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47 Cards in this Set
- Front
- Back
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An investor has taken the following gains and losses during the tax year: a $19,000 gain, and a $24,000 loss. What amount of ordinary income may the investor offset this year?
a. 0 b. $2,000 c. $3,000 d. $5,000 |
c. $3,000
The maximum capital loss an investor may write off against ordinary income in one tax year is $3,000. The balance of the capital loss must be carried forward to the next year. |
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Which of the following documents is NOT needed to open a corporate margin account?
a. A corporate charter and resolution. b. A new account form. c. And hypothication agreement. d. A trust agreement. |
d. A trust agreement
When a corporation opens a margin account, all of the documents listed are needed except a trust agreement. A trust agreement is needed when opening an account for a retirement plan or trust account. |
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Exclusions from the definition of an investment advisor are given to all of the following groups, except:
a. Accountants and lawyers to provide advice in a manner incidental to their profession b. Publishers c. Broker-dealers and their representatives d. Advisors who limit advice to corporate debt only |
d. Advisors who limit advice to corporate debt only.
The investment advisors Act of 1940 excludes choices (a), (b), and(c). There is no exclusion for the definition of advisors to limit advice to corporate debt only. |
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Under industry rules, the final approval to open a new account is given by a(n):
a. Registered representative b. Operations manager c. Partner or principal d. Supervisor |
c. Partner or principle
Final approval must be given by a partner or principal of the firm. Not every supervisor is a principal and only a principal can approve a customer account. |
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One of your clients informs your firm that she will be traveling in Europe and would like your firm to hold all of her confirmations and statements. How long may your firm do this?
a. This cannot be done b. 1 month c. 2 months d. 3 months |
d. 3 months
If the client is out of the country, the firm may hold all correspondence for 3 months per the client's written instructions. If traveling within the US, the firm may hold the correspondence for only 2 months. |
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Relative to a custodian account, which TWO of the following statements are TRUE?
I. The minor is responsible for tax consequences II. The custodian is responsible for tax consequences III. Income generated in the account is taxed as it is received IV. Income generated in the account is taxed when a minor becomes an adult a. I and III b. I and IV c. II and III d. II and IV |
a. I and III
The minor is responsible for all tax consequences in the account. The income is taxed as it is received, not with a minor becomes an adult. |
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Which of the following statements is NOT TRUE regarding the Uniform Gifts to Minors Act?
a. Only one custodian is allowed for each account b. The minor is responsible for all taxes due on dividends and interest received from the securities held in the account c. Only an adult may be a custodian d. Securities must be held in the name of the brokerage firm |
d. Securities must be held in the name of the brokerage firm.
All of the choices regarding the Uniform Gifts to Minors Act are true except securities must be held in the name of the brokerage firm (street name). All securities are registered in the name of the custodian for the minor. |
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A customer has a nondiscretionary account. The customer instructs the registered representative to purchase 500 shares of a specific stock. The RR is given permission to execute the stock when she feels she can get the best price. Which of the following actions is MOST appropriate for the registered representative to take?
a. Cancel the order if the stock does not trade at a good price b. Wait until tomorrow's trading session and see if she can get a better price c. Purchase the stock before the end of the day d. Reject the order |
c. Purchase the stock before the end of the day
This is a nondiscretionary count and, therefore, no shares may be purchased unless the customer gives the broker-dealer an order to purchase the security. In some cases, the registered representative may accept the customer's verbal authorization to make certain decisions without it being considered discretionary. If a customer selects the specific security, decides whether to buy or sell the security, and specifies the number of shares, leaving discretion only as to time or price, it would not be considered discretionary and written authorization would it not be required . |
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Which of the following statements is NOT TRUE regarding discretionary accounts?
a. All discretionary orders must be marked discretionary b. A written power of attorney must be on file c. Orders must be approved verbally by the customer prior to execution d. Orders must not be excessive in terms of size or frequency |
c. Orders must be approved verbally by the customer prior to execution
When transacting business for a discretionary account, the registered representative must have written power of attorney authorizing her to act for the customer. Each order in which the registered representative exercises discretion must be marked discretionary. Representative should not enter orders that are excessive in size or frequency. The registered representative makes the investment decisions and does not need to receive the customers approval for each order being executed. |
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A registered representative has purchased two tickets to attend a basketball game with a client. If the tickets cost $85 each, which of the following statements is NOT TRUE?
a. Under FINRA rules, this is defined as entertainment b. If the registered representative does not attend the game and gives one ticket to the client, this is a violation c. If the registered representative does not attend the game and gives both tickets to the client, this is a violation d. This does not require approval by a principal of the firm |
b. If the registered representative does not attend the game and gives one ticket to the client, this is a violation
Employees at FINRA member firms may not give, or permit to be given, a gift of material value exceding $100 per recipient per year to personnel employed by another member firm. Exempt from the $100 limit are occasional meals, tickets to sporting and cultural events, reminder advertising and expenses related to business travel. In order for the activity to be considered an expense, the associated person employed dealer must attended the event with the client. This type of activity is defined as an expense. Since one ticket is valued at $85, it may be given to the client. Two tickets given to the client would exceed the $100 limit. Approval by a principal is not required. However, member firms should have this type of activity included in their policy and procedures manuals. |
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Which TWO of the following orders is a designated market maker (DMM) prohibited from accepting in his book
I. An open (GTC) order II. A market order III. A day order IV. A not-held order a. I and III b. I and IV c. II and III d. II and IV |
d. II and IV
A designated market maker may accept open GTC orders and day orders in his book. A not-held order allows a floor broker to use his expertise with regard to the proper time and price for execution of the order. The term 'not-held' it means the floor broker is not held to a specific price for the stock. The DMM is not involved with not-held orders. Market orders will not be placed in the DMMs book, as market orders would immediately be executed. |
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Quotes for non-Nasdaq, over-the-counter traded equities can be obtained from the:
I. Third market II. OTC pink market III. Consolidated Quotation System IV. OTC Bulletin Board a. I and III only b. I and IV only c. II and III only d. II and IV only |
d. II and IV only
Quotes for non-Nasdaq, over the counter traded equities can be found in the OTC Pink Market and the OTC Bulletin Board (OTCBB). The third market refers to exchange-listed securities traded over the counter and can be found on the Consolidated Quotation System (CQS). |
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A corporation calls for the redemption of 1 million shares of convertible preferred stock. The Corporation announces that the convertible preferred will be redeemed at a price of $20 and an accumulated dividend of 12 cents. Each share of preferred can be converted into 1/2 share of common. The preferred stock is selling at $19. There are two million shares of common outstanding. Earnings for the common stock $2.50 per share. The common stock is selling at $35.75
Which of the following alternatives is the LEAST attractive for a preferred stockholder? a. Redeem the shares b. Sell the shares c. Convert the shares d. All alternatives are equally attractive |
c. Convert the shares
The least attractive alternative for a preferred stock holder is to convert the shares into common stock. If an investor redeemed the shares, the preferred stock holder can receive $20 + $0.12 of accrued dividends, which would amount to $20.12. If the investor sells the preferred stock at the current market price, the investor will receive $19 per share. If the preferred stock is converted into common stock, it will have a market price of $17.88, making the conversion the least attractive alternative. |
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An individual wishes to sell restricted securities according to the Rule 144 exemption. There are six million shares outstanding. The trading volume for the last 5 weeks prior to the sale are:
April 1.....45,000 April 8.....62,000 April 15....70,000 April 22....75,000 April 29....72,000 If the customer where to sell the securities as of May 6, how many shares may he sell? a. 60,000 b. 63,000 c. 69,750 d. 72,000 |
c. 69,750
The average weekly volume for the last 4 weeks prior to the sale equals 69,750 shares. One of the shares outstanding is 60000. The individual may sell the greater of these two amounts which is 69,750 shares. |
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The Board of Directors of a corporation is responsible for establishing all of the following dates, EXCEPT the:
a. Declaration date b. Payable date c. Ex-date d. Record date |
c. Ex-date
The ex-dividend date is standardized in the securities industry and is normally 2 business days prior to the record date. |
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An investor owns shares of stock that have declined in value. She wants to sell them at $39 a share but is not willing to accept less than $38. The RR should recommend which of the following orders?
a. A market order b. Sell limit at $39 c. Sell stop $38, limit $39 d. Sell stop $39, limit $38 |
d. Sell stop $39, limit $38
If an investor wants to sell a security if the price falls, but is not willing to accept less than a certain price, the RR should recommend a sell stop-limit order. In this example, the first trade at or below $39 would trigger (activate) the order into a limit order to sell at or above $38. If the stock traded at or below $39, and then immediately traded below $38, the order would be activated, but not executed. This is one of the risks when placing a stop-limit order. |
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Which of the following persons may purchase a new issue from a member firm according to the New Issue Rule?
a. The brother brother-in-law of a person associated with a member firm b. The uncle of a person associated with a member firm c. A buy-side trader employed by a mutual fund d. The owner of a member firm |
b. The uncle of a person associated with a member firm
Restricted persons are not permitted to purchase shares of an equity IPO under FINRA's New Issue Rule. Immediate family members of a person associated with a member firm, portfolio managers, and owners of a broker-dealer are considered restricted persons. Aunts, uncles, and cousins are not defined under the rule as an immediate family members and are, therefore, not considered restricted. A buy-side trader has the ability to make trading decisions and is defined as a portfolio manager, who is considered a restricted person under the rule |
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On February 22, an investor sold 100 shares of ABC short at $34 a share. The investor covered the position on November 3 by purchasing 100 shares of ABC at $39 a share, establishing a 5 point loss. If, on December 15, the investor shorts 100 shares of ABC at $35 a share, the:
a. Investor is short 100 shares of ABC against the box b. Wash sale rule has been violated c. Investor has a $400 short-term capital gain d. Investor has a $500 short-term capital loss |
d. Investor has a $500 short-term capital loss
Reinstating a position within 30 days of realizing a loss will trigger the wash sale rule. Since the position is reinstated after 30 days, the client may recognize a $500 short-term capital loss. |
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A company declares a forward stock split. What is the effect on a stock's par value?
a. No effect on par value b. An increase in par value c. A decrease in par value d. An increase in par value in a decrease in the number of shares outstanding |
c. A decrease in par value
When a company declares a forward stock split, the number of outstanding shares increases in the par value decreases proportionately. One reason for a forward stock split is to make a stock attractive to a wider range of investors. By having the stock split, it causes the stock to sell at a lower price. |
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An investor who buys stock and on the same day buys a put (creating a hedge) has established a __________.
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An investor who buys stock and on the same day buys a put (creating a hedge) has established a "married put."
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What technique can be used to roll assets from one annuity to another without taxation?
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A 1035 exchange
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Rule 415 allows shelf registration. This permits one registration statement to cover all securities to be issued during the next:
a. 6 months b. 1 year c. 3 years d. 5 years |
c. 3 years
Shelf registration allows be sure to find the registration statement with the SEC and then, over a three-year period, sell the securities when the issuer considers the time appropriate. |
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A corporation intends to raise additional funds from its existing shareholders rather than use the services of an underwriter. The corporation is engaging in a:
a. Rights offering b. Secondary distribution c. Special offer d. Private placement |
a. Rights offering
The corporation is engaging in a rights offer. It will issue rights to all existing shareholders enabling them to subscribe to new stock below the current market price of the outstanding securities, thereby saving the corporation the costs involved in using an underwriter. |
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A client purchased 1500 shares of stock from a broker dealer, a registered market maker in this stock. The broker dealer acted in a(n):
a. Principal capacity and charged the client a markup b. Agency capacity and charged the client a commission c. Principal capacity and charged the client a commission d. Agency capacity and charged the client a markup |
a. Principal capacity and charged the client a markup
A broker dealer that is always willing to buy and/or sell shares of stock is considered a market makeer. A market maker will normally act in a principal capacity and charge the client a markup or markdown. When acting in an agency capacity, the broker dealer will normally charge the client a commission. |
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In China, a US issuer conducts an offering of corporate bonds. How long is the holding period is a broker dealer wants to offer the securities to an investor in the US?
a. 25 days b. 40 days c. 90 days d. 1 year |
b. 40 days
And overseeing investor who acquires securities pursuant to Regulation S may sell the securities overseas and mediately through a designated offshore securities market. There is a distribution compliance period of 40 days for securities and a one year period before an equity securities sold pursuant to Regulation S may be we sold in the US. |
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XYZ corporation has 7,000,000 shares of common stock ($1 par value) authorized, of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price of XYZ is $20.
The market capitalization of XYZ common stock is: a. $4,500,000 b. $5,000,000 c. $90,000,000 d. $100,000,000 |
c. $90,000,000
A company's market capitalization is found by multiplying the market value by the outstanding shares. $20 market value x 4,500,000 shares outstanding = $90,000,000. |
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On Tuesday May 1st, XYX Corporation's Board of Directors announced a dividend payable on Friday, May 25 to stockholders of record on Monday, May 14. The ex dividend date is:
a. Wednesday, May 23 b. Thursday, May 10 c. Monday, May 14 d. Tuesday, May 1 |
b. Thursday, May 10
Stocks sell ex-dividend on the second business day preceding the record date. The record date is Monday, May 14. Therefore, the ex-dividend date would be 2 business days before, or Thursday, May 10. |
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Which of the following would increase most in price if interest rates decline?
a. Short-term bonds selling at a discount b. Long-term bonds selling at a discount c. Short-term bonds selling at a premium d. Long-term bonds selling at a premium |
b. Long-term bonds selling at a discount
When interest rates decline, bond prices rise. The longer maturities rise more in price than the shorter maturities due to market risk. Bonds selling at a discount rise more sharply in price than those selling at a premium. |
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When a bond is selling at a premium:
a. The market price is greater than the par value b. The current yield is higher than the nominal yield c. It is a better quality bond than one selling at a discount d. The yield to maturity is greater than the current yield |
a. The market price is greater than the par value
The only true statement is that the market price is greater than the par value. When a bond is selling at a premium, the current yield is lower than the coupon rate. Bonds that are selling at a premium are not necessarily of better quality than bonds selling at a discount. |
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Which of the following statements describes the greatest risk associated with mortgage-backed securities?
a. Borrowers might default on their mortgage payments b. The market for mortgage-backed securities is illiquid c. The market price of the bonds might fall due to a rating downgrade d. Falling interest rates might accelerate early repayment of principal |
d. Falling interest rates might accelerate early repayment of principal
Mortgage-backed securities are subject to prepayment risk. The early return of principal would then need to be reinvested when rates are low. Many mortgages that underlie mortgage-backed securities are backed by government guarantees or private mortgage insurance, which insulates many holders from defaults on the underlying mortgages. |
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XYZ convertible debentures are convertible into 20 shares of XYZ Corporation common stock. If the bonds were selling in the market at $960, what would the common stock need to be selling for to be on parity?
a. $19.20 b. $20 c. $48 d. $50 |
c. $48
To find the stocks parity price, divide the current market price of the bond($960) by the conversion rate (ratio) which is given as 20 shares. This equals $48. |
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Which of the following statements is TRUE concerning bonds issued by FNMA (Fannie Mae)?
a. They have yields that are lower than comprable Treasury securities b. They are a direct obligation of the US government c. The value of these securities is highly dependent on current interest rates d. They are generally not considered suitable for investors seeking income |
c. The value of these securities is highly dependent on current interest rates
Government-Sponsored Enterprise (GSE) bonds, such as those issued by FNMA (Fannie Mae) or FHLMC (Freddie Mac) are not direct obligations of the US government. They are able to borrow funds from the government, which makes their yield slightly higher than Treasury securities with the same maturities. As with most fixed income securities, their value is highly dependent on current interest rates, and they are suitable for investors seeking income. |
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A bond is selling at a premium. This indicates that:
a. The yield to maturity is greater than the nominal yield b. The market price is less than the par value c. Interest rates have decreased since the bond was issued d. The nominal yield is less than the current yield |
c. Interest rates have decreased since the bond was issued
The amount that the market price exceeds the par value is known as a premium. One reason for selling at a premium is a decrease in the interest rates after the bonds were issue. When looking at the yields for premium bonds, the nominal yield is the highest, followed by the current yield, with the yield to maturity being the lowest yield of the three. |
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Which of the following CMO's has the MOST prepayment risk?
a. Sequential Pay Tranches b. Accrual or Z Tranches c. Planned Amortization Class (PAC) Tranches d. Support or Companion Tranches |
d. Support or companion tranches
Do you plan amortization class PAC is a type of CMO that is designed for more risk averse investors and provides a predetermined schedule of principle, as long as mortgage speeds are within a certain range. This greater predictability of maturity is accomplished by establishing a sinking fund type of schedule. The PAC tranch has top priority and receives principal payment up to a specified amount. Any excess goes to a companion or support tranche that has lower priority. Holders of the companion tranche are generally compensated for this risk with higher yields. |
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Four municipal bonds have the same maturity date. Which of the following bonds will cost an investor the greatest dollar amount when purchased?
a. A 4 3/4% coupon bond offered on a 5.10 basis b. A 5 1/4% coupon bond offered on a 5.00 basis c. A 5 3/4% coupon bond offed in a 6.00 basis d. A 6 1/4% coupon bond offered on a 6.50 basis |
b. A 5 1/4% coupon bond offered on a 5.00 basis
When bonds are purchased at a discount (below the $1000 par value) the yield to maturity (basis) will be greater than the coupon rate (nominal yield). This is the case in all of the choices listed except where the coupon rate is 5 1/4% is greater than the yield to maturity of 5%. This would mean that an investor purchased the bond at a premium (above the $1000 par value) and paid the greatest dollar amount. |
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Which TWO of the following statements are TRUE of US Treasury bills?
I. They do not have a stated rate of interest II. They mature in more than one year III. The interest received is taxed in the year that they are sold IV. They are issued at a discount a. I and III b. I and IV c. II and III d. II and IV |
b. I and IV
Treasury bills do not have a stated rate of interest a coupon rate. They are issued at a discount below their face value, and the difference received is considered interest, which is taxable in the year that the securities mature, not in the year they are sold. They are sold in minimum amounts of $100 and currently are issued with maturities of 4, 13, 26, and 52 weeks. |
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An outstanding municipal bond would most likely be called when interest rates:
a. Rise above the bond's nominal yield b. Rise above the bond's yield to maturity c. Fall below the bond's nominal yield d. Fall below the bond's yield to maturity |
c. Fall below the bond's nominal yield
Bonds may contain a provision that allows the issuer, at its option, to redeem the bonds before they mature. Call provisions usually benefit the issuer, which has the option of calling the bonds when interest rates decline. The issuer may then refinance the debt at a lower rate of interest. For instance, if an issuer's outstanding bond is paying a coupon rate (nominal yield) of 9% at a time when similar bonds are only paying 5%, the issuer can reduce its interest costs by calling in the 9% bonds and issuing new ones at 5%. As interest rates decline, yield to maturity or yield to call would also decline. |
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XYZ Corporation has $40M of convertible bonds outstanding. Each bond is convertible into 20 shares of common stock. The conversion price is:
a. $20 b. $25 c. $50 d. $100 |
c. $50
To find the conversion price, divide the $1000 par value by the 20 share conversion ratio. This equals a conversion price of $50. The amount of bonds outstanding is not relevant in calculating the conversion price. |
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An engineering report is used for a:
a. General obligation bond b. Hospital revenue bond c. Limited-tax GO d. School bond |
b. Hospital revenue bond
An engineering report and a feasibility report are necessary for a revenue bond. The other choices represent a general obligation securities. |
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According to MSRB rules, a municipal bond dealer will not consider with the following factors when determining a markup?
a. Expenses b. Profit c. Coupon rate d. Total dollar amount of the transaction |
c. Coupon rate
All of the choices is given would affect the market accept the coupon rate of the securities. |
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An investor has a federal tax rate of 35% and a state tax rate of 6% and is offered a 4.90% out-of-state municipal bond. What yield would the investor need in a taxable bond to receive the same after tax yield as the municipal bond?
a. 7.54% b. 8.31% c. 11.95% d. 14% |
a. 7.54%
The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefits of tax-free interest income to after tax income of a taxable bond, it is necessary to find the equivalent taxable yield. Since the investor is purchasing an out-of-state bond we use the 35% rate. |
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An increase in personal income tax rates would MOST likely result in an increased demand for:
a. Municipal securities b. AAA rated corporate bonds c. Mortgage backed securities d. Treasury bonds |
a. Municipal securities
An increase in personal income taxes would result in more investor demand for municipal bonds. This is because the interest income is exempt from federal income taxes. |
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When doing a municipal bond swap, which of the following items is not a factor when trying to avoid the wash sale rule?
a. The issuer b. Maturity date c. The rating d. The coupon |
c. The rating
If a security is sold at a loss, and within 30 days (prior to and after the sale), substantially the same security is purchased, the IRS considers is it a wash sale and will disallow the loss. To avoid purchasing a security that the IRS will consider substantially the same as the security sold, you should purchase bonds either by a different issuer or with a different coupon or maturity. The rating of the bonds would not be a factor. |
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The manager of a new issue municipal syndicate wants to allocate securities in a different manner than specified in the syndicate agreement. He may do this if he:
a. Notifies the SEC b. Amends the syndicate agreement c. Is prepared to justify the change to the syndicate members d. Assumes any loss incurred by the syndicate members |
c. Is prepared to justify the change to the syndicate members
The Syndicate manager is permitted to change the priority of orders if, in his opinion, it is in the syndicate's best interest. He must be able to justify the change to the syndicate members. |
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A customer purchases a municipal bond at $960 in the secondary market that will mature in 4 years. Which of the following statements regarding the purchase is not true?
a. The interest is exempt from federal income tax b. The customer will have taxable income if the bond is held to maturity c. The customer will need to pay a tax on the prorated amount of the discount each year d. If the bond was a new issue when purchased, and held to maturity, the customer will not have to pay any federal tax |
c. The customer will need to pay a tax on the prorated amount of the discount each year
If a municipal bond is purchased at a discount in the secondary market and held to maturity, there will be reportable taxable income. The investor may pay the tax each year or elect to report the entire gain at maturity. If a municipal bond is purchased at an original issue discount and held to maturity, there will be no federal tax liability,. The IRS requires that the discount be accreted each year and be used to increase the cost basis of the bond. However, the amount of the accretion is considered interest and it is, therefore, exempt from federal tax. |
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Relating to a municipal bond swap, which of the following would NOT be a consideration?
a. The coupon rate b. The amount of accrued interest c. The maturity d. The quality |
b. The amount of accrued interest
A bond swap is simultaneously selling one bond and purchasing another. Bond swaps may be done to change the coupon, maturity, quality or rating, and for tax purposes. Accrued interest is not a consideration. |
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Under MSRB rules, all of the following statements are TRUE regarding customer confirmations, EXCEPT for the statement that the confirmation:
a. Must show commissions in an agency transaction b. Need not show the markup in a principal transaction c. Must disclose the third party to the trade in an agency transaction or offer to furnish such information upon request d. Need not disclose if the broker-dealer acted as a principal or agent in the transaction |
d. Need not disclose if the broker-dealer acted as a principal or agent in the transaction
All of the choice is given regarding customer confirmations are true under MSRB rules except that they need not disclose if the dealer is acting as a principal or agent in the transaction. This is not true since the broker-dealer must disclose the capacity in which it acted. |
