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When discussing a corporation’s capitalization, each of the below would be included except:
non-voting class B preferred stock
subordinated debentures rated BB+ by Standard & Poor’s
plant & equipment
Question 1 Explanation:
Capitalization includes Stockholders’ Equity and Long-term Debt. Plant & Equipment are Fixed Assets, which are assets purchased with the Capital raised by the business but are not themselves considered Capital.
Miami-Dade County currently has the following four GOs outstanding. All issues possess a call feature and have coupons and maturities as shown below. Assume all issues have similar principal amounts outstanding. In the event interest rates decline, and the County plans to do a refunding of only one of the four outstanding GOs, which issue would most likely be called?
6.25s31 callable at 100
5.50s33 callable at 100½
4.65s34 callable at 101
Zr29 callable at 100
Question 2 Explanation:
If you were in charge of finances for the county and you were considering paying off only one of your debts, wouldn’t it be the debt that’s costing the county the most (the highest interest rate)? In this scenario, the county will retire/call the 6.25% callable bonds because those are costing the county the most every year. Also notice that those bonds have an added advantage – they are callable at 100, which means at Par, meaning there is no call ‘premium’ required to retire them.
When viewing the latest quotes on T-bills, you note that the current quote on the new 3 month Bills, 0.55 − 0.50, is somewhat higher than the quote on new 3 month Bills at the previous auction.
T-bill prices have risen
The yield curve is inverting
The Fed is easing money supply
T-bill discounts have increased
Question 3 Explanation:
T-bills are not quoted as a percentage of par, whereas notes and bonds are. Bill quotes represent the percentage of Discount from Par Value at which banks and dealers purchase T-bills at the Fed Auction. If you’re told that this week’s quotes, which are discounts from par, are HIGHER than the discounts from last week, that means T-Bill purchase prices have gotten LOWER -----we all know that when department stores increase the DISCOUNT, the price in dollars gets cheaper. It’s the same with T-bills. For any of you who put answer A, it is wrong because it says prices have gone up. When a discount gets higher/bigger, the sale price goes down.
CPU Industries, Inc. (ticker symbol CPU) has $50,000,000 par value convertible debentures outstanding with a 40 to 1 conversion ratio. If the bonds are currently trading at 110 and are above parity, CPU common must be trading:
at 27.49 or below
at 27.51 or above
Question 4 Explanation:
Solving this problem involves a number of steps. Step 1 is to determine the parity price of the stock. The bond is trading at 110, which is $1,100. The bond is convertible into 40 shares: that’s the 40 to 1 conversion ratio given in the question. By dividing $1,100 by 40 shares, one gets $27.50. That is the price the stock should be trading at, in order to be exactly equal to the current market value of the bond: therefore, $27.50 is the parity price of the stock. However, you are specifically being told that the bond is ‘trading above parity.’ In plain English, this means that at its current price of $1,100, the bond is WORTH MORE THAN the stock. Therefore, the stock can’t be AT $27.50, it must be at least 1 penny below $27.50. So 40 shares at $27.49 (or below) is less than $1,100.
All of the below represent bond sweeteners with the exception of:
a put option
a call feature
Question 5 Explanation:
A sweetener is a feature that is good for investors. Owning a callable bond exposes one to call risk, which is not considered desirable by bond investors. Call risk is the risk of having one’s portfolio altered when the issuer chooses to call the bonds. Having a put feature, a conversion feature, or warrants attached to a bond can be desirable and even highly profitable.
Stabilizing a new stock issue
I. May occur once the S-1 has been filed with the SEC
II. May only occur if disclosed in the final prospectus
III. May not occur at or above the POP
IV. If necessary, is normally a function performed by a syndicate manager
I and III
II and IV
III and IV
I, II, III and IV
Question 6 Explanation:
Stabilizing a new issue can only be done once the effective date of the new issue has arrived. It isn’t done during the cooling off period, which is prior to the effective date. Stabilizing is normally done by the managing underwriting either at, or just below, the POP (public offering price). It cannot be done above the POP.
Lyon Technology is being quoted by 3 market makers as follows:
Market Maker A 42.22 – 42.72 10 by 15
Market Maker B 42.28 – 42.75 15 by 10
Market Maker C 42.20 – 42.68 5 by 5
If a member firm received and accepted a customer sell order for 500 shares of Lyon Tech common, the mark-up or mark-down would be based upon:
Question 7 Explanation:
The key words in this question are ‘customer sell order.’ Your client is selling TO your firm. Your firm will give the client the BEST BID price available at this time, then charge a fair reasonable mark-down in accordance with the FINRA 5% policy. The best bid is the HIGHEST of all the bids on the NASDAQ screen, which in this case is $42.28, the bid of Market Maker B.
Your firm is the lead underwriter of a $100,000,000 municipal general obligation offering of New York City. One of the key elements in the list of disclosures to prospective investors is the legal opinion. Pick from the below who prepares and issues the legal opinion for this bond issue?
the City Attorney for NYC
the Attorney General for NY State
the lead underwriter’s chief counsel
independent bond counsel
Question 8 Explanation:
No lawyer connected in any way to the issuer or the underwriter can issue the legal opinion on a municipal bond. The law firm rendering the opinion must be ‘independent.’
As an RR, you’ve determined that investment companies would be a suitable product for several of your customers. In your research, you’ve located two companies and their NAV and Offer Prices respectively are shown below:
Company A: 18.45 − 20.25
Company B: 8.79 − 8.15
Which of these companies could be an open-end management investment company?
Company A only
Company B only
Both A & B
Neither A nor B
Question 9 Explanation:
The rules regarding mutual funds (open-end investment companies) require that the purchase price be no less than the Net Asset Value. That eliminates Company B whose purchase price/offer price is LESS than the NAV. What is wrong with Company A? The spread between the NAV and the Offer price is so large it violates the maximum sales charge permitted by the regulators, which is set at 8.5% of POP. Company A has a spread of $1.80. Dividing $1.80 by the POP of $20.25 gives us 8.89%. Therefore, Company A cannot be a mutual fund. Neither of these 2 investment companies could be open-end mutual funds. They are most likely closed-end investment companies, listed for trading on a stock exchange, and trading every day at prices based upon supply & demand, not NAV.
Among the most popular features of mutual funds is the availability of reinvestment of dividend and capital gains distributions into full and fractional shares of the fund. None of the following statements about this reinvestment privilege is untrue except:
reinvestment will enable the shareholder to defer taxes on the distributions until such time as the newly acquired shares are liquidated
reinvestment can be done at NAV
reinvested dollars can count towards a breakpoint under the right of accumulation
none of these is untrue
Question 10 Explanation:
Reinvesting dividend and capital gains distributions is a wonderful investment practice, but it does not defer taxation.
Mr. and Mrs. Smith, a couple roughly 15 years from retirement, have inquired about the availability of a product you might recommend to them which accommodates their investment objective, which is a hedge against both inflation and deflation. Which of the below would be most suitable?
a Roth IRA
a combination annuity
a variable annuity
an S&P Index Fund
Question 11 Explanation:
A combination annuity involves placing some of one’s money into a fixed annuity (hedge against Deflation) while also investing money in a variable annuity (hedge against Inflation).
Each member firm must provide firm element continuing education training which is appropriate to the type and size of the member. However, FINRA rules mandate Regulatory Element CE testing on a specific periodic schedule. For an associated person who has just reached his or her 6th anniversary as a registered rep, in how many years will they be required to perform the regulatory element CE testing?
two years from now
three years from now
Question 12 Explanation:
The day you pass your registered reps test is your anniversary date for the rest of your career. Two years later, you have your first Regulatory Element CE test. Every 3 years thereafter you are required to undergo the Regulatory CE testing. Therefore, your test dates will be your 2nd anniversary, your 5th, your 8th, your 11th, your 14th, etc., until your retire. If you’ve just celebrated your 6th year in the business, you have 2 more years before your next Regulatory CE test, which is required at your 8th anniversary.
In the course of opening a new margin account, an individual customer is required to sign a number of documents provided by the member firm. Choose from the below which documents, if any, require the customer’s signature.
I. Loan consent agreement
II. Hypothecation agreement
III. Credit agreement
none of these are required
II and III only
I and II only
I, II and III
Question 13 Explanation:
The hypothecation and credit agreements, as well as a margin agreement, all require the customer’s signature to open a margin account. The loan consent agreement is not a requirement, though the client does have the option of signing it. Should the client choose to allow the firm to lend out the client’s excess margin securities to others who, for example, wish to borrow the shares to engage in short sales, the client would sign the loan consent agreement. The firm cannot force the client to sign the Loan Consent agreement.
Mr. Woods, an existing cash account customer of yours, has spoken with you regarding his travel plans for the upcoming 3 months. He’s indicated he does not want to receive the regular monthly customer statements and confirmations of transactions while he’s out of town for this extended period of time. As his registered rep, you inform Mr. Woods:
that your firm is required to send the confirmations, but can hold the monthly statements for up to 3 months if he’s traveling abroad.
that your firm can hold mail for up to 3 months if he’s traveling abroad.
that your firm is required to send both the confirmations and the monthly statements and cannot hold the mail under these circumstances.
that you will inform your firm’s operations department to send the confirms and statements to your home address until Mr. Woods completes his travel.
Question 14 Explanation:
A firm, under normal circumstances, may hold a customer mail for 90 days.
Each of the below will have no impact upon the NAV per share of an open-end management investment company with the exception of:
investors purchasing fund shares at the POP
investors reinvesting distributions at the NAV
none of the above
Question 15 Explanation:
Since all purchases and redemptions of mutual fund shares take place based upon the Net Asset Value, purchases and redemptions don’t change the NAV per share of the fund. One example of an event that does change NAV per share would be day to day changes in the market prices of the investment securities inside the fund’s portfolio.
As a financial advisor, your client has asked which form of business enterprise would provide limited liability and not be subject to internal revenue code taxation. Though you point out to the client that you are neither an attorney nor an accountant, you could inform the client that each of the below generally satisfy those conditions except:
a C Corp.
an S Corp.
Question 16 Explanation:
The regular corporation, called a ‘C’ Corp., does offer limited liability for its shareholders, however it is considered a taxable entity. The other 3 choices are not taxable entities, and the owners have limited liability.
A United States Treasury Note with a $5,000 par value is quoted 106.10 – 106.15. A customer sell order would be executed, disregarding commissions, at which of the following prices assuming no change in the quote?
Question 17 Explanation:
Government bonds are quoted in 32nds. Since the client has placed a sell order, the client is selling TO the firm. The firm buys FROM its clients at the bid price, which is 106.10, which is 106 and 10/32nds percent of par which in decimal format is 106.3125% times $5,000 par. This equals $5,315.63.
In accordance with the latest FINRA rules, under what circumstances may associated persons buy common shares of an IPO on the offering in their own account?
Under no circumstances
When the purchase is consistent with their normal investment practice and is not disproportionate in size to the overall offering.
When the purchase is being made in an account held at a brokerage firm other than their own.
Both (B) and (C).
Question 18 Explanation:
FINRA rules prohibit personnel working in the brokerage industry from purchasing equity IPOs on the offering. There are some extremely narrowly-defined exceptions, however it is unlikely you would find those showing up on a registered rep examination.
SEC Rule 15c2-1 mandates that the maximum rehypothecation permissible by a member firm is:
50% of the purchase price in a margin account
100% of the customer debit balance
140% of the customer debit balance
25% of the current market value in a long margin account
Question 19 Explanation:
The member firm may use margin securities worth up to 140% of the customer’s debit balance in order to secure the margin loan to the customer.
Which of the below investments trades on an exchange at a price which is unrelated to its underlying value?
private hedge fund
closed-end investment company shares
open-end investment company shares
Question 20 Explanation:
Closed end investment companies have a market price which is determined by supply & demand, in the same way that listed and NASDAQ stock prices are determined by investor supply & demand. Therefore, the price of a closed-end share is not based upon, nor is it related to, the net asset value of the closed end fund. Private hedge funds don’t trade on an exchange: open end funds are priced each day AT the 4 pm NAV and don’t trade on an exchange: forward contracts are private commodities contracts, and don’t trade on an exchange.
Research indicates that the stock of BNM Corp. is in an inverted head and shoulders formation. This most likely signals:
a reversal of a downward trend
continued bearishness ahead
the stock is approaching the resistance level
the company’s latest earnings report missed Wall St. expectations
Question 21 Explanation:
Inverted head and shoulders formation is a diagram which looks like a headstand. It indicates the stock is approaching or is at a bottom and suggests that the stock’s downward move is ending, referred to as the reversal of the downward trend. This also suggests it may be time to engage in bullish strategies in the stock.
According to FINRA rules, the best approach when investigating allegations of churning a customer’s account is to focus on:
the frequency of trades
the size of the trades
the investment objectives of the customer
the amount of time that the customer allowed to elapse between the questionable trades and the filing of the complaint
Question 22 Explanation:
Though one could argue that any of these answers could provide evidence that a churning violation has occurred, FINRA’s interpretation states that #1 on the list of considerations is the investment objective of the customer. Case in point: a day trader would have a very difficult time claiming churning for excessive frequency of trades – constant in and out trading is, by definition, the day trader’s investment objective!
Which of the portfolio positions described below has the greatest risk exposure?
short stock/short put
short stock/long call
Question 23 Explanation:
In this type of question, you have to evaluate all four answers to determine the maximum potential loss of each one in order to know the one with the greatest risk of loss. Shorting stock has unlimited risk of loss. Even when selling a put option to go with the short sale of stock, the risk of unlimited loss remains in place. Why answer D is not correct is that when one shorts stock, one can buy a call option to provide a hedge which serves to eliminate the risk of unlimited loss.
In the opening of a new options account, certain procedures must be followed in accordance with CBOE and/or other SRO requirements. Which of the following represents the final step in the options account procedures?
furnish a copy of the options disclosure document (ODD)
branch manager approval of account opening
the client’s first options trade
the special options agreement is signed and in the firm’s files
Question 24 Explanation:
The special option agreement form is required to be reviewed and signed by the new options account customer and returned to the firm within 15 days of account opening. One can actually engage in trading in the account during those 15 days, but if this agreement is not returned to the firm in time, no further opening transactions are permitted until this agreement has been returned to the firm.
Mrs. Couples has been referred to you by one of your long-time clients. It seems Mrs. C has an account at another B/D and would like to make a change. After speaking with you, she has decided to do an account transfer.
Which of the following most accurately describes the time requirements upon her soon-to-be former firm to complete the transfer process?
1 business day in which to validate the transfer request/instructions; 3 business days in which to effect the transfer of the account assets
1 business day in which to validate the transfer request/instructions; 5 business days in which to effect the transfer of the account assets
3 business days in which to validate the transfer request/instructions; 4 business days in which to effect the transfer of the account assets
No transfer can be effected until a Clearance Letter has been received from Homeland Security that there is no evidence of money laundering and no Suspicious Activity Report has been filed by her current firm
Question 25 Explanation:
This is the account transfer rule: 1 day to validate; 3 days to transfer.
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