Practice Test 1

Question 1

What is a notice made in the financial press that formally announces a particular transaction, such as an IPO or stock placement?

Answer 1

Tombstone Ad

Question 2

What is the minimum denomination of Treasury notes that can be purchased by an investor?

Answer 2

$100

Question 3

The statement of cash flow is separated into what 3 categories?

Answer 3

Cash flow from income activities
Cash flow from investing activities
Cash flow from operating activities

Question 4

What is a complex trust?

Answer 4

A trust that may distribute income annually; it may choose to make distributions or it can choose to accumulate income

Question 5

What is the Howkey Test?

Answer 5

determines what qualifies as an “investment contract” and would therefore be subject to U.S. securities laws

Question 6

What is the equation for Return on Equity?

Answer 6

Earnings after taxes/common stockholder equity = ______________

Question 7

What is a Money Purchase Plan?

Answer 7

An annual employer contribution to its employees’ retirement savings.
Employees don’t contribute to their pension plan, but they may have 401(k) plans as well.
This is a “qualified” retirement savings plan, meaning the employee does not pay taxes on the money until it is withdrawn.

Question 8

Which mutual fund share classes will charge investors a front-end load?

Answer 8

Class A Shares

Question 9

In order to be eligible to make a traditional IRA contribution, individual must be younger than ______ by the end of the taxable year.

Answer 9

70 1/2 years

Question 10

What is Regulation T?

Answer 10

Governs cash accounts and the amount of credit that broker-dealers can extend to investors for the purchase of securities.
Investors who want to purchase securities using broker-dealer credit need to apply for a margin account.
Mandates that investors can borrow no more than 50% of the purchase price while the remaining balance must be paid in cash.

Question 11

What is a family limited partnership?

Answer 11

A business or holding company owned by two or more family members.
Each family member can buy shares in the venture for a potential profit.
There are two types of partners- general partners and limited partners.
Often established to preserve a family’s generational wealth, allowing for tax-free transfers of assets, real estate, and other wealth.

Question 12

What is the Dividend Discount Model?

Answer 12

It attempts to calculate the fair value of a stock irrespective of the prevailing market conditions and takes into consideration the dividend payout factors and the market expected returns.

Value of a Stock = EDPS/(RRR-DGR)

EDPS = expected dividend per share
RRR = required rate of return
DGR = dividend growth rate

Question 13

What is a “not-held” order?

Answer 13

A type of order that gives a broker the time & price discretion to seek the best price available.
Investor places this in hopes of obtaining a better price than could be attained with immediate action
May be placed as market orders or limit orders
The broker is not held liable for any losses that the shareholder may suffer if the broker misses an opportunity while waiting for a better price

Question 14

What is a target benefit plan?

Answer 14

Type of retirement plan that is often considered a “hybrid” of a money purchase & defined benefit plans

• like defined benefit plans, annual contribution calculations are based upon a specified projected retirement benefit (the target benefit)
• as with other money purchase pension plans, annual contributions (which are both fixed and mandatory) are made to individual participant accounts, and the actual retirement benefit a participant ultimately receives depends upon his or her individual account balance

Question 15

What is a flat benefit plan?

Answer 15

An employee benefit plan where the pension payout is determined by multiplying the employee’s month or years of service by a predetermined flat rate

Question 16

What is an SEP (simplified employee pension)?

Answer 16

An individual retirement account that an employer or self-employed individual can establish
Used by small businesses and self-employed individuals to meet retirement savings needs
Contribution limits are annual and often higher than standard IRAs and 401(k)s
Contributions are vested immediately

Question 17

What is a cash balance pension plan?

Answer 17

A pension plan where participants receive a set percentage of their yearly compensation plus interest charges
Contributions limits increase with age
Maintained on an individual account basis

Question 18

What is a profit sharing plan?

Answer 18

Retirement plan that gives employees a share in their company’s profits based on its quarterly or annual earnings
Up to the company to decide how much of its profits it wishes to share
Contributions are made by the company only- employees cannot contribute

Question 19

What is a Unit Benefit Plan?

Answer 19

A retirement plan where contributions from employer are determined based on the years of service of the employee
A way to reward the employees for staying at the company for longer

Question 20

What are American Depository Receipts?

Answer 20

They represent ownership interest in foreign securities denominated in US dollars
They are traded on secondary exchanges
They are issues by banks in foreign countries

Question 21

What is Regulation SHO?

Answer 21

A set of rules from the SEC that regulates short sale practices

Introduced the “locate” and “close-out” requirements aimed to restrict naked short selling (Naked shorting is the illegal practice of short selling shares that have not been affirmatively determined to exist.)

Question 22

What does “accounts receivable” mean?

Answer 22

legally enforceable claims for payment held by a business for goods supplied or services rendered that customers have ordered but not paid for
Listed on the balance sheet as a current asset

Question 23

What does “accounts payable” mean?

Answer 23

money owed by a business to its suppliers shown as a liability on a company’s balance sheet

Question 24

What are 2 examples of hybrid securities?

Answer 24

Preferred stock (trades like common stock but receives fixed income like a bond)
Convertible Bond (fixed income and common stock properties)

Question 25

What denomination is commercial paper issued in?

Answer 25

$100,000 or more

Question 26

What is a zero-coupon bond?

Answer 26

A debt securities that does NOT pay interest but instead trades at a deep discount - renders a profit at maturity when the bond is redeemed for its full face value
Requires taxes to be paid on accrued interest each year, even though no interest is received (“phantom interest”)

Question 27

What is FINRA rule 3240?

Answer 27

This rule generally prohibits borrowing and lending arrangements between registered persons and their customers
Member firm must have a written policy in place regarding borrowing and lending arrangements

Question 28

How long are assets held to be considered “short-term” capital gains?

Answer 28

12 months OR less

Question 29

How long are assets held to be considered “long-term” capital gains?

Answer 29

13 months or more

Question 30

What is the Securities Act Rule 144?

Answer 30

Set of SEC guidelines outlining the sale of restricted or unregistered securities
Regulates transactions in securities held by controlling or majority shareholders
Mandates 5 restrictions to be met for restricted, unregistered and control securities to be sold or resold to the public

Question 31

What is the Beta Coefficient?

Answer 31

Measures the volatility of an individual stock compared to the systematic risk of the entire market

Question 32

What is the Times Interest earned ratio?

Answer 32

Measures of a company’s ability to pay its debt obligations

Operating Income/Interest Expense

Question 33

What was the standard settlement cycle shortened to for most broker-dealer transactions in the 2017 amendment to the Settlement Cycle Rule?

Answer 33

standard settlement cycle was shortened from 3 business days after the trade (T+3) to 2 business days after the trade (T+2)

Question 34

What is the Section 1035 Policy Exchange?

Answer 34

a provision in the Internal Revenue Service (IRS) code allowing for a tax-free transfer of an existing annuity contract, life insurance policy, long-term care product, or endowment for another one of like kind

The primary benefit of a section 1035 exchange is that it lets the contract or policy owner trade one product for another with no tax consequence

Question 35

What is a Modified Endowment Contract?

Answer 35

an overfunded life insurance policy

The taxation of withdrawals under the MEC is similar to that of non-qualified annuity withdrawals.

These limits on the amount of cash inside a policy are in place to avoid abusing tax advantages inherent in permanent life insurance.

The taxation of withdrawals under the MEC is similar to that of non-qualified annuity withdrawals.

Once a policy has triggered MEC status, it cannot be reversed.

Question 36

What is a Reverse Convertible Bond?

Answer 36

A reverse convertible bond (RCB) is a bond that can be converted to cash, debt, or equity at the discretion of the issuer at a set date.

The most significant advantage of RCBs is their high coupon rates.

Question 37

What is a convertible bond?

Answer 37

A convertible bond pays fixed-income interest payments, but can be converted into a predetermined number of common stock shares.

The conversion from the bond to stock happens at specific times during the bond’s life and is usually at the discretion of the bondholder.

A convertible bond offers investors a type of hybrid security that has features of a bond, such as interest payments, while also having the option to own the underlying stock.

Question 38

What is FHLMC/Freddie Mac?

Answer 38

Federal Home Loan Mortgage Corporation

Stockholder-owner, government sponsored enterprise

The role of Freddie Mac is to buy a large number of loans from mortgage lenders, then combine them and sell them as mortgage-backed securities.

obtains its loans from smaller banks.

Question 39

What is SLMA or Sallie Mae?

Answer 39

Originally the Student Loan Marketing Association

Originates, services, and collects private education loans

Question 40

What is FNMA/Fannie Mae?

Answer 40

Federal National Mortgage Association

not fully backed by the US Government but has a line of credit from the US Treasury

Question 41

What is GNMA/Ginnie Mae?

Answer 41

Government National Mortgage Association

only government agency issuer with full backing by the US government/government garaunteed

Question 42

What is convertible preferred stock?

Answer 42

Preferred stock with a convertible provision that allows owners to convert/exchange their preferred stock to a designated number of common shares

This gives them potential price appreciation of the stock in the future