Securities and Market Makers Quiz
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Questions and Answers

What is the purpose of sending Forms 10-K to broker-dealers?

  • Broker-dealers are required to retain them permanently.
  • Broker-dealers must forward them to their clients. (correct)
  • Broker-dealers must analyze them for compliance.
  • Broker-dealers use them for their internal reporting.

Which of the following is true regarding sales charge breakpoints?

  • Breakpoints apply to funds from different broker-dealers.
  • Purchases by spouses can be combined to reach breakpoints. (correct)
  • Sales charge breakpoints can only be reached with individual fund purchases.
  • Only purchases by the shareholder count towards breakpoints.

What type of offering assures a corporation that it will receive the full amount?

  • Public offering
  • Private placement
  • Firm commitment (correct)
  • Best efforts offering

What is the main restriction on the use of 12b-1 fees?

<p>They cannot be used to pay commissions for executing trades. (C)</p> Signup and view all the answers

Under what condition can a brokerage firm temporarily hold a securities transaction?

<p>For the account of a specified adult. (D)</p> Signup and view all the answers

Who bears the most risk in a limited partnership within a direct participation program?

<p>General Partner (D)</p> Signup and view all the answers

What is the breakeven point for the buyer of a call option?

<p>Strike price plus premium (D)</p> Signup and view all the answers

What distinguishes an open-end investment company from a closed-end investment company?

<p>Determines share prices once per day (B)</p> Signup and view all the answers

What happens to the current yield when a bond is sold at a premium?

<p>Current yield is lower than nominal yield (C)</p> Signup and view all the answers

Which statement is true regarding the liquidity of hedge funds?

<p>Hedge funds typically have restrictions on withdrawals (C)</p> Signup and view all the answers

What characterizes a mutual fund investor's redemption of shares?

<p>Receives the next computed bid price (D)</p> Signup and view all the answers

What is a primary benefit of investing in an index mutual fund?

<p>Lower management fees due to passive management (C)</p> Signup and view all the answers

What position does a seller of call options generally take on the underlying stock?

<p>Bearish outlook on stock price (C)</p> Signup and view all the answers

What must be obtained to issue a general obligation bond?

<p>Voter approval (C)</p> Signup and view all the answers

What is the total takedown when a syndicate member sells a new issue?

<p>The additional takedown plus the concession (D)</p> Signup and view all the answers

How long must prospectuses be delivered for unlisted IPOs in the aftermarket?

<p>90 days (C)</p> Signup and view all the answers

When can an underwriter first discuss a new issue with customers?

<p>After the cooling-off period (A)</p> Signup and view all the answers

What does Rule 144 limit for a control person in a secondary market?

<p>The amount of shares they can sell (C)</p> Signup and view all the answers

What is assumed if an order has no qualifier attached?

<p>It is a day order (C)</p> Signup and view all the answers

Which order type allows a broker discretion over execution time and price?

<p>Not held order (C)</p> Signup and view all the answers

What happens when an investor sells stock short?

<p>They borrow stock and hope it drops in value (D)</p> Signup and view all the answers

What role do corporations typically play in capital markets?

<p>They can issue both equity and debt securities. (A)</p> Signup and view all the answers

Which type of investor is characterized by having a minimum of $100 million in securities investment?

<p>Qualified institutional buyers (QIB) (A)</p> Signup and view all the answers

What does a broker primarily do in a transaction?

<p>Serves as an agent that connects buyers and sellers. (B)</p> Signup and view all the answers

What is the main function of a market maker?

<p>To buy and sell specific amounts of securities at specific prices. (D)</p> Signup and view all the answers

What distinguishes debt securities from equity securities?

<p>Debt securities represent a creditor's claim on assets. (C)</p> Signup and view all the answers

Which act regulates the primary market for new securities offerings?

<p>Securities Act of 1933 (A)</p> Signup and view all the answers

What is a significant characteristic of dark pools in trading?

<p>They limit the impact on market activity by keeping quotes anonymous. (C)</p> Signup and view all the answers

What is the primary responsibility of a clearing firm in a fully disclosed account setup?

<p>To maintain client assets and establish accounts. (A)</p> Signup and view all the answers

What type of security represents ownership in a corporation?

<p>Stocks (A)</p> Signup and view all the answers

Who must be registered with the SEC when advising municipalities on bond offerings?

<p>Municipal advisors (D)</p> Signup and view all the answers

What is the primary purpose of the Options Clearing Corporation (OCC)?

<p>To issue and guarantee option contracts. (B)</p> Signup and view all the answers

What is meant by the term 'spread' in trading?

<p>The difference between bid and ask prices. (B)</p> Signup and view all the answers

What is an IPO?

<p>An initial public offering of securities. (A)</p> Signup and view all the answers

What is the primary purpose of a prime broker in the hedge fund industry?

<p>To offer custody and margin financing services (C)</p> Signup and view all the answers

What is the maximum coverage provided by SIPC for cash and securities per customer?

<p>$500,000 in cash and securities with a cash limit of $250,000 (D)</p> Signup and view all the answers

Which of the following best describes 'cumulative preferred stock'?

<p>Entitles shareholders to unpaid dividends before common stock dividends (C)</p> Signup and view all the answers

Which regulatory body is responsible for enforcing federal securities laws?

<p>Securities and Exchange Commission (D)</p> Signup and view all the answers

What is the primary function of Regulation T?

<p>To establish guidelines for margin trading (A)</p> Signup and view all the answers

How do 'restricted stocks' become recognized under Rule 144?

<p>They require a mandatory six-month holding period (B)</p> Signup and view all the answers

In which scenario would the SEC require a filing of Form 144?

<p>When selling restricted and control stock (C)</p> Signup and view all the answers

What does the term 'insider trading' refer to?

<p>Using non-public, material information for trading (B)</p> Signup and view all the answers

Which type of stock typically does not provide voting rights to its shareholders?

<p>Preferred stock (D)</p> Signup and view all the answers

Which of the following is NOT a characteristic of a debenture?

<p>Secured by specific company assets (C)</p> Signup and view all the answers

What is a main goal of the Federal Reserve when conducting open market operations?

<p>To control money supply and interest rates (D)</p> Signup and view all the answers

Under what circumstances might a company repurchase some of its outstanding shares?

<p>To create Treasury stock which does not receive dividends (A)</p> Signup and view all the answers

What do 'American Depositary Receipts (ADRs)' represent?

<p>Shares of foreign companies traded in the U.S. (B)</p> Signup and view all the answers

What does a zero-coupon bond represent?

<p>A bond issued at a discount and matures at face value (D)</p> Signup and view all the answers

Which type of bond maturity allows for payments to be made over several years?

<p>Serial maturity (A)</p> Signup and view all the answers

What is the main financial benefit of bonds with call provisions?

<p>Allows issuer to redeem bonds prior to maturity (B)</p> Signup and view all the answers

In terms of bond pricing, what does a bond trading at a discount indicate?

<p>The bond is priced below its par value (A)</p> Signup and view all the answers

What is the role of conversion parity in convertible debentures?

<p>Reflects the market value of the common stock received (C)</p> Signup and view all the answers

Which of the following correctly describes the relationship between bond prices and market interest rates?

<p>Inverse relationship (B)</p> Signup and view all the answers

What risk is associated with bonds that have high credit risk ratings?

<p>Default risk (D)</p> Signup and view all the answers

Which agency is responsible for providing mortgage-backed securities?

<p>Ginnie Mae (D)</p> Signup and view all the answers

When a bondholder wishes to redeem a bond before maturity due to rising interest rates, which provision is typically involved?

<p>Put provision (A)</p> Signup and view all the answers

What describes the coupon rate of a bond?

<p>The fixed rate of return on investment. (D)</p> Signup and view all the answers

T-bills are characterized by which of the following features?

<p>Issued at a discount and mature at face value (C)</p> Signup and view all the answers

What does 'current yield' refer to in bond terminology?

<p>Annual interest divided by the bond's current market price (D)</p> Signup and view all the answers

Which bond has the lowest credit risk typically associated with it?

<p>U.S. government securities (B)</p> Signup and view all the answers

What does it mean when a bond is trading at a premium?

<p>It is selling above its par value (A)</p> Signup and view all the answers

What is the significance of the 'conversion price' in convertible debentures?

<p>It sets the number of shares upon conversion (B)</p> Signup and view all the answers

Flashcards

Issuers

Legal entities that raise capital by issuing securities.

Equity (Stocks)

Represent ownership in a company and may receive dividends.

Debt (Notes and Bonds)

Represent an issuer's promise to pay back borrowed money with interest.

Broker-Dealers

Firms that act as intermediaries, connecting buyers and sellers of securities.

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Dealer

A firm that acts as a principal, buying and selling securities for their own account.

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Spread

The difference between the price a dealer is willing to buy (bid) and sell (ask) a security.

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Investment Adviser (IA)

A firm that manages securities portfolios for clients, charging a fee based on assets under management.

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Municipal Advisor (MA)

A person or firm that advises municipalities on bond offerings.

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Institutional Investors

Customers with a large amount of assets, typically institutions or individuals with significant wealth.

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Accredited Investors

Individuals who meet specific financial criteria, typically high net worth or income.

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Qualified Institutional Buyers (QIB)

Buyers who own and invest a minimum of $100 million in securities, excluding natural persons.

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Primary Market

The market where new securities are initially issued.

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Secondary Market

The market where existing securities are traded among investors.

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Initial Public Offering (IPO)

The process of a company issuing securities to the public for the first time.

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Follow-On Offering

The process of a company selling additional securities to the public after an IPO.

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Inside Market

The highest bid and lowest ask prices for a security, signifying the most favorable buying and selling prices currently available.

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Good-til-Cancelled (GTC) Order

A type of order that remains active until it's filled or canceled, allowing for potential execution even if market conditions change.

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Not Held Order

An order that allows the broker to exercise their discretion in determining the price and/or timing of the execution.

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Control Person

A shareholder owning more than 10% of a company's voting stock, subject to specific rules and limitations when selling their shares.

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General Obligation Bond

A type of bond issued by a municipality with its creditworthiness backing the debt, requiring voter approval for issuance.

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Revenue Bond

A bond issued by a municipality for a specific project, with revenue generated from the project used to repay the bond.

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Additional Takedown

The portion of the underwriting spread received by syndicate members for assuming the risk of selling the new issue.

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Concession

The portion of the underwriting spread received by syndicate members for actually selling the new issue.

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Covered Call Writer

A covered call writer owns the underlying stock and is selling a call option on that stock. This strategy can provide income but also limits potential gains if the stock price rises.

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Limited Upside Potential

A covered call writer has a limited upside because the potential profit is capped at the strike price of the call option.

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Downside Risk

A covered call writer has a downside risk similar to owning the stock, as they will lose money if the stock price falls.

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General Partner Risk

In a limited partnership, the general partner has the most risk because they are personally responsible for the debts and obligations of the partnership.

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Open-end vs. Closed-end

The main difference between open-end and closed-end investment companies is that open-end companies issue new shares and redeem existing shares at net asset value (NAV) each day.

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Mutual Fund Redemption Price

A mutual fund investor redeeming shares will receive the next computed bid price on that day. This price may be different from the previous day's NAV, but it represents the current market value of the shares.

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Premium Bond Yield

When a bond is selling at a premium, its current yield is lower than its nominal yield. This happens because the bond's price is higher than its par value, resulting in a lower yield.

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Bond Yield and Price Relationship

A bond's yield and price have an inverse relationship. As yields rise, prices fall, and vice versa.

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Broker-dealers forwarding Form 10-K

Broker-dealers are obligated to promptly forward Form 10-K reports to their customers. This ensures investors have timely access to important financial information about the companies they invest in.

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What is a proxy?

A proxy is a document that allows shareholders to vote on company matters without attending the annual meeting. It empowers them to delegate their voting rights to someone else.

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Sales charge breakpoint: Spouses & same family funds

Sales charge breakpoints are discounts on mutual fund purchase fees based on the total investment amount. These discounts can be applied to purchases of the same fund family by spouses at the same broker-dealer.

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FINRA approval required for published articles

FINRA rules require principal approval and filing for any independently prepared reprint of an article regarding mutual funds that a member firm distributes to 30 or more retail investors. This ensures the communication is accurate and appropriate.

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12b-1 fees: No trading commissions

12b-1 fees are used to cover marketing and distribution expenses, not to pay trader commissions. They should not be used to profit the fund manager.

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Prime Broker

A centralized firm that offers specialized services like custody, securities lending, margin financing, clearing, processing, operational support, research, and customized reporting for hedge funds.

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Bond

A type of debt security, typically with a fixed coupon rate, that represents a loan made by an investor to a borrower. When the bond matures, the borrower repays the principal amount (face value) to the investor.

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Par Value

The amount that the issuer agrees to pay its investors when the bond matures.

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Coupon Rate (Nominal Yield)

The rate of interest that a bond pays, usually fixed at the time of issuance. It is stated annually but paid semi-annually.

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Debenture

Unsecured corporate debt, meaning the issuer does not pledge any specific asset as collateral. It is backed by the company's overall earnings ability.

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Due Date (Maturity)

The date on which the principal of a bond is repaid and the last interest payment is made.

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Preemptive Rights

A shareholder's right to maintain their percentage ownership in a company by purchasing additional shares in a rights offering. This prevents dilution of their ownership.

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Warrant

A type of security that gives the holder the right to purchase a specific number of the company's common shares at a predetermined price, typically above the current market value.

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American Depositary Receipts (ADRs)

A type of stock that represents ownership in a foreign company traded on U.S. exchanges. They are priced and pay dividends in U.S. dollars.

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Blue Chip Stocks

Stock of large, well-established companies with a history of consistent profits and dividend payments.

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Growth Stocks

Stock of companies with sales and earnings growing faster than the overall economy. They typically pay limited or no dividends.

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Income Stocks

Stock of companies that pay higher-than-average dividends relative to their market price. These companies tend to be mature and have a history of stable earnings.

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Defensive Stocks

Stock of companies that are less affected by economic downturns. They tend to perform well in recessions, making them good choices for defensive portfolios.

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Cyclical Stocks

Stock of companies whose performance is directly tied to the overall business cycle. Their earnings fluctuate significantly with economic growth and contraction.

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Preferred Stock

A type of stock that gives the holder priority over common stockholders in terms of dividend payments and asset distribution in case of liquidation. However, it typically does not carry voting rights.

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Term Maturity

A bond structure where the entire offering matures on the same date.

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Serial Maturity

A bond structure where the offering matures over a period of years, with portions of the principal maturing each year.

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Zero-Coupon Bond

A bond issued at a deep discount to its face value, with no periodic interest payments. The investor receives the face value at maturity. The difference between the purchase price and the face value represents the interest earned.

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Accrued Interest (Zero-Coupon Bonds)

The difference between the purchase price of a zero-coupon bond and its face value, representing the interest earned over the life of the bond.

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Inverse Relationship (Bond Prices & Interest Rates)

The relationship between a bond's price and market interest rates. When interest rates rise, bond prices fall, and vice versa.

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Credit Risk

The risk that an issuer may not be able to meet its obligations to pay interest and principal to bondholders.

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Credit Rating

A system used to classify bond issuers based on their creditworthiness.

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Coupon Rate

The annual interest payment on a bond, expressed as a percentage of its par value. It's a fixed rate.

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Bond Price

The price at which a bond is traded in the market, expressed as a percentage of its par value. It can fluctuate depending on various factors.

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Yield to Maturity (YTM)

The return an investor earns on a bond, taking into account the purchase price, annual interest, and any gain or loss at maturity.

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Current Yield (CY)

The annual interest payment divided by the current market price of a bond. It shows the current return on a bond.

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Call Provision

A provision that allows the issuer of a bond to redeem it before its maturity date, typically at a premium, to take advantage of declining interest rates.

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Put Provision

A provision that allows the bondholder to redeem (put back) the bond prior to maturity, usually because interest rates are rising, giving the bondholder a favorable price.

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Convertible Bond

A bond that gives the investor the option to convert the bond into a predetermined number of shares of the company's common stock.

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Conversion Parity

The equivalent market value of a convertible bond's potential shares compared to the bond's current market value.

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Agency Security

A debt instrument issued and/or guaranteed by federal agencies and GSEs. They are considered relatively safe and are exempt from state and local taxes.

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Study Notes

Issuers

  • Legal entities raise capital by issuing securities
  • Corporations
  • US treasury and government agencies
  • State and local governments
  • Banks
  • Foreign governments

Types of Securities

  • Equity (stocks)
    • Sold only by corporations and banks
    • Represents ownership
    • May receive dividends
  • Debt (notes and bonds)
    • Represents an issuer's promise to pay
    • Receive periodic interest payments
    • All entities can sell debt
  • Public or private markets
    • Companies raise money via debt or equity
    • The market can be either public or private

Broker-Dealers

  • Broker
    • Acts as a conduit or agent
    • Finds a counterparty
    • Earns a commission
    • No risk to the firm
    • Uses an agency model
  • Dealer
    • Acts as a principal
    • Takes the other side of the trade
    • Makes a markup/markdown
    • Has inventory/risk exposure
    • Uses a principal model

Market Maker

  • Broker-dealer displays quotes to buy/sell specific securities.
  • Quotes are firm for 100 shares(round lot)
  • Odd lot--other number of shares

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Description

Test your knowledge on issuers and types of securities, including equity and debt. This quiz covers the roles of broker-dealers and market makers in the financial markets. Assess your understanding of how these entities operate and interact within public and private markets.

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