Series 7 STC Investment Risks, Returns, & Disclosures (Ch. 14) Flashcards
A registered representative (RR) has a customer who recently retired and sold her business to a private equity firm. The RR should:
Update both the customer’s financial background and investment objectives
Update the customer’s financial background, but not her investment objectives
Update the customer’s investment objectives, but not her financial background
Only update the customer’s account information if the assets in the account exceed $1 million
Update both the customer’s financial background and investment objectives
The best course of action is to update both the customer’s financial background and investment objectives.
Which of the following is NOT disclosed on a customer’s confirmation?
The number of shares purchased or sold
The trade and settlement date
The settlement date and original cost of the security
The capacity in which the firm acted
The settlement date and original cost of the security
A customer confirmation must include the identity and price of the security being purchased or sold, the number of shares, units, or principal amount, the date of the transaction, the capacity in which the broker-dealer acted. The settlement date and the name of the contra party are provided upon request. The original cost of the security is not required to be disclosed.
T/F. The settlement date is NOT required on a confirmation
True (available by request)
A stock is purchased at $46 per share and has a $0.55 quarterly dividend. If the stock’s market price is now $54, the current yield is:
1.01%
4.78%
2.03%
4.07%
4.07%
The formula for calculating a stock’s current yield is the stock’s annualized (not quarterly) dividend divided by its current market price. In this case, the stock’s annualized dividend is $2.20 ($0.55 x 4). The stock’s current yield is 4.07% ($2.20 / $54).
Prior to placing a temporary hold on a customer’s account:
It’s recommended for the firm to first notify a relative
It’s recommended for the firm to first attempt to resolve the situation with the customer
It’s required for the firm to freeze the assets in the account
It’s required for the firm to receive the prior written approval of the customer’s trusted contact person
It’s recommended for the firm to first attempt to resolve the situation with the customer
Before placing a temporary hold, it’s recommended for the firm to first attempt to resolve the situation with the customer. However, if the temporary hold is placed, the firm is required to notify the customer’s trusted contact person.
In which of the following situations is the appointment of a trusted contact person MOST likely?
If the account owner is 70 years old.
If the spouse of the account owner is 75 years old.
If the account is an UTMA account and the minor has a mental impairment.
If the owner of the account granted trading authorization to a person who’s 65 years old.
If the account owner is 70 years old.
A specified adult is one who will most likely have a trusted contact. A specified adult is defined as any person who’s age 65 or older or any person who’s age 18 or older and the firm reasonably believes has a mental or physical impairment that renders the person unable to protect his own interests. The age of the account owner’s spouse or the age of a person that has trading authorization is not relevant. A UTMA account has a custodian who acts as the fiduciary of the account.
An investor sells short 1,000 shares of stock and, 13 months later, closes out the short sale at a lower price. The tax consequence is:
A gain which is taxable at a rate that’s greater than 20%
Neither a capital gain nor a capital loss
A gain which is taxable at the investor’s marginal tax rate
No gain or loss, but return of capital
A gain which is taxable at the investor’s marginal tax rate
Capital gains are generated on a short sale if the position is closed out (stock is repurchased) at a price that’s lower than the short sale price. Any profit on a short sale can only result in a short-term gain and short-term gains are taxed at the same rate as the investor’s marginal tax rate.
Gains from short sales are always considered _____ for a tax basis, regardless of how long the contract was open
Short-term Gains
Prepayment risk is MOST important when analyzing which of the following securities?
Common stock of a company that offers residential housing
A real estate investment trust (REIT) that owns office buildings
A private label collateralized mortgage obligation (CMO)
A debenture of a company that provides mortgages
A private label collateralized mortgage obligation (CMO)
Mortgage-backed securities, such as CMOs, are subject to a special type of risk that’s referred to as prepayment risk (the risk of falling interest rates causing mortgage holders to prepay). Although the other choices (non-mortgage-backed securities) are involved in real estate or mortgage industries, they’re not impacted by prepayment risk.
Diversifying a portfolio will still subject an investor to:
Purchasing power risk
Credit risk
Liquidity risk
Business risk
Purchasing power risk
Unsystematic risk (e.g., credit risk, liquidity risk, and business risk) are based on circumstances that are unique to a specific security and may be managed by diversifying the assets in a portfolio (i.e., by selecting stocks that possess different risk/return characteristics). A diversified portfolio will still be subject to systematic risk, such as purchasing power (inflation) risk, interest-rate risk, and market risk.
If a customer invests in a U.S.-based company that offers products and services in Europe, she would be negatively impacted by:
A weak U.S. dollar
A strong U.S. dollar
Reduction in supply chain issues in Europe
An increase in the prices of its goods and services in Europe
A strong U.S. dollar
If the U.S. dollar increases (strengthens) in value, the euro will decline and cause the dollar value of the revenue to decline. Ultimately, this means that more euros will be required to purchase the same good, thereby resulting in fewer goods sold based on the U.S. dollar. The reduction in revenue would have a negative impact on the U.S. company. Reduction in supply chain issues and an increase in the prices of its goods and services in Europe would typically have a positive impact on the company’s revenue in Europe
Which of the following statement is TRUE regarding a temporary hold placed on the account of a specified adult?
A temporary hold can only apply to a single disbursement.
If a firm places a temporary hold, it’s required to immediately initiate an internal review of the facts and circumstances.
If a firm places a temporary hold, it’s required to notify a relative of the specified adult.
The firm can place a temporary hold on the disbursement of a specified adult’s funds or securities, but not on transactions.
If a firm places a temporary hold, it’s required to immediately initiate an internal review of the facts and circumstances.
If a member firm places a temporary hold on the account of a specified adult, it’s required to immediately initiate an internal review of the facts and circumstances that caused it to reasonably believe that financial exploitation of the specified adult has occurred, is occurring, has been attempted, or will be attempted. The rule permits a firm to place a temporary hold on the disbursement of a specified adult’s funds or securities and on any transaction if there’s a reasonable belief that the customer is being financially exploited. The rule also applies to both a single disbursement and a transfer of an entire account. Any person who’s authorized to transact business in the account as well as the trusted contact person must be notified of the temporary hold.
When securities are received as a gift, the recipient’s cost basis is:
The greater of the security’s market value or the donor’s cost
Always the market value of the securities
Always the donor’s cost
The lesser of the market value of the securities or the donor’s cost
The lesser of the market value of the securities or the donor’s cost
When securities are received as a gift, the recipient’s cost basis is the lesser of the market value of the securities or the donor’s cost.
A person is permitted to give a gift to her spouse without incurring a tax:
With no limit
Of up to $18,000 per year
Of up to $36,000 per year
Of up to $90,000 over a five-year period
With no limit
A customer whose spouse has recently died is in the process of transferring her account to a new firm and has been notified that the transfer is being protested. This may occur if:
The securities in the account included options
The customer is considered a specified adult
The deceased spouse provided power of attorney to another third party
The documentation failed to include a copy of the death certificate
The documentation failed to include a copy of the death certificate
Some of the reasons to protest transfer requests include additional documentation is required (e.g., death certificate), the account is flat (has no assets), an invalid account number, the Social Security number or account title doesn’t match, or there’s an existing court order or tax lien. The other choices are not considered valid reasons to protest the transfer.
A brokerage firm is a registered market maker in security that’s listed on Nasdaq. The firm sells this security to a customer from its inventory and charges the client a markup, which is disclosed. The firm has acted in:
An agency capacity
A dual agency capacity
A principal capacity
A riskless principal capacity
A principal capacity
When executing a customer order in a principal capacity, a firm sells securities out of its inventory or buys securities for its inventory and charges the customer a markup or markdown. Commissions are charged by firms that execute transactions in an agency capacity.
If an investor purchases a bond and, 10 months later, sells it at a higher price, he has:
A gain that’s taxable at the investor’s marginal tax rate
A gain which is taxable at a rate that’s greater than 20%
No gain or loss, but a return of capital
A gain or loss depending on the amount of interest income received
A gain that’s taxable at the investor’s marginal tax rate
Capital gains are generated when an investment is sold for a greater value than its cost basis. If the investment had been held for one year or less prior to its sale, the gain is considered short-term and is taxed at the same rate as the investor’s ordinary income (marginal tax rate). If the investment had been held for more than one year prior to its sale, the gain is considered long-term and is taxed at a maximum of 20%.
The bond yield that takes in consideration the interest payment plus the difference between price paid and amount received at maturity is the:
Yield-to-maturity
Nominal yield
Current yield
Bond equivalent yield
Yield-to-maturity
A bond’s yield-to-maturity includes its interest payments plus the difference between what the investor paid for the bond and what’s received at maturity (par).
A customer is considering transferring his securities account because his registered representative has changed firms. The carrying firm is permitted to:
Seek a court order to stop the transfer
Request for FINRA to stop the transfer
Contact the customer to discuss whether he would consider keeping his account at the firm
Contact the customer and state the firm will be filing legal documents to stop the transfer
Contact the customer to discuss whether he would consider keeping his account at the firm
Firms and their employees are prohibited from interfering with customer account transfer requests. They’re prohibited from seeking court orders to restrict the movement of the customer assets once the client has given his written consent to transfer the account. However, the carrying firm (existing firm) is permitted to contact the customer to discuss whether he would consider keeping his account at the firm.
An investor sells short 500 shares of stock and, three days later, closes out the short sale at a higher price. The tax consequence is:
A capital loss which cannot be offset against capital gains
A capital loss which can be offset against capital gains
Neither a capital gain nor a capital loss
A capital gain which is taxable as ordinary income
A capital loss which can be offset against capital gains
Capital losses are generated on a short sale if the position is closed out (stock is repurchased) at a price that’s higher than the short sale price. Capital losses are first used as deductions against capital gains.
An investment in which of the following is LEAST suitable for a customer who’s concerned about inflation?
An equity real estate investment trust
10-year U.S. Treasury notes
An S&P 500 index fund
A mutual fund that invests in precious metal mining companies
10-year U.S. Treasury notes
Historically, equity securities, variable annuities, investments in real estate (e.g., REITs), investments in precious metals (e.g., gold and silver), or mutual funds that invest in precious metal mining companies have provided the best protection against inflation. Inflation impacts bondholders in two ways, (1) inflation leads to rising interest rates which causes the market prices of existing bonds to fall, and (2) the purchasing power of their interest payments decreases.
A customer inherits stock after the owner had held it for seven months. If the stock is sold four months later at a gain:
The customer is required to pay a tax at his ordinary income rate
The customer is required to pay tax at a rate that’s no higher than 20%
The customer is not required to pay any tax
The customer is only required to pay tax if the previous owner failed to pay estate tax
The customer is required to pay tax at a rate that’s no higher than 20%
Regardless of the deceased’s actual holding period, the recipient’s holding period is considered long-term. As a result of the long-term holding period, the gain is taxed at a maximum rate of 20%.
