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The largest sampling of stocks in the major market indices is found in the:
The Wilshire Index
S&P 500 Index
The Russell Index
The NASDAQ Index
Question 1 Explanation:
The Wilshire was formerly known as the Forbes Wilshire 5000 Index, which makes it by far the largest sampling of these choices.
Under normal circumstances, the ex-dividend date for open-end investment company shares is:
3 business days prior to the record date.
on a date set by the fund or its principal underwriter.
2 business days prior to the record date.
1 business following the record date.
Question 2 Explanation:
The Board of Directors, or the fund’s principal underwriter, set the ex-dividend date in mutual funds. In most corporate stocks, it’s 2 business days prior to the record date, but not in mutual funds.
Which of the following are eligible methods for acquiring a breakpoint when investing in shares of open-end investment companies?
I. Lump sum
III. Right of accumulation
IV. The exchange privilege
I and II
II and III
III and IV
I, II, and III
Question 3 Explanation:
A breakpoint can be accessed by writing a single check (lump sum), by signing a 13 month letter of intent (LOI), or using the right of accumulation. This last method simply says that when your periodic investments over a long period of time reach the breakpoint, the fund will begin giving you the discounted sales load.
Which of the following is NOT a type of economic indicator?
Question 4 Explanation:
Leading economic indicators are those which change before the economy changes (such as the stock market). A lagging economic indicator doesn't change direction until a few quarters after the economy does (such as unemployment). A coincident economic indicator is one that moves at the same time the economy does (such as GDP).
FINRA’s rules pertaining to communications with the public define retail communications as which of the following?
Any communication regarding securities sent to more than 1 individual public investors within a 30 calendar day period.
Any communication regarding securities sent to more than 25 individual public investors within a 30 calendar day period.
Any communication including individual correspondence sent to more than 25 public investors within a 30 calendar day period.
Any communication regarding securities sent to 25 or more individual as well as institutional customers within a 30 calendar day period.
Question 5 Explanation:
Retail communication specifically excludes correspondence, which is sent to 25 or fewer public investors, and institutional communications which are only sent to entities meeting FINRA’s definition of an institution investor (think banks, pension plans, insurance companies and the like).
NASDAQ Market Makers are required to report each trade within how many seconds of execution?
No requirement to report
Question 6 Explanation:
NASDAQ Real-Time Trade Reporting rules require that Market Makers (and non Market-Makers in certain cases) report each trade within 10 seconds of execution.
What is the maximum potential loss when holding a long straddle position?
strike price of long call + net premium paid
strike price of long put − net premium paid
Question 7 Explanation:
The maximum loss for a long straddle will occur when the underlying stock price is trading at the strike price of the options on the expiration date of the option contracts. Both options will expire worthless and the investor will lose the entire amount paid for the straddle, the straddle premium.
Which of these calls would have the largest premium?
JKL October 25 call
JKL October 30 call
JKL October 35 call
JKL October 40 call
Question 8 Explanation:
The call with the lowest strike price will be the closest to being in-the-money (or the furthest in-the-money if the underlying stock is above the strike price). So, the call with the lowest strike price will have the highest premium.
When a custodianship account under UGMA purchases securities,
they may be registered in street name if the custodian specifically requests it
they must be transferred and shipped to the custodian
they are required by law to be registered in the name of the custodian FBO the minor under the UGMA laws of that particular state
the trade may be done in either a cash or margin account
Question 9 Explanation:
Custodianship in UGMA requires the certificates be issued in the name of the Custodian, for the benefit of (FBO) the minor, under the UGMA of that state. The certs cannot be in the name of the broker/dealer (street name) and it can never be a margin account when a child is involved.
Which of the following securities instruments will most likely decline the least in market price when interest rates rise?
AAA rated Corporate debenture, 6% coupon, maturing in 15 years
US Treasury Bond, 6% coupon, maturing in 15 years
4.0 % AAA rated GO bond, maturing in 15 years
5% AA rated listed debenture, maturing in 15 years
Question 10 Explanation:
When comparing the decline in price of bonds that all mature in the same number of years, the bonds with the highest coupons will decline the least when rates rise. If two bonds have the same coupon, as in this case we have a corporate and a Treasury at 6% coupon, the bond with the higher quality will fall the least, and that would be the Treasury bond.
AAA is trading at $55. Mr. Jones buys a May 60 call at $1 and sells a May 50 call at $7. What options strategy has he implemented?
bull call spread
bear call spread
bull put spread
Question 11 Explanation:
This is the bear call spread, where the investor is moderately bearish and buys call options of a specific strike price while selling the same number of call options of a lower strike price (options are on the same underlying security and have the same expiration month).
This type of underwriting contract is safest for the issuer, but also the most expensive.
Question 12 Explanation:
With a firm commitment contract the underwriter will guarantee the sale of the issue at the price that has been agreed upon.
Ms. Stein sees that CBA is trading at $53. She buys a December 50 put for $150 and she writes a December 55 put for $400. The stock closes at $59 on the expiration date of the options. What is her profit or loss?
Question 13 Explanation:
This was a bull put spread. She received a net credit of $250 when she entered the position. Both put options are worthless at expiration, because both put option contracts are out of the money with the stock at $59.
What percentage of its income is a REIT required to distribute to its equity investors?
Question 14 Explanation:
To qualify as a ‘Regulated Investment Company’ and get the special flow-through tax treatment under the Internal Revenue Code, 90% flow through is a requirement. IF the REIT doesn’t distribute enough income, it will pay taxes on 100% of its net investment income.
In the issuance of new stock offerings, a free-writing prospectus is generally deemed to be a document which FINRA requires to be filed with the SRO if:
the brokerages participating in the offering intend to use if for broad unrestricted dissemination
the brokerages participating in the offering intend to provide it only to road show participants
the SEC has approved the free-writing prospectus before broker-dealers may use it in their distribution efforts
none of the above
Question 15 Explanation:
The key with using a free-writing prospectus is that brokerage firms plan to use it in a broad, unrestricted way, such as through open access at their website.
Emma sells 500 shares of SJM short at a price of $55. What is the credit balance in her margin account as the result of this transaction?
Question 16 Explanation:
Emma’s short sale will generate sale proceeds of $27,500 (500 shares times $55), which will be credited to her margin account. In addition, Emma will be required to deposit a Reg. T 50% deposit in accordance with the margin rules, which would be an additional $13,750 credited to her account. Her total Credit Balance is therefore $41,250.
A market maker is quoting ABC common as follows:
25.50 – 25.75 15 x 10
The inside market at the time is 25.55 – 25.70. If the market maker receives and accepts a customer buy order for 100 shares, the price to be used as basis for the mark-up will be:
Question 17 Explanation:
A customer buy order means the customer wishes to purchase. Customer purchases take place at the Inside Ask price, to which a fair reasonable mark-up will be added. The inside ask in this question is 25.70.
When a registered representative engages in the sale of securities outside the scope of his or her member firm without obtaining express authorization from the member, this is referred to by FINRA as:
outside business activities
Question 18 Explanation:
Engaging in sales of securities outside the scope of the member firm without the firm’s permission is referred to as ‘selling away’ and is a violation of FINRA rules.
Your client is selling restricted shares of a stock that is quoted on NASDAQ. One of the conditions of their Rule 144 sale is that the amount of stock they sell in a 3-month period cannot exceed the greater of 1% of the outstanding shares of the same class being sold or:
the average daily trading volume during the week preceding the filing.
the average daily trading volume during the week after the filing.
the highest weekly trading volume during the six weeks preceding the filing.
the average weekly trading volume during the four weeks preceding the filing.
Question 19 Explanation:
Rule 144 applies to the sale of restricted and control securities. The volume restrictions of Rule 144 are ‘the greater of 1% of the outstanding shares or the average weekly trading volume for the previous 4 weeks.’
Passive market making is a term associated with Regulation M of the SEA of 1934 and stipulates that broker-dealers participating in an APO who are also market makers in that issuer’s outstanding stock must:
not be alone at the inside bid price for the stock with limited exceptions
comply with Reg. M restrictions whether the underwriting is being done on a firm commitment or best efforts basis.
notify NASDAQ that they are going into an excused withdrawal from marketing making for the duration of the cooling off period
all of the above
Question 20 Explanation:
Market makers who are participating in an ‘additional public offering (APO)’, also known as a follow-on deal, can continue to make a market but there are restrictions. One of those restriction is they cannot bid the stock up and be at the inside bid price with no other firms at that price as well, ‘alone’ at the inside bid. This would be considered a manipulative act by the SEC.
Holders of this type of preferred stock have the opportunity to receive additional dividends if the company attains certain predetermined financial goals.
Question 21 Explanation:
With participating preferred stock, investors receive an additional dividend if predetermined goals are achieved. These goals could relate to earnings, sales, or profitability.
A municipality issues 30,000 bonds at an offering price of $1,000. The syndicate manager's fee is $1.00 per bond. The selling concession is $4.50 per bond and the total takedown is $7.75 per bond. How much will the issuer receive per bond?
Question 22 Explanation:
Total takedown consists of the selling concession plus additional takedown that the underwriting group gets for assuming risk. The total spread is the total takedown of $7.75 plus the $1.00 manager's fee, which come to $8.75 per bond. With a $1,000 offering price minus the $8.75 underwriting spread, the issuer will receive $991.25 per bond.
When a corporation activates the call provision on a bond which is both callable and convertible, the most likely outcome would be:
a forced conversion
an increase in the issuer’s leverage ratio
an increase in EPS
all of these answers are correct
Question 23 Explanation:
When an investor’s bond is called, and the bond also possesses a conversion provision, in most cases the investor will be economically better off by converting into the common stock rather than by accepting a check for the call price. In the jargon of Wall St., the bondholder was forced to make a decision to convert once the call announcement was made — ‘forced’ conversion is the term.
Non-recourse loans when used in the financing of the operations of direct participation programs:
will generally be interest-only loans
will increase investor basis only in real estate programs
do not serve to increase investor basis
none of these answers are correct
Question 24 Explanation:
Non-recourse loans do not increase investor basis in DPPs unless the loan is from a Qualified lender and the DPP is a real estate program.
The best measure of a corporation’s ability to meet its ongoing obligations over the coming 12 months is:
quick asset ratio
cash asset ratio
margin of profit
Question 25 Explanation:
When viewing 12 months of bills payable/obligations, the current ratio is the best of these choices. The other ratios measure shorter time periods, or in the case of the margin of profit, it measures how profitable the company has been. Current Ratio measures current assets divided by current liabilities.
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