Questions and Answers
A registered representative is permitted to contact a person whose name is on the national Do Not Call List:
On Wednesday, March 11, a customer purchases 1,000 shares of an OTC equity security in a cash account. The transaction will settle:
A brokerage account for which a trusted person's name is required applies to which of the following?
The maximum civil penalty for insider trading violations is:
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If a FINRA-registered person does not fulfill the continuing education requirements by the appropriate date:
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The primary concern for investors who use a buy-and-hold strategy to maintain their portfolios is:
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Although all of the following are reportable events on Form U4, which one results in statutory disqualification?
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A client has sold short XYZ stock. Which of the following actions may be taken to offset the risk of the short position?
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Which of the following activities is an unregistered employee of a brokerage firm allowed to perform?
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A customer contacts her registered representative to buy an OTC stock. Rather than buying the shares directly from a market maker, the broker-dealer contacts another broker-dealer. This creates two levels of transaction fees and is referred to as:
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Which of the following choices has the LEAST amount of interest-rate risk?
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The maximum political contribution from a municipal finance professional (MFP) to a candidate for whom she may not vote is:
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Which of the following organizations enforces municipal securities regulations for broker-dealers?
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When a bond is called, the bondholder receives the:
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Which of the following statements is TRUE concerning electronic communication networks (ECNs)?
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The federal securities regulation that provides rules for the secondary market is:
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State securities laws are also referred to as:
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An issuer includes warrants with a bond offering that it's conducting. This is done to:
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If an investor wants to build a bond portfolio that maintains a stable value, she should purchase bonds with:
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Which of the following sources of revenue is NOT used to pay the debt service on general obligation bonds?
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Which term is used for a member of a stock exchange that's responsible for providing liquidity by buying and selling throughout the trading day?
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Which of the following choices does NOT hold customer cash or securities?
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A type of bond in which the amount of interest paid to the investor may change is referred to as a:
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Although most bonds are traded according to their maturity dates, which of the following investments are traded according to their average life?
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A financial services firm that charges customers based on a percentage of the assets under management is BEST defined as:
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Interest on U.S. Treasury securities is:
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What type of bond would MOST likely be secured by an excise tax, cigarette tax, or gasoline tax?
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A customer purchased a premium bond which gives the issuer the ability to redeem the entire issue prior to maturity. Which yield is MOST relevant?
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An annuitant is receiving payments from a variable annuity and, at the time of his death, his beneficiary receives a lump-sum payment. The annuity payout option is:
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If a stock is sold before the ex-dividend date, but delivered after the record date, it must be accompanied by:
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A REIT will receive preferential tax treatment if it distributes at least what percentage of its income to shareholders?
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A fund which invests in companies that pay high dividends is:
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If an options contract is exercised, which of the following statements is TRUE?
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While saving for her retirement, a variable annuity owner investing $1,000 per month will buy a:
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All of the following statements are TRUE of 529 plans, EXCEPT:
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A hedge fund would NOT be a suitable investment for an investor seeking to:
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If an investor expects a sharp increase in a stock's price, which of the following will be the most profitable?
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Two years ago, an investor bought mutual fund shares. Today, if the investor intends to purchase additional shares, she can obtain a reduced sales charge by using:
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Which of the following terms is NOT associated with a variable annuity?
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The Bond Buyer Index is based on which of the following securities?
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Which of the following choices best describes the price that a mutual fund investor receives when she redeems her shares?
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A hedge fund is:
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All of the following are considered a qualified institutional buyer (QIB), EXCEPT:
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In an equity offering, what's the function of a syndicate desk?
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An individual may roll over a lump-sum distribution from a corporate pension plan to an IRA without tax consequences if it is done within:
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Which of the following statements is TRUE regarding contributions to a 401(k) plan?
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An individual owns 100 shares of GHI stock. If GHI announces a 3-for-1 stock split, the individual:
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Which of the following items is NOT found on a sell order ticket?
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Immediately prior to the effective date of an underwriting, an adverse event occurs that causes a sharp decline in the price of the stock. Which of the following clauses permits the underwriter to withdraw without a penalty?
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The most detailed financial information regarding a municipal securities issuer is found in the:
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A customer sells short 100 shares of XYZ at 34. The customer wishes to protect herself against a loss. Which of the following orders will prevent a loss on the short position?
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How many shares may an individual sell under Rule 144 if there are 3,500,000 shares outstanding and average weekly trading volumes are provided?
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A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered were at 18.60, 18.25, 18.38, 18.50, and 18.63. The execution price is:
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Who keeps track of the shareholders of a mutual fund?
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Which of the following choices would NOT be subject to the holding period restriction under Rule 144?
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The investments that tend to perform the WORST during periods of inflation are:
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If a customer exceeds SIPC limits:
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When discussing the purchase of a variable annuity with a client, the RR is not required to disclose:
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Jamie inherited 500 shares of an investment company. What kind of investment company does she own if it makes no provision for future purchases or redemptions?
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Which of the following is TRUE if a mutual fund investor chooses to implement a systematic withdrawal plan from the fund?
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A husband and wife have combined earnings of greater than $300,000 in each of the last two years. The couple is considered:
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All of the following persons are permitted to be named as a trusted contact person for a senior investor, EXCEPT:
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Which of the following risks does not apply to both foreign and domestic debt instruments?
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A Treasury bond is quoted 105.04 - 105.24. The purchase price that a customer would expect to pay would be:
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An equity inverse exchange-traded fund (ETF) is most similar to:
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When a broker-dealer sells a security to a client and charges a commission on the transaction, it is acting as the client's:
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A corporation will be paying a cash dividend to its shareholders. On what date will the market price of the stock be reduced?
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Which types of investments have historically shown a great deal of sensitivity to regulatory risk?
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A firm is the managing underwriter of a follow-on offering of a security that's listed on the NYSE. The aftermarket prospectus delivery rule:
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An investor shifted the allocation of corporate bonds in his portfolio to American Depository Receipts (ADRs). As a result, he will be more exposed to:
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Which bonds are considered the most liquid?
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Which of the following securities trades in fractional units of 1/32 of a point?
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A brokerage firm purchases 600 shares of stock from a customer and places the securities into its inventory. In this case, the firm likely acted as a(n):
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A previously registered person was convicted of a felony 14 years ago. If he's now seeking employment as a registered representative, he should be informed that:
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Which of the following securities would be subject to federal securities registration requirements?
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All of the following statements concerning hedge funds are TRUE, EXCEPT the funds:
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All of the following characteristics would be associated with a growth company, EXCEPT that it has a:
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What's a general obligation (GO) bond?
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Study Notes
Mutual Fund Shareholders
- The transfer agent is responsible for tracking shareholders of a mutual fund.
Rule 144 Holding Period
- Control stock from open-market purchases is exempt from the six-month holding period required for restricted stock.
Investment Performance During Inflation
- Bonds are the investments that typically perform the worst in inflationary periods.
SIPC Limit Exceedance
- If SIPC limits are exceeded, the customer is considered a general creditor and does not have a claim to excess amounts.
Variable Annuity Disclosure
- Probation fees are not required to be disclosed when discussing variable annuities, unlike surrender, mortality, and administrative fees.
Inherited Shares of Investment Company
- A closed-end fund does not allow for future purchases or redemptions once shares are inherited.
Systematic Withdrawal Plan
- Withdrawals from a mutual fund under a systematic withdrawal plan lead to a reduction of capital since shares must be redeemed.
Accredited Investor Definition
- Couples earning over $300,000 annually for two consecutive years qualify as accredited investors.
Trusted Contact for Senior Investors
- Only natural persons (not law firms) can be trusted contacts for senior investors.
Debt Instrument Risks
- Exchange rate risk applies only to foreign debt instruments; domestic debt is not subject to this risk.
Treasury Bond Pricing
- Treasury bonds are quoted in 32nds; a quote of 105.24 equates to a purchase price of $1,057.50.
Equity Inverse ETFs
- Equity inverse ETFs are similar to selling stock short, designed to perform inversely to an index.
Broker-Dealer Transactions
- When a broker-dealer acts as an agent, they charge a commission rather than taking on risk.
Tender Offers
- A company will not buy shares if the tendered amount does not meet the minimum requirement.
Government-Sponsored Enterprise Securities
- Not all government-sponsored enterprise securities are guaranteed by the government.
Investment Risk Exposure
- Investing in ADRs increases exposure to political risk.
Information Barriers
- There must be information barriers between investment banking and trading departments in brokerage firms.
Regulatory Risk Sensitivity
- Limited partnerships are highly sensitive to regulatory risks compared to other investment vehicles.
529 Prepaid Tuition Plans
- The main drawback of 529 Prepaid Tuition Plans is financial loss if the beneficiary does not attend a public college in that state.
Selling Away Definition
- Selling away involves transacting securities privately without the consent of the broker-dealer.
Entertainment Expenses with Clients
- Under FINRA rules, the giving of a ticket valued at $85 to a client is permissible, while giving both is not.
Aftermarket Prospectus Delivery Rule
- A firm does not need to deliver an aftermarket prospectus when it manages a follow-on offering.
Variable Annuity Tax Consequences
- In the event of the holder's death during the accumulation period, the excess proceeds are taxed as ordinary income.
Employment After Felony Conviction
- A person convicted of a felony can become a registered representative after ten years, provided they have served their sentence.
Stock Ex-Dividend Date
- The ex-date is when a stock's price is reduced by the dividend amount.
Municipal Bond Offering Responsibility
- The issuer is responsible for creating the official statement for a municipal bond offering.
Short-Term Trading Vehicles
- Leveraged ETFs are considered short-term trading vehicles due to their volatility.
Market Maker Quotes
- A market maker with a quote of 50.00 - 50.05 indicates a willingness to buy at $50.00 and sell at $50.05.
Asset Allocation Funds
- Asset allocation funds adjust investment percentages across assets based on market conditions.
Deflation Impact
- Persistent deflation generally leads to lower interest rates.
Securities Registration Requirements
- Mutual fund shares are subject to both state and federal securities registration requirements.
Hedge Fund Registration
- Hedge funds do not have to register under the Investment Company Act of 1940 when offered to U.S. residents.
Characteristics of Growth Companies
- A growth company typically has a high price/earnings ratio but not a high dividend payout ratio.
General Obligation Bonds
- GO bonds are backed by taxes imposed by local municipalities.
Liquidity of Treasury Bonds
- Treasury bonds are regarded as the most liquid due to high trading volumes.
Fractional Trading Units
- Treasury bonds trade in fractional units of 1/32 of a point.
Brokerage Firm's Role
- A firm that purchases stocks for its inventory acts as a dealer.
Aggressive Growth Investments
- Common stock is best suited for investors seeking aggressive growth potential.
Regulatory Enforcement for Municipal Securities
- FINRA enforces regulations related to municipal securities for broker-dealers.
Bond Call Price
- Upon a bond call, the bondholder receives the call price along with any accrued interest.
Electronic Communication Networks (ECNs)
- ECNs allow investors to trade anonymously, catering to various types of investors.
Federal Securities Regulation
- The Securities Exchange Act of 1934 sets rules for secondary market activities.
State Securities Laws
- State securities laws are commonly referred to as the Blue Sky laws.
Purpose of Issuing Warrants with Bonds
- Issuing warrants with bonds is intended to enhance the bonds' appeal and value.### Bonds and Interest Rates
- Lowering the coupon rate on bonds can significantly reduce the issuer’s interest cost.
- Short-term bonds are less affected by interest rate changes, making them a safer option for stability in portfolios.
General Obligation Bonds
- Revenue sources for debt service include income taxes, property taxes, and licensing fees.
- Tolls collected at municipal tunnels are not used to pay general obligation bond debt.
Market Mechanics
- Market makers provide liquidity on stock exchanges by standing ready to buy and sell at any time.
- The Depository Trust Company does not hold customer cash or securities.
Bond Types
- Variable rate bonds have interest payments that can change over time.
- Asset-backed securities are traded based on their average life rather than maturity.
Financial Services
- Investment advisers charge fees based on assets under management (AUM) rather than commissions.
- The interest from U.S. Treasury securities is taxed federally but exempt from state taxes.
Special Tax Bonds and Annuities
- Special tax bonds are typically secured by revenue from specific taxes like excise or cigarettes.
- The current yield is most relevant for premium bonds that can be redeemed before maturity.
Account Management and Securities
- 529 plans allow tax-free withdrawals for educational expenses but have specific contribution limits set by states.
- The rights of accumulation offer reduced sales charges for purchasing additional mutual fund shares.
Hedge Funds and Qualified Buyers
- Hedge funds are private investment funds designed for affluent and sophisticated investors, not suitable for those needing immediate access to funds.
- Qualified institutional buyers are defined by specific asset thresholds, with certain exceptions.
Trading Mechanics
- Market-out clauses allow underwriters to withdraw from agreements due to adverse events.
- The execution price for sell stop-limit orders is determined by the price at which the order becomes active.
Insider Trading and Education Compliance
- Maximum civil penalties for insider trading violations can be three times the amount gained or lost avoided.
- FINRA-registered individuals who do not meet continuing education requirements may remain employed but cannot serve in a registered capacity.
Investment Strategies
- A buy-and-hold strategy focuses on proper asset allocation to manage risks effectively.
Stock Splits and Market Orders
- In a stock split, the total value of the investment remains unchanged despite an increase in the number of shares.
- Specific protocols must be followed for orders such as due bills when stock ownership changes.
Compliance in Brokerage Accounts
- Special protocols exist for brokerage accounts opened for senior investors, requiring the designation of a trusted person.### DUI Conviction and Disqualification
- Conviction of a felony charge for driving under the influence (DUI) leads to disqualification only if the conviction is for a felony.
Risk Mitigation for Short Selling
- To offset risk from a short position in XYZ stock, purchasing calls is advisable. This allows the investor to buy the stock if its value increases.
Unregistered Employee Responsibilities
- Unregistered employees can send prospective clients account opening forms.
- They are prohibited from accepting orders or discussing investment objectives, as well as explaining financial products.
Interpositioning in Brokerage Transactions
- Interpositioning refers to the practice where a broker-dealer uses another broker-dealer to execute a customer's order, resulting in additional transaction fees.
- This practice is generally prohibited unless it secures a better price for the customer.
Interest-Rate Risk Analysis
- A BB-rated corporate debenture maturing in two years carries the least interest-rate risk due to its short maturity.
- Interest-rate risk increases with the bond’s maturity; hence, longer-term bonds face greater risk.
Political Contributions by Municipal Finance Professionals
- Municipal finance professionals (MFPs) are not allowed to make any political contributions to candidates for whom they cannot vote.
- Any contribution could result in a two-year ban on municipal securities business with the candidate’s issuer.
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