Random Flashcards
Long Straddle
A long straddle consists of a put and a call on the same security with the same strike price and the same expiration date. Should the stock increase, the call will increase in value. If the stock declines, the put will increase in value, making the position profitable if the stock moves in either direction.
Rule 144 Trading Rules for Affiliates
The affiliate who has held the restricted shares beyond the six-month holding period may sell the greater of 1% of the shares outstanding or the average weekly trading volume over the four weeks before the sale in any 90-day period. In this instance, 1% of the outstanding shares (125,000) is greater than the last four weeks’ average trading volume (30,000).
LO 20.f
A customer’s confirmation of a municipal securities transaction must include
Customer confirmations always reflect a worst-case scenario (lowest) regarding yield. Any possible tax ramifications, such as the bond being designated as an AMT bond, must also be disclosed. Catastrophe call provisions need not be disclosed on a confirmation. Commissions and markups/markdowns are disclosed, but not the highest yield. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
LO 6.h
When an analyst adds back the current year’s depreciation to the net income, she is computing the company’s
Cash flow from operations is computed by adding the year’s depreciation deduction to the net income.
Which items would change if a company buys equipment for cash?
I. The working capital
II. The total assets
III. The total liabilities
IV. The shareholders’ equity
I only
The general balance sheet formula is assets = liabilities + shareholders’ equity. A purchase of equipment for cash would affect working capital by reducing current assets. However, it would not affect total assets because it is an exchange of one asset (cash) for another asset of equal value (equipment). Because no loan was needed, it does not affect total liabilities, nor does it affect equity.
LO 13.d
Auction Rate Securities
ARS are long-term securities, typically issued by municipalities that are tied to short-term interest rates. A Dutch auction method is used to reset a new rate, known as the clearing rate, at predetermined short-term intervals. Failed auctions—ones where no bids are received to reset the rates—are an inherent risk with ARS.
FINRA’s Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for
trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor.
FINRA’s Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for
trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor.
The OCC must receive exercise instructions for equity options no later than
5:30 pm ET on the third Friday of the expiration month.
Explanation: Although trading stops at 4:00 pm ET on the third Friday of the expiration month, the final exercise deadline is 5:30 pm ET (4:30 pm CT) that same day.
LO 10.j
A 50-year-old investor purchases a single payment deferred variable annuity with a premium of $50,000. Five years later, the value of the account is $45,000, and the investor makes a $10,000 withdrawal. The tax consequences of this action would be
no tax is due. Because Investors in variable annuities are only taxed on the earnings of the account. This account lost money—there were no earnings to be taxed.
LO 9.d
One of your clients is an executive with a corporation that covers him under a qualified defined benefit pension plan. In addition, the client has maxed out his IRA contributions. With retirement coming up in about a decade, he decides to make a $100,000 lump sum deposit to a single premium deferred annuity. Then, he will begin monthly investments of $5,000 into a periodic payment deferred annuity. He does not plan to annuitize. Instead, he will withdraw funds from the annuities as needed. When those withdrawals are made, how will they be taxed?
The earnings will be taxed as ordinary income and will be withdrawn first using LIFO. Because this is a nonqualified annuity, there are no contribution limits and, once the earnings have been received, the balance is a tax-free return of the original principal. Annuities never receive capital gains treatment.
LO 9.d
An immediate dilution to earnings per share (EPS) would be least likely to occur from
A)a 2:1 stock split.
B)conversion of debentures.
C)refunding a bond at par.
D)a 10% stock dividend.
C)refunding a bond at par.
When a bond is refunded at par, the cash used is equal to the reduction in the liability resulting in no immediate corporate EPS (the number of shares remains the same). A stock split, a stock dividend, and conversion of a debenture increase the number of shares outstanding. Because the earnings haven’t changed and there are more shares, the EPS is lower (diluted).
LO 13.d
Circumstances that will allow withdrawals from her IRA without having to pay the 10% penalty.
Distributions before age 59½ are subject to a 10% penalty, as well as regular income tax. The 10% penalty is not applied in the event of the following: death; disability; purchase of a principal residence by a first-time homebuyer (up to $10,000—lifetime); education expenses for the taxpayer, a spouse, a child, or a grandchild; medical premiums for unemployed individuals; medical expenses in excess of defined AGI limits; and Rule 72(t): substantially equal periodic payments.
LO 1.g
Municipal finance professional (MFP)
An MFP is an associate of a broker-dealer engaged in municipal securities representative activities, other than retail sales. Those activities can include the solicitation of municipal bond business. Though someone employed by a broker-dealer is not prohibited from being an elected official of a municipality, there is no requirement that an MFP must be. Being employed by a broker-dealer dealing in municipal bonds and the MSRB simultaneously would be prohibited as a conflict of interest.
LO 6.h
The preliminary prospectus will contain
The preliminary prospectus will include an overview and history of the business as well as any risks associated with it. The preliminary prospectus cannot include the effective date or public offering price (POP) because they have yet to be determined.
LO 20.c
A U.S. importer orders computer components from a Japanese manufacturer with payment to be made in yen upon delivery. To hedge against the dollar weakening against the yen before payment is due, the importer should
A)sell yen calls.
B)sell yen puts.
C)buy yen puts.
D)buy yen calls.
D)buy yen calls.
If the dollar was to weaken against the yen, then the yen would increase in value. If one wished to gain as the result of an asset’s increased value, the appropriate option strategy is the purchase of a call. As a general rule, to hedge, importers buy calls on the foreign currency, whereas exporters buy puts.
LO 10.g
Hedge Funds are generally structed as a…
partnership with the general partner as investment manager and the investors as limited partners. In general, hedge funds are exempt from registration with the SEC. Hedge funds are actively and aggressively managed, seeking superior returns—and they are best suited for wealthy, sophisticated investors. Under the typical 2% + 20% fee schedule, hedge fund managers are largely compensated for performance, not assets under management.
LO 12.a
Time value of each contract
Time value is the premium minus the intrinsic value
Mini max Underwriting
A mini-max agreement is a best efforts underwriting setting a floor, or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell.
LO 20.b
Horizontal or Time spreads
Time or horizontal spreads have contracts that expire in different months, not the same time.
LO 10.h
T-bills
T-bills pay no interest; they are issued at a discount and are direct obligations of the U.S. government. They are not callable and have maximum maturities of 52 weeks (not 365 days) or less. Most T-bills are auctioned weekly.
LO 7.a
Warrants
Warrants are corporate issues typically attached to debt offerings as a sweetener. They generally have a life of two to five years and are therefore considered long-term, giving the holder the right to purchase shares in the future at a price that is usually higher than the price of the shares when the warrants were first issued. Warrant holders have no voting rights.
LO 3.f
Which of the following collateralized mortgage obligation (CMO) tranches tends to have low extension and reinvestment risk?
A)Z-tranche
B)PACs
C)Companion
D)TACs
B) PACs have targeted maturity dates. They are retired first, and offer protection from prepayment risk and extension risk (the chance that principal payments will be slower than anticipated) because changes in prepayments are transferred to companion tranches, also called support tranches.
LO 12.d
ELNs
ELNs are debt instruments. Their final payment at maturity is based on the performance of a single stock, a basket of stocks, or an equity index. These notes can be traded OTC or on listed exchanges. ETFs trade on listed exchanges and have many of the same trading characteristics as stocks. Their portfolios can hold assets such as equity securities, debt securities, or commodities, and many ETF portfolios are structured to track the performance of a specific index.
LO 4.g
A customer calls you and excitedly tells you that she just had her first child. She says her mother-in-law gifted $20,000 to them in honor of the birth. She wants to invest it to have funds available for the child’s higher education in 18 years. She wants assurance that the principal will grow, regardless of market conditions. Which of the following would be the most appropriate recommendation?
A)AAA rated municipal bonds maturing in 18 years
B)U.S. Treasury STRIPS maturing in 18 years
C)U.S. Treasury bonds with 18 years to maturity date
D)Blue-chip stocks
B)STRIPS are issued at a discount, and are backed by the U.S. Treasury. Purchasing these maturing in 18 years gives the client a guaranteed rate of growth and assurance that the funds will be there when needed. The Treasury bonds will certainly pay off at maturity, but there is no growth potential. The same problem plagues the municipal bonds. Common stock, no matter how respectable the company is today, offer no guarantees for the future.
LO 7.a
Roth IRA: 4 Exceptions where Earnings are subject to tax but no 10% penalty
- Ruly 72t - Substianally equal payments for life
- Qualified medical expenses
- Medical Expenses
- Health insurance for the unemployed
Bond See Saw
When buying a bond at a premium what must be disclosed as the “yield to worst”
If its selling at a premium then it is yield to call.
Rationale: If you pay a premium ($1100) and its called early that’d suck because you would get $1000 back and your interest payments cease. You want it to mature (best case)
When buying a bond at a discount what must be disclosed as the “yield to worst”
If its selling at a discount then it is yield to maturity.
Rationale: If you pay a discount ($900) and it goes to maturity that is crappy because you have to wait so long to get the $1000 par value. You would want the bond to be called early so you get the $100 back sooner.
Investment Company 75-5-10 Rule
In order for an investment company to be considered Diversified (open or closed) then it must follow this rule:
Atleast 75% of the assets are invested
The 75% must be invested in such a way that:
- no more than 5% of the fund’s total assets are in the securities of one issuer
- The fund owns no more than 10% of the outstanding shares of any one issuer
There are no restrictions on the remaining 25%
(LOOK UP EXAMPLES)
Debit Call Spread
Objective / attitude
Breakeven
Max Gain and Loss
Objective / attitude: If you are net out of pocket then you are a debit. We want the spread to narrow. Buy Low Sell High = Bullish
Breakeven for calls: Add the net premium to the lower strike
Maximum gain: Difference between the two strike minus the net debit
Maximum loss: Net debit the most you can lose is your debit
Credit Call Spread
Objective / attitude
Breakeven
Max Gain and Loss
Objective / attitude: If you are net in bringing in income then you are a credit. We want the spread to widen i.e. we keep the premium. Buy High Sell Low = Bearish
Breakeven for calls: CALLS ADD to the LOWER STRIKE (CALS)
Maximum gain: The net premium
Maximum loss: The difference between the two strikes minus the net credit
Debit Put Spread
Objective / attitude
Breakeven
Max Gain and Loss
Objective / attitude: If you are net out of pocket then you are a debit. We want the spread to narrow. Buy High Sell Low = Bearish
Breakeven for Puts (PSHS): Subtract the net premium to the Higher strike
Maximum gain: Difference between the two strike minus the net debit
Maximum loss: Net debit the most you can lose is your debit
Green Shoe Clause
If the syndicate manager, based on anticipated demand, wants to sell more shares than initially registered with the SEC, the manager can invoke the green shoe clause on short selling. A green shoe clause, negotiated with and agreed to by the issuer, allows the syndicate to sell up to 15% more shares than initially registered within 30 days of the IPO beginning to trade. The additional shares are made available to the syndicate by the issuer. To be effective, a green shoe clause must be disclosed in both the registration statement filed with the SEC and the prospectus.
LO 20.c
Green Shoe Clause
A greenshoe option is an over-allotment option. In the context of an initial public offering (IPO), it is a provision in an underwriting agreement that grants the underwriter the right to sell investors more shares than initially planned by the issuer if the demand for a security issue proves higher than expected.
Vertical Option Spread
A vertical spread involves the simultaneous buying and selling of options of the same type (i.e., either puts or calls) and expiry, but at different strike prices. The term ‘vertical’ comes from the position of the strike prices.
Horizontal Option Spread
A horizontal spread (more commonly known as a calendar spread) is an options or futures strategy created with simultaneous long and short positions in the derivative on the same underlying asset and the same strike price, but with different expiration months.
Regulation SHO
Regulation SHO is a set of rules from the Securities and Exchange Commission (SEC) implemented in 2005 that regulates short sale practices.
Regulation SHO established “locate” and “close-out” requirements aimed at curtailing naked short selling and other practices. Naked shorting takes place when investors sell short shares that they do not possess and have not confirmed their ability to possess.
Term bonds
- Also called
- How they are quoted
Term bonds are often called dollar bonds because they are quoted in a dollar price. That price is a percentage of par. While Serial bonds are quoted on their basis (yield to maturity).
Options account agreement must be returned within
15 days… certainly not after a trade has been made
When does a customer have to receive the options disclosure document?
No member or person associated with a member shall accept an order from a customer to purchase or write an option contract, or approve the customer’s account for the trading of options unless the broker-dealer furnishes or has furnished to the customer the ODD, and the customer’s account has been approved for options trading.
POs and IOs Asset Backed Securities
Principal Only are a stream of payments that consist of the principal portion of the underlying mortgages. A PO sells at a discount to par like a Zr-bond. It is valuable when these bonds are paid early (when interest rates decline)
Interest Only are sold at discount and its cash flow declines over time. These move opposite of how POs move with interest rates. It is bad when interest rates decline these decrease in value because investors want a long time of interest payments. Because of their positive correlation to interest rates they can be used to hedge against interest rate risk.
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Planned Amortization Class CMOs (PACs)
These have targeted maturity dates; they are retired first and offer protection from prepayment risk and extension risk. Prepayments are transferred to other tranches so these are also called Support Tranches.
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Target Amortization Class CMOs (TACs)
A TAC structure transfers prepayment risk only to a companion tranche and does not offer protection from extension risk.
They get a higher interest rate than PACs because they accept the extension risk.
Zero-Tranche (Z-Tranche)
This tranche recieves no payment until all preceding CMO trances are retired. These are the most volatile.
These are not suitable for an investor needing funds in a specified period of time because they are unpredictable.
Joint Account
A joint account has two or more adults named on the account as co-owners. They must sign a joint account agreement. The owners are called tenants. The check must be endorsed by all parties (mail only sent to one address). This account needs authorization from all parties.
Joint Tenants with Rights of Survivorship (JTWROS)
A deceased tenant’s interest in the account passes to the surviving tenant(s). This is most common for spouses. Ownership is equal and undivided, UNLIKE TIC which has ownership broken down by percentages.
Tenants in Common (TIC)
A deceased tenant’s interest fractional share in the account goes to the tenant’s estate. Most common for friends or non-spousal relatives (I would imagine this would’ve been common for LGBT individuals before marriage was legalized). Ownership is divided as percents.
Community Property
this is a martial property, and it is not uniform across every state, so it is likely that if it is a choice in a question this it is the incorrect one. When an individual gets married and they open an account usually it is a Joint ownership account and all the property acquired during the marriage is split at divorce or death… However, there are some exceptions for inheritances, gifts, or any property that is owned by one spouse before marriage. That is considered separate property of that spouse.
Usually, gifts to, and inherited assets of, one spouse are not considered community property. Assets acquired before the marriage are not considered community property (although in some jurisdictions, these assets can be commuted to community property). Debts acquired during the marriage can be considered community property.
S Corporation
Taxed like a partnership (so there is flow through of losses), but also has limited liability like corporations. LLCs also have this structure, however S corps can only have 100 members.
C Corporation
This is a business structure that designates itself as a separate entity. This is great for raising large sums of cash (where a partnership wouldn’t be). The officers and directors (and shareholders) are shielded from personal liability for the debts and liabilities of the company. However, there is a corporate income tax, which isnt present in any other business structure.
Placement Ratio
Placement Ratio= ( Municipal Bonds Available / Municipal Bonds Sold )
Placement Ratio The dollar amount of new issues of bonds that underwriters have placed with investors, expressed as a percentage of all new issues. The placement ratio is published in Bond Buyer.
MSRB: Lifetime Records to be held by a firm:
- Articles of incorporation of the broker-dealer or partnership agreement (if the B-D is a partnership)
- Minutes of board or partnership meetings
- Records of stock certificates (if the B-D is a corporation)
*
- Records of stock certificates (if the B-D is a corporation)
MSRB: Six-year Records that must be held by a firm:
- Blotters (records of original entry)
- General Ledger (account information such as income and expense and asset and liabilities)
- Customer Ledgers (statement’s of the customer accounts)
- Customer account records (six years after the account is closed)
- Customer complains (only written complains… emails are considered written)
- Principal designation record (which supervisor supervises what)
MSRB record keeping requirement for complaints
MSRB rules list customer complains as a six-year record. FINRA is 4 years and SEC is 3.
SEP IRAs
SEP IRAs have higher annual contribution limits than standard IRAs. Fundamentally, a SEP IRA can be considered a traditional IRA with the ability to receive employer contributions. One major benefit of a SEP IRA is that employer’s contributions are vested immediately.
Eligibility to participate
Eligibility to participate in a SEP IRA is limited to employees who have earned a minimum of $600 for the year in question.
Customer account information must be updated atleast every
36 months
What is a required to be on a customer confirmation by the MSRB
Because the settlement date on a when issued security is unknown, it is impossible to compute the accrued interest. MSRB rules require that all confirmations include the firm’s capacity in the trade (agent/principal). The amount of the dealer’s markup or markdown on a principal trade must be disclosed. The commission on an agency trade must be disclosed.
A customer of a member transfers his account to another member firm. Under SEC rules, the transferring member must maintain copies of the customer’s account records for how many years following the transfer?
Six years after the account is closed
How long much blotters, general ledger, customer ledgers, stock records, and customer account records be kept?
Six years
How long must Bank statements and trial balances and customer correspondence and order tickets be held?
3 years
When customers receive their account statements, they will generally not include
A)
trade dates of all transactions during the statement period.
B)
interest charged on debit balances in margin accounts during the statement period.
C)
security positions at the end of the statement period.
D)
total cost of purchases and net proceeds of sales made during the statement period.
Form 112
Form 112 is the currency transaction report. It is filed when currency, is deposited, withdrawn, or transferred in an amount exceeding $10,000 in a single day. Currency includes cash, postal money orders, and traveler’s checks.
LO 15.f
Long Margin Deposit Trick
Classical Long Margin equation
LMV - DR = Equity
Reg T (.5*LMV)
Excess equity / SMA = Equity - (Reg T (.5*LMV))
If a customer wishes to withdraw cash dividends, the customer must do so within how many days….
If a customer wishes to withdraw cash dividends, the customer must do so within 30 days of receipt. Otherwise, they become a permanent reduction of the debit balance. The customer does not lose the dividend; rather, the dividend amount is now reflected as increased equity in the account. As the debit balance falls, equity in the account goes up dollar for dollar.
Classical Short Margin equation
CR - SMV = EQ
Reg T (.5*SMV)
Excess equity / SMA = Equity - (Reg T (.5*SMV))
Interpositioning
Placing a third party between the BD and the best available quote, which results invariably in a less favorable execution for the customer.
Sell order tickets must be marked…
marked as either long OR short
An investor enters a day order to buy 200 shares of GGZ at 63. Three hours later, with GGZ trading above that price, he calls his registered representative wanting to change the order to a good-til-canceled order. The registered representative should
- immediately cancel the existing order.
- leave the existing order on the order book.
- immediately enter a new limit order to buy 200 shares of GGZ at 63 good til canceled (GTC).
- enter a new limit order to buy 200 shares of GGZ at 63 GTC before the next day’s opening if the day order was unexecuted.
The representative should not cancel the existing order because it would lose priority on the order book. However, the representative should not enter a good-til-canceled order that day because it could be filled twice. Instead, the representative should let the order stay for the day, when it would be canceled automatically if not executed. Then, the representative could enter a good-til-canceled order the next morning.
For a selling a stock trading under $5 per share, a customer must maintain…
For stock trading under $5 per share, a customer must maintain 100% of SMV or $2.50 per share, whichever is greater.
When an investor sells stock short on the ex-dividend date, the dividend belongs to
The lender of the stock.
The key here is that the sale is taking place on the ex-dividend date. That means that the buyer is not entitled to the dividend. Rather, it belongs to the seller. However, in this question, the seller does not own the stock because this is a short sale. Who is the owner of the stock? Whose name will be on the records? That would be the lender of the stock, and that is who will receive the dividend. This is one of those cases where a due bill is sometimes required to get the dividend to the proper party.
SLoBS/BLiSS
Sell limits or Buy Stops are placed above the market price
While
Buy limit and Sell stops are placed below the market price
When would a technical trader use a buy stop and a sell stop if resistance was at 30 and support was at 20
The TA would place a buy stop at 30.50 if he thought that when it breaks through resistance it will take off.
The TA would place a sell stop at 19.50 if he thought that when it breaks through support it will keep going.
Reducing offers
Certain orders on the DMM order book are reduced when a stock goes ex-dividend. All orders entered below the market are reduced on the ex-dividend date (or ex-date) - the first date in which the new owner (purchaser) does not qualify for the current dividend. On the ex-date the stock price opens lower by the amount of the dividend.
Orders reduced include buy limits and sell stops (BLiSS)
SLoBS over BLiSS (SLoBS are BLiSS)
Advertising relating to municipal securities must be approved by which of the following?
A general securities principal or municipal securities principal
According to MSRB rules, advertising (communications with the public) must be approved by either a municipal securities principal or a general securities principal.
LO 19.c
Participation in a tender offer (an offer to buy your shares) requires that investors must have engaged in an irrevocable action to acquire the common stock by the time of the cutoff for the tender offer.
What are current assets?
Current assets are those that are either cash to expected to generate cash within the next year. Warehouse are fixed assets used for many years
13.c
What do we want debit option spreads to do?
We want the debit to widen and exercise the option
What do we want credit option spreads to do?
We want them to narrow and expire (so we keep the premium)
Call option spreads
Debit spread = bullish… Buy LOW Sell HIGH… widen and exercise
Credit spread = bearish … Buy HIGH Sell LOW… narrow and expire
Put option spreads
Debit spread = Buy Low Sell HIGH… bearish… widen and exercise
Credit spread = Buy HIGH Sell LOW.. bullish… narrow and expire
A customer purchases $100,000 of original issue discount municipal bonds. How will this trade be considered for tax purposes when the bonds mature?
Original issue discount profit at maturity is treated as part of the tax-free interest on a municipal bond. However, for a municipal bond bought at a discount in the secondary market, the discount is considered ordinary income subject to tax.
LO 6.f
A corporate bond pays interest on a J/J 15 schedule. An investor purchasing these bonds on Friday, April 17, would pay accrued interest for
A) 92 days.
B) 91 days.
C) 95 days.
D) 96 days.
Six year recordkeeping
Six-year records include;
- blotters
- the general ledger
- the stock record
- customer statements
- Customer account information
Which of the following statements regarding a bond trading flat is not true?
A) It may be an income bond.
B) It may be a bond in default.
C ) It may be traded with accrued interest.
D) It may have interest in arrears.
C
A municipal or corporate bond trading flat is trading without accrued interest. The bond may be an income bond, which normally pays no interest, or it may be a bond currently paying no interest because it is in default.
LO 6.e
Code of arbitration:
How long is the claim eligible for submission to arbitration from the time of the event giving rise to the claim?
Under the Code of Arbitration Procedure, no claim is eligible for submission to arbitration if six years or more have elapsed from the time of the event giving rise to the claim.
A prospectus must be delivered to customers who purchase which of the following new issues?
- U.S. government bonds
- Corporate bonds
- Fixed annuities
- Variable annuities
2 & 4
U.S. government bonds are exempt securities under the Securities Act of 1933 and are not subject to the act’s registration and prospectus delivery requirements. Fixed annuities are not considered securities, as the risk is borne by the insurance company issuer. Corporate bonds and variable annuities, however, are nonexempt securities and are subject to prospectus delivery requirements.
LO 20.c
What are STRIPS
Treasury STRIPs are zero-coupon bonds, backed in full by the U.S. government. Purchased at a discount and maturing at face value in the future, they are suitable investments for those wishing to save for anticipated future expenses, such as college tuition.
Collateralized mortgage obligations (CMOs) are a type of asset-backed security. What type of securities are frequently the assets behind a CMO?
CMOs usually bundle Ginnie Mae, Fannie Mae, and Freddie Mac products into a single product that passes through monthly payments from these investments to investors. They have been highly rated historically and are good income producers.
When must a new options customer return a signed option agreement?
A) Within 15 days of the account approval
B) Before the first order is entered
C) At the time or before the customer receives the options disclosure document
D) Before the account is approved by a registered options principal
The option agreement must be signed and returned within 15 days of account approval. This agreement states the customer will abide by the rules of the options exchange and the OCC and will not violate position or exercise limits. If it has not been returned, the customer can only close out existing positions. No new positions may be opened.
LO 10.j
A bond resolution is most likely found in what?
A municipal bond
LEAPs held longer than a year are considered what type of gain
Long-term capital gain if held longer than a year.
Which of the following is an automated system of delivering information relating to the market for municipal securities?
A) The Bond Buyer
B) Thomson’s Muni News or Muni Market Monitor (Munifacts)
C) The Blue List
D) INSTINET
Thomson’s Muni News or Muni Market Monitor (formerly Munifacts) supplies up-to-the-minute information to its subscribers.
LO 13.f
Abbreviations allowed in a corporate signer
Corporate signers are the exception to the general rule that endorsement of a certificate must match exactly the name on the front. The word and may be substituted with an ampersand (&) and the word company may be abbreviated.
LO 17.d
Which of the following actions would cause a corporation’s earnings per share (EPS) to increase?
A)The exercise of outstanding warrants
B)An increase in cost of goods sold (COGS)
C) A 3:2 stock split
D) A reduction in the number of shares outstanding
D.
There are two primary ways to increase EPS. The most obvious is to increase the company’s earnings. That is accomplished either by increasing revenue or reducing costs. The second is to reduce the number of outstanding shares. The math behind the EPS formula is net income divided by the total number of common shares outstanding. If the denominator (the number of shares) is reduced, the EPS increases. A stock split and the exercise of warrants have the opposite effect because there are now more shares outstanding. An increase to COGS reduces the net income.
LO 13.d
The difference between the syndicate bid and the reoffering price on a competitive bid of a new municipal underwriting is
The spread, or underwriter’s compensation, on a competitive bid underwriting is the difference between the bid to the issuer and the dollar price at which the underwriter reoffers the bonds to the public.
LO 20.b
In most cases, a mutual fund is structured as a corporation. Because of certain tax regulations, it is important for the fund to compute its net investment income. That computation is
interest plus dividends received on portfolio securities, minus the operating expenses of the fund.
Interest + Dividends - Operating expenses = NET INVESTMENT INCOME
In the case of a real estate direct participation limited partnership program, nonrecourse financing will
A) be added to a limited partner’s sales proceeds at the time the partnership is dissolved.
B) decrease a limited partner’s original cost basis
C) have no effect on a limited partner’s original cost basis
D) increase a limited partner’s original cost basis.
For real estate limited partnerships, nonrecourse loans are included in the limited partner’s cost basis. In this way, the loans increase the partner’s original cost basis by the amount of the partner’s debt liability for the loan.
LO 11.f
NONRECOURSE LOANS FOR Real Estate LPs are included in the limited partner’s cost basis.
The minimum maintenance requirement on short stock selling above $5 is
The minimum maintenance in a short account is 30% of the market value or $5 per share (whichever is greater) for stocks trading above $5. For stocks trading below $5, the minimum maintenance is $2.50 per share or 100% of market value (whichever is greater).
LO 16.d
Which of the different sharing arrangements for limited partnerships between the general partners (GPs) and the limited partners (LPs) is generally considered the most common?
While both LPs and GPs share equally in the revenues with a functional allocation arrangement, it is most commonly used because it gives the best tax benefits to each. The LPs receive the immediate tax write-offs from the intangible drilling costs, whereas the GPs receive continued write-offs from the tangible costs over the course of several years.
LO 11.f
Which of the following would least likely occur when a corporation engages in a rights offering?
A) The number of outstanding shares would increase.
B) The corporation would use a standby underwriter.
C) After successful completion of the offering, the market price would decline slightly
D) After successful completion of the offering, the market price would rise slightly.
Successful completion of a rights offering generally results in a slight decline in the market price of the stock. This is because the subscribers were able to purchase at a price below the current market. This would have a small dilutive effect, causing a slight reduction in the market price. The rights offering is of additional shares, so the number outstanding would increase. Most corporations use a standby underwriter who will buy any shares that were not exercised. Please note: From a test-taking skill point of view, when you have two answer choices that are the opposite of each other (the price would rise slightly or the price would decline slightly), in almost all cases, one of those two must be the correct answer.
LO 3.f
What is paid-in surplus?
Paid-in surplus is a balance sheet entry that accounts for money raised from the issuance of stock in excess of par value. When more shares are sold, paid-in surplus will increase.
LO 13.c
An insured municipal bond is purchased by your client in the secondary market. After the sale, Municipal Securities Rulemaking Board rules would require you to
make delivery of the certificates accompanied by evidence of insurance, either on the face of the certificates or in a separate document.
Although it is likely that the confirmation would include a statement that the bonds are insured, it is also necessary to provide the client with some proof of that insurance, either on the bond itself or, in the case of book entry delivery, as a separate document.
LO 6.d
The manager will credit each syndicate member based on sales of that particular maturity allotted to the member, and such credits shall extinguish liability based only on such securities that are sold by the member. This statement describes an agreement among underwriters that is
A) a divided account.
B) an Eastern account.
C) a proportionate underwriting
D) an undivided account.
a divided account.
This is part of an agreement for a Western (divided) syndicate.
LO 20.b
Many businesses open brokerage accounts to invest surplus funds. For which of the following business forms would suitability information on the owners not be required?
A C corporation is the only business form where the tax and other consequences of the account do not accrue to the individual owners. Can you imagine a well-known publicly traded corporation with several million shareholders opening an account where the registered representative would have to obtain suitability information on all of them?
A married couple are both employed by firms that cover them under the company pension plans, and each earns approximately $300,000 annually. If they both open a traditional IRA and make the maximum contribution, how much of their contribution could they deduct?
They are ineligible to deduct any contribution made.
It is important to recognize that FINRA does not expect you to know the income level at which deductible contributions for those covered under employer-sponsored plans begins to phase out. The question uses numbers that are so much higher than current law just to remind you that such a regulation exists. While each are eligible to make the maximum contribution, at this income level, neither spouse—both of whom are covered under employer-sponsored plans—would be eligible to deduct their contributions to their respective IRAs.
LO 1.g
A customer opens an account, and payment and delivery instructions are established. Beyond the opening of the account, these instructions may
be changed for individual transactions, or going forward, for all transactions.
It is normal for new customers to establish payment and delivery instructions at the time the account is opened. An example would be “transfer and ship” where the investor’s instructions are to have stock that is purchased transferred into their name and then sent to them. These instructions can be changed for any individual transaction or for all transactions going forward.
LO 1.a
As such, any retail communications (and a communication to more than 25 existing and/or potential clients within a 30-day period is retail communications) must be filed with FINRA at least 10 business days before first use. IF…..
IF the Brokerage firm is within its first 1 year of membership. After the first year of membership, retail communications must be filed with FINRA within 10 business days of first use or publication.
Primary differences between UTMA and UGMA
One of the primary differences between UTMA and UGMA is the investment flexibility. Real property can be transferred into an UTMA, while no such provision exists with UGMA.
If a member firm suspects exploitation in the account of a specified adult, proceeds from sales may be put on temporary hold for
15 business days.
Three specific obligations under Rule 2111.
- reasonable-basis suitability,
- customer-specific suitability
- quantitative suitability.
Complying with the first of the three means the registered representative has to have a reasonable basis to believe that a recommendation is suitable for at least some investors.
A registered representative of a FINRA member firm specializes in handling business accounts. In which of the following accounts are the business owners subject to double taxation?
It is the C corporation whose owners are subject to double taxation. First, the corporation pays income tax on its earnings. Then, any dividends paid from the after-tax income are taxed again, this time to the shareholders.
When an officer or director acquires control stock when a company goes public and then wants to sell the securities to a retail investor, what is the mandatory holding period?
Because the securities were received in a public offering, they are registered securities (not restricted), and therefore, there is no holding period. However, the sale is subject to Rule 144 volume limits. Control stock that is received in something other than a public offering is restricted and would have a six-month holding period in addition to volume limitations.
LO 20.f
Transfer and ship
A type of delivery instructions for purchased securities. The securities are registered in the customer’s name by the brokerage firm then shipped to the customer’s address of record.
Designating a beneficiary with a transfer on death (TOD) provision may be done in which of the following accounts?
The TOD designation is limited to the individual account and the JTWROS account.
LO 1.b
TOD CANNOT BE PUT ON TIC ACCOUNT
Within a firm commitment underwriting, which document details the responsibilities and liabilities of each firm?
The agreement among underwriters, also called the syndicate letter, is signed by representatives of all syndicate members and establishes a joint account to sell newly issued securities.
LO 20.b
One of your customers with a JTWROS account contacts you to remove the other tenant and put the account into the customer’s own name. This can be done only
Under FINRA rules, no change in any account name(s) can be made unless the change has been authorized by a qualified and registered principal designated by the member. This principal must, before giving her approval of the account designation change, be personally informed of the essential facts relative thereto and indicate her approval of such change in writing. The essential facts relied upon by the person approving the change must be documented in writing and preserved with the customer account records. One of those facts is approval of the other tenant, but that approval goes to the principal, not to you, the registered representative. Even in the case of death of the other tenant, the principal needs to see the proper documentation, such as a death certificate.
LO 1.e
Municipal securities advertisements must be approved by
Municipal security advertisements can be approved by a general or a municipal securities principal.
LO 19.c
An incorporated business model that allows flow-through of business income and losses directly to shareholders in order to avoid double taxation is
The S corporation, the general partnership, and the limited partnership are business models where all income or loss flows through to the owners. This avoids the double taxation on the business level and owner level, as is the case with the C corporation. With C corporations, corporate earnings taxed once at the business level and again when they are paid out to shareholders as dividends. Because the question is asking about the incorporated business model, the correct choice is the S corporation.
LO 1.c
S corp is like C corp, but with flow through business models of income or loss flows