Series 7 Terms Flashcards
Progressive taxes are also referred to as _____ taxes
Graduated
What 2 documents are needed for a corporation to open an options or margin account?
1) Corporate Resolution
2) Corporate Charter
True or False: BDs are responsible for determining client suitability and providing best execution.
True
What happens to the deceased’s portion in a joint account with tenants-in-common?
Goes to their estate
True or False: In a DVP transaction, payment is made by a client’s agent when the securities are delivered and accepted.
True
Name two requirements that must be followed with CMO-related retail communication.
1) Can’t be compared to other investments
2) Educational material must be offered
Define pattern day trading
Executing four or more day trades over a five-day period
Who may enter orders in a joint account?
Any owner named on the account
True or False: On request, institutional communication may be provided to a retail client.
False (Institutional communication may never be provided to a retail investor)
What program must be established by BDs to verify the identity of each customer opening an account?
Customer Identification Program (CIP)
True or False: RRs are always prohibited from sharing in a customer’s account.
False. RRs may share in a customer’s account if they have permission and sharing is proportionate to their investment.
What retail communications are required to be filed with FINRA at least 10 business days PRIOR to first use?
Those for INVESTMENT COMPANIES and SECURITY FUTURES
A public appearance does NOT include large ________ meetings.
Internal
What is the formula for calculating an individual’s personal discretionary income?
Discretionary Income = Income - Expenses
True or False: Institutional communication must be preapproved by a principal and filed with FINRA.
False. Institutional communication is not required to be preapproved or filed with FINRA.
List some retirement accounts that have required minimum distributions.
-IRA
-401(k)
-457
-403(b)
True or False: Suitability rules do not apply when clients makes their own investment decisions.
True
All forms of communication with the public must be kept for _____ years, but easily accessible for the first ___ years.
3 ; 2
Regressive taxes are also referred to as _______ taxes.
Flat taxes
Define an insider.
Officers, directors, partners, greater than 10% owners, and immediate family members of all listed
A gathering of fewer than ____ separate investors is not considered a public appearance.
15
If a BD’s investment company communications include self-created rankings, when must they be filed with FINRA?
At least 10 business days prior to use
May a wife enter trades in a husband’s account?
Yes, but only with written 3rd party authorization
What is not pertinent when opening an account, a client’s educational or financial background?
Educational
Who is responsible for authorizations and disclosures on independent third party research?
The member firm that produces the research
True or False: Using a P.O. Box as an address is not acceptable to open an account.
An actual address is required; however, mail may be sent to a P.O. Box.
What should an agent consider when determining suitability for an institutional client?
Whether the client is acting independently and has the capability to understand the risks
What is the maximum tax rate for long-term capital gains tax?
20%
Who is responsible for determining the suitability of orders placed in a discretionary account?
Individual placing the order
What regulation protects the non-public personal information of customers?
Regulation S-P
True or False: RRs are typically not permitted to lend money to a client.
True. While exceptions existing, personal loans to clients are typically prohibited.
Define the term public appearance.
A speaking engagement with 15 or more persons or with one or more media representatives
What forms of communication are required to be approved by a principal, but NOT filed with FINRA?
Email recommendations, telemarketing or sales scripts, independently prepared reprints, and ads promoting products (retail)
If an RR suspects that a client may be showing signs of dementia, what is the best course of action?
To request a meeting with both the client and a family member
Based on written instructions, a B/D may hold customer correspondence (mail) for _____ months
3 months
Define churning
Excessive trading solely for the purpose of generating commissions or fees
What three items must be specified on a not held order?
Action (buy/sell), Amount (quantity), and Asset (security)
Income and estate tax are examples of a ___________ or __________ tax.
Progressive ; Grauduated
How large can a gift be between spouses and remain exempt from the gift tax?
Unlimited amount
Under FINRA’s communication rules, what is meant by the term broadly disseminated?
That material has been created for generally accessible Web sites, print media, and television or radio (retail)
True or False: A prime broker provides centralized clearing and custodial services, as well as consolidation of reports.
True. For margin customers, it also allows for the consolidation of positions resulting in lower interest costs.
Define vesting.
The right an employee gradually acquires by length of service at a company to receive employer-contributed benefits
What retail communications are required to be filed with FINRA within 10 days of first use?
Retail communications related to DPPs, CMOs, and ETNs
How are withdrawals from Roth IRAs treated for tax purposes?
Withdrawals are tax-free if the account is open for at least five years and is not considered an early withdrawal.
_____________________________ protects customers from BD bankruptcy.
Securities Investor Protection Corporation (SIPC)
Retail communication generally requires who’s pre approval?
Principal preapproval
True or False: Firms writing research reports must disclose potential conflicts of interest.
True (e.g., firm makes a market in the stock or has had or will have an investment banking relationship with the issuer)
When must customer confirmations be sent?
By the completion of the transaction (usually the settlement date)
Define institutional communication.
Written or electronic communication that is distributed or made available only to institutional investors
True or False: Names appearing on the OFAC List are customers who had a previous business relationship with the firm.
False. The list shows the names of suspected terrorists and criminals.
Is a gift of $36,000 per married couple, per year, exempt from gift tax?
Yes ($18,000 gift x 2 people)
The ___________________ must sign the account form
Supervising Principal
What list must be checked to identify suspected terrorists and criminals?
OFAC List
What must be done by the carrying firm when opening an account for an employee of another Finra member firm?
The carrying firm must receive written consent from the employer
What is needed to exercise discretion over a client’s account?
Written power of attorney
True or False: Principals must approve discretionary orders prior to entry
False. The orders must be approved promptly afterward.
List the three forms of communications with the public.
Retail communication, institutional communication, and correspondence
What are the benefits of setting up an irrevocable trust?
Reduces estate taxes and avoids probate
List some of the information to be included on a municipal customer confirmation.
Description, price and yield (lower of YTM or YTC), BD capacity (commission for agency), trade and settlement dates
Anyone with __________ income may contribute to an IRA.
Earned
What is some of the important information to obtain when opening a new client’s account?
Name, address, age, occupation, SSN, citizenship, income, net worth, objectives, risk tolerance, investment experience
In a public appearance, what is offered by an analyst?
Recommendations and opinions concerning equity securities
True or False: Not held orders may only be executed in a discretionary account.
False. Discretionary power of attorney is not required.
Define correspondence.
Material that a member firm makes available to 25 or fewer retail investors within any 30-calendar-day period.
True or False: FINRA’s suitability rules for institutions are less stringent when compared to the rules for retail investors.
True
Explain a prime-brokerage arrangement.
A situation in which multiple BDs execute a client’s trades and report them to one independent BD for settlement
List some important considerations when determining the suitability of recommendations made to customers.
Investment objectives, financial situation, risk tolerance, tax status
An owner of utility stocks, preferred stocks, and bonds would be most concerned about changes in ______________.
Interest Rates
If a client refuses to provide certain information, may the account still be opened?
Yes (but name and address are required)
What is the benefit of establishing a revocable trust?
Avoids probate
True or False: A BD has no responsibility to determine suitability for institutional investors.
False. A BD is never relieved of its suitability obligation.
True or False: FINRA regulates accounts of member firm employees opened at another firm.
True. The rule also covers accounts for the employee’s spouse or dependent children.
To determine suitability, what information must be obtained to complete an investor’s profile?
Age, current investments, tax rate, objectives, investment experience, time horizon, liquidity, needs, risk tolerance
A ___________________ is required to open an account for a partnership.
Partnership Agreement
For a joint account, how many account numbers and SSNs are used for tax reporting?
1
The __________ is the person who has fiduciary control over a trust.
Trustee
What happens to the deceased’s portion in a joint account with right of survivorship?
Passes to the survivor
True or False: Firms may NOT use proprietary names when selling variable contracts.
False. Proprietary names are permitted as long as the policy is described as either variable life or variable annuity.
What forms of communication are NOT required to be approved by a principal or filed with FINRA?
Retail communications that do not recommend or promote a BD’s services, institutional communications, and correspondence
True or False: Money may be withdrawn from a joint account in one owner’s name.
False. Any checks should be in both parties’ names.
Options-related retail communication must be filed with a regulator at least _____ calendar days prior to use.
10
Sales tax is an example of a _____________________ tax.
Regressive (flat)
True or False: Only one person must provide information to open a joint account.
False. Each owner must provide information to open a joint account.
There is a ____% penalty for early withdrawals from an IRA.
10%
When an individual reaches age ______, they may begin withdrawing from an IRA without penalty.
59 1/2
For how long may a not held order be maintained?
End of day
RRs must examine what document to open any corporate account?
Corporate Resolution
A client executes seven day trades over a two-business-day period. Is this client a pattern day trader?
Yes. A pattern day trader executes four or more day trades over a five-day period.
True or False: Options-related retail communication that is sent to existing clients must be filed with a regulator.
False. Retail communication sent to a person who has received the ODD (e.g. existing customers) need not be filed.
What is the difference between a revocable and irrevocable trust?
Revocable trusts can be changed after they’re established, while irrevocable trusts cannot be changed.
What are some of the acceptable investments for IRA contributions?
Stocks, bonds, mutual funds, and CDs
According to FINRA rules, list some of the persons that are considered institutional investors.
Banks, insurance companies, investment companies, investment advisers, FINRA members and their RRs
Why is a client’s profession relevant when determining suitability?
It may indicate the client’s level of sophistication and the potential need for liquidity
For accounts opened for employees of another member firm, what is provided to the individual’s employer upon request?
Duplicate confirmations and statements
What three suitability obligations does FINRA impose on broker-dealers?
1) Reasonable basis 2) Customer specific 3) Quantitative
When must insiders report their transactions?
Within 2 business days of the trade
What specialized services does a prime broker offer to its clients?
Custody, securities lending, margin financing, clearing, processing, research, customized reporting
If a client seems confused and demands an unsuitable change of objective, what step should an RR take?
Confusion and/or dementia are concerns that may warrant an RR to request a meeting with the client and a family member.
Is correspondence subject to principal approval?
No, but it must be reviewed by the firm.
Individuals must register with the SEC within __________ of becoming an insider.
10 days
True or False: Clients need not sign the account form for a cash account.
True, but signature would be required for an option or a margin account.
ERISA gave the U.S. Government jurisdiction over ___________________ plans.
Private Pension
True or False: All corporate officers may effect transactions for the corporation.
False, only those named in the Corporate Resolution
For a firm’s first year as a FINRA member, when must its broadly disseminated retail communications be filed with FINRA?
10 business days prior to their first use
True or False: Clients have to sign the account form for a margin account.
True
What items are acceptable as proof of identity under the Customer Identification Program (CIP)?
Passport or driver’s license (both have a picture)
What may an RR do with full discretion, but not with limited discretion?
Withdraw money from the account
When must IRA withdrawals begin in order to avoid the late withdrawal penalty?
By April 1st of the year after an individual turns the age of 73
Regulation S-P requires clients be provided with a ______________ detailing how BDs handle personal client information.
Privacy Notice
A client executes three day trades over a five-business-day period. Is this client a pattern day trader?
No. A pattern day trader executes 4 or more day trades over a 5-day period
If a corporation executes a stock split, is there a resulting gain or loss for existing stockholders?
No, the overall position stays the same. Forward = more shares at lower price; Reverse = fewer shares at higher price.
What is the maturity type where a portion of principal is retired each year?
Serial Bond
True or False: Cumulative voting benefits smaller shareholders since they can concentrate votes for a specific director.
True
The money held in escrow from a pre-refunding is invested in _________________________.
U.S. Government securities
What is forced conversion?
An issuer calls bonds at a point where the stock is worth more than the bond’s call price.
A bond trading at a price above par is a ____________ bond.
Premium
True or False: Investors may exercise a bond’s call privilege any time after issuance.
False. Only issuers may exercise the call privilege after the call protection period has passed.
What can be determined if given the following bond information? 7% bond, due 6/1/20XX, yielding 8.7%.
$70 interest ($35 each 6/1 and 12/1), matures on June 1, 20XX, is a discount since YTM (8.7%) is above the nominal (7%)
To determine whether a wash sale violation has occurred, what is the total time period used?
61 days; which includes the trade date and 30 days both before and after the trade date.
Accrued interest on municipal bonds is calculated using ____ days in the month and _____ days in the year.
30 days in the month and 360 days in the year
True or False: Interest paid on corporate bonds is entirely tax-exempt
False. Corporate bond interest is taxed at the federal, state, and local level.
What is a step-down, long-term CD?
A CD that offers an interest rate that’s higher than current rates, with subsequent interest rates paid being lower
Will a bond’s conversion price and conversion ratio be adjusted for stock splits or stock dividends?
Yes, due to a bond’s non-dilutive feature.
Name 2priorities that preferred stock has over common stock.
1) Order of Liquidation
2) Dividends
A bond backed by machinery or rolling stock is called a(n) ______________________.
A bond backed by machinery or rolling stock is called a(n) Equipment Trust Bond.
What is level debt service?
Each year’s debt service payments remaining generally equal.
Pete just inherited securities from his grandfather and is asking about his basis. What is the correct response to Pete?
His basis is the market value at the time of his grandfather’s death (stepped up basis).
List some of the risks associated with brokered CDs.
Call risk, interest rate risk, and limited liquidity
What happens to losses that remain after offsetting gains and also taking $3,000 against ordinary income?
They are carried forward to subsequent years.
Joe sells XYZ and claims a 5-point loss, but triggers the wash sale by repurchasing XYZ at $40. Joe’s cost basis is:
$40 + 5 point loss = $45 (The disallowed loss is added to the new purchase.)
If securities are inherited, a beneficiary’s holding period is automatically ____________ (long/short-term)
Long-term (regardless of previous owner’s holding period)
A type of maturity where all bonds mature on one specific date is called a _______ bond.
Term
What does yield-to-maturity (YTM) take into account that current yield does not?
Discount/premium made or lost at maturity, reinvestment of interest at YTM, and time value of money
What yield would be disclosed for a bond purchased at a premium and callable at par?
YTC
What happens if a bond is convertible at $20 (ratio is 50 shares) and the company issues a 10% stock dividend?
Conversion ratio increases to 55 shares (50 x 10% = extra 5) and the new conversion price would be $18.18 ($1,000 ÷ 55).
Name some of the different types of money-market instruments.
T-Bills, Bankers’ Acceptances (BAs), Commercial Paper, Negotiable CDs
$______ is the par value for bonds.
$1,000
Name two issues on which common stockholders may vote.
1) BOD elections
2) Stock splits
Into what does an issuer periodically set aside money for retiring debt?
Sinking fund
How does S&P and Moody’s further differentiate their ratings?
S&P uses + or - , while Moody’s uses 1, 2, 3.
Calculate the price of a corporate bond quoted at 98 ¾.
Convert fraction into a decimal: 3 ÷ 4 = .75 and then multiply $1,000 by 98.75% = $987.50.
Rank in order, from highest to lowest, the three yields on a bond priced at a premium.
Nominal Yield, Current Yield, YTM
The maximum maturity of commercial paper is ____ days.
270
Does the receipt of a stock dividend create a taxable event?
No, not until the stock is actually sold.
If not designated by a client at the time of sale, what method will the IRS use to determine which shares were sold?
FIFO
What yield would be disclosed for a bond purchased at a premium and callable at a premium?
The lower of the YTM or YTC
A sale for a loss would trigger the wash sale rule if the same security is repurchased within ____________________.
30 days of the sale
Refunding would most likely occur when interest rates have _________.
Fallen
If a bond is converted to stock, what is the investor’s basis?
The same as the basis of the converted security.
To what is a reverse convertible structured product linked?
To the performance of an unrelated reference asset - often a single stock or basket of stocks, or an index
True or False: Treasury stock has no voting rights and receives no dividends.
True
Are serial or term bonds more likely to have a sinking fund?
Term
What is the formula for calculating a bond’s current yield?
Annual Interest ÷ Current Market Price
How is interest on corporate bonds treated for tax purposes?
Fully taxable (taxed at the federal, state, and local level)
A bond trading at a price of $1,000 is a ______ bond.
Par
Describe call protection.
The # of years after issuance during which bonds may not be called by the issuer
What does one basis point represent as a percentage?
0.01%
True or False: Bonds with call features have higher yields, while bonds with put features have lower yields.
True
When discussing a bond, the YTM may also be referred to as _______.
Basis
True or False: When interest rates go up, bonds prices go up, and when interest rates go down, bond prices go down.
False
What is the advantage existing stockholders receive through rights offerings?
The ability to maintain their percentage of ownership and buy additional shares at a discount (Anti-Dilution).
Joe owns 100 shares of MNO at $20 (total cost $2,000). If MNO declares a 10% stock dividend, what is Joe’s new basis?
Original cost ÷ new total number of shares ($2,000 ÷ 110 shares = $18.18)
What are some examples of rolling stock used to back a bond offering?
Airplanes, trucks, railroad cars
Negotiable CDs (also called Jumbo CDs) have a minimum denomination of $__________.
$100,000
Define parity.
The value of two investments being equal, even, or the same
The process of adjusting the basis of a premium bond down to par over its life is called _______________.
Amortization
When executing a pre-refunding, into what account would the new issue proceeds be placed?
An escrow account managed by a trustee.
What are some of the special standards that firms follow in regard to soliciting sales of penny stocks?
Determine suitability, principal approval, send risk disclosure, client’s written authorization for the first 3 trades
A bond trading at a price below par is a __________ bond.
Discount
May Eurodollar bonds be issued in the U.S.?
No, and they are not registered with the SEC.
If an investor does not use Specific Identification when selling securities, the IRS assumes __________________.
FIFO
What is the proper order of liquidation for a corporation at bankruptcy?
Secured creditors, unpaid workers, IRS, unsecured creditors, preferred, and then common.
What is the tax consequence for an investor who receives a stock dividend?
Cost basis must be adjusted
At what rate are long-term capital gains on option positions taxed?
At the investor’s tax bracket up to a maximum of 20%
$______ is normally the par value for preferred stock.
$100
The corporate dividend exclusion rule applies to dividends paid on both ____________ and ____________ stock.
Common ; Preferred
Is the conversion of a bond a taxable event?
No, it is a tax-free exchange. The taxable event would occur when the stock is sold.
True or False: A favorable arbitrage situation occurs when a bond is trading at a discount to parity.
True
The formula for finding conversion ratio on convertible preferred stock is: ______ ÷ ____________
Par ÷ Conversion Price (par for preferred is $100)
The formula for finding conversion ratio for a bond is: ______ ÷ ____________
Par ÷ Conversion Price (par for a bond is $1,000)
What is the impact on bonds that have been prerefunded?
Credit is improved and the issue is considered defeased for the issuer.
What is a step-up, long-term CD?
A CD that offers an interest rate that is lower than current rates, with subsequent interest rates paid being higher
For wash sale purposes, what would cause the loss on the sale of a municipal bond to be disallowed by the IRS?
Purchasing a substantially identical bond at any point within the wash sale period
How is basis determined for the recipient of gifted securities?
Basis will be the donor’s cost or market value, whichever is lower.
____________ refers to a situation where an issuer sells a new bond to pay off the debt of an old bond.
Refunding
Describe cumulative preferred stock.
Stock that requires payment of any missing dividends before common stockholders are paid
What is the method to calculate the number of shares that can be purchased through a rights offering?
(# of rights received) ÷ (# of rights needed to buy each additional share)
May bonds be called early due to an event which destroys the source of revenue backing the bond?
Yes, when using a catastrophe call
True or False: Convertible preferred stock may be converted into a bond.
False. Convertible securities are convertible into common stock.
____________ stock is stock that was issued and repurchased by the issuing corporation.
Treasury
What is the typical life of a reverse convertible security?
1 year or less
What can a U.S. investor do when foreign taxes are paid on dividends received on foreign stocks?
The amount of the foreign tax can be claimed as a credit or deduction on her U.S. return.
The type of bond where bondholders have a lien on real property is called a __________________.
Mortgage Bond
How can an even split be identified?
Any split to 1 (e.g., 2:1, 3:1, 4:1, 5:1)
What instruments are used to facilitate trading of foreign securities in the U.S.?
American Depositary Receipts (ADRs)
A client selling shares would like to determine the specific shares being sold, he should use ________________________.
Special Identification
May a warrant be detached and traded separately?
Yes
When warrants are attached to bonds, will the issuers pay a higher or lower rate of interest?
Lower, due to the added opportunity
The strike price for conversion on a reverse convertible is also called the _________ price.
Knock-In
If a bond is referred to as trading flat, this means it trades ___________________________.
Without accrued interest
A bond with an 8% coupon would pay how much interest per year?
$80.00. Par x Rate ($1,000 x 8%)
What are two synonymous terms for a bond’s interest rate?
Coupon rate and nominal yield
What yield would always be disclosed for a bond that has been prerefunded?
YTC
What voting method permits one vote for each share owned to be voted for each director?
Statutory
What are Eurodollar bonds?
Dollar-denominated bonds issued outside the U.S.
What yield would be disclosed for a bond purchased at a discount?
YTM
Issued stock - Treasury stock = ____________________
Outstanding Stock
If an asset was held for one year or less prior to its sale, any gain or loss would be ____________ (short/long term)
Short-term
Rank in order, from highest to lowest, the three yields on a bond priced at a discount.
YTM, Current Yield, Nominal Yield
Bonds rated ___________ and higher are considered investment grade.
Bonds rated BBB (for S&P and Fitch) or Baa (for Moody’s) and higher are considered investment grade.
Are debentures considered secured or unsecured?
Unsecured. They are backed only by the issuer’s full faith and credit.
If there are losses remaining after offsetting gains, what amount may be used against ordinary income?
A maximum of $3,000.
What bonds are dollar-denominated, U.S. registered, and issued by multinational companies and foreign governments?
Yankee Bonds
What voting method permits common shareholders to vote in any manner in which they choose?
Cumulative Voting
True or False: Collateral Trust Bonds are backed by the stock of the issuing corporation.
False. The stock pledged must be that of a separate company.
According to the wash sale rule, what securities are considered substantially the same?
Same stock, rights, warrants, a bond or preferred stock convertible into the stock, or the purchase of a call option
Existing stockholders receive ______ right for every one share owned.
1
Does interest that is paid by one corporation to another corporation qualify for the corporate dividend exclusion?
No. The rule only applies to dividends.
A bond convertible at $50 is trading at $1,200. For parity, where should the stock be trading?
Conv. ratio = $1,000 ÷ $50 = 20 shares. The stock needs to trade at $60 to be at parity with the bond ($1,200 ÷ 20 = $60).
True or False: Long-term CDs are considered money-market instruments.
False. Since long-term CDs mature in over one year, they are not money-market instruments.
A corporation that issues convertible bonds is borrowing money at a _______ rate (higher/lower)
Lower (convertibles pay lower interest rates)
Money-market securities have a maturity of __________________.
1 year or less
Who are considered the owners of a corporation?
Common and preferred stockholders
True or False: A stockholder is able to vote for a director, but not an officer.
True
Accrued interest on corporate bonds is calculated using _____ days in the month and ______ days in the year.
30 days ; 360 days
What is the first use of capital losses?
They are first used as deductions against capital gains
Accrued interest on T-Notes and T-Bonds is calculated using ______ days in the month and _____ days in the year.
Actual days ; 365 days
A reverse convertible typically contains what 2 components?
1) A debt instrument that pays an above-market coupon
2) A derivative (often a put option)
ABC = $50. ABC’s bond is convertible at $40 and callable at 105. Is the call or conversion and sale more profitable?
Conversion and sale equals $1,250 (25 shares x $50), while the call only provides $1,050.
True or False: All owners have the right to vote.
False. Only common stockholders have the right to vote.
Debt service represents the total of all ____________ and ____________ payments.
Principal ; Interest
True or False: Corporations receiving dividends from other corporations qualify for the dividend exclusion rule.
True (50% are tax-free)
What is the highest credit rating?
AAA for S&P and Fitch, and Aaa for Moody’s
True or False: A wash sale is triggered if the only difference in a bond sold and then repurchased is accrued interest.
True. To not trigger the wash sale rule, the bond’s issuer, coupon, or maturity must be changed.
Warrants are a ______-term right to buy stock at a preset price.
Long-term
Zero coupon bonds are purchased at a __________ and mature at ____________.
Discount ; Par Value
A bond convertible at $25 is trading at $1,150, and the stock is trading at $30. Is the bond at parity with the stock?
No, the bond’s parity price is $1,200. The bond can be converted to 40 shares selling at $30, which equals $1,200.
Bondholders are also referred to as ____________.
Creditors
What is a derivative?
A financial product that derives its value from the value of underlying assets such as stocks, bonds, or mortgages
True or False: Both common and preferred stockholders are offered preemptive rights.
False. Preemptive rights are only offered to common stockholders.
Ken covers a short position at a loss and re-shorts the same position within 30 days. Is the wash sale rule triggered?
Yes
What does a put feature on a bond allow?
Bondholders may put (redeem) the bond back to the issuer prior to maturity.
For a gain to be considered long-term, the asset must be held for ______________________.
More than 1 year
What is the IRS method for accreting the basis of a bond?
Constant yield or constant interest method
Cash dividends received by individuals are generally taxed at a maximum rate of ____%.
20%
What is the longest duration for a warrant?
Perpetual
Rights are a ______-term instrument allowing holders to buy additional shares at a discounted price.
Short-term
True or False: Warrants are generally attached to the delivery of another security (stock or bond).
True
A bond has a 12% coupon and is trading for $1,200. What is a realistic YTM for this bond?
YTM must be less than 10% since the current yield ($120 ÷ $1,200) is 10%.
What are some examples of odd splits?
3:2, 5:4, 12:5 (denominator greater than 1)
What are the capital gains tax rates for Short-term gains and Long-term gains
1) Short-term gains are taxed at ordinary income rates
2) Long-term gains are taxed at a maximum of 20%.
True or False: Common stockholders have the right to vote for the payment of dividends.
False. Dividend payments are determined by the board of directors.
Currently, long-term capital gains are taxed at a maximum rate of ____%.
20%
A reverse convertible is a type of ___________ product.
Structured Product
What generates a capital gain or loss?
The sale of an asset at a price that exceeds its basis (gain) or at a price lower than its basis (loss)
The __________________ represents the amount above par that issuers pay to redeem bonds early.
Call Premium
Bond interest is stated ___________ and paid ________________.
Annually ; Semi-annually
May Eurodollar bonds later trade in the U.S.?
Yes
When securities are gifted, the recipient’s holding period will be _______________________.
Same as the donor’s
What is the original issue that is being refunded called?
Prerefunded bonds
Bonds rated BB (Ba) or lower are considered _______________________ bonds.
Speculative/Junk bonds
If the Green Fund has a NAV of $12.70 and a sales charge of 5.5%, what is the POP?
The formula is NAV ÷ (100% - Sales Charge %). $12.70 ÷ 94.5% = $13.44.
MIG stands for ___________________________.
Municipal Investment Grade
In a bond swap (bond sold at a loss and another purchased), what features need to be changed to not trigger a wash sale?
Change the issuer, or the coupon, or the maturity
What are Auction Rate Securities (ARS)?
Long-term bonds (municipal or corporate) with a variable interest rate set periodically through a Dutch Auction
General Obligation (GO) bonds are backed by the issuer’s ________________________ and their ability to levy _______.
Full faith and credit ; taxes
The process of adjusting the basis of an Original Issue Discount bond up to par over its life is called ____________.
Accretion
What price is paid for closed-end management company shares?
Market price plus a commission
A mutual fund’s POP = ___ + ____________.
NAV + Sales Charge
After the initial offering, where are shares of a closed-end management company purchased?
Secondary Market
What is the tax consequence if a municipal bond is purchased at a premium and sold prior to maturity?
A capital gain/loss determined by the difference between the adjusted basis and the proceeds of the sale
A _______________________ fund is one that invests in a specific industry or geographic region.
Sector/Specialized
Is a redemption fee the same as a CDSC?
No. The CDSC is a sales charge, not a fee.
True or False: The settlement date for T-Bills purchased at the auction is the next business day.
False. Settlement at auction is the Thursday following the auction. Next business day is for secondary market trading.
What price do non-competitive bidders agree to pay at a Treasury auction?
The lowest price (highest yield) of the accepted competitive bids
True or False: The credit rating of an IDB (Industrial Development Bond) is based on the credit of the municipality.
False. The rating is based on the corporation making the lease payments.
What price is paid for mutual fund shares?
The Public Offering Price (POP). POP = NAV + Sales Charge (if applicable).
An OID (Original Issue Discount bond) is sold prior to maturity. Is the capital gain (or loss) based on the original cost basis or accreted value?
The accreted value of the bond.
The principal value of TIPS may be adjusted based on changes to the __________________________.
CPI (inflation)
A competitive bid placed at a Treasury auction will indicate both ___________ and _________.
Quantity ; Price
_____ Plans are college savings plans with high contribution limits set by the state sponsor.
529
What are 3 distinct advantages to investing in an open-end investment company?
1) Diversification
2) Professional Management
3) Liquidity
What is a fund’s net investment income?
Dividends + interest - expenses
What is a Construction Loan Note (CLN)?
Municipal note issued to provide funds for construction of housing projects to be repaid by permanent financing
Interest paid on bonds issued by U.S. territories or possessions is ___________________.
Triple-tax-exempt
What is the formula for determining the number of shares able to be purchased when reaching a breakpoint?
Dollars invested ÷ newly calculated offering price (based on the reduced sales charge)
How often will VRDOs (Variable Rate Demand Obligations) adjust their interest rate?
At specified intervals such as daily, weekly, or monthly. VRDOs may allow owners to put (sell) back to the issuer.
What risk is primarily associated with mortgage-backed securities?
Prepayment risk
Though subject to federal tax, interest on Treasuries is exempt from ________ and ________ tax.
State ; Local
For a municipal bond to be considered good delivery, is a Legal Opinion mandatory?
Yes. A Legal Opinion must be imprinted or attached (unless identified as ex-legal).
Describe a typical index fund’s expenses (low/high) and management style (active/passive)
Low ; Passive
Since mutual funds are considered primary market issues, they must be sold by ____________.
Prospectus
A Regulated Investment Company’s net investment income will ultimately be taxed to the __________________.
Shareholders
What does the following quote indicate about the fund? NAV: $9.20 POP: $9.20
It’s a no-load fund.
What 2 restrictions exist in describing a fund as no load?
1) No front-end load
2) 12b-1 fees cannot exceed .25%
If the Hi-Tech Fund has a NAV of $4.25 and a POP of $4.50, what is its sales charge percentage?
The formula is (POP - NAV) divided by POP ($4.50 - $4.25 = $.25
($.25 ÷ $4.50 = 5.5%).
What are T-STRIPS?
Any T-Note/T-Bond where a BD has stripped the interest and principal payments to sell separately as zero-coupons
How is interest on Treasuries treated for tax purposes?
Exempt at the state and local level, but subject to federal tax
______ is the mortgage-backed agency that is fully backed by the U.S. Government.
GNMA
True or False: T-Bills are quoted on a dollar basis.
False. T-Bills are quoted on a discount yield basis.
What are the requirements for being considered a Regulated Investment Company?
The fund must be a domestic company that distributes at least 90% of its net investment income.
What is the annual fee levied against a fund’s assets and used to pay expenses of commissions and retail communications?
12b-1 fees
What is the maturity range of a T-Note?
2-10
What is the dollar price of a T-bond with a bid of 98-24 and a par value of $100?
98 and 24/32. Convert fraction into a decimal 24 ÷ 32 = .75. Now multiply $100 by 98.75% = $98.75.
What is a major advantage to investing in a bond issued by the Commonwealth of Puerto Rico?
Triple tax advantaged
A fund whose portfolio is created to mirror the composition of a particular index is referred to as an ________ fund.
Index
What does ownership of a GNMA pass-through certificate represent?
An undivided interest in a pool of residential mortgages
True or False: Interest paid on GNMA, FNMA, FHLMC, and SLMA agency bonds is fully taxable to investors.
True. The interest is taxed at the federal, state, and local level.
Is a UIT considered managed or unmanaged?
Unmanaged, since the holdings are supervised as opposed to actively managed
Define overlapping debt.
Debt of a municipality that is shared with another political entity (e.g., school district debt)
An investor has been purchasing mutual fund shares using dollar cost averaging. Is she guaranteed against loss?
No. The market may never recover.
What is a Tax Anticipation Note (TAN)?
Municipal note issued in anticipation of future tax receipts (e.g., real estate taxes)
Are mutual funds considered marginable securities?
No. Investors must pay 100% of the purchase price.
According to industry rules, _____% is the maximum sales charge on mutual funds.
8.5%
Is a CMO considered a derivative?
Yes
What bond would be issued to build a facility for a private company?
Industrial Development Revenue (IDR) bond
Assuming a net revenue pledge bond, what is the first priority according to the flow of funds?
Operating and maintenance fund
How often do GNMA pass-throughs make payments?
Monthly
Municipal bond interest is exempt from __________ tax.
Federal
When a fund distributes a capital gain, is it the fund’s or shareholder’s holding period that is considered?
Fund’s holding period
What are 2 examples of tax-free money-market instruments?
Municipal Notes and Tax-Exempt Commercial Paper
In what covenant does the issuer pledge to keep the project in good working order?
Maintenance and Operation Covenant
A muni. bond is bought at a secondary market discount and sold for a gain before maturity. What is the tax consequence?
The gain is taxable as ordinary income up to the accreted value, and a capital gain for any amount above that.
Corporate and municipal bonds are quoted in 8ths, while T-Notes and T-Bonds are quoted in ______.
32nds
What is a Bond Anticipation Note (BAN)?
Municipal note issued for a capital project that will eventually be paid from the proceeds of a long-term bond
What is the net (after-tax) yield for an investor in the 28% tax bracket who owns an 8.5% corporate bond?
The formula is: Taxable Yield x (100% - Tax Bracket %). 8.5 x 72% = 6.12%.
True or False: Custodian banks provide investment management service to a fund.
False. Custodian banks provide safekeeping for a fund’s cash and securities.
Identify the acronym: CDSC
Contingent Deferred Sales Charge
A ______ is a type of investment company which has a fixed portfolio of securities and is supervised, not managed.
A UIT is a type of investment company which has a fixed portfolio of securities and is supervised, not managed.
Standard & Poor’s four ratings for municipal notes are ______, ______, ______, ______.
SP-1+, SP-1, SP-2, SP-3.
What terms are synonymous with a mutual fund’s Net Asset Value (NAV)?
Bid price/Redemption price
Funds offer ______________________ to allow buyers to add all purchases made from a fund family to reduce sales charge.
Rights of Accumulation
If $25,000 is invested in an inverse ETF, what is the value if the market drops 10% on day 1, then rises 10% on day 2?
Day 1: $25,000 x 1.10 = $27,500 and Day 2: $27,500 x .90 = $24,750
What two sources are used to pay debt service on a double-barreled bond?
Revenue dollars and tax dollars
A fund distributes a gain on shares held for 3 yrs. Joe has owned the fund shares for 6 months. How is Joe’s gain taxed?
As a long-term capital gain, since the fund held the shares for three years. Joe’s holding period is irrelevant.
What is a municipal OID?
An Original Issue Discount (OID) bond.
A __________________ is a revenue bond backed by one specific tax.
A special tax bond is a revenue bond backed by a specific tax (e.g., bonds issued for highway repair backed by gas tax)
True or False: Agency-backed CMOs have high credit ratings.
True. They are usually highly rated because of the collateral backing them.
Revenue bonds are backed by ___________________ generated by ________________________.
Specific Revenue (User Fees) ; Project/Facility
At a Treasury auction, __________________ bids are awarded first.
Non-competitive
The following would be a quote for what security? Bid 4.26 Asked 4.22
T-Bill
What’s stated in a municipal indenture (bond resolution)?
Issuer’s responsibilities, bondholders’ rights, and the different covenants (pledges) made to protect bondholders
By what types of taxes are state general obligation bonds backed?
Income, sales, or gasoline tax, but also licensing fees and fines.
True or False: The interest rate reset periods on Auction Rate Securities range from 7, to 28, or 35 days.
True
What is the maturity range of a T-Bond?
More than 10 years
True or False: An increase in unfunded pension liabilities is a negative sign of the municipality’s creditworthiness.
True
What is the tax consequence if a municipal bond is purchased at a secondary market discount and held to maturity?
The gain is taxed as ordinary income.
Mack, in the 35% tax bracket, is earning 5.4% on a tax-free municipal bond. What is his taxable equivalent yield?
The formula is: Tax-Free Yield ÷ (100% - Tax Bracket %). 5.4% ÷ 65% = 8.3%
A bond backed by a charge to benefiting property owners is called a __________________________.
special assessment bond (e.g., water/sewer system).
Does a unit investment trust (UIT) have a board of directors?
No. These entities are supervised by a board of trustees.
True or False: Promoting the purchase of certain fund shares due to an impending dividend payment is acceptable.
False. Selling dividends is prohibited. Since the dividend is imbedded in the share price, there is no monetary benefit.
A fund’s management fee is typically calculated based on a percentage of _________________________.
AUM
What are TIPS?
Treasury Inflation-Protected Securities
What do the differences in mutual fund share classes represent?
Difference in how sales charge is collected
With CMOs, the term ____________ represents separate bond classes.
Tranche
True or False: A breakpoint sale is a prohibited action of selling shares at just under where breakpoints are available.
True
True or False: The market price of closed-end shares could be higher, lower, or equal to the NAV.
True
What is the tax consequence if a municipal bond is purchased at a premium and held to maturity?
Since the basis must be amortized down to par, there is no capital gain or loss when a premium bond is held to maturity.
True or False: To lower sales charges, investors add mutual fund purchases in all accounts using Rights of Accumulation.
True. However, the purchases must all be from the same fund family.
Since T-STRIPS are sold at a discount and mature at par, what must be done to their basis each year?
The discount must be accreted each year
The tranche that is the last to receive cash flow is the ____________.
Z Tranche
Bonds subject to the AMT will trade with a _________ (higher/lower) yield.
Higher
What are the three different types of investment companies?
1) Face Amount Certificate Companies 2) Unit Investment Trusts (UITs) 3) Management Companies
Each payment from GNMA will represent both ____________ and ____________.
Principal ; Interest
Describe an asset backed security.
A security whose value and income are collateralized by group of assets, usually bank receivables (e.g. mortgages).
When do most mutual funds calculate their net asset value (NAV)?
4:00 p.m. ET, which is when the stock markets close.
Sales charge is always expressed as a percentage of the ________.
POP
Which tranche has the most predictable cash flow and maturity?
PAC Tranche (Planned Amortization Class)
Is a mutual fund’s redemption fee considered a sales charge?
No, since it does not go to selling brokers, but rather stays within the fund.
To calculate Debt Service Coverage Ratio, the formula used is: (________ - ________) ÷ ___________
(Gross Revenue - O/M Expenses) ÷ Debt Service
True or False: Regulated Investment Companies (under Subchapter M) may relieve their burden of paying tax on income.
True. Regulated Investment Companies will only be taxed on the income retained.
Identify the acronym: SAI
Statement of Additional Information
Describe dollar cost averaging (DCA).
DCA involves investing a fixed-dollar amount at regular intervals, regardless of the price of the asset.
Local general obligation bonds are backed by what type of tax?
Property tax (e.g., school district bonds)
True or False: If a mutual fund investor chooses to reinvest dividends, taxes will be deferred.
False
How does the Dutch Auction set the interest rate on Auction Rate Securities?
It sets the lowest interest rate at which all the securities being offered will clear the market (net clearing rate).
What types of municipal bonds are most likely subject to the Alternative Minimum Tax?
Private Activity bonds
What are some of the advantages of investing in open-end investment companies (i.e., mutual funds)?
Diversification, professional management, liquidity, and ability to reduce sales charges
$9 million gross revenue, $3 million oper./maint. expenses, and $2 million debt service. Debt service coverage ratio?
($9 million - $3 million) ÷ $2 million = 3:1 coverage.
___________________ is the balancing of investment classes according to an investor’s investment objectives.
Asset Allocation
Is a letter of intent binding on the investor?
No. However, the letter is binding on the investment company.
Is a letter of intent binding on the investor?
No. However, the letter is binding on the investment company.
Moody’s rates municipal notes using ______, ______, ______, ______.
Moody’s rates municipal notes using MIG1, MIG2, MIG3, SG.
True or False: The Flow of Funds covenant on a revenue bond describes the priority for distributing project revenue.
True
What funds are similar to an index fund, but trade in the secondary market like stock?
ETFs
True or False: Investors can buy fractional shares of a mutual fund.
True
Interest on Federal Farm Credit system and FHLB securities is subject to which taxes?
Federal only
What is a Revenue Anticipation Note (RAN)?
Municipal note that will eventually be paid from future federal or state subsidies
What is a Grant Anticipation Note (GAN)?
Municipal note issued in anticipation of receiving government funding in the form of a grant
Which security has no connection to CMOs - GNMA, FNMA, FHLMC or SLMA?
Student Loan Marketing Association (SLMA)
True or False: ETFs are marginable and may be sold short.
True
True or False: The interest rate on TIPS is fixed, but the principal may be adjusted.
True
Letters of Intent may be back-dated for _____ days.
90 days
To calculate the sales charge percentage for a mutual fund, the formula is: (______-______) ÷ ______
(POP - NAV) ÷ POP
The minimum face value of a T-Bill, T-Note or T-Bond is $______.
$100
Into what does a growth fund invest?
Common stock
How is the phantom interest on an OID treated for tax purposes?
It is considered interest income on a municipal bond, and therefore, tax exempt.
What system is used for the issuance of Treasury securities?
An auction
Letters of Intent are valid for ____ months.
13 months
May closed-end funds issue more than one type of security?
Yes. Closed-end funds may issue common stock, preferred stock, or bonds.
Who may issue bonds that offer interest that is triple tax-exempt?
Commonwealths, territories, and possessions (e.g., Puerto Rico)
To calculate the POP for a mutual fund, the formula is: ______ ÷ (______ - ___________)
NAV ÷ (100% - Sales Charge %)
Describe the tax treatment of contributions made to a 529 Plan.
They are after-tax contributions that may possibly grow tax-free.
When analyzing GO bonds, what are some important considerations?
Property values, per capita income and debt, population, current debt, tax collection, unfunded pension liabilities
T-Bills are issued in maturities of: ____ week, ____ week, ____ week, and ____ week
4, 13, 26, 52
What condition must exist for a municipal bond’s interest to be exempt at the state and local level?
Investors must buy the bond from the state in which they reside.
Which bond would most likely require a feasibility study to be issued?
Revenue Bond
Define breakpoint.
Dollar levels of investment purchases that qualify for a reduced sales charge
What is the tax consequence if a municipal Original Issue Discount (OID) bond is held to maturity?
Since the basis must be accreted up to par, there is no capital gain or loss when an OID is held to maturity.
True or False: 529 plans allow for a five-year front-end contribution of $90,000, which avoids gift tax.
True ($18,000 x 5 years)
Grandparents who contribute to a grandchild’s 529 plan may give how much money and still avoid gift tax consequences?
Front-loading five years of contributions is allowed; therefore, each could contribute $90,000 for a total of $180,000.
Assuming a net revenue pledge bond, what is the second priority according to the flow of funds?
Debt Service (with Operating and Maintenance first)
______________________ bonds would most likely require voter approval
General Obligation (GO) bonds
Which tranche has the most unpredictable cash flow and maturity?
The support or companion tranche
If $25,000 is invested in an inverse ETF, what is the value if the market rises by 5% on day 1, then drops 10% on day 2?
Day 1: $25,000 x .95 = $23,750 and Day 2: $23,750 x 1.10 = $26,125
How is interest on municipal bonds treated for tax purposes?
Federally tax-exempt, but may be subject to state and local tax
True or False: Mutual fund shares may be purchased and sold in the secondary market.
False. Mutual funds are always considered new issues and are bought and sold through the fund.
How much may be contributed to a 529 plan and avoid gift tax?
A donor may give up to $18,000 per year and avoid the gift tax.
__________ is the deduction allowed for naturally wasting assets.
Depletion
True or False: Income Programs purchase already producing wells, but offer few intangible drilling costs.
True
What payout option requires the insurance company to provide payments for as long as one of two people remain alive?
Joint and Last Survivor
Is the death benefit of an annuity included in the estate of a deceased client?
Yes. Additionally, any amount over the cost basis may be taxable to the beneficiary.
True or False: REITs are exempt from the registration requirements of the Securities Act of 1933.
False. REITs are required to register
The annuity with growth dependent on the performance of securities in a separate account is called a __________ annuity.
Variable annuity
If performance in a given period equals the AIR, the next payment will __________________.
Remain constant
In a qualified annuity, how is the payout taxed?
The entire payout is taxed as ordinary income, since the annuity was funded with pre-tax dollars.
If performance in a given period is below the AIR, the next payment will ___________.
Decrease
What written documentation is required when recommending a 1035 exchange of a variable annuity?
Whether the client has completed a 1035 exchange in the past 36 months
What are the two types of partners in a limited partnership?
General partner and limited partner
When a partner sells his interest in a partnership, what can he do with the remaining losses?
Passive losses can be deducted against any type of income (passive or non-passive).
What are some of the acceptable actions for the limited partner?
Inspecting partnership books, suing the general partner, voting on major issues affecting the partnership, competing
Are life insurance death benefits taxable?
No. Death benefits are received tax-free.
Is a fixed annuity a security?
No
True or False: Performance must be negative for a variable annuity’s payment to fall.
False. Performance below the AIR will cause the payment to fall, even if the investment result was positive.
True or False: The AIR is a guaranteed minimum rate of return.
False. The AIR is a benchmark rate that is not guaranteed.
Regarding limited partnerships, what is the difference between a managed and non-managed offering?
Managed use an underwriting syndicate; non-managed offerings use a wholesaler rather than a syndicate.
What actions are considered a violation for the general partner of a limited partnership?
Admit another general partner (need approval from limited partneres), change the partnership, compete with the program, personally use partnership assets
Which annuity allows for a pre-tax contribution - Qualified or Non-Qualified?
Qualified
Which is more expensive to own, a variable annuity or a mutual fund?
A variable annuity, since it typically has greater expenses due to the death benefit and mortality expenses
What program generates no cash flow and is based on the speculation of land value appreciation?
Raw Land Program
True or False: If client suitability for a variable annuity is determined, an RR signs and documents the recommendation.
True
General Partners must contribute at least ____% of the capital.
1%
If a REIT pays dividends, would the corporate dividend exclusion rule apply?
No
Is a REIT a form of direct participation program (DPP)?
No. Unlike DPPs, REITs do not pass through losses (only income)
____________ Partners are the primary contributors of capital to a limited partnership
Limited Partners
Is a person who invests in a variable annuity more susceptible to legislative risk or investment risk?
Investment risk, since the separate account of a variable annuity fluctuates with the overall performance of the market
What is the primary disadvantage to Government Assisted Housing Programs?
The historic lack of potential appreciation
True or False: DPPs are pass-through investments.
True
In a non-qualified annuity, how is a return of capital taxed?
Tax-free, since it is part of the client’s basis
True or False: Passive income is income derived from dividends and interest generated by securities in a portfolio.
False. Passive income is derived from an investment in a direct participation program (e.g., limited partnership).
Name the real estate program that does not specify the property or land to be purchased at time the program is created.
Blind Pool
In a non-qualified annuity, how is the payout taxed?
Basis is tax-free, earnings are taxed as ordinary income
Name some of the different types of Direct Participation Programs (DPPs).
General Partnerships
Limited Partnerships
Joint Ventures
S Corps
Non-listed REITs
Non-listed BDCs
Ann invests $15,000 in a non-qualified annuity. At age 64, she withdraws all $22,000. What’s Ann’s basis; what’s taxed?
$7,000 of earnings would be taxed as ordinary income.
At annuitization (payout), accumulation units are exchanged for __________ units.
Annuity Units
What benefit will a tax deduction provide for an investor?
Deductions reduce an investor’s taxable income with a tax savings found by multiplying the deduction by the tax bracket.
Which annuity provides a fixed, guaranteed minimum rate of return?
A fixed annuity
What is the effect of an outstanding loan at the death of the insured?
The death benefit will be reduced by the loan amount.
True or False: Raw land is not a depreciable asset.
True
What is a 1035 Exchange?
A tax-free exchange of one annuity for another. These exchanges are allowed under Section 1035 of the Tax Code.
May hedge funds sell stocks short and use margin?
Yes
A limited partner could lose limited liability status for what reasons?
Taking an active role in the management of the program (hire/fire employees or negotiate contracts)
Who assumes the investment risk in a variable insurance contract?
The client (insured)
List 3 characteristics of hedge funds.
Hedge funds are often leveraged, unregistered, and illiquid.
An annuity client contributed $100,000 which has grown to $200,000. If the client dies, what is her death benefit?
$200,000. The death benefit on an annuity is the greater of the contribution or the account value.
Is switching between annuity sub-accounts taxable?
No
What type of oil and gas program drills for new oil reserves in unproven areas?
Exploratory (wildcatting)
What is the role of a wholesaler when dealing with limited partnerships?
A wholesaler assists in marketing the partnership to other BDs as well as educating RRs.
____% of the gross proceeds represents the maximum allowable underwriting compensation for a limited partnership.
10%
Prospectus delivery is required for all ___________ insurance contracts.
Variable insurance contracts
Prior to selling a DPP, passive losses can only be used as deductions against ____________________.
Passive Income
Which type of annuity is considered a security, fixed or variable?
Variable
What does a limited partnership’s Subscription Agreement state in regard to a purchaser?
He is aware of risks, can meet suitability standards, has read disclosure document, and knows the required investment.
True or False: A hedge fund is always required to register as an investment company.
False. A hedge fund is not required to register if it has no more than 100 shareholders and makes no public offering.
The _________ partner is in charge of management and decision-making for the partnership.
General Partner
A REIT could derive income from what different sources?
Interest (mortgage REIT), rent from both residential and commercial property, and capital gains (equity REIT)
List some natural resource wasting assets that a DPP is permitted to deplete.
Oil, gas, gold, and timber; but not wheat since it’s replanted and grown every year (i.e., it’s renewable).
What does it mean to say “a limited partnership is a pass-through investment?”
The results of the business venture (profits and losses) flow through directly to the investor.
What is a hedge fund?
An investment pool that typically has a complex investment strategy, is leveraged, and employs long and short strategies
What technique can be used to roll assets from one annuity into another without taxation?
A 1035 Exchange
________________ Drilling Programs drill in proven areas.
Developmental
In a Non-Qualified Annuity, how is the payout taxed?
Only the earnings portion is subject to ordinary income tax
Can a variable life policy’s death benefit grow over time?
Yes. If the account performance is positive, the benefit will increase
What amount of net income must a REIT distribute?
90%
True or False: Variable annuities are subject to registration requirements of the Act of 1933 and sold by prospectus.
True
Does a variable life policy have a guaranteed minimum death benefit?
Yes. Regardless of account performance, the minimum DB is paid (typically, the initial DB listed on the policy’s face).
Joan invests $15,000 in a qualified annuity. At age 64, she withdraws all $22,000. What’s Joan’s basis; what’s taxed?
Her basis is zero, since the annuity is qualified (funded pre-tax) and the entire $22,000 is taxed as ordinary income.
What does the Partnership Agreement define?
The rights, liabilities, and obligations of each partner
Is a hedge fund investment considered liquid?
No
A limited partnership could be formed by a minimum of how many individuals?
2 (one general partner and one limited partner)
Describe the liability of the two partners in a limited partnership. General partners have _____ liability, and Limited partners have _____ liability
Unlimited ; Limited
_________________ is the payout option that provides payments for the annuitant’s whole life and will cease at death.
Straight-Life
The ____________________ is the point at which a program stops losing and starts making money.
Cross-over point
What is the benefit of the Straight-Life payout option to the annuitant?
This option provides the highest monthly income.
True or False: Investment Tax Credits are applied directly against an investor’s tax liability.
True. Tax Credits provide a dollar-for-dollar tax savings.
What is the order of liquidation for a limited partnership?
1) Secured Creditor 2) General Creditor 3) Limited Partner 4) General Partner
Over-development and high leverage are the risks associated with a ____ _____________ Program.
New Construction Program
What document is filed with the state of legal domicile to create a partnership?
Certificate of Limited Partnership
___________ Drilling Programs drill in proven areas and also look for new oil.
Balanced
What may an RR recommend to a non-accredited investor wishing to participate in hedge fund investing?
A fund of hedge funds. However, these funds do not offer daily redemption rights.
A major advantage to investing in Government Assisted Housing Programs is the availability of _____________.
Tax Credits
To invest in a limited partnership, an investor must complete the _____________ __________.
Subscription Agreement
The money invested in a variable annuity is used to buy _____________ _____.
Accumulation Units
What’s the difference between straight-line depreciation and accelerated depreciation?
Straight-line has the same deduction each year, while accelerated has larger deductions in the early years.
What are the important numbers associated with REITs?
90% income distributed, 5 or less may not own more than 50%, 100+ shareholders, 75% of assets invested in real estate
What happens when an investor’s passive losses exceed her passive income?
She is able to carry forward the passive losses
At annuitization (payout), what will determine the annuitant’s payment?
A fixed number of annuity units with a fluctuating value per unit
In an non-qualified annuity, how is a single distribution taxed?
Earnings first (LIFO)
What modification is made to the Straight-Life payout option to guarantee payments for a minimum number of years?
Straight-Life with Period Certain
If performance in a given period is greater than the AIR, the next payment will ___________.
Increase
May loans be taken against variable life policies?
Yes, for a portion of the contract’s cash value
Is income generated by a limited partnership taxed once or twice?
Only once, and it is at the partner’s level. The program itself is not a taxable entity.
The trading of REITs is most similar to what type of investment company?
Closed-end management companies, since both trade in the secondary market (exchange or OTC)
True or False: Limited partnership units are illiquid and require permission of the general partner to sell.
True
What is the tax implication of the death benefit on a variable annuity?
Any amount above the contract’s basis is taxable to the beneficiary.
To become a limited partner, the _______ ________’s signature is required on the Subscription Agreement.
General Partner’s
True or False: If a registration statement has not been filed with the SEC, BDs may not discuss new issue information.
True
A large short interest is a __________ indicator.
Bullish
____________ is the buyer’s refusal to accept the delivery of municipal bonds.
Rejection
True or False: The Wilshire Associates Index is considered the broadest of the broad-based indexes.
True
______ is the measure of an asset’s volatility compared to the market as a whole.
Beta
Given a yield change, ____________ (long-term/short-term) (lower/higher coupon) bonds move more in price.
Long-term ; Lower coupon
Is the Placement Ratio compiled daily or weekly?
Weekly
Business, regulatory, political, and liquidity risk are all types of ____________ risk.
Unsystematic
True or False: The 11 GO Bond Index is composed of 11 of the 20 bonds in the 20 GO Bond Index.
True
Account statements must be sent to customers at least ____________.
Quarterly
True or False: 100% of investors must be state residents to qualify for the Rule 147 intrastate exemption.
True
The final ________ _____ will not appear in a red herring.
Offering price
Written disclosure of a control relationship is normally found on a client’s ____________.
Confirmation
Under Reg. D private placement, ___ is the maximum number of non-accredited investors allowed.
35
What would a member of the syndicate (not the manager) earn for selling bonds?
The total takedown
What advertises that municipal bonds are available and invites underwriters to bid on a new competitive issue?
Notice of Sale
True or False: Systematic risk may be avoided through diversification.
False
What does the Placement Ratio indicate?
The number of bonds that were sold during the week compared to what was available for sale (the demand side)
An offering of shares of the issuer and selling shareholders (e.g., officers) is a _____________________ offering.
Combined primary/secondary offering
What must issuers have to qualify for the Rule 147 intrastate exemption?
Principal place of business in that state
True or False: Form 144 must be filed for any sale of restricted or control stock, regardless of the size.
False. If a sale is for 5,000 shares or fewer, and has a market value of $50,000 or less, no notification is required.
True or False: The SEC judges an offering’s investment merit and provides approval.
False
If a BD has a control relationship with an issuer, what’s needed to place the bonds in a client’s discretionary account?
Client’s specific consent
The document underwriters submit to issuers when bidding on a competitive issue is called the ______________________.
Official Bid Form
Accredited investors have net worth of at least $_________ or pre-tax income in each of the last two years of $________.
$1 million ; $200,000
____________ level is the price level at which point a stock stops increasing.
Resistance
Credit risk measures the issuer’s risk of _________________________.
Default on debt service
According to The Dow Theory, what two averages must reach a new high or new low to confirm a major trend?
Dow Jones Industrial Average and Dow Jones Transportation Average
Name the 3 components of the spread for a bond offering.
1) Manager’s Fee
2) Additional Takedown
3) Sales Concession
An increase in odd lot selling is a _________ indicator.
Bullish
How is the underwriter determined for a Negotiated Sale?
The issuer selects the underwriter it would like to work with, and they negotiate the offering terms.
QIB stands for ___________________________.
Qualified Institutional Buyer
What are the requirements to qualify for a Tier 1 exemption under Regulation A?
A maximum offering of $20 million over 12 months, with no more than $6 million being offered by selling shareholders
What does Regulation A concern?
Exempt public offerings with SEC
QIBs are financial institutions that have at least $_________________ invested in securities of non-affiliated issuers.
$100 million
What type of opinion will a bond counsel render if the legality of the issue is in question or a lawsuit is pending?
Qualified
What is a principal trade?
BD or IA buying or selling securities for its own account at its own risk.
A head and shoulders bottom formation is considered a __________ indicator.
Bullish
True or False: Canadian companies are not eligible to use the Regulation A exemption.
False. Both U.S. and Canadian companies are eligible to use the Regulation A exemption.
What must occur when a member firm’s customer places an order for a company’s stock and a control relationship exists?
Verbal disclosure must be made prior to the trade, with written disclosure made prior to settlement.
Is the average credit rating of the 11 GO Bond Index higher or lower than the 20 GO Bond Index?
Higher; the average is AA+/Aa1.
Define duration.
The measure, expressed in years, of a bond’s price sensitivity to interest rate changes
What is the primary purpose of the Securities Act of 1933?
Provide investors with full and fair disclosure regarding new issues (prospectus)
True or False: Syndicate managers may change the priority of orders if justifiable and in the syndicate’s best interest.
True
May a preliminary prospectus (red herring) be sent during the cooling-off period?
Yes. The red herring is used to obtain indications of interest from potential purchasers.
List the priority of orders from first to fourth.
1) Presale orders
2) Group net orders
3) Designated orders
4) Member orders
The Dow Jones Composite Average comprises ____ industrial stocks, ____ transportation stocks, and ____ utility stocks.
30 ; 20 ; 15
The holding period for unregistered (restricted) securities under Rule 144 is __________.
6 months
If a bond counsel has no concerns related to the new offering, the counsel may render an ______________ opinion.
Unqualified
The ___________ clause gives underwriters the ability to buy additional shares from the issuer to cover over-allotments.
Green Shoe
List the securities that are exempt from registration.
Government/municipal bonds, commercial paper, bankers’ acceptances, bank issues, non-profit and small business issues
What theory analyzes the amount of a company’s stock that has been shorted and not yet covered?
Short Interest Theory
Define the term cost basis.
The total cost to acquire an asset.
__________ level is the price level at which point a stock stops decreasing.
Support
True or False: Shelf Registration gives flexibility to the issuer by allowing delayed or continuous sales.
True
A Regulation A Tier 1 exemption is permitted for issuers that raise no more than $__________ over 12 months.
$20 million
The total takedown is made up of ____________ + _____________.
Additional Takedown ; Sales Concession
What rules govern the registration of an issue in any state in which it will be offered?
Blue-Sky Laws
True or False: The head and shoulders patterns are indicative of the reversal of a trend.
True
Is the head and shoulders top formation the reversal of an upward or downward trend?
Upward
How is the underwriter determined for a Competitive Sale?
The issuer invites syndicates to bid on the issue, with the best bid (lowest interest cost) winning the competition.
What is the difference between what the syndicate pays the issuer for the new issue and the public offering price?
The Underwriting Spread
Which department of a broker-dealer handles the underwriting and issuance of securities for clients?
Investment Banking
Is the average credit rating of the Revenue Bond Index higher or lower than the GO Bond Indexes?
Lower; the average is A+/A1.
The breakout of an area of support is a __________ indicator.
Bearish
May multiple confirmations be printed on the same page?
Yes. However, each transaction must be clearly segregated.
____________ orders are given to a syndicate and identify two or more members (not all) to receive credit for the sale.
Designated
What information would the manager of a municipal underwriting provide in the Syndicate Letter?
Underwriting type (negotiated/competitive), amount, allocation, priority of orders, type of account (eastern/western)
Where can Visible Supply figures and the Placement Ratio for municipals be found?
The Bond Buyer
What is the disclosure document, similar to a prospectus, that is used for municipal bonds?
Official Statement
Does Rule 144 require a specific holding period for control stock?
No, but the SEC must be notified when a sell order is placed and volume limitations apply.
What does Rule 145 of the Securities Act of 1933 cover?
Registration/prospectus requirements of any reclassification of securities (primarily from mergers or acquisitions).
List some examples of systematic risk.
Market, interest rate, inflation and event risk are all systematic risks.
If a control relationship exists between a B/D and issuer, may the bonds be placed in a client’s discretionary account?
Only if the client provides specific written consent
The Securities Act of 1933 regulates ____________.
New Issues
True or False: The Efficient Market Theory indicates that, through analysis, undervalued situations can be discovered.
False (markets are efficient)
What theory states that all known relevant information is reflected in a security’s price?
Efficient Market Theory (also called the Random Walk Theory)
What type of underwriting is cancelled if the entire issue is not sold?
All-or-None
_________ orders are those in which only one member earns the total takedown.
Member Orders
Indications of interest are _______________ (binding/non-binding) on both the customer and BD.
Non-binding
The private placement disclosure document is the _____________________.
Official Memorandum
In a firm commitment underwriting, unsold securities are retained by ________________.
The Syndicate
An increase in odd lot buying is a _________ indicator.
Bearish
In a best-efforts underwriting, unsold securities are retained by ______________.
The Issuer
The index showing the average yield on 25 revenue bonds with 30-year maturities is called the ______________________.
Revenue Bond Index
What is the difference between a syndicate member and a firm in the selling group?
Syndicate members assume liability, while firms in the selling group do not.
During the registration cooling-off period, what should an agent do if a client sends a check to purchase securities?
Return the check to the customer
What orders are placed prior to the actual awarding of the issue to the syndicate?
Presale orders
The Green Shoe Clause allows the issuer to expand the offering by a maximum of ____%.
15%
Underwriters operating under a best-efforts agreement with an issuer are acting in a ________________ capacity.
Agency/Broker
What type of underwriting is cancelled if a specified portion is not sold?
Mini-Max
True or False: Stabilization is designed to artificially raise the price of a new issue.
False. Stabilization is designed to support or keep a new issue’s price from falling.
Besides BDs and their employees, who else is restricted from purchasing equity IPOs?
An employee’s immediate family if materially supported by, or sharing household with, the employee
Is it mandatory for a municipal issuer to prepare an Official Statement?
No, but if one has been prepared, the MSRB requires BDs to distribute it.
If a spread only differs in expiration dates, which is the dominant leg?
The leg with the later expiration
If an asset outperforms the market when prices are up, but underperforms when prices are down, what is its beta?
Beta greater than 1
If there is a lack of liquidity in a security, the spread between the bid and asked price would be expected to ________. (grow/shrink)
Grow
A ___________ underwriting is used for shares not purchased through a rights offering
Stand-By
The ________________ the duration, the greater the bond’s price sensitivity.
Longer/Greater
What orders benefit the entire syndicate by percentage of liability?
Group net orders
Describe inflation or purchasing power risk.
The risk that today’s investment will not be worth as much when the money is received in the future.
A change of address notification must be sent within ____ days.
30 days
For purposes of ACATS, what is a non-transferrable asset?
A proprietary product of a delivering organization or an asset that is the product of a third party (e.g., mutual fund)
Though some securities are exempt from registration, nothing is exempt from the ____________ provisions of the Act.
Anti-Fraud
Reclassifications, merger or consolidation activities, and transfers of assets are regulated under what provision?
Rule 145
The ____________________ is the disclosure document concerning a Regulation A issue.
Offering Circular
Underwriters that have made a firm commitment to an issuer are acting in a ________________ capacity.
Principal/dealer
Are Visible Supply figures compiled daily or weekly?
Daily
Name some of the different items found on a customer confirmation. (7)
Description
Amount
Purchase/sale
Execution price
Trade/settlement date
BD capacity
Commission (on agency)
How do you reduce non-systematic risk?
Through diversification
True or False: According to CAPM, a security’s return equals a risk-free return (T-Bill return) plus a risk premium.
True
If a client wins $1 million, what should a RR do?
Update the account form
The highest price at which a stabilizing bid may be placed is the ________________________
POP
True or False: The legal opinion addresses the creditworthiness of an issue.
False. Legal opinions address the legality (authority/validity) of the issue and the tax exemption of the interest.
Is the head and shoulders bottom formation the reversal of an upward or downward trend?
Downward
What is the Capital Asset Pricing Model (CAPM)?
A model of the relationship between expected risk and expected return
Why will the manager prioritize orders for the purchase of bonds sold through the syndicate?
To give the maximum benefit to the entire syndicate as a group versus any one particular member
Define real interest rate (real rate of return).
Interest rate minus the inflation rate (e.g., Bond yielding 8% when inflation is 3% has a real interest rate of 5%).
The New Issue Rule covers what new issues?
All equity IPOs
The Visible Supply figure indicates the number of municipals expected to reach the market within the next ____ days.
30
What are the requirements to qualify for a Tier 2 exemption under Regulation A?
A maximum offering of $75 million over 12 months, with no more than $22.5 million being offered by selling shareholders
When bidding on a new issue, what will underwriters first determine?
Reoffering Yield
For how long may a new issue be sold under a shelf registration?
Up to 3 years
True or False: Trade confirmations may be sent electronically.
True
A BD that is a part of the selling group (not a syndicate member) would only be entitled to the ____________________.
Sales Concession
When it receives a transfer request, the ___________ (delivering/receiving) firm submits a list of the assets in ACATS.
Delivering
The breakout of an area of resistance is a __________ indicator.
Bullish
True or False: When formulating a financial plan, it is always important to consider the client’s liquidity needs.
True
Once Form 144 is filed, owners have __________ to sell their securities.
90 days
What is the purpose of a Tombstone Ad?
It calls attention to the new issuance of securities and members of the syndicate.
Is the Dow Jones Industrial Average considered broad or narrow?
Broad
Is an official statement or preliminary official statement considered retail communication?
No. However, a summary or abstract of an official statement is considered retail communication.
Is a summary prospectus of an official statement considered retail communication?
Yes (but not a normal official statement)
What is the document that establishes the agreement between the issuer and the underwriter?
Underwriting Agreement
____________ is the only form of price manipulation allowed by the SEC.
Stabilization
What type of syndicate has members responsible only for their specific allocation - Eastern or Western?
Western (divided)
Is a Western syndicate divided/undivided?
Divided
The 20 GO Bond Index is composed of ____ GO bonds with ____-year maturities.
20 ; 20-year
True or False: BDs and their employees may buy shares of equity IPOs from the syndicate.
False
What is the spread minus the manager’s fee?
Total Takedown
What is the maximum sale allowed under Rule 144?
1% of the outstanding shares or average trading volume over the last 4 weeks - whichever is greater
Put the following four types of orders in the correct priority: Group Net, Member, Presale, Designated
1) Presale
2) Group Net
3) Designated
4) Member
Who must review a change of address for a client of a producing branch manager?
An independent supervisor
A head and shoulders top formation is considered a __________ indicator.
Bearish
Securities issued under the intrastate exemption may not be sold outside the state until ____________ have passed.
6 months
May a customer request to have trade confirmations e-mailed to her?
Yes
Rule 144A exempts sellers from the holding period and volume limitations of Rule 144 if trading is done with a _____.
QIB
For active accounts, many firms send account statements ________.
Monthly
What type of syndicate is formed when members retain a level of liability until all bonds are sold - Eastern or Western?
Eastern (divided)
Is an Eastern syndicate divided/undivided?
Undivided
Is there a maximum number of stabilizing bids that may be placed?
Yes, 1 (usually placed by syndicate manager)
The _________ Theory states that small public investors are generally wrong.
Odd Lot
True or False: An RR may send a confirmation for a trade he believes will occur soon.
False. Trade confirmations may only reflect actual transactions.
The average rating for the 20 GO Bond Index is ____________.
AA/Aa2
Where may quotes for non-Nasdaq (OTC) stocks be found?
OTC (Pink) Market
If the S&P 500 falls by 20% from the previous day’s close, trading halts for ________________________.
Remainder of day
How will the sale of securities from an account affect the account balances?
LMV and Debit decrease by the sales proceeds, Equity stays the same, and SMA increases by 50% of the sales proceeds.
What is an ECN?
Electronic Communication Network; any one of several systems which permit the entry and dissemination of quotes
How would a $2,000 cash dividend or voluntary cash deposit affect a margin account’s balances?
LMV is unchanged, Debit is reduced by $2,000, Equity is increased by $2,000, and SMA is increased by $2,000.
In order to sell short, Regulation SHO requires that securities be easy or hard to borrow?
Easy to borrow (called the locate requirement)
Existing account: LMV $40,000, Debit $10,000, Equity $30,000, SMA $10,000. SMA is used for a $20,000 purchase. Result?
LMV $60,000 - Debit $30,000 = Equity $30,000 and SMA is $0
True or False: Restricted accounts must be remedied immediately by depositing the appropriate dollar amount.
False. Restricted accounts do not require immediate response.
Does the 5% policy apply when a BD is acting in an agency capacity, a principal capacity, or both?
Both
True or False: Customers are required to sign the Loan Consent Agreement.
False. Signing the agreement is optional.
What is the formula for calculating the P/E ratio?
Price/EPS
How is book value per share calculated?
Common stockholders’ equity / # common shares outstanding
What orders may be placed in the Designated Market Maker’s (Specialist’s) Book?
Stop and limit orders placed away-from-the-market
Existing account: LMV $40,000, Debit $25,000, Equity $15,000. How is SMA affected by receiving a $5,000 cash dividend?
SMA would be credited with $5,000 (100% of the deposit).
For inventory purposes, what is the benefit of using LIFO versus FIFO during an inflationary period?
LIFO would create lower earnings; therefore, a lower tax expense.
If the price of a stock falls while its earnings remain the same, what happens to its P/E ratio?
The P/E ratio will fall.
How long will a GTC Limit order remain on the Display Book?
Until executed or cancelled by the customer
Is this a not-held order? “Sell some of my RST position today if the news is bad.”
No, because the client did not specify the number of shares to sell.
True or False: Market declines will reduce SMA.
False. The only way to lose SMA is to use SMA.
Define earnings before interest and taxes (EBIT).
Operating income (adjusted for other income (or expenses) that is not generated by normal operations
Is this a not-held order? “Buy 500 shares of XYZ this morning if it looks good.”
Yes
True or False: In a period of rising prices, the FIFO inventory method would create a greater profit than using LIFO.
True
What type of order gives discretion as to price and time of execution, but does not require a power of attorney?
Not-held order
A ________ order indicates quantity, security, and whether to buy or sell and is executed at the best price available.
Market
What information is found on a confirmation and NOT an order ticket? (4)
Firm capacity
Accrued interest
Commission
CUSIP #
Is this a not-held order? “Buy 5,000 shares of LNC sometime this week.”
No, because not-held orders are only effective for one day.
Sally converts her XYZ bonds and enters an order to sell XYZ stock. How would the sell order ticket be marked?
Since the tender for conversion has been entered prior to the sale, the order ticket may be marked long.
Identify the following formula: Total Assets = Total Liabilities + Shareholder’s Equity
Balance Sheet Equation
Define Regulation T.
The percentage a customer must deposit when purchasing securities or selling short
What is exempt from the 5% policy? (4)
Municipal bonds
New issues
Registered secondary offerings
Mutual funds
True or False: The 5% Policy is a rule that may not be exceeded.
False, it’s a guideline, not a rule.
To find a stock’s current yield, the formula is: ____________ ÷ ____________
Annual Dividend / Current Market Price
Any quote qualified by the terms “subject”, “workout,” or “nominal” is not considered a ______ quote.
Firm
Working Capital, Current Ratio, and the Quick Asset Ratio (Acid Test) are examples of ____________ ratios.
Liquidity
True or False: Nasdaq is a securities exchange registered with the SEC.
True
A long margin account’s minimum initial equity requirement is _____% of the purchase or $______ , whichever is less.
100% ; $2,000
Any amount of equity greater than 50% is called _______________.
Excess equity
What are some of the different functions of Designated Market Makers?
Maintaining liquidity and buying and selling from their own account
True or False: An order ticket will identify the broker on the other side of the trade (contra broker).
False
Existing account: LMV $40,000, Debit $25,000, Equity $15,000. If $5,000 is sold from the account, how is SMA affected?
SMA would be credited with $2,500 (50% of the sales proceeds).
What is the ROE formula?
Earnings Available to Common Shareholders / Average Common Equity
The formula for determining equity in a short margin account is: ____________ - ____________ = Equity
Credit Balance - Short Market Value (SMV) = Equity
An investor’s strategy is __________ when effecting a short sale.
Bearish
According to FINRA, the guideline for determining commission or markup on transactions is ___%.
5%
If the S&P 500 declined by 7% after 3:25 p.m., how long will trading be halted?
After 3:25 p.m., the 7% limit does not apply; trading will continue until the close or a 20% decline (Level 3 halt).
Beginning at what time of the day does the 7% not apply?
3:25
Do stop orders guarantee a specific price when buying or selling?
No, stop orders execute at the market price (which is uncertain) once they are activated.
What is the margin requirement when buying options?
100% of the premium
True or False: When prices are rising, switching from a LIFO to FIFO inventory method will reduce EBITDA.
False
What stocks does the FRB deem to be marginable?
Stocks listed on major exchanges and on Nasdaq
What may a BD lend to a customer in a margin account?
The complement of the Reg T margin call (50%)
May the Designated Market Maker (Specialist) accept a not held order?
No
What does Regulation SHO regulate?
Short Sales
If the S&P 500 declines by 13% after 3:25 p.m., trading will continue until there is a ____% decline.
If the S&P 500 declines by 13% after 3:25 p.m., trading will continue until there is a 20% decline.
For agency trades, ____________ must be disclosed.
Commission
Market makers must report trades within _____ seconds.
10 seconds
The ______________ is where trades of NYSE-listed securities occur in the over-the-counter market.
3rd market (OTC/Pink)
The ___________________________ is the primary system for accessing the quotes of Nasdaq market makers.
The Nasdaq Market Center Execution System
According to NYSE rules, if the S&P 500 falls by 7% from the previous day’s close, trading will halt for ______ minutes.
15 minutes
How long will a Day Limit order remain on the Display Book?
Until executed or the end of the day (if unexecuted)
On margin, Ben buys 100 shares of ABN at 50 and sells 1 ABN Oct 55 call at 3. What is Ben’s required cash deposit?
$2,200, which is 50% of the stock position minus the $300 premium received on the sale of the call
True or False: For principal trades, commissions must be disclosed.
False. Principal trades charge a markup or markdown which must be disclosed on the confirmation.
True or False: Market makers are obligated to honor their quotes for both size and price (i.e., they are firm quotes).
True
Prior to 3:25 p.m., if the S&P 500 has declined by 7%, how long will trading be halted?
15 minutes
What amount of fully paid securities must be deposited to meet a margin requirement?
Securities with a loan value equal to the margin call (in other words, 2x the margin call)
On the floor of the exchange, who executes orders for the clients of their firm?
The Floor Broker (also called the Commission House Broker)
Securities that are acceptable as collateral have a loan value that equals ____%.
50%
On margin, Emma shorts 100 shares of DEF at 68 and sells 1 DEF Oct 60 put at 4. What is Emma’s required cash deposit?
$3,000, which is 50% of the short position minus the premium received on the sale of the put
If earnings are rising while the price of the stock remains the same, what happens to its P/E ratio?
The P/E ratio will fall.
Would the declaration of a dividend increase/decrease Retained Earnings? Do Current Liabilities increase/decrease? What about Working Capital?
1) Retained Earnings is reduced and
2) Current Liabilities is increased
3) Working Capital is reduced
What is the difference between the current ratio and the quick asset ratio?
Current ratio includes inventory, while the quick asset ratio excludes inventory.
True or False: An all-or-none order qualifier requires all of the bonds to be purchased.
True
A company with more debt than equity outstanding is considered ____________.
Leveraged
If an investor is short stock, a buy stop order can be used to limit _________ (upside/downside) risk
Upside
Firms acting in the capacity of a broker will collect a ____________.
Commission
By how much is the following account restricted? LMV $40,000, Debit $25,000, Equity $15,000
$5,000. The equity should be $20,000 (50% of $40,000), but there is only $15,000.
How would the payment of a dividend affect Current Assets (cash)? Current Liabilities? Working Capital?
1) Current Assets (cash) is reduced
2) Current Liabilities is reduced
3) Working Capital stays the same
On margin, Henry sells short 100 shares of DEF at 68 and sells 1 DEF Oct 60 put at 4. What is the margin requirement?
$3,400, which is 50% of the short position. Since this is a covered position, there is no requirement on the short put.
What factors could justify a larger markup than 5%? (3)
The type of security, the availability of the security, or the total transaction amount
If an investor writes a covered call, is there a margin requirement on the option position?
No, the long stock position covers the sale of the call.
When a customer buys on margin, what % of cash may a BD borrow from a bank? ______% of debit balance
100% of the debit balance
What is the formula for calculating operating profit margin?
Operating Profit ÷ Sales
Existing account: LMV $40,000, Debit $10,000, Equity $30,000, SMA $10,000. If SMA is withdrawn, what are the balances of equity and SMA?
LMV $40,000 - Debit $20,000 = Equity $20,000
SMA is $0
An account with equity below the Reg T requirement is called ____________.
Restricted
True or False: Fundamental analysis focuses on analyzing the market using charts, patterns, trends, and short interest.
False. Charts, trends, pattern analysis, and theories would be the focus of a technical analyst.
How long can a short stock position be maintained?
Unlimited, provided the account maintains the minimum required equity.
On margin, an investor buys 100 shares of ABN at 50 and sells 1 ABN Oct 55 call at 3. What is the margin requirement?
$2,500, which is 50% of the stock position. Since this is a covered position, there’s no requirement on the short call
What is a customer using when she borrows funds to increase the size of her position?
Leverage
Identify the following formula: (Net income - preferred dividends) ÷ Common shares outstanding
EPS
What is the formula for calculating the Debt-to-Equity Ratio?
Total Debt ÷ Total Equity
The minimum equity requirement for the initial short sale in a margin account is $_______ .
$2,000
Is the 5% policy based upon the current market value of the security or the dealer’s cost?
Generally, the current market value
A markup is generally based on the _______ (inside/outside) market, but not the _____________.
Inside ; Dealer’s cost
____________ - ____________ = Working Capital
Current Assets ; Current Liabilities
How would the issuance of stock affect Current Assets (cash)? Shareholders’ Equity? Working Capital?
1) Current Assets (cash) increases
2) Shareholders’ Equity increases
3) Working Capital increases
What is Interpositioning?
The placement of another BD between a customer and the best market
The highest bid and the lowest offer for a security is referred to as the ________________.
Inside Market
True or False: Investors generally place stop orders to limit a loss or protect a profit on a stock position.
True
On the floor of the exchange, the _____ maintains a fair and orderly market
Designated Market Maker (DMM)
Where will excess equity be recorded?
The Special Memorandum Account (SMA)
Stop orders become _________ orders once they are triggered/activated.
Market
What can be found on Level II Nasdaq?
Current quotes of all market makers for a specific security
Calculate SMA using the following balances: LMV $40,000, Debit $10,000 and Equity $30,000
Equity - 50% of the LMV = Excess Equity ($30,000 - $20,000 = $10,000)
Hypothecation is synonymous with what term?
Pledge
Which level of Nasdaq will only show the inside market for a security?
Level 1
True or False: The capacity in which a firm acts appears on both the confirmation and the order ticket.
False. Firm capacity is disclosed on the confirmation, not the order ticket.
The analysis of a specific company (its balance sheet, income statement, etc.) are the focus of the ___________ analyst.
Fundamental
Calculate the combined equity in the following account: LMV $24,000, Debit $10,000, Credit $18,000, SMV $9,000
(24,000 + 18,000 - 10,000 - 9,000) = $23,000
What is the system that provides quotes for the Third Market?
Consolidated Quotation System (CQS)
Transactions effected on an exchange or OTC must be reported within ____ seconds.
10 seconds
The formula for determining equity in a long margin account is: ____________ - __________ = Equity
LMV ; Debit Balance
What is the rate of interest that a bank charges a BD on margin loans?
Call Rate
How is a firm acting if it effects trades on behalf of its customers, without taking the other side of the trade?
Agent or broker
A _______ order indicates quantity, security, and whether to buy or sell, but only at a particular price or better.
Limit
What is the margin requirement for a short against the box position?
5% of the long position
How long must new issues be held before they may be used as collateral?
30 days
What is the Reg T margin requirement for short sales?
50%
True or False: Level III Nasdaq is available to the public.
False. Level III is exclusively for market makers.
How has access to Level III Nasdaq?
Market Makers
Mutual fund shares have loan value after they have been owned for ____ days.
30 days
Goodwill is an example of what type of asset?
Intangible
The _________________________ regulates margin requirements.
FRB (Federal Reserve Board)
How would the issuance of debt affect Current Assets (cash)? Long-term Liabilities? Working Capital?
1) Current Assets (cash) increases
2) Long-term Liabilities increases
3) Working Capital increases
Which market is the decentralized, negotiated market?
OTC
True or False: The capacity in which the firm is acting in a transaction is found on the order ticket.
False. Firm capacity is found on the confirmation.
What trades would be covered by the 5% policy?
Secondary market trades of stocks, corporate bonds, and Treasuries
What are the two ways order tickets can be marked when selling securities?
- Long (selling shares that are owned)
- Short (selling stock that is being borrowed)
What is the benefit of using accelerated depreciation? _______ depreciation expenses and, therefore, _______ (higher/lower) taxable income in the short-term
Higher depreciation expenses ; Lower taxable income in the short term
Define trading ahead.
Buying or selling securities just before the release of a research report by the firm’s research department
True or False: When prices are rising, switching from a LIFO to FIFO inventory method will increase EBITDA.
True
True or False: When prices are rising, switching from a FIFO to LIFO inventory method will increase EBITDA.
False
If earnings are falling while the price of the stock remains the same, what happens to its P/E ratio?
P/E increases
True or False: ECNs allow subscribers to post quotes and trade electronically and anonymously.
True
If an order has been entered as Immediate-or-Cancel (IOC), is a partial execution acceptable?
Yes. The order must be executed immediately, but not completely.
To meet a $20,000 Reg. T call, a customer could deposit cash of $________ or fully paid securities of $________.
$20,000 ; $40,000
True or False: The Locate Requirement of Regulation SHO applies when a sell order ticket is marked long or short.
False. The Locate Requirement only applies when a sell order ticket is marked short.
The Locate Requirement only applies when a sell order ticket is marked _____ (long/short)
Short
True or False: When prices are rising, switching from a FIFO to LIFO inventory method will reduce COGS?
False. Switching from FIFO to LIFO inventory method will increase COGS.
How is buying power calculated?
SMA divided by Reg T of 50% (just remember SMA x 2)
True or False: When calculating book value, exclude preferred stock.
True
True or False: Short against the box is considered being long and short the same position at the same time.
True
How is the Debit Balance and Equity affected if SMA is withdrawn?
Debit Balance increases ; Equity decreases
The current Reg T margin requirement is ____%.
50%
How is fully diluted EPS different than basic EPS?
Fully diluted EPS includes all rights, warrants, and convertible securities, even if they have not been exercised.
To what is a firm entitled when acting in the capacity of a principal or dealer?
Markup when selling to a customer and markdown when buying from a customer
Markup is for ________ in principal/dealer capacity
Markdown is for ______ in principal/dealer capacity
1) Selling to a customer
2) Buying from a customer
OTC markets use a _____________ system, while most exchanges use a ____ or ___________ system.
Market Maker ; DMM ; Specialist
What is the maximum amount of securities that a BD may rehypothecate to a bank?
140% of the debit balance
The credit balance is made up of what two components added together?
Short sales proceeds plus the Reg. T requirement
How is cash flow calculated?
Net income plus depreciation. Depreciation is added back, since it is a non-cash expense.
What does Level III Nasdaq give market makers the ability to do?
Change their quotes
Sell order tickets are marked long when clients have unconditional contracts to buy, but the trades have not ________.
Settled
The industry minimum maintenance requirement for a long account is ____%.
25% (Equity must be at least 25% of LMV)
Identify the following formula: Stock’s market price ÷ EPS
Price/Earnings (P/E) Ratio (also called the earnings multiple)
True or False: Depreciation is a source of cash on the Cash Flow Statement.
True
The _____________________ has the authority to regulate margin requirements.
Federal Reserve Board (FRB)
True or False: Not-held orders may be entered by both retail and institutional clients.
True
____________ governs the extension of credit by BDs.
Regulation T
A client with $3,000 of SMA has buying power of $________.
$6,000 (the SMA balance x2)
True or False: Firms may establish their own in-house rules relating to payment dates and minimum requirements.
True. However, the requirements must be at least as stringent as those established by the regulators.
The ______________ is where trades occur between institutions without the use of BDs.
Fourth Market
A client buys stock on margin and makes no cash deposit because he uses SMA. How are LMV, Debit Balance, and Equity changed?
LMV and Debit Balance both increase by the full purchase price
No change for Equity
May new issues (e.g., IPOs or mutual fund shares) be purchased on margin?
No
If an investor is long stock, a sell stop order can be used to limit ___________ (Downside/Upside) risk.
Downside
True or False: When prices are rising, switching from a FIFO to LIFO inventory method will reduce EBITDA.
True
What is the formula for calculating the dividend payout ratio?
Dividend Payout Ratio = Annual Dividend ÷ EPS
If the price of a stock rises while its earnings remain the same, what happens to its P/E ratio?
P/E ratio will rise
In a margin account, customers pay interest on the ________ balance.
Debit
What does selling short mean?
Selling securities that are not owned, but are borrowed from a BD
True or False: When prices are rising, switching from a LIFO to FIFO inventory method will reduce COGS?
True
What document allows a BD to lend customer securities to someone wishing to sell them short?
Loan Consent Agreement
Identify the following formula: Annual dividend ÷ EPS
Dividend Payout ratio
What is the Nasdaq Market Center Execution System?
The automated quotation and execution system for Nasdaq
The industry minimum maintenance requirement for a short account is ____%.
30% (Equity must be at least 30% of SMV)
What is the violation for a market maker failing to honor its firm quote?
Backing away
What is the formula for finding equity in a combined margin account?
LMV + Credit Balance - Debit Balance - SMV
Why would an investment banker use EBITDA instead of EPS?
EBITDA is used for companies with different depreciation costs. It also neutralizes capital structure differences.
What is required for a not-held order to be valid for more than one trading day?
A client’s written authorization
True or False: Stocks quoted in the Pink Market are often thinly traded.
True
The ________________ Agreement describes the customer’s pledging of securities as collateral to the BD.
Hypothecation Agreement
A written customer complaint is retained for _____ years from the date of its resolution.
4 years
Why would a trade have “when issued” settlement?
It’s a primary market (new issue) trade and the certificates have yet to be created.
Customers are given ____ business days after settlement date to pay for their portion of a trade (i.e., S+__ or T+__).
2 ; (S + 2) ; (T + 3)
What annuity does not protect an investor against inflation?
Fixed (guaranteed) contracts are not a good hedge against inflation.
If an option is purchased, Regulation T requires payment to be made within _____ business days after the trade date.
3
True or False: The ex-dividend date is on the same date as the record date.
True
True or False: Mediation is often cheaper and quicker than an arbitration proceeding.
True
For municipal bearer bonds, what factors determine good delivery? (2)
1) All unpaid coupons attached
2) Denominated in $1,000 or $5,000 increments
True or False: Listed securities and OTC securities have the same threshold for filing erroneous trade reports.
False
Simplified arbitration procedures are used for monetary disputes not exceeding $__________.
$50,000
RTRS (Real-Time Trading Reports) requires firms to report municipal trades within ____ minutes.
15 minutes
Firms are required to maintain written complaint records for _____ years.
4 years
What does the term good delivery mean? (2)
1) The security is in proper form
2) Security is endorsed or accompanied by a stock power.
True or False: Debt issued or guaranteed by a U.S. government agency or enterprise is TRACE-eligible.
True
Once a firm is randomly selected by the OCC to receive the exercise notice, how will it in turn assign the notice?
Random selection, first-in / first-out (FIFO), or any other fair and equitable method.
In the case of an erroneous transaction report, the _______ execution price is binding on the client.
Actual
True or False: Form U4 provides information regarding the schools the associated person has attended.
False
What is TRF? What 2 markets do TRF report trades in?
Trade Reporting Facility
Nasdaq and Third Market
True or False: In settling disputes, arbitration and mediation attempt to help the disputing parties reach an agreement.
False. Only mediation seeks to find a mutually acceptable resolution for the disputing parties.
he OCC will automatically exercise any option that is in-the-money by $____.
$0.01
Is an income bond appropriate for a client who desires income?
No. Income (adjustment) bonds will only pay interest if the issuer has sufficient income
For good delivery, what multiple of shares must be delivered?
100 shares (round lot)
True or False: Zero coupon bonds would be a suitable recommendation for college funding
True, especially since clients may want to avoid stock market risk.
An applicant will be subject to statutory disqualification for any felony conviction within the last ___ years.
10 years
Trades involving corporate and municipal securities settle by the _______________ day following the trade date (T + __).
First ; (T + 1)
CAT (Consolidated Audit Trail) is used to track the life of orders for what types of securities?
Listed (NMS) stocks, OTC equity securities, and listed options.
For what type of investor is a large-cap mutual fund most suitable?
Conservative equity investors, since the portfolio consists of stocks of large, established companies
True or False. Nasdaq Market Center Execution System must be manually reported to TRF (Trade Reporting Facility)
False. They are automatically reported by the executing BD
List some of the items found on an associated person’s Form U4. (8)
1) Personal Data
2) Address
3) 10-year employment history
4) Personal bankruptcy in last 10 years
5) SEC or SRO discipline
6) Felony convictions
7) False statements made to regulators
8) Aliases or previously used names
A stock or bond power grants a third party (usually a BD) the ability to _________ or ___________ a customer’s security.
Transfer ; Re-register
What steps should be taken when an RR executes a trade but uses the wrong account number?
Do a cancel and re-bill. Transfer the trade to the correct account number with permission of a supervising principal.
If a transaction is reported at a clearly erroneous price, when will review and action be taken by FINRA?
Within 30 minutes
What does the Direct Registration System (DRS) do?
The DRS allows registered owners to hold their assets in book-entry form with the transfer agent.
Any amendment to Form U4 must be filed within ___ days of the event.
30 days
True or False: Any tax liens against an agent must be reported on Form U4.
True
Whose authentication is acceptable for mutilated securities?
The transfer agent, registrar, trustee, or issuer
Industry disputes are handled through ______________.
Arbitration
___________ is the settlement for cash transactions (also referred to as cash trades or cash settlement).
Same-day
True or False: A security that is directly held may be transferred using the DRS (Direct Registration System).
True. The DRS enables an investor to electronically move a security between the issuer and the investor’s BD.
When a BD reports a trade to the TRF, what type of information is included? (5)
of shares
1) Ticker
2) Price
3) # of shares
4) Whether a buy/sell/cross
5) Execution time
If short stock, a call option can be used to limit _________ risk.
Upside
Secondary market trades involving U.S. Government securities settle _____________________.
T + 1
How often must CAT (Consolidated Audited Trail) reports be submitted to FINRA?
Daily
To whom are written or electronically-sent grievances (complaints) forwarded?
An immediate supervisor (principal)
Form U4 contains details about settlements exceeding $______ related to complaints, arbitration, or civil litigation.
$15,000
Hearing Panel findings may be appealed to the ___________________________,then the _____, and then ________________.
National Adjudicatory Council (NAC) ; SEC ; Federal Court
Name some of the advantages of buying convertible bonds.
Consistent interest payments, appreciation if stock rises, downside protection if stock falls (since it’s still a bond).
What is a suitable investment in a college fund for a 3-year-old?
Growth funds, since the child has a long time horizon
What are the advantages provided by the DRS (Direct Registration System)?
It reduces turnaround delays, mail losses, and the risks associated with stolen, forged, or counterfeit securities.
Investors who want to generate income on a stock position should ______ an option.
Sell
How do investors holding bearer bonds receive interest?
By clipping the attached coupons
What is a suitable investment in a college fund for a 17-year-old?
High-grade bond funds, since the individual has a short time horizon.
At what time do equity options stop trading?
4:00 p.m. ET on the third Friday of the expiration month
What method does the OCC use when issuing an exercise notice to a BD?
Random selection
When a minor dispute is handled through simplified arbitration, is the ruling final and binding?
Yes, all arbitration decisions are final.
If long stock, a put option can be used to limit ___________ risk.
Downside
By what time must equity options be exercised?
5:30 p.m. ET on the third Friday of the expiration month
The maximum claim under simplified arbitration is $________.
$50,000
True or False: For a 500-share trade, two stock certificates each for 250 shares is considered good delivery.
False. Certificates must be in in multiples of 100 shares.
True or False: Five stock certificates that have 300 shares each is considered good delivery.
True. Since each certificate is in a multiple of 100 shares, this is good delivery.
What is the trade reporting system for Nasdaq securities?
Trade Reporting Facility (TRF)
If a written complaint is received from a customer, what must be kept in the firm’s complaint file? (6)
1) Original copy
2) Firm’s response
3) Any action taken
4) Customer ID
5) Date
6) Name of RR handling the account
If a firm uses another firm to report transactions to RTRS (Real-Time Reporting System) which firm is responsible for timely and accurate reporting?
The firm that executed the order
Give some examples of TRACE (Trade Reporting and Compliance Engine)-eligible securities.
Depository-eligible U.S. dollar-denominated debt of U.S. and foreign companies
Investment or non-investment-grade debt
True or False: Trades executed on the NYSE floor are reported to the TRF and then the Consolidated Tape.
False. NYSE trades are reported directly to the Consolidated Tape.
Who is qualified to endorse a mutilated certificate or coupon?
The issuer or one of its agents (transfer or paying agent or trustee)
True or False: On Form U4, a person must disclose any aliases or previously used names.
True
If a client’s goal is preservation of principal, what fund would be most appropriate?
Money-Market fund
If a firm makes an error in executing a client order, a __________ must be consulted to correct the error.
Principal
What is a suitable investment for a conservative client seeking monthly income?
A GNMA Fund, since income is typically paid monthly
When do GNMA funds make interest payments?
Monthly
A BD bought 100 shares of CBA for Jim, rather than ABC shares. How is the BD’s error account used to fix the mistake?
1) Move CBA to error acct 2) sell ABC to client from error acct 3) buy ABC to cover sale 4) sell CBA from error acct
After acknowledging receipt of a written complaint, when must firms respond to the complaint?
Within a reasonable period
ABC sets a record date of Wednesday, Oct. 19. Would a buyer of ABC on Wednesday, Oct. 19 be entitled to the dividend?
No, the investor must own (trade settles) on or before the record date. This trade doesn’t settle until October 20.
How does CAT (Consolidated Audit Trail) define an order?
Any oral, written, or electronic instructions to effect a trade received from clients, the member, or another firm
True or False: If an RR executes a trade in error, the trade goes into the RR’s error account.
False. Firms, not RRs, maintain error accounts.
What information is included in a CAT (Consolidated Audit Trail) report? (6)
Life of an order including:
1) Receipt
2) Routing
3) Display
4) Modification
5) Cancellation
6) Execution
An investor sells short 100 XYZ at 47 and buys 1 XYZ Nov 50 call at 3. Is the investor bullish or bearish on XYZ?
Bearish since the investor is short the stock. The call is purchased to protect upside risk.
When arbitration involves public customers, __________ of arbitrators must be from outside the securities industry.
A majority
The ___________________________ issues and guarantees option contracts.
Options Clearing Corporation (OCC)
An investor buys 100 shares of RST at 30 and sells 1 RST October 35 call at 2. What is the reason for selling the call?
To provide premium income on stable stock. Also note the premium provides a partial hedge against downside risk.
When are DK (Don’t Know) notices used?
When a trade comparison is received by one firm, but there is no corresponding trade
True or False: A sales practice violation settled for $10,000 or more requires an amendment to Form U4.
True
What should an investor do on the VIX if she anticipates an increase in volatility?
Buy VIX Calls. If volatility increases, the underlying VIX will rise and the calls will increase in value.
If directly held securities are registered in the client’s name on the issuer’s books, with whom are they held?
With either the company or its transfer agent in book-entry form.
When do options trades settle between BD and the OCC?
Next business day (T + 1)
To apply for a securities license, one must file Form _____ with FINRA.
U4
True or False: When stock is sold, stock certificates must be endorsed with a signature or stock power.
True. Similar to when cashing a check, stock must be endorsed before it’s sold.
Under Regulation T, does the payment date requirement apply to cash or to margin accounts?
Both. Payment is due within three business days for a cash account (100% payment) and a margin account (50% payment).
True or False: TRF (Trade Reporting Facility) is used to execute trades in Nasdaq securities.
False. TRF is a reporting, not execution, system for Nasdaq securities.
How do investors receive interest on fully registered bonds?
Interest is mailed to the owner of record.
Is market-timing a suitable recommendation for mutual fund investors?
No, since market-timing is a short-term trading strategy
Corporate bond trades are reported through TRACE (Trade Reporting and Compliance Engine) within _____ minutes.
15 minutes
What is a suitable asset mix for a 65-year-old retiree?
65% fixed income and 35% equity
Form U4 contains a person’s employment history for the last ____ years.
10 years
_______________ following the trade date is settlement for trades of U.S. Government securities or option contracts.
1 business day (T + 1)
True or False: Money-market instruments are TRACE-eligible securities.
False
If an equity option is exercised, when does the transaction in the underlying security settle?
1 business day from exercise date (T + 1)
A BD must file Form U5 with FINRA when a person’s association with that firm ______________.
Ends
What is TRACE?
The Trade Reporting and Compliance Engine. TRACE is a reporting system for corporate bonds.
What security transactions does TRACE report?
Corporate bonds
What actions may the hearing panel take regarding rule violations?
Censure, fine, suspension, request to requalify, or expulsion of the respondent
When do corporate bond trades settle?
One business day after the trade date (i.e., T + 1)
If a pricing error occurs when reporting a trade, the client is obligated to accept the ________ price.
Actual
True or False: A difference between arbitration and mediation is that mediation is binding and arbitration is not.
False. Arbitration is binding on all parties, whereas mediation is not.
When do municipal bond trades settle?
1 business day after the trade date (T + 1)
List some of the order information that appears on a CAT report. (7)
1) Entry party
2) Date/time received
3) Order terms
4) Routing information
5) Any modifications
6) Execution details
7) Firm capacity
What is a suitable investment for a client whose goal is capital preservation?
T-bills or a U.S. Government money-market fund
For physical certificates to be in good deliverable form, stock and bond powers must be _____________________.
Signature guaranteed.
May a customer be forced to use arbitration?
No, but signed pre-dispute arbitration agreements are binding.
The _________ date is the date by which stock must be owned to receive the dividend.
Record Date
What is the trade reporting system for OTC equities?
Over-the-Counter Reporting Facility (ORF)
When will a cash trade for a municipal bond settle?
Same day
A client was screaming at an RR on the telephone. Is a record of this complaint required to be maintained?
No. Only records related to written complaints are required to be maintained.
For what reasons would a firm use its error account?
If the firm or one of its RRs executed a trade involving the wrong security/quantity or on the wrong side of the market
XYZ’s record date is Tuesday, May 3. With a regular-way trade, when could a person sell her stock and keep the dividend?
On Tuesday, May 3 or later. She must be the owner of record at least through May 3 to keep the dividend.
True or False: To hedge a stock position, buying options provides more protection than writing options.
True. When long stock, investors may buy a put. When short stock, investors may buy a call.
When is a due bill required?
If a trade occurs before the Ex-Dividend Date, but the seller delivers after the Record Date.
Would a civil lawsuit filed by a customer against an RR be reported on the RR’s Form U4?
Yes. Arbitration cases and civil lawsuits are reportable events.
True or False: A CAT (Consolidated Audit Trail) report will only include details on orders that have been executed.
False. A CAT report tracks an order from its receipt, to modification, to execution, or its cancellation.
What is the CRD?
The Central Registration Depository (CRD). CRD is FINRA’s database for member registrations.
A variable annuity is most suitable for a client who is seeking ________ ____________ over a long period.
Capital Appreciation
Shares were mistakenly bought in a client’s account. Who is authorized to place the shares in the firm’s error account?
The firm’s principal
True or False: A gambling-related misdemeanor must be reported on Form U4.
False. Only gambling-related felonies must be reported.
The term ____________ refers to the form of issuance where there are no physical certificates delivered.
Book Entry
True or False: Covered call writing is a conservative option strategy that is designed to generate income.
True
Member firms must acknowledge receipt of written customer complaints within ____ business days of receipt.
15 business days of receipt
What are the specifics regarding the expiration of equity options?
They expire at 11:59 p.m. ET on the third Friday of the expiration month.
The name of the customer on a stock power and the name on the stock certificate must be __________.
The same
If a registered representative executes a transaction, but uses the wrong account number, this is an error can
be corrected through a _______
Cancel and Rebill
What is reported on Form U6?
Disciplinary actions against an RR or firm and final arbitration awards against RRs and firms
Information about the disciplinary history of a member firm or
registered representative is available to the public through FINRA’s public disclosure program, ____________
BrokerCheck
OATS (Order Audit Trail System) was replaced by _______
CAT (Consolidated Audit Trail)d
What is EMMA? What is found on EMMA?
MSRB’s Electronic Municipal Market Access (EMMA) System
Primary market disclosure service for official statements, other related primary market documents, and market information
What is a Seller’s Option?
If trade settlement cannot be completed on a regular-way or for-cash basis, the seller
may request a seller’s option settlement. At the time of the transaction, both parties to the trade may agree to a seller’s option, which gives the selling firm additional time beyond the normal one business
day to make good delivery.
Often, a seller’s option is used when the seller needs additional time because of legal requirements, such as the removal of a legend from a stock certificate.
If a client dies, what documents must be given to transfer agent before securities can be transfered?
1) Death Certificate
2) Affidavit of Domicile
3) Copy of Will or court appointment (Letters Testamentary)
4) State inheritance tax waiver
Who declares a dividend?
BOD
Explain Ex-Rights:
Similar to ex-dividend, for the buyer of stock with rights attached to be entitled to
participate in the rights offering, the trade must have settled on or before the record date.
What are the 3 significant times for options?
1) Cease of Trading at 4:00 pm
2) Exercise Notice Deadline at 5:30 pm
3) Expiration at 11:59 pm
What account must a short sale occur in?
Margin account
What’s included in the Margin Disclosure Document? (6)
1) An investor may lose more funds than the amount deposited in the margin account.
2) The firm may force the sale of securities or other assets in the account.
3) The firm may sell an investor’s securities or other assets without contacting the investor.
4) An investor is not entitled to choose which securities or other assets in the account that are being
liquidated or sold to meet a margin call.
5) The firm may increase its house maintenance margin requirements at any time and is not required to
provide the investor with advance written notice.
6) An investor is not automatically entitled to an extension of time on a margin call.
What is a Same-Day Substitution?
When an investor purchases and sells securities on the same day in a
restricted account
What is Phantom SMA?
If a margin customer intends to take a withdrawal from SMA, but the withdrawal causes the account’s equity
to fall below the minimum maintenance requirement, he will be unable to withdraw the funds. In this type
of situation, the SMA is referred to as phantom SMA and may only be withdrawn when the equity returns to
an acceptable level.
Minimum maintenance requirement for LMV? SMV?
25% ; 30%
What is the minimum maintenance requirement for a 2x leverage ETF for a long position? Short position?
1) 50% (25% x 2)
2) 60% (30% x 2)
What is a pattern day traders minimum equity requirement?
$25,000
What is Riskless Principal? Does profit (markup) have to be disclosed?
When a firm buys a security and brings it into its inventory to fill preexisting
customer orders, its capacity is considered to be a riskless principal
Yes
What is Net Basis? Does the firm’s profit have to be disclosed?
If the dealer had sold the securities to the customers at a different price than it paid, the executions are described as occurring on a net basis. In a net-basis trade, rather
than charging a markup, the dealer profits by charging a different price for the securities
No
Can a DMM compete with Public Orders?
No
