Simulated Exam Deck 1 Flashcards
Your investors invests in a mutual fund at an offering price slightly higher than the funds net asset value ( NAV). Your investor is likely purchasing what share class?
A. B shares
B. D shares
C. D shares
D. A shares
D. The investor is paying the sales charge up front , so they are most likely not buying class A shares. There are no D shares on the exam.
L.O 4b
Secondary market transactions would include all of the following except:
A. Sale of $10 million of corporate bond by a broker dealer acting as an underwriter.
B. Sale of $10 million of U. S Treasury bonds by a broker
C. Sale of 10 million of municipal bonds by a broker dealer acting as a market maker
D. Sale of 10 million of corporate stock by. Broker dealer acting as a market maker.
A. Market makers are broker dealer who sells out of their own account in the secondary market. Underwriters are broker dealers, who help issues bring their securities to the market in the primary market.
The Securities and Exchange ( SEC) require that notice of corporate actions be given for all of the following except:
A. The issuance of warrants to be attached to a bond offering
B. A reverse split on the issuers debt instruments.
C. Interest payments on the issuers debt instruments
D. Dividend on the issuers common stock
C. Payment of bond interest is an obligation and therefore not considered a special corporate action notice. Reverse splits and warrants are not regular happenings, and through some companies have paid have paid dividends regularly, those can be halted. Hence these events would be considered special corporate actions and therefore require notification to the marketplace.
LO 2.i
The Uniform Securities ACT (USA) provides a legal framework for the registration of?
A. Variable annuities at both state and federal levels
B. Securities at the state level
C. Foreign securities traded abroad
D. Mutual funds at the federal level
B. The USA provides a legal framework for the state registration of securities. It may be adopted by individual states and adapted to their needs.
LO 10.d
Which of the following is true regarding the primary market?
A. Price is determined by supply and demand
B. Issuer transactions occur in the primary market
C. The NYSE is an example of s primary market
D. It is regions the Securities ACT of 1934
B. The primary market is where securities are sold to the investing public through issuer transactions. It is regulated by the Securities ACT of 1933. The NYSE is an exchange of a secondary market where price is determined by supply and demand
LO 1.a
A broker - dealer firm has just rehypothecated a thousand shares of MMS stock. This means:
A. The firm withdrawn the stock from a bank and pledged it to the customer.
B. The customer withdraws the stock from the bank and pledges it directly to the firm
C. The customer pledge the stock to the firm, which has now pledged it to the bank.
D. A bank had pledge the stock to the firm, which now pledges it to the customer.
C. in a long margin account, customers put up at least half of the purchase price of securities, and the broker dealer firm borrows the remainder on the customers behalf from a bank. The customer pledges the securities to the broker dealer, which is known as hypothecating the securities. The broker dealer, then we hypothecate them to the bank as collateral for the margin loan.
LO 6g
Which of the following is not an exempt issuer?
A. City of Newark
B. County of Rural Township
C. First National Bank
D. National Bank Holding Company
D. corporations are non-exempt must register. Banks and savings and loan associations are exempt hypothesis but the bank holding companies are not. Municipal governments are exempt.
Lo 1.c
Which of the following option strategies has the most risk?
A. Long puts
B. Long calls
C. Short Calls
D. Short Puts
C. Short calls have unlimited loss potential
LO 5a
XYZ Corp pays. Quarterly dividend of $1. The common stock is currently valued at $ 160 per share. What is XYZ common stock’s dividend yield?
A. 2.5%
B. 5.0%
C. 1.0%
D. 7.5%
A. The formula for dividend yield( or current yield) is annual income \ current market value. In this example you need to multiply the dividend by four to find the annual number: 4 / 160= .025 (2.5%).
LO 8.a
Which of the following is a true statement regarding regarding warrants?
A. Warrants are short-term investments typically 30 to 45 days
B. Warrants are issued to existing shareholders on a basis of one right for one existing share.
C. Warrants are normally issued along with a bond offering as a unit
D. The warrant allows the holder to exercise and purchase the stock at a price lower than the market
C. A warrant grants the owner the right to purchase securities from the issuer at a specified price, normally higher than the current market price at the time the warrants are issued and at some time in the future. A warrant is usually a long - term , instrument, normally 5 years or more until expiration. Warrants are usually offered in connection with other security, such as debt instruments ( bonds) or preferred stock, to make those securities more attractive.
LO 2.g
Which of the following investments is managed by an investment advisor?
A. A unit investment trust
B. Face- amount certificate
C. Treasury Bill
D. Managed investment company
D. The managed investment company actively manages a securities portfolio to achieve a stated investment objective. UITs and FACs do not have actively managed portfolios. T-bills are not “managed “.
LO 4a
Regarding the decision to dissolve a LP before it’s scheduled predetermined dissolution date, it would need to be:
A. Made by the general partner with the largest capital contribution with no vote required
B. Voted by general partners only.
C. Ratified by the IRS because of the tax implications to dissolve earlier than planned.
D. Voted on by the limited partners holding a majority interest.
D. In instances where a decision to dissolve a limited partnership before its pre determined date is made, an affirmative vote to do so must be taken by the limited partners.
LO 5.F
If an investor purchases a mutual fund based solely on seeing the summary prospectus, the investor must:
A. Be given a full prospectus before the check is signed
B. Receive a paper copy of the full prospectus no later than confirmation of sale
C. Be able to access a full prospectus no later than confirmation of sale
D. Received a refund, because shares may only be sold on the basis of a full prospectus
C. A mutual fund investor may base a decision to purchase solely upon studying the summary prospectus. If so a full prospectus must be made available for delivery no later than the receipt of confirmation of sale. In the case, online delivery of the full prospectus is permissible.
LO 4e
Jim’s Tech Fund has a public offering price of $75.28 per share. Your customer invests $40,000 at this price. How many shares will they receive?
A. 531 with a refund of $26.48
B. 532 with an additional demand for $48.93
C. 531.350
D. The customer must choose to round up or round down
C. Mutual fund shares may be purchased either full or fractional shares. In this example 40,000/75.28= 531.350 share
LO 4.b
Your customer sells 100 shares of small Co., Inc., common stock at $50 per share. After 6 months they close the short position at $40 per share. Small Co. Does not pay a dividend. What is the total return?
A. 20%
B. 25%
C. 20%
D. 15%
B.The formula for calculating total return is ( income + gains or - losses)/cost basis . For this question ( $50 -10)/40 = 10/40 = .25 25 %
The US balance of payments deficit would decrease in all of the following scenarios except:
A. A decrease in imports of foreign goods to the United States
B. A decrease in dividend payments by US companies to foreign investors
C. A decrease in the purchases of U.S securities by foreign investors
D. An increase in exports of domestic goods from the United States
C. A deficit in the balance of payments occurs when more money is flowing out of the country than in. When foreign investors decrease their purchases of U. S securities, the flow of money coming into the United States decreases, this adds to the deficit rather than decreasing it.
LO 9f
Deposit is received in currency for amounts over $10,000 in a day would require the firm to report the transaction in how many days on what form?
A. SAR within 15 days
B. SAR within 30 days
C. CTR within 15 days
D. CTR within 30 days
C. The bank Secrecy Act requires firms to report on the CTR any currency received in the amount of more than $10,000 on a single day, within 15 days.
LO 12.b
Your client , Janice Thomas, is an active trader and wants to invest in a managed equity portfolio that she can trade intraday. Which of the following should you recommend.
A. An exchange- traded note ( ETN)
B. A closed end fund
C. A mutual fund
D. An exchange traded fund (ETF)
B.A closed end fund is actively traded and most of them are equity funds. They trade on the exchanges like stocks. Mutual funds can be equity funds and can be actively managed, but they only trade once per day, they are not good for active training. ETFs are actively traded but are not actively managed. ETNs are debt securities not equities.
LO 7d
A married couple have equal 50% ownership interests in a tenants in common account (TIC) . If one party on the account dies , what happens to the shares in the account?
A. All the shares are distributed to the heirs named in the estate of the deceased party.
B. Ownership and distribution of all shares would be determined by the probate court
C. Half of the shares, or 50% , would belong to the remaining party and the balance would be distributed to the estate of the deceased party.
D. The deceased party’s interest is transferred to the remaining party
C. I’m a tenants in common (TIC ) account, securities owned by the decedent pass to the decedents estate- in this case 50% of the assets. The other 50% is retained by any remaining living parties to the account.
LO 6.a
Financial risk is most attributed to which of the following investments?
A. Municipal general obligation bonds
B. Value stock
C. US government bonds
D. Corporate bonds
D. Financial risk is the risk that an issuer would not be able to make principal and interest payments. This rules out government bonds and municipal general obligation bonds because they are backed by taxing power, and stocks don’t pay principal and interest.
LO 7a
The primary regulatory body for the securities industry would be which of the following?
A. Financial Industry Regulatory Authority ( FINRA)
B. Securities and exchange Commission ( SEC)
C. Federal Reserve Board
D. Municipal Securities Rule Board )MSRB)
B. Created under the Securities Exchange Act of 1935, the over riding or primary. Securities industry regulatory body is the SEC.
LO 10.a
JIM Growth Fund has net assets of $75 million and liabilities of $3 million. The fund had 1.2 million outstanding shares. What is the fund’s current Net Asset Value ( NAV) per share?
A. $62.50
B. $60.00
C. $61.50
D. $65.00
A.NAV is calculated by dividing the net assets of the fund by the number of outstanding shares. In this question the net assets are given; the liabilities are already in the figure. The math is 75 million/ 1.2 million = $62.5 per share.
LO 4c
(FINRA) The Financial Industry Regulatory Authority and other self regulatory organizations) (SRO)s place extreme importance of knowing your customer. That involves knowing both Financial and Non Financial consist. All of the following are non financial considerations except:
A. The number of children the client has
B. The salary paid to the client by her employer
C. The client’s attitude towards risk.
D. The clients age
B. Non financial considerations are those for which there is no monetary relationship. Clearly, the client’s salary is one of the most important financial considerations.
LO 7.d
A customer enters an order to buy 325 shares of Bryce Bridges INC., at 17 . Which of the following regarding these order instructions is true ?
A. The order can only be executed at 17,
B. The order can be executed at 17 or lower.
C. The order must be executed immediately
D. The order can be executed at 17 or higher
This is a buy limit order (at 17) and can only be executed to purchase XYZ or better. Because this is an instructions to buy , purchasing better than the limit would be lower than the limit. B.
LO 1.g
Which of the following regarding open end ( mutual fund) and closed end management investment company is true?
A. A closed - end company sets its own dividend ex- date, but an open end company ex date is set by self regulatory organizations ((SRO)
B. An open end company may sell fractional shares, but a closed end company may not.
C. The price of an open end company shares is shares is set by supply and demand, but not the price of close end shares.
D. Only the closed end company may issue additional shares without charging its charter.
B. Open - end shares are redeemable and may be purchase in specific dollar amounts. This results in fractional shares being sold. Closed end shares trade on the open market, and therefore traded in round lots of full shares only. The other choices reverse the characteristics of open and closed end companies.
LO 4.a
If a margin deposit is late, an extension request made by the broker dealer
A. Is not permitted to be made in any circumstance.
B. Is not required but, if made, will always be granted.
C. Is required to be made out but may not always be granted
D. Is not required but can be made, and may or may not be granted.
D. Extension request can be made by the broker dealer but are not mandatorily required. When made to the firms designated examining authority ( DEA), they may or may not be granted.
LO 6.g
The minimum initial requirement when purchasing 100 shares at $30 in a new account would be:
A. $750
B. $1500
C. $375
D. $2,000
D. The requirement is normally 50% but not less than $2000, unless the purchase price is less than $2000, then 100% of the purchase price will be required.
LO 6.g
An investor purchases a T - bill for $9,925 that will mature at $10,000 that will be received at maturity.
A. The premium above par and would be considered dividends received at maturity
B. The premium above par and will be considered the interest received at maturity
C. The discount to par and will be considered a capital gain at maturity.
D. The discount to par will be considered interest received at maturity
D.T-bills are purchased at a discount to par. I’m this case, it is bought at $9,925, which is a $75 discount to the $10,000 par value to be received at maturity. Debt interest pay interest nor dividends, and the $75 difference between what was paid and what will be received is considered the interest paid on the T-bill at maturity.
LO 3.e
How an account is registered determines
A. The sole individual allowed to access the account
B. Control of the investments in the account only
C. Ownership and control of the investment in the account.
D. Ownership of the account only
C. Accounts can be registered in the name of one or more persons, as well as legal entities such as corporations or partnerships. Account registration determines the ownership of the account and who wil have control of the investments in the account.
Your customer retired two years ago at age 70. He recently took a job with a retailer greeting customers. He would like to contribute to a retirement plan to accumulate additional money with the view to leave something to his grandchildren. You would most likely advise him to open:
A. An annuity
B. A traditional IRA
C. A Roth IRS
D. A mutual fund
C. The Roth IRA would require after- tax ( non - deductible) contributions but would allow earnings to accumulate tax deferred as in any retirement plan. Roth IRA distributions need not begin at age 72, and if holding period requirements are satisfied, all distributions are tax free.
LO 6.e
The windmill bond fund has a POP of $12.34 per share. Your customer invests $4000 at this price. How many shares will they receive?
A. 325 with an additional demand for $10.50
B. 324 with a refund of $1.85
C. 324.150
D. The customer must choose to round up or round down.
C. Mutual fund shares may be purchased in either full or fractional shares. In this example $4000/ $12.34 = 324.15 shares
LO 4.b
Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144?
A. Unregistered Stock acquired by a non affiliate under an investment letter
B. Unregistered stock required by a corporate affiliate in the stock options program
C. Stock acquired by a corporation affiliate in a private placement
D. Stock acquired on the NYSE by a corporate affiliate
D. The holding period rule applies only to unregistered stock, which may or may not be control stock. Unregistered stock results from either private placement or the exercise of a corporate stock option. Because this question asked which of the securities were subject to Rule 144 holding period, only stock acquired on the NYSE by a corporate affiliate is the correct answer. However the affiliated person is subject to volume restrictions.
LO 2.f
Which of the following investment companies had an actively managed portfolio?
A. Debt fixed investment trust ( UIT)
B. Face - amount- certificate company
C. Equity Fixed unit investment trust ( UIT)
D. Close - end company
D. The portfolios of both face amounts certificate companies and UITs are non managed. The closest they come to management is when these securities to make up the portfolio are selected. After that, the portfolio does not change. Closed- end companies have an investment advisor who actively manages the portfolio, buying and selling the securities.
Lo 4a
Which of the following characteristics are associated with FACs ( Face - Amount Certificates.
A. Variable returns
B. Set death benefit
C. In return for a future payment, the investor agrees to pay the issuer a set amount of money
D. No specific maturity date
C. A FAC is a contract between an investor and an issuer in which the issuer guarantees payment of stated ( face-amount) sum to the investor at some date in the future. In return for this future payment, the investor agrees to pay the issuer a set amount of money, either a lump sum or in periodic installments.
LO 4.a
Besty Bingham asks you what her current yield will be if she buys a 6% corporate bond at $1,200. The answer is
A. 5%
B. 2%
C. 6%
D. 3%
The formula for current yield is the stated rate ( coupon rate) dividend by the current market price. $60 dividend divided by $1,200 equals 5%.
LO 8.a
Upon termination a Form U5 must normally be filed within how many days?
A. 30 days
B. 45 days
C. 60 days
D. 15 days
A.Form U5 should be filed within 30 days of termination.
LO 12.a
All of the following are add with being a carrying firm except:
A. Bring a fully disclosed firm
B. Accepting customers securities
C. Accepting customer funds
D. Being Able to clear customer transactions
A. A carrying firm has the capability to do trade executions, clear and settle transactions , and take custody of customer funds and securities. A fully disclosed fund is one that introduces its customers business to another firm for the purpose of clearing and setting transactions.
Lo 1.e
A customer of a Financial Industry Regulatory Authority ( FINRA) member firm buys securities in margin. The customer is expected to pay a rate of interest on the margin loan based on which of the following?
A. The federal funds rate
B. The prime rate
C. The broker call loan rate
D. The discount rate
C.The broker call loan rate is the interest rate banks charge broker dealers on money they borrow to lend to margin account customers. Margin accounts permit customers to purchase eligible securities with out paying in full. Typically, an investor is required to deposit only 50% of the purchase price of eligible common stock with the balance being borrowed. The amount borrowed, as with any loan, is subject to interest payments.
Which of the following would be funded by general obligation ( GO) bonds.
A. A college dorm
B. Toll road
C. A new city hall
D. Public housing
C. City halls are funded by local taxes which is what backs GO bonds.
An investor buys 1 DWQ May 70 call at 2, giving the investor the right to buy 100 shares of DWQ at $70 per share. All the specifications of the transaction are set or standardized by the Options Clearing Corporation ( OCC) except
A. Expiration date in May
B. Premium of 2.
C. Exercise price of 70.
D. Contract size of 100 shares
B. The OCC sets standard exercise prices and expiration dates for all listed options, but the options premiums that buyers pay are determined by the market
Lo 5c
A customer purchased 100 shares of GHI common stock for $20 per share. After a year, they sell the shares for $23 per share. Over the past two years, GHI has paid $.25 quarterly dividend. What is the total return.
A. 25%
B. 10%
C. 20%
D. 15%
The formula for calculating total return is ( income + gains or - losses)/ cost basis. For this question ( $1+3)/20 = 4/20= .20 (20%)
Note that this position was held for only one year.
LO 8.c
A corporate stock is purchased on Friday , April 2, regular way. When will the trade settle?
A. Tuesday, April 6th
B. Wednesday, April 7th
C. Friday , April 3
D,’. Monday, April 5th
A. For corporate securities, regular way settlement is the trade date ( Friday April 2nd). Plus two business days; therefore, the trade will settle on Tuesday April 6th.
LO 1i.
A call option reaches its expiration date and goes un exercised. This means:
I. The buyer gains the premium paid
II. The buyer loses the premium paid
III. The writer gains the premium received
IV. The writer losses the premium received
A. II and III
B. II and IV
C. I and III
D. I and IV
A. Buyers of options pay the premiums for the contracts, and writers ( sellers) receive the prep. If the contract goes unexercised, the buyer loses the premium paid while the seller gets to keep it- a gain
Lo 5a
Discretion given to a registered representative to make transactions applies to all of the following except:
A. The number of shares or units for the transaction
B. Timing and price only
C. the security for the transaction
D. Whether to Buy or Sell
B. Discretion is defined as the authority to decide, what security, the number of shares or units, and white but or sell. Discretion does not apply to decisions regarding only the timing of an investment or the price at which is bought or sold.
LO 6.h
With money market securities, the risks are:
I. Lack of liquidity
II. A lower return than with longer- term instruments
III. Relative safety compared with other longer- term instruments
IV. The potential reinvestment of principal at different rates over short periods of time
A. I and IV
B. II and III
C. II and IV
D. I and III
B. Because of their short- term maturities, money market instruments are relatively liquid and safe compared with other debt securities. These are considered advantages. The risks how’re, would be lower returns ( a trade-off for the safety) and potentially having to reinvest one’s funds at a different rate each time the instrument matures( short intervals). In this light, not only is income minimal, but it will fluctuate with each new instrument purchased.
LO3.f
A stock currently has a market value of $75 per share. If a put option on the stock has an exercise price of $60, the put option is:
A. At break even
B. Out of the money
C. In the money
D. At the money
B. This put option has a zero intrinsic value and is therefore out of the money by the 15 points difference by which the market price exceeds the strike price. A put option has intrinsic value or is in the money when the current market price of the underlying asset is less than the exercise price( in this example, $60)
LO 5.a
To ensure that the information obtained from each new customer is accurate, firms must furnish to each customer a copy of the account record within how many days of opening an account?
A. 30
B. 45
C. 10
D. 20
A. A copy of the account record must be furnished to each customer within 30 days of opening the account.
LO 11.k
In 2011, RST Corp. had both common stock $100 par value 4% non cumulative preferred stock, outstanding. The preferred stock, like common stock, pays dividends on a quarterly basis. Because of financial difficulties, the company stopped paying dividends after 2011. After resolving its problems in 2015, the company resumed dividend payments in 2016. Before paying the first quarterly common stock dividend that year, the company would have to pay a quarterly dividend to the preferred stockholders of
A. $1
B. $4
C. $17
D. $20
A. In the case of a non cumulative preferred stock, skipped dividends are forever lost. So, when the company is able to pay a dividend, which is always the case, it must pay the current preferred dividend prior to paying common. The question states that dividends are paid quarterly. Therefore, the quarterly dividend on stock paying $4 annually would be $1- an amount that must be paid before before the quarterly common dividend can be paid.
LO 2.d
A municipal securities dealer has just made a contribution to the mayor’s reelection campaign. How long must the firm wait before it can enter competitive bids on proposed bond issues by the city?
A. Two Years
B. Can never underwrite a bond for the city again
C. Six months
D. No waiting period
D. If a potential bond issue it is up for competitive bids, any firm may participate in the bidding process, because the city will select the best arrangement available. If it is a negotiation bid ( non competitive), there is a two- year waiting period because a firm that has made a political contribution might have an unfair negotiation advantage over firms that have not.
LO 12.f
The rules to prevent pay to play regarding contributions made to political parties, candidates, and elected officials by firms involved in the underwriting or sales of municipal securities and are enforced by:
A. Securities and exchange Commission ( SEC)
B. Financial industry Regulatory authority
C. Federal Reserve Board( FRB)
D. Municipal Securities Rule Board ( MSRB)
B. Having no authority to enforce the rules it enacts, the MS RB relies on FINRA to enforce its municipal securities rules. This would include the enforcement to pay to play rules regarding political contributions.
L.O 12.F
