intangible costs are associated with natural resource programs such as oil and gas, and DDPs do not pay dividends or interest.

Answer 526

d. 1350 Buyers of options (calls or puts) lose the premium paid if the options expire unexercised. The most this investor can lose is the number of contracts (6) multiplied by the amount of the premium received, $225. Therefore, this investor's maximum loss is $1,350.

Answer 527

a. front running Although each of these choices is a violation of FINRA rules and securities laws, when an investment professional places an order for his own account or one that he controls ahead of other orders that are so large that they will likely move the market in an attempt to gain from the price movement is an illegal activity known as front running. Those caught front running would be subject to severe sanctions by market regulators.

Answer 528

a. I and IV A bond with a 4.5% stated, nominal, or coupon yield pays $45 annual interest (4.5% × $1,000 par value). If the $45 annual interest is paid in semiannual payments, each would be $22.50.

Answer 529

d. 65.66 shares Mutual funds can issue fractional shares. This is an advantage for those who invest in mutual funds because they can think in terms of the dollars they want to invest rather than in the numbers of shares they want to purchase. Wanting to invest $1,000 at the current price of $15.23 allows 65.66 shares to be purchased ($1,000 / $15.23 = 65.66 shares).

Answer 530

c. the stocks issue date There is no need to include the original date of issue of the stock, which might be many years in the past, in the notice delivered for a stock dividend.

Answer 531

a. oil and gas income program The depletion allowance is a tax benefit reflecting the decreasing supply of oil or gas (or any other natural resource or mineral) after it is taken and sold. With income programs, the wells have been drilled and are already producing and, therefore, being depleted. By contrast, exploratory programs have a low expectation of success and it is therefore more likely that there will not be anything found to deplete.

Answer 532

a. an open end management investment company An open-end (mutual fund) management investment company may only issue redeemable common stock. A unit investment trust offers units of beneficial ownership. A closed-end management investment company may also issue bonds and preferred stock, while a face-amount certificate company offers a contract, as opposed to units or shares.

Answer 533

b. the buyer to exercise the contract, with the seller obligated to fulfill the terms of the contract Options contracts involve 2 parties: buyer and seller. The buyer has the right to exercise the contract, and when this occurs, the seller is obligated to fulfill the terms of the contract.

Answer 534

b. 4 years Copies of all customer complaints must be maintained in a file at the office of supervisory jurisdiction (OSJ) for a period of 4 years.

Answer 535

c. the 3rd Friday of November Options can be exercised up to and including (no later than) expiration. Options expire on the 3rd Friday of the expiry month. In this case, the 3rd Friday of November.

Answer 536

b. greater than 6.1 For bonds trading at a premium (101), the nominal yield (or coupon) is higher than the basis (YTM). For bonds at a premium, yields from lowest to highest are yield to call, yield to maturity, current yield, and nominal yield

Answer 537

b. calling an investors attention to a section that may be interesting A prospectus for any security, not just one for a mutual fund, may not be marked, highlighted, or otherwise altered in any way, nor may steps be taken to call an investor's attention to some passage or section that might be of special interest, even if the potential customer asked that it be done.

Answer 538

c. an open end management investment company If managed by the insurance company's own investment advisor, a separate account must register as an open-end company. If it is managed by a third party, it must register as a unit investment trust.

Answer 539

d. has paid $200 for the call contract An investor who is long 1 July 40 call at 2 has paid $200 premium to purchase the call. Owning the call, the investor has the right to exercise the contract to purchase 100 shares of stock at the strike price ($40).

Answer 540

a. cut taxes and increase government spending for programs and development Fiscal policies to grow or expand the economy would encompass cuts in taxes allowing consumers to have more money to spend, spurring the economy forward, and increasing government spending for programs and development that creates jobs, again spurring the economy forward.

Answer 541

b. less than the exercise price Put buyers are bearish. Puts have intrinsic value if the price of the underlying stock falls below the exercise price of the option, The client will be profitable if the price decline (below the strike) exceeds the amount of the premium paid. If the price of the stock rises above the exercise price or is the same as the exercise price, the put will expire worthless.

Answer 542

d. mortgage debt Examples of secured corporate debt includes outstanding bonds and mortgage paper. Debt owed to suppliers would be unsecured. Government debt owed is taxes, and preferred and common stock is equity.

Answer 543

a. II and III The custodian’s fiduciary responsibility is for the benefit of the minor and ceases upon the minor’s death. The account passes to the minor’s estate for distribution to the minor’s heirs.

Answer 544

b. II and IV When a company declares a stock dividend, the cost basis per share is always reduced. The customer will receive 25 new shares (100 shares × 0.25 = 25). The computation is the original total cost $4,000 (100 × $40) divided by the new number of shares 125 (100 + 25). $4,000 / 125 shares equals a new cost basis per share of $32. The holding period for capital gain or loss (short or long term) is always from the original purchase date. In this case, because the shares were sold 3 years later at 50, the gains are long term.

Answer 545

d. RR should determine suitability of options trading for the customer Once the customer request being able to trade options in their account, the first step would be for the RR to collect all necessary information (financial and nonfinancial) to determine if trading options would be suitable for the customer.

Answer 546

a. bond price have an inverse relationship to interest rates Bond prices have an inverse relationship to interest rates. If interest rates go up, bond prices for those bonds trading in the secondary markets will go down. Conversely, if interest rates decline, bond prices rise. Par value is a fixed number for the life of the bond.

Answer 547

c. regulation s-p Privacy Requirements are mandated in Regulation S-P enacted by the SEC to protect the privacy of customer information. In particular, the regulation deals with nonpublic personal information

Answer 548

b. SEC If proxies are to be solicited in what is known as a proxy contest, the corporation must send out written material to the shareholders to permit them to make informed proxy decisions. The SEC imposes this requirement and further requires that it be given the material to review before it is sent to the shareholders.

Answer 549

d. breakeven point The breakeven is that point at which an investor neither makes nor loses money on the investment.

Answer 550

a. usually, for ETFs, there are no tax consequences for investors until the shares are sold The single greatest advantage associated with ETFs is the fact that while they can pass on capital gains from time to time, creating tax consequences in that year, they rarely do. Therefore, there would be no expected tax consequences until the shares are sold. This is the tax efficiency generally associated with ETFs.

Answer 551

c. bearish on DGF the stock Those who sell equity call options may be obligated to sell the stock at the strike price if the contract is exercised by the owner. Being in a position to sell makes the investor bearish.

Answer 552

a. treasury receipts and STRIPS Treasury receipts or STRIPS can represent U.S. T-bonds and notes held on deposit at a bank where essentially the coupon interest payments have been separated from the principal. When the Treasury Department does this, the resulting new issues are known as Treasury STRIPS, and when broker-dealers do this, the resulting new issues are known as Treasury receipts

Answer 553

b. states and local governments Municipal securities can be issued by state or local governments or by U.S. territories, authorities, and special districts.

Answer 554

a. an unsecured corporate debt obligation A debenture is unsecured corporate debt, not backed by any physical assets but only the issuer's good faith and credit.

Answer 555

d. II and III Treasury receipts are issued at a discount and redeemed at par, and the difference represents the interest earned, which isn't received until maturity.

Answer 556

b. 24 If the company is going to pay a common stock dividend, it must pay the preferred dividends first, including all dividends in arrears (missed). There are $16 due in back dividends for the 2 years missed, in addition to $8 this year, for a total of $24.

Answer 557

d. 6 month holding period, with sales allowed freely thereafter For restricted stock (unregistered) held by a nonaffiliated, a 6-month holding period before any sales can be made applies. After the holding period, sales can be made freely.

Answer 558

d. substantial borrowing or purchasing on margin While hedge funds can employ all these investment types and strategies, being highly leveraged means borrowing to purchase. Borrowing to purchase securities is typically known as buying on margin.

Answer 559

d. unlimited liability and active role In limited partnerships, whether real estate or other types, the general partner is the active partner managing the business and taking on unlimited liability.

Answer 560

a. all interest at maturity Treasury bills (T-bills) are the only Treasury security issued at a discount to par value. At maturity, par value is received. The difference between what was paid and the par value received would be considered the interest income.

Answer 561

b. conviction of DUI resulting in a fine and probation Disciplinary sanctions by the SEC, an SRO, a foreign financial regulator, or the foreign equivalent of an SRO may be cause for statutory disqualification of FINRA membership. This would also be the case for willful misstatements made in an application for membership or a felony conviction, either domestic or foreign, or a misdemeanor conviction involving securities or money (not a DUI) within the past 10 years.

Answer 562

c. a discount When a bond is priced below par value, it is trading at a discount (discount to par).

Answer 563

a. purchase the stock and therefor is bullish Call buyers pay the premium for the right to purchase the stock at the strike price. Those who buy stock are bullish (anticipate that it will rise).

Answer 564

d. adjustment bonds Income bonds, also known as adjustment bonds, are issued when a company is reorganizing and coming out of bankruptcy. Income bonds pay interest only if the company has enough income to meet the interest payment. Therefore, the interest payments are not predictable, and they are not suitable for customers seeking income.

Answer 565

b. either a buy or a sell An opening transaction can be either a buy or a sell. Which one will determine the investor’s market attitude—bullish when buying to open a position and bearish when selling to open a position (selling short).

Answer 566

a. all Obviously, the price of a company's common stock will be impacted by earnings, whether it is higher or lower than anticipated. Changes in the business cycle, as well as FRB policies, will also carry weight in the marketplace. In today's global economy, conflicts even on the other side of the world can affect stock market prices.

Answer 567

c. buy 1,000 shares of CDT To close a short position consisting of 1,000 shares of CDT stock, one would need to purchase 1,000 shares—buy 1,000 shares of CDT. Buying the call options would not close the position, but once owned, they could be exercised with the purchased shares then used to close the short position.

Answer 568

b. sell short to open a position When selling short, an investor is opening a position (a short position). Selling short means selling shares not yet owned. In order to do so, the shares must be borrowed first.

Answer 569

c. a face amount certificate company A face-amount certificate company offers the investor a certificate with a face amount on it. The investor buys it for a discount from the face amount, with the agreement being that the company will pay the investor the face amount on a specific date in the future.

Answer 570

b. high yielding debt instruments Money market instruments are highly liquid, short-term debt securities. The short time to maturity makes them less volatile and relatively safe, suitable to meet short-term investment horizons. In return for the safety, investors sacrifice high potential yields for low yields.

Answer 571

a. municipal bond pool The Investment Company Act of 1940 defined face-amount certificate companies, unit investment trusts, closed-end management investment companies, and open-end management investment companies (the latter, mutual funds) as investment companies.

Answer 572

c. 51 For puts, the breakeven is found by subtracting the premium (4) from the strike price (55). Because put buyers are bearish, the long put contract is profitable below the breakeven at expiration.

Answer 573

c. FINRA Whenever a customer complaint is received, it is essential that the proper personnel are notified. Persons who should be notified may include the account’s representative, the account’s principal, the branch manager, or a member of the compliance department. A notice to FINRA is required only in regards to certain scenarios, such as allegations of theft, forgery, misappropriation of funds, or securities.

Answer 574

a. can sell shares unrestricted at any time Selling shares under Rule 144 effectively registers the shares. In other words, buyers of stock being sold subject to Rule 144 are not subject to any restrictions if they choose to resell.

Answer 575

d. characteristics of both equity and debt securities Preferred shares are equity securities, but not only do they have the characteristics of equity securities, they share some of the characteristics of debt securities as well. The most notable characteristic is that a preferred stock's annual dividend represents its fixed rate of return, like the fixed rate of return for a bond (debt security).

Answer 576

a. wash sale The investor’s intent with this wash sale is to declare a $50 capital loss without changing positions on the bond. Immediate repurchase is not illegal, but it precludes declaring the loss for tax purposes. The investor must wait at least 30 days before buying the bond back, or the loss will be disallowed.

Answer 577

b. unlimited Long calls are bullish positions. The investor wants to see the stock go up in price. The maximum gain on a long call is unlimited because, in theory, the underlying stock's price can go to infinity and is, therefore, also unlimited.

Answer 578

a. I and III A rights offering allows current shareholders to purchase enough additional stock to maintain their proportionate ownership of the corporation, in the event more shares are sold to the public. The shareholders may purchase the stock before the public has access and will purchase the stock at a discount from its market price. Warrants allow the owner to purchase a certain number of shares of stock at a specified price at a specified time later. Splits and stock dividends, the other choices, do not involve the purchase of stock but instead are adjustments to existing stock positions.

Answer 579

b. excessive transactions done solely for the purpose of generating commissions Unnecessary transactions entered into for the purpose of generating commissions with no regard for profitability constitute churning. A charge of churning can result from both excessive number and excessive size of transactions.

Answer 580

c. I, IV, III, II When a corporation is liquidated, employee wages and accrued taxes are paid first, then secured debt, debentures and general creditors, unsecured debt, subordinated debt, preferred stock, and last of all, common stock.

Answer 581

d. 6 months Restricted securities may not be sold until they have been held fully paid for a period of 6 months. This applies to both affiliates and nonaffiliates, but affiliates would be subject to volume restrictions.

Answer 582

a. investors must be provided with specific information when purchasing mutual funds Mutual fund investors must be provided with specific information and disclosures before purchasing shares. Among the information required would be all that is disclosed either on a full or summary prospectus.

Answer 583

d. I and IV As long as an investment club has no restricted persons as members, the club may purchase new equity issues at the public offering price. A registered representative is a restricted person under the rules regarding the purchase of new equity issues.

Answer 584

d. long the position and bullish Owning a security means that one is long the position. When one is long (owns) the security, the person is bullish, anticipating it will go up in value in the hopes of selling it later at a higher price than it was purchased for.

Answer 585

d. parent as custodian for one of the children In an UTMA account, only one adult can be the custodian for one minor. Joint custodians or joint beneficiaries to a single account are not permitted.

Answer 586

a. dividend payment will cease on the call date When a corporation calls in preferred shares, the shares stop trading and dividend payments cease on the call date.

Answer 587

d. nonsystematic risk Nonsystematic risks are those that are unique to a specific industry, business enterprise, or investment type.

Answer 588

a. T-Bonds, T-Notes, T-Bills US Treasury bonds are offered with the longest maturity. T-notes are intermediate length, followed by T-bills, which mature in 52 weeks or less.

Answer 589

d. annually Firm element requires member firms to prepare an annual training plan, taking into account such factors as recent regulatory developments, the scope of the member’s business activities, employee performance in the regulatory element, and its supervisory needs.

Answer 590

For any bond priced at par, all of the yields are equal; nominal = CY = YTM = YTC if callable.

Answer 591

a. customer ledgers (statements) Customer ledgers, from which account statements are prepared, must be kept on file or in appropriate electronic form for 6 years. Minute books and Form BD and its amendments are kept for the life of the firm. Confirmations and order tickets are kept for 3 years.

Answer 592

b. I and III There are a number of red flags that might generate an exception report. Among them are a trade in the account of a deceased person and a trade for an amount in excess of the customer’s order. Address numbers or area codes matching what we know or is expected is not a red flag nor is a single complaint, but excessive complaints could be.

Answer 593

b. minors estate If the beneficiary of a custodial account (minor) dies, the securities in the account must pass to the minor’s estate, not to the parents’ or custodian’s estate.

Answer 594

b. REITS Tax anticipation notes (TANs) for example are used to finance current operations in anticipation of future tax receipts. This helps municipalities to even out cash flow between tax collection periods. Similarly, BANs, bond anticipation notes will be converted to long-term financing through the sale of bonds and so on. REITs are not a municipal security. They issue shares of beneficial interest in a trust set up for real estate investment.

Answer 595

a. writers | Those who sell calls and puts, those who are short the contract, are known as writers.

Answer 596

a. reduce tax liability dollar for dollar Offered by the federal government for only certain types of real estate programs (not all), tax credits reduce tax liability dollar for dollar. In this light, credits are considered far greater benefits than deductions, which only reduce taxable income.

Answer 597

b. the lower the statutory debt limit, the safer for bondholders Municipal debt limits, known as statutory debt limits, can make a bond safer for investors. These limit the amounts of debt that the municipality can incur. The lower the debt limit, the less risk of excessive borrowing and default by the municipality, and thus the issuer's securities are safer for investors.

Answer 598

D) portions of bond principal scheduled to mature at intervals over a period of years until the entire balance has been repaid A serial bond issue schedules portions of the principal to mature at intervals over a period of years until the entire balance has been repaid.

Answer 599

a.ETFs have different potential tax consequences than mutual funds The potential tax consequences of owning an ETF can be different than those experienced when owning mutual funds. While an ETF can make a capital gains distribution, they generally do not—unlike a mutual fund, which generally would make such distributions on an annual basis. ETFs can be traded like other exchange products using traditional stock-trading techniques and order types and are priced by supply and demand. Customers pay commissions, not sales charges

Answer 600

d. less than the exercise price Put buyers are bearish and want the underlying stock to fall in value. Puts give the owner the right to sell at the contract's exercise (strike) price. Therefore, the put contract will pick up intrinsic value if the price of the underlying stock falls below the contract's strike price. The long put position will become profitable if the stock falls below the strike by more than the amount of the premium paid.

Answer 601

a. when interest rates fall Bonds with call features are most likely to be called by an issuer when interest rates fall. For example, if an issuer has an outstanding bond paying 6% and interest rates have fallen to 4%, why pay out 6% when prevailing market rates are only 4%? Better to call in the 6% bond and reissue a new bond at the current rate of 4%. In this way, call features benefit the issuer.

Answer 602

d. II, I, IV, III The steps or order of events to open an options account would occur in the following order: obtain essential facts about the customer, give the customer an options disclosure document, have the manager approve the account, enter the initial order, and have the customer sign the options agreement within 15 calendar days.

Answer 603

d. bills, notes, bonds Treasury bills have a maturity of less than 1 year, Treasury notes mature in 1 to 10 years, and Treasury bonds mature in 10 years or more. Therefore, in ascending order, short-term to long-term, they are T-bills, T-notes, T-bonds.

Answer 604

b. become a limited partner in an oil and gas drilling program Passive investments, such as the purchase of a limited partnership interest, are not considered outside business activity. An associated person may make a passive investment for his own account without providing written notice to the employing broker-dealer.

Answer 605

d. C/S One of the differences between common and preferred shareholders is that preferred shareholders generally have (with few rare exceptions) no voting rights.

Answer 606

a. American style option Call or put buyers can exercise a contract any time before expiration if the contract is an American-style option. European-style options can be exercised on expiration day (last day of trading) only. Nearly all equity options are American style. Foreign currency options may be either American style or European style.

Answer 607

d. risk that an issuer will be unable to meet interest and principal payments on debt obligations Financial risk emanates from the use debt financing (leverage). It represents the potential inability to meet interest and principal payments on debt obligations, which can lead to bankruptcy. It is sometimes called credit risk or default risk.

Answer 608

d. money market instruments Repurchase (repo) agreements and reverse repurchase agreements are short-term debt securities and are, therefore, a type of money market instrument.

Answer 609

c. I and IV Stockholders as owners can benefit from an increase in the price of the shares (capital appreciation) and by sharing in earnings through the receipt of dividends (distributed profits). Both are potential benefits, but neither are guaranteed.

Answer 610

d. II and IV All those participating in the solicitation of proxies, whether directly to obtain proxies themselves, or to provide unsolicited advice to shareholders regarding how to vote must register with the SEC.

Answer 611

b. courts protect both corporate and individual filers from creditors Bankruptcy is a general term for court procedures available to both individuals and businesses. During the proceedings, filers are protected by the court from creditors. Protection is granted independent of any actions to liquidate or file a plan for reorganization.

Answer 612

d. II and IV Commissions for agency transactions are shown on confirms but not markups or markdowns charged in principal transactions. In a bond trade, the par value of the bond purchase (or sale) is confirmed, not the number of bonds. If the security has one, the applicable Committee on Uniform Securities Identification Procedures (CUSIP) number is included

Answer 613

c. II and III When the current yield (12%) is higher than the coupon (10%), it means the bond was purchased at a discount. Because the question tells us that current interest rates are now 8%, the bond maturing within a year with a 10% coupon would now be able to be sold at a premium.

Answer 614

c. I and III The Form U-4 contains the applicant’s name as well as any aliases used. Residence history is shown for the past 5 years and employment history for the past 10 years. Charges, arrests, and convictions for securities related violations must be disclosed.

Answer 615

a. writings calls Short (writing) calls are bearish and have an unlimited maximum loss potential. In wanting the stock to go down, one's risk is that the underlying stock goes up and, in theory, could go as high as infinity.

Answer 616

d. broker dealer acted as a principal in the trade Broker-dealers must always indicate their capacity on the confirmation. If the client had looked, there would have been a statement something to the effect of “we acted as principals in this trade”. When the firm does that, there is no commission; there is a markup (in the case of a buy) or a markdown (in the case of a sell). In this instance, the actual price of the stock would have been lower than $50 per share and the BD marked it up to $50. (e.g., price of $49.50 with a .50 markup = $50) When the firm is acting as an agent however, commissions are always disclosed.

Answer 617

b. a large group of investors, each contributing a small sum Unlike partnerships sold as private placements, those limited partnerships sold through a public offering via a prospectus would consist of a large group of investors (partners), each contributing a small investment sum to the partnership.

Answer 618

c. after holding them for 6 months and freely thereafter Nonaffiliates holding unregistered shares must wait 6 months before divesting of those shares, but because they are nonaffiliates, they may sell freely (without volume restrictions) thereafter.

Answer 619

c. is not required but can be made, and may or may not be granted Extension requests can be made by the broker-dealer but are not mandatorily required. When made to the firm’s designated examining authority (DEA), they may or may not be granted.

Answer 620

b. the customer pledged the stock to the firm, which has now pledged it to a bank In a long margin account, customers put up at least half the purchase price of securities, and the broker-dealer firm borrows the remainder on the customer’s behalf from a bank. The customer pledges the securities to the broker-dealer, which is known as hypothecating the securities. The broker-dealer then rehypothecates them to the bank as collateral for the margin loan.

Answer 621

a. in the money In this case, the strike price is less than the current market value, so a call option would be in the money by the difference between the strike price and the market price (6 points, in this case). "At the money" means the strike price and the market price are the same; "at parity" means the premium equals the intrinsic value.

Answer 622

d. all are issued in book entry form U.S. Treasury-issued debt instruments are all issued in book-entry form. Only T-notes and bonds are priced as a percentage of par, have interest stated as a percentage of par, and pay semiannual interest payments. T-bills are issued at a discount, have no stated interest rate, and do not pay interest until maturity.

Answer 623

b. trade confirmation Options are issued by OCC and traded by investors without a physical certificate. The definitive proof of ownership is the trade confirmation—essentially, the document that confirms the purchase.

Answer 624

c. 600 The potential gain on any short (written) option position, call or put, is the premium received on the transaction

Answer 625

a. loses 150 premium paid The owner (buyer) of the put would have paid 1.5 ($150) for the contract. When option contracts expire unexercised, the buyer (owner, holder, party who is long) loses the premium paid—in this case, $150.

Answer 626

a. number of bonds in the issuer A bond's yield expresses the cash interest payments in relation to the bond's value. Yield is determined by the issuer's credit quality, prevailing interest rates, time to maturity, and any features the bond may have. The number of bonds in a single issue is generally determined by how much capital the issuer needs to borrow at the time of issue, while its yield is something that will fluctuate as the bond trades in the secondary market and gets closer to maturity

Answer 627

c. prime brokerage account A prime brokerage account is one in which a customer (an institution) selects one member to provide custody and financing of securities and executes trades with other firms known as executing brokers.

Answer 628

d. business, reputation, character, education, experience Before submitting an application to enroll any person with FINRA as a registered representative, a member firm must ascertain the person’s business reputation, character, education, qualifications, and experience. As part of the application process, the member firm must certify that it has made an investigation and that the candidate’s credentials are in order.

Answer 629

d. purchasing power risk Remember that the fixed dividends received by preferred shareholders are a stated percentage of par value. Purchasing power risk is the possibility that the income produced via the fixed dividend received will not purchase as much in the future for preferred shareholders as it does today due to inflation.

Answer 630

d. there is no secondary market making them highly illiquid While one's interest in a DPP can be sold, there is virtually no secondary market. In this regard, they are considered highly illiquid.

Answer 631

a. front end load The front-end load is the most common way a mutual fund's sales charge is paid. The sales charge is paid at the time of purchase. Front-end load, or Class A, shares have lower expenses than other classes, because the fund does not have to keep books on sales charge payments. It's already taken care of.

Answer 632

c. I and III election, authorization Common stockholders never vote directly on dividend payment or size. They may elect the board of directors (indirectly influencing the policy on payment of dividends) and may vote on issues concerning the company's capitalization, such as the issuance of more common stock. They do not vote on day-to-day business decisions, such as suppliers used.

Answer 633

d. I and III title, repossessed When equipment trust certificates have been issued, the titles to the assets (not the actual equipment) backing the certificates are held in trust. If the issuer fails to make the payments on the equipment, it can be repossessed and sold to pay off the debt held by the certificate holders. In other words, it is the equipment acting as the collateral that secures these loans.

Answer 634

d. ADR pricing is dollar based and fluctuates throughout the day Many ADRs are listed on exchanges such as the NYSE or Nasdaq. ADRs trade throughout the day and settle in the same manner as would the shares of a U.S.-based company. ADRs are priced in U.S. dollars.

Answer 635

a. I and III New account forms filled out when the customer account was opened and stock records showing all the securities held by the firm and where they are held must be kept for 6 years. Minute books showing the minutes of directors’ meetings are lifetime records. Advertising need only be kept for 3 years.

Answer 636

d. currency risk A foreign stock or bond issuer runs all the usual risks associated with business, finance, and investment, but currency risk is peculiar to foreign investments. If the foreign currency involved weakens against the dollar, dividends and interest paid by the foreign company will buy fewer dollars and thus be smaller as far as the American investor is concerned.

Answer 637

b. fixed income (debt) securities with short term maturities Money market instruments are fixed-income (debt) securities with short-term maturities, typically one year or less

Answer 638

a. income or net worth criteria with substantial investment experience Investors in limited partnerships offered in private placements as opposed to those being offered publicly must be accredited investors. The generally accepted definition of an accredited investor is one who meets designated annual income or net worth criteria, and has substantial investment experience.

Answer 639

c. increasing consumer demand for goods and services, increasing industrial production, rising stock market and property values Expansions in the business cycle are characterized by increasing consumer demand for goods and services, increasing industrial production, and rising stock markets and property values. Each of the remaining characterizations would more likely be associated with periods of contraction in the economic business cycle.

Answer 640

a. callable bonds with higher coupons When interest rates fall, issuers will call in their callable debt issues with the highest coupon rates first. These are the ones currently costing the issuer the most in interest payments. Therefore, when interest rates are falling, holders of higher coupon bonds are more exposed to call risk than are those investors holding lower coupon bonds.

Answer 641

b. the officer may not purchase a new issue he is considered a restricted person Under the rules regarding the purchase of new issues, bank officers would generally be characterized as restricted persons. They may not, therefore, purchase new issues.

Answer 642

b. II and III A short stock position gives an investor unlimited risk potential if the stock should rise because the investor must eventually buy back the stock at the higher price. Because stock can rise an unlimited amount, there is unlimited risk. The sale of a naked call requires that, if exercised, the writer must buy the stock in the market and deliver it at the strike price. Again, because the stock can rise to some unlimited price, the position carries unlimited risk.

Answer 643

b. individual owning 5% or more of a member firm Rules prohibit member firms from selling public offering stock in equities to any account in which restricted persons are beneficial owners. Restricted persons include FINRA members, employees of member firms, finders and fiduciaries acting on behalf of the underwriters, portfolio managers, and any person owning 10% or more of a member firm. Also included are the immediate family members of any restricted persons.

Answer 644

c. interest rates are rising Bonds are more likely to be called when interest rates are falling. Call protection, a length of time during which the bond cannot be called, protects the investor during these times. Therefore, the call protection is least impactful when interest rates are rising—in other words, least impactful during times when the bond wouldn't likely be called.

Answer 645

a. 2 point gain or loss Because we do not know if the opening transaction was a buy or a sell from what we are told, this could be either a 2-point gain or loss. If the opening transaction was a buy, this represents a gain (bought at 45, sold at 47). But if the opening transaction was a sell, this represents a 2-point loss (sold at 45, bought back at 47).

Answer 646

d. fiduciary account may only trade if specifically permitted in trust or custodial agreement Both individual and joint accounts may trade on margin. While corporate and partnership accounts may trade on margin as long as they are not specifically restricted from doing so, a fiduciary account may only trade on margin if permission is specifically granted in the trust or custodial agreement.

Answer 647

b. liquidity risk One of the advantages of a security being traded on a U.S. listed stock exchange is the ready availability of buyers and sellers. This means the investment can be considered a liquid one—easy to divest of at a fair price, if and when one needs to.

Answer 648

b. approval of new account by a principal All accounts must be approved by a principal before the first trade. Neither the customer nor the registered representative need sign the new account form, and no self-regulatory organization (SRO)—requires the filing of new account information with them.

Answer 649

d. before or during the sales presentation The mutual fund purchaser must receive a prospectus before or during any sales solicitation or presentation. Additionally, sales literature sent out to prospective customers is considered a sales solicitation and must therefore be accompanied by a prospectus.

Answer 650

c. when interest rates rise, the prices for preferred shares can fall Preferred shares, like debt securities, are sensitive to and have an inverse relationship to interest rates. Rates up, prices down. Rates down, prices up.

Answer 651

b. limited profit potential and unlimited loss potential Short sellers are bearish—wanting to see the stock go down in value. Because stock could only go down as far as zero, the profit for a short seller is limited to the difference between the price the stock was shorted at and zero. By contrast, the risk for a short seller is that the stock goes up in value and there is no limit to how high the stock might rise, giving the short seller potentially unlimited losses.

Answer 652

c. plan donors must be related to student benefactor Donors to 529 plans need not be related to the student benefactor. Each of the remaining statements is true.

Answer 653

b. both persons are considered restricted Working for a BD, the RR is considered restricted. While grandparents of restricted persons are generally not considered restricted, anyone being provided financial support and/or living under the same roof as a restricted person (as is the case here) is also restricted.

Answer 654

b. T-notes, T-Bonds, can be considered money market instruments when they have only a year left to maturity Only T-bills, because they have maturities of one year or less, are considered money market securities at the time of issue. However, though issued with longer maturities, both T-notes and bonds are considered money market instruments once they have only a year left to maturity.

Answer 655

d. shares may be held to reward others who can direct business to the member Designed to protect the integrity of the public offering process, the rules ensure that members make a bona fide public offering of securities at the public offering price, do not withhold securities in a public offering for their own benefit or use shares to reward others in a position to direct future business to the member and that members and their associated persons do not take advantage of their insider status to gain access to new issues for their own benefit at the expense of public customers.

Answer 656

b. the nations largest borrower and considered best credit risk The federal government is the nation's largest borrower, as well as the best credit risk. Securities issued by the U.S. government are backed by its full faith and credit. There is no stronger backing than that of the U.S. federal government.

Answer 657

c. Treasury STRIPS are backed in full, treasury receipts are not Brokerage firms can create and issue a type of bond known as a Treasury receipt from U.S. Treasury notes and bonds. Issued by financial institutions, they are not backed by the U.S. government. However, the Treasury Department has its own version of receipts known as Treasury STRIPS. Issued by the Treasury Department, they are direct debt obligations of the U.S. government.

Answer 658

c. they have fees associated with sales and redemptions No-load shares have fees that are not considered sales charges, but rather service fees, purchase fees, redemption fees, and so on. Some fees, especially some of those levied at redemption, may look like sales charges but are not—hence, the term "no-load shares."

Answer 659

c. T bills and negotiable CDs Given the long-term investment time horizon and the willingness to accept some risk to earn better returns, the lease suitable recommendations would be short-term money market instruments, such as T-bills and negotiable CDs where the trade-off for safety is return.

Answer 660

c. II and III FINRA members must send at least quarterly account statements to their account holders. If activity has occurred in a given month, a statement must be sent that month, and monthly statements are required as long as the account holds penny stocks.

Answer 661

a. provide prior written notice to their employer Associated persons who wish to enter into a private securities transaction must provide prior written notice to their employer. Approval is only required when compensation will be paid. All supervision for the transaction is the responsibility of the employing member and not the firm accommodating the transaction.

Answer 662

c. 2,000 No credit may be extended in a new margin account with less than $2,000 in equity. This purchase of $3,000 of stock would normally require 50% payment ($1,500) in accordance with Regulation T, but because it is the initial trade in the account, the $2,000 minimum must be met.

Answer 663

b. 5 per share SEC rules define penny stocks as those that are unlisted on an exchange or Nasdaq trading at less than $5 per share.

Answer 664

a. breakeven is the same for both parties Every option is a 2-party contract. One party's gain is the other party's loss. Therefore, MG and ML for each party is different. But BE is the same for both parties. One wants the underlying stock to be above the BE, while the other wants the underlying stock to be below the BE.

Answer 665

c. not purchase shares of a new issue Persons characterized as restricted persons are prohibited from purchasing shares of new issues in any quantity. If one is already restricted, working for a bank or a BD does not exempt them from the rule.

Answer 666

c. direct participation program A limited partnership (LP) is the most common form of direct participation program (DPP). LPs are business entities allowing for the economic consequences of the business to flow through to the individual investors (partners).

Answer 667

a. the fixed annuity buyer assumes no investment risk With fixed insurance products such as whole life insurance and fixed annuities, the insurance company assumes the investment risk. This elimination of investment risk for the purchaser is what differentiates the product from a security. Note that with fixed products, even though not a security, the purchaser faces inflation risk.

Answer 668

c. have the opportunity to approve or disapprove of the associated persons participation If the private securities transaction involves compensation, the employing member may approve or disapprove the associated person’s participation. While the employing member firm is responsible for all supervision regarding the transaction, it is not obligated and normally is not in a position to provide any services related to accommodating the transaction.

Answer 669

b. not required If a registered person wants to be employed by or accept compensation from an entity other than the member firm, that person must provide prior written notice to the member. Note that notice must be made, but the employing member’s permission is not being requested nor is it required.

Answer 670

c. assets less liabilities Net worth is calculated by taking the business's assets less its liabilities (creditors' claims).

Answer 671

b. a proxy Most voting shareholders choose not to undertake the travel, expense, inconvenience, and time away required to attend a shareholders’ meeting. Having someone else vote the shares is called voting by proxy and is a way to stay at home but still have a voice in crucial corporate decisions.

Answer 672

b. lending money to and becoming a creditor of the corporation While stock represents ownership, a bond represents a loan. When investors purchase bonds, they are lending money to the borrowing entity and thus become creditors of the entity.

Answer 673

d. pays past and current preferred dividends before paying dividends of common stock Dividends in arrears (those missed) on cumulative preferred have the highest priority of dividends to be paid. Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Bond interest, however, is always paid before any dividends, preferred or common.

Answer 674

c. ETFs ETFs make final and summary prospectuses available, for example on a website, for viewing or downloading but there is no requirement to send one to those who trade the exchange-traded fund. Publicly traded closed-end funds are not obligated to deliver a prospectus when traded in the secondary market place.

Answer 675

c. its full faith and credit based on its power to tax the people Securities issued by the U.S. government are backed by its full faith and credit. The promise to pay is based on the federal government's power to tax the people, as well as to print currency when it needs to.

Answer 676

d. not subject to statutory debt limits and do not require voter approval Municipal revenue bond issues are self-supporting. Given that they do not rely on taxes to support the debt service, they do not require voter approval. Nor are they subject to statutory debt limits as GO bonds are.

Answer 677

a. exploratory Exploratory programs, also called wildcatting programs, are those that look for resources near existing producing wells in the hopes of finding more deposits. These are considered riskiest of the oil and gas programs—exploratory, income or a combination of the 2. Raw land is a type of real estate program, not an oil and gas program.

Answer 678

b. 56 weeks Though the maximum maturity for T-bills is subject to change, they are always short-term instruments—that is, one year or less—and are typically issued with maturities of 4 weeks, 13 weeks, 26 weeks, and at times, 52 weeks.

Answer 679

a. bullish on LMN stock Those who buy equity call options have the right to purchase the underlying stock—in this case, LMN stock. Being in a position to buy the stock makes the investor bullish on the stock. If the underlying goes up in value, so too will the call premium.

Answer 680

b. must be registered as a principal Those who manage any part of a member’s securities activities must be registered as a principal with FINRA, including those involved solely in training associated persons.

Answer 681

a. t+4 business days Regulation T, which applies to everyone who opens a brokerage account, specifies that payment in full for securities must take place no later than 2 business days after regular way settlement. Since regular way settlement is T + 2, it follows that T + 4 is the latest.

Answer 682

d. neither an owner of nor a debtor of the company Derivative securities of corporate equity securities represent neither equity (ownership) in a company nor debt (a loan). They represent the right to either buy or sell the stock at a later time at a fixed price.

Answer 683

d. short term time drafts issued by banks to corporations Used by corporations to finance international (foreign) trade, BAs are issued by banks to corporations. They are considered money market instruments because of their short-term maturities, generally no longer than 270 days (9 months).

Answer 684

d. are nonregulated with no SEC registration required Hedge funds do not require registration with the SEC and are therefore considered to be nonregulated. Furthermore, they do not come under the Investment Company Act of 1940.

Answer 685

a. rehypothecates the stock to a bank Stock in a client’s margin account is hypothecated (pledged) to the broker-dealer. In order to obtain funds to carry the margin loan, the broker-dealer rehypothecates a portion of the stock to a bank. The shares pledged to the bank serve as collateral for the bank’s loan to the broker-dealer, which is made in accordance with Regulation U (not T).

Answer 686

b. dividend Scheduled, common events such as dividend declarations, issuance of rights and warrants, and forward and reverse stock splits are accompanied by standardized adjustment of the stock’s cost base. Unique events such as corporate mergers, takeovers and spinoffs are dealt with in a nonstandardized case-by-case manner that depends on the individual circumstances. Ideally, the outcome is what is best for the stockholder and the company.

Answer 687

c. 100 per individual per year No member or associated person (AP) may give anything of value in excess of $100 per individual per year to any person, principal, employee, or representative of another person where such payment is in relation to the business of the employer of the recipient of the payment or gratuity.

Answer 688

b. rights will be distributed to existing stockholders with an exercise price lower than the current market value Preemptive rights entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public. They are offered with an exercise price lower than the current market value and are issued (typically) for a period of four to six weeks (30–45 days). Existing shareholders who receive rights have three options: they may be exercised, sold in the secondary market, or allowed to expire at the end of their subscription.

Answer 689

c. general partners When a limited partnership (LP) is dissolved, the general partners are paid last.

Answer 690

b. being in a fiduciary position with responsibilities to others The fiduciary responsibility is borne by the GPs, not the LPs. The flow-through of income and expenses, limited liability, and having an investment managed by the GPs are all considered advantages for the LPs.

Answer 691

a. municipal revenue bonds These are all examples of municipal revenue bonds, which are bonds issued to finance a project or facility with the bonds' debt service backed by the facility's revenue stream. The revenue might come from rents, tolls, or admission fees, among other sources.

Answer 692

c. left to expire unexercised At expiration if the strike price of a put (40) is below the current market value of the underlying stock (43), the put contract is out of the money, has no intrinsic value and therefore would expire without being exercised. Remember that owning the put gives the holder the right to exercise and sell the stock at the strike price of 40. One wouldn't want to sell a stock at 40 if it is currently trading at 43 in the open market.

Answer 693

b. freeriding “Freeriding” is a term used when securities are purchased and then sold before making payment for the purchase. Freeriding is generally prohibited in both cash and margin accounts.

Answer 694

d. common stock All corporations will issue common stock, of which there can be only one class, but not all corporations issue preferred stock. Corporations that choose to issue preferred shares can issue more than one class.

Answer 695

a. the account records system has been changed to a new format Updated account information must be sent to the customer with 30 days for confirmation upon the opening of the account, at least once every 36 months thereafter, and in the event of the customer notifying the firm of changes in any information shown or listed on the account form.

Answer 696

c. notification to the broker dealer of the change within 30 days When there are significant changes to the client’s status, such as salary and bonus potential as well as change of address, the client should notify the member firm within 30 days.

Answer 697

c. corporate bond fund Bond mutual funds typically have lower expense ratios than stock funds, which tend to be riskier and require more sophisticated investment strategies. The ABC Bond fund is the only bond mutual fund listed. Growth funds involve equities (stock), and of course, the stock income fund specifies equities as well.

Answer 698

a. pay dividends and pass gains through to investors but not losses REITs pay dividends and pass gains through to investors but do not pass through losses like limited partnerships do. With no pass-through of losses, this differentiates them from direct participation programs (DPPs).

Answer 699

a. 17.50 A bond with a nominal yield of 3.5% pays $35 in interest annually (3.5% × $1,000 par value). Given the bond makes semiannual interest payments, each of those payments would be in the amount of $17.50.

Answer 700

c. I and III Those who buy options contracts pay the premium for the right to exercise (buy or sell the underlying security). Those who sell the contract incur the obligation to either buy or sell the underlying to fulfill the buyers exercise.

Answer 701

d. II and IV The trip itself is acceptable in principle, because it has a business purpose. Having it in the Canary Islands would be inappropriate. Side tours, outings, and so on are acceptable, provided the guests pay their own expenses for them. Paying the expenses of guests would be inappropriate as well. Permission of the employing firm to attend is always required.

Answer 702

c. accrued taxes first, subordinated bondholders last The liquidation priority is as follows; taxes and wages first, followed by secured debt and then unsecured debt, including general creditors, then subordinated debt and then equity holders with preferred shareholders first, followed by common shareholders. Therefore, of those that are listed here, accrued taxes would be paid first, and subordinated bondholders last.

Answer 703

b. I and III Common stockholders of publicly traded companies have a residual claim to assets of a corporation at dissolution and are entitled to receive an annual report containing audited financial statements. The board of directors would vote to pay a dividend.

Answer 704

d. immediately at the lowest Market orders carry the idea of immediate execution at the best available price. A market order to buy would require execution at the lowest available price.

Answer 705

d. II and IV The term “investment strategy” applies to recommendations to invest in, hold, or sell specific securities. When making recommendations, both financial and nonfinancial items in a customer’s profile should be considered.

Answer 706

d. has received 300 for writing the call contract An investor who is short 1 January 20 call at 3 has received $300 premium to write (sell) the call. Being short the call (sold), the investor will be obligated to sell 100 shares of XYZ stock if the contract is exercised at the strike price ($20). Remember that only the owner, the buyer or the party who is long can exercise the contract.

Answer 707

a. 3 months The statute of limitations on fraudulent practices, under the Securities Exchange Act of 1934, is 3 years from the event itself, or 1 year from its discovery, whichever comes sooner. In this case, the event took place 2 years and 9 months ago, therefore action would need to be taken within the next 3 months (3 years total), as that would be sooner than 1 year from the current discovery.

Answer 708

d. a specific rate of return the borrower pays the investor for use of the funds Interest is the rate of return above the principal sum received by a lender (investor) from a borrower. Interest is rate of return the investor receives for use of the funds over the life of the loan.

Answer 709

d. a city or local municipality Ad valorem taxes are real estate taxes. Real estate taxes can only back debt securities issued by towns, cities, or counties (never states). These are collectively known as local municipalities.

Answer 710

c. II and III Buyers of options pay the premiums for the contracts, and writers (sellers) receive the premiums. If any contract, put or call, goes unexercised at expiration, the buyer loses the premium paid while the seller gets to keep it; a gain.

Answer 711

c. retail distribution The most common types of direct participation programs are real estate, oil and gas, and leasing programs.

Answer 712

c. withdrawals may not be free of state taxation Contributions into a 529 plan are always after tax at the federal level but not always at the state level. Therefore, withdrawals are always tax free at the federal level if used for qualified education purposes (tuition, books, lecture fees, lab fees). They are generally tax free at the state level unless it is an out-of-state plan, in which case, state tax law may apply.

Answer 713

d. hedge fund Investment companies include face-amount certificates, unit investment trusts, and management companies (both open- and closed-end). Hedge funds are organized as private investment companies, which are excluded under the definition of investment company und the Act of 1940.

Answer 714

d. 900 A put writer's maximum loss is the put's strike price (15) less the premium received (6)—in this case, 9 points. Note that this is the same as the breakeven. This maximum loss occurs when the stock price drops to zero. The investor is forced to buy the worthless stock at the option's strike price of 15 and, therefore, has lost 15 points. The investor's total loss (15), however, is reduced by the premium (6) received, making the ML 9 points ($900).

Answer 715

c. a transportation company This is the essence of an equipment trust certificate. These are corporate bonds commonly issued by transportation companies, such as railroads and airlines. These bonds are backed by equipment (e.g., aircraft) the issuer uses in its day-to-day business.

Answer 716

a. private investment companies The 3 classifications established under the Investment Company Act of 1940 are face-amount certificates, unit investment trusts, and management companies (open and closed-end funds). Private investment companies do not come under the Act of 1940.

Answer 717

c. 8,850 The maximum gain on a long put is calculated by subtracting the premium from the strike price (95 − 6.50 = 88.50 per share). Because one contract represents 100 shares, the owner's maximum gain is $8,850 and would occur if the stock falls to zero. Remember, put buyers are bearish; therefore, they will make money if the stock falls below the breakeven point—in this case, below 88.50.

Answer 718

d. the federal reserve board (FRB) Regulation T, the initial margin requirement currently at 50%, is set by the Federal Reserve Board (FRB).

Answer 719

c. 25 days For new issues that qualify for listing on an exchange or Nasdaq, the prospectus delivery requirement period in the aftermarket (after the effective date) is 25 days. For nonlisted and non-Nasdaq securities the period is 40 days. If the new issue will be specifically quoted on the OTCBB or the electronic OTC Pink, the period is 90 days.

Answer 720

a. currency risk Whenever investing in securities issued in non-U.S. markets, investors need to be sensitive to the different risks that might apply to foreign investments. Of those listed here, currency risk should be of concern. Currency risk is the possibility that an investment denominated in a foreign currency could decline for U.S. investors if the value of that currency declines in its exchange rate with the U.S. dollar.

Answer 721

b. these dividends may be taxed by both the foreign and US Dividends paid to a U.S. investor may be subject to a withholding tax by the home country of the underlying foreign stock issuer. In many cases, the amount of tax withheld by the foreign government is applied as a credit against the investor’s U.S. tax liability. Note: Any trading profits (capital gains) from the ADR would only be taxable here in the United States.

Answer 722

c. income bonds Also known as adjustment bonds, income bonds pay interest only if the issuer has enough earnings to do so. They are often issued by companies coming out of bankruptcy. As a result, the interest payments providing the income to meet the objective are uncertain.

Answer 723

b. the put has intrinsic value When the CMV of the stock is below the strike price, puts are in the money. Therefore, they have intrinsic value. This contract is in the money by 5 points (75 – 70).

Answer 724

d. call writers and put buyers Buyers of puts and writers of calls are bearish investors. Buyers of calls and writers of puts are bullish investors.

Answer 725

a. FINRA Financial Industry Regulatory Authority (FINRA) regulates all matters related to investment banking, trading in the OTC markets and some exchange markets, and the conduct of FINRA member firms and associated persons including the promotion of self-discipline among members. It also investigates and looks to resolve grievances between the public and members and between members. The MSRB relies upon FINRA to perform dispute resolution.

Answer 726

d. wages and insurance Intangible drilling costs (IDCs) are costs for those items that would have no salvage value at the end of the program. These might include wages, supplies (not equipment that can be depreciated), fuel, and insurance.

Answer 727

a. limited access to a company's books and records By virtue of owning the company's common stock, shareholders have a limited right to review the company's books and records. For example, they have the right to examine the minutes of meetings of the board of directors.

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