Practice Test 8

Question 1

In a contested proxy (proxy contest) solicitation, all those soliciting proxies from shareholders must register with
A) FINRA
B) FRB
C) NSCC
D) SEC

Answer 1

In a contested proxy solicitation all those soliciting proxies from shareholders must register with the Securities Exchange Commission (SEC).

Question 2

If a customer does not pay for securities purchased within 2 business days of regular way settlement date, the broker/dealer may request a time extension from:
A) the Philadelphia Stock Exchange.
B) FINRA.
C) its designated examining authority.
D) the Chicago Stock Exchange.

Answer 2

its designated examining authority.

Question 3

Which of the following individuals normally trade on the floor of an exchange?
Two-dollar broker.
Registered market maker.
Allied member.
Stock lending representative.

Answer 3

Two-dollar broker.

Registered market maker.

Question 4

Which of the following are spreads?
Long 1 FLB May 40 call; short 1 FLB May 50 call.
Long 1 FLB May 40 call; long 1 FLB May 50 call.
Long 1 FLB Aug 40 call; short 1 FLB May 40 call.
Long 1 FLB Aug 40 call; short 1 FLB Aug 50 put.

Answer 4

Long 1 FLB May 40 call; short 1 FLB May 50 call.
Long 1 FLB Aug 40 call; short 1 FLB May 40 call.

Choices I and III fit the definition of a call spread because each includes one long and one short option of the same type with different strike prices (I, a price spread) or different expiration dates (III, a time spread). Choice II involves options of the same type, but both are long. Choice IV involves options of different types.

Question 5

DWQ declares a quarterly cash dividend of $.20. After the ex-dividend date, what will be the exercise price of a listed DWQ May 25 call option?

A) 25.
B) 25.25.
C) 24.8.
D) 24.75.

Answer 5

Because a listed option is not adjusted for a cash dividend, the exercise price of a DWQ May 25 call option remains the same: $25.

Question 6

If a mutual fund's objective is income, it would NOT hold which of the following securities in its portfolio?
A) Corporate bonds.
B) Income bonds.
C) Preferred stock.
D) U.S. T-notes.

Answer 6

Income Bonds;
A fund designed to generate current income for its shareholders would not hold an income bond, also known as an adjustment bond. 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, these bonds tend to trade like zeroes.

Question 7

Which of the following statements are TRUE regarding tax-deferred, noncontributory, defined benefit plans?

Contribution amounts are fixed.
Contribution amounts vary.
Benefit payments are fixed.
Benefit payments vary.

Answer 7

Contribution amounts vary.
Benefit payments are fixed;
In an employer-sponsored defined benefit plan, the contribution amounts vary according to the assumptions used. The benefit amount, however, will be fixed per person based on a formula combining age, years of service, salary, etc.

Question 8

Which of the following capital structures would be considered the most highly leveraged?
A) A large value of common stock and a small value of bonds.
B) A large value of bonds and a small value of common stock.
C) Equal values of common stock and bonds.
D) Common stock only.

Answer 8

A large value of bonds and a small value of common stock;
Leverage is using other people’s money to enhance equity value. In this case, borrowing at a fixed-rate of payment enhances cash flow, giving the company extra money to invest in its operations. Just as individuals, a company has to be careful not to borrow more than they can afford.

Question 9

An official notice of sale publicizes each of the following EXCEPT:
A) the amount of good faith deposit required.
B) the issuer’s name.
C) the bond counsel’s name.
D) the bond’s rating.

Answer 9

The Bond’s Rating;
The notice of sale is the advertisement placed by a municipality soliciting bids from underwriters for an issue it wishes to sell. It does not include the bond’s rating.

Question 10

Which of the following statements regarding a shelf offering are TRUE?
It can be used to distribute an initial public offering only.
It can be used to distribute an additional offering only.
Its maximum duration is 90 days.
Its maximum duration is 3 years.

Answer 10

It can be used to distribute an additional offering only.
Its maximum duration is 3 years.

Shelf offerings are used by publicly traded companies to issue additional equity or debt securities. The issuer must sell the securities within 3 years after the registration is declared effective.

Question 11

The Fed would be inclined to increase the money supply if which of the following were declining?
The Gross National Product.
Unemployment.
Bond yields.
The Consumer Price Index.

Answer 11

The Gross National Product.
The Consumer Price Index.

Increasing the money supply tends to increase business activity through lower interest rates. If the GNP is declining, business is slowing down, and the Fed would want to stimulate the economy by making more money available. If the CPI is declining, inflation is receding, which usually occurs when business is contracting, which the Fed would usually wish to counteract. There is a danger of increased inflation if the Fed is too generous.

Question 12

The portion of a municipal bond underwriting spread that remains after the syndicate manager subtracts the management fee is:

A) the total takedown.
B) the total spread.
C) the additional takedown.
D) the concession.

Answer 12

the total takedown.

Question 13

The Three Contact Rule does NOT apply to the purchase or sale of a non-Nasdaq security provided there is at least:

A) 2 priced quotations available electronically .
B) 3 priced quotations available electronically .
C) 4 priced quotations available electronically .
D) 1 priced quotation available electronically.

Answer 13

Provided there are at least 2 priced quotations available electronically, the Three Contact Rule does not apply.

Question 14

All of the following concerning CMOs are true EXCEPT:

A) CMOs are issued by government agencies.
B) most CMOs are backed by government agency pass-through securities held in a trust account.
C) CMOs are not backed by the federal government.
D) CMOs can be purchased and sold OTC.

Answer 14

CMOs are issued by government agencies.

Question 15

Market timing is normally associated with which of the following portfolio management styles?

A) Passive management.
B) Tactical asset allocation.
C) Modern portfolio theory.
D) Strategic asset allocation.

Answer 15

Tactical asset allocation.

Tactical asset allocation, which attempts to capitalize on short-term market swings, is a market timing strategy.

Question 16

A registered representative mentions a particular 6% municipal bond quoted on a 6.5% basis. Which of the following is correct?

6% is the bond’s coupon.
6% is the bond’s current yield.
6.5% is the bond’s yield to maturity.
6.5% is the bond’s current yield.

Answer 16

6% is the bond’s coupon.
6.5% is the bond’s yield to maturity;

When a bond is referred to by a yield percentage, it is the coupon (nominal or stated) yield being referenced. Basis yield refers to yield to maturity (YTM). Hence, a 6% bond currently trading with a 6.5% YTM is correct.

Question 17

Which of the following ratios is normally considered adequate coverage of interest and principal charges for a municipal revenue bond?

A) 7.5 to 1.
B) 3 to 1.
C) 1 to 1.
D) 2 to 1.

Answer 17

Generally, a sound debt service (interest and principal) coverage ratio for municipal revenue bonds is 2 to 1. In other words, $2 of revenue is collected for every $1 of debt service.

Question 18

A confirmation of each customer trade must be given or sent:
A)before the settlement date.
B) before the trade date.
C) on or before the settlement date.
D) on the trade date.

Answer 18

A confirmation must be sent to a customer on or before the completion of the transaction (the settlement date).

Question 19

All of the following statements regarding OTC markets are true EXCEPT
A) securities traded OTC include ADRs and municipal bonds
B) a bid is the highest price a dealer will pay when buying
C) the OTC market is an auction market
D) an offer is the lowest price a dealer will accept when selling

Answer 19

the OTC market is an auction market

Question 20

A group of underwriters have agreed to engage in a mini-max underwriting for a new issue of equity securities with the issuer of those securities. Which of the following best describes this underwriting agreement?

Answer 20

A mini-max agreement is a best-efforts underwriting setting a floor or minimum, which is the least amount the issuer needs to raise in order to move forward with the underwriting, and a ceiling or maximum on the dollar amount of securities the issuer is willing to sell.

Question 21

A broker’s broker does all of the following EXCEPT:

A) conceals the identity of the principals.
B) assists in placing securities.
C) makes a market in securities.
D) acts as agent for dealers.

Answer 21

makes a market in securities;

A broker’s broker acts as agent in transactions by facilitating the movement of blocks of bonds. The broker’s broker is allowed to conceal the identities of the contra-parties, thus protecting investment strategies. A broker’s broker does not make a market in securities.

Question 22

The trust indenture of a revenue bond includes a statement explaining rates will be maintained at a level sufficient to cover the debt service and operating expenses. This statement would be found in that part of the indenture dealing with the:
A) feasibility study.
B) official statement.
C) bond covenants.
D) flow of funds.

Answer 22

bond covenant;

The trust indenture of a bond contains the protective bond covenants. Within the bond covenants can be found the rate covenant which is a statement explaining that rates or user fees will be maintained at a level sufficient to cover the debt service and operating expenses for the bond issue.