Answer Keys

Chapter 1: Equity Securities

(D) As a common stock holder, you will have the right to receive your percentage of any residual assets.
(D) All listed are ways that a company can pay a dividend.
(C) The yield on the stock will have gone up as the price has fallen because the dividend has remained constant.
(D) All dividends are taxed at a rate of 15% for the year in which they were received.
(B) A stockholder does not get to vote directly for executive compensation.
(B) Each ADR represents between one to 10 shares, and ADR holders have the right to vote and receive dividends. Foreign governments put restrictions on the foreign ownership of stock from time to time.
(B) The current yield is found by using the following formula: Annual income/current market price of $10/$110 = 9.1%.
(C) First you must determine the number of shares. Par/conversion price = 100/20 = 5 multiplied by the number of preferred shares: 5 × 100 = 500.
(B) An ADR may represent more than one share of the company's common stock and may be exchanged for the ordinary common shares. The dividend, however, is paid in the foreign currency and is received by the investor in U.S. dollars; as a result, the investor is subject to currency risk.
(D) The investor will receive $8 per share × 100 shares: $800 plus $1 per share because it is participating, so $800 + $100 = $900.
(C) The investor who buys a 7% preferred stock is entitled to $7 per year or $3.50 every six months.
(C) A holder of a cumulative preferred has all of the rights listed, except the right to convert the preferred into common stock.
(B) Authorized stock is all of the answers listed, except the number of authorized shares may be changed by a vote of the shareholders.
(D) Common stockholders do not have voting power in the matter of bankruptcy.
(D) Dividend yield (or current yield) is found by dividing the annual income by the current market price.
(C) 800 shares × 5% = 40 shares.
(A) In addition to maintaining control, a company may want to increase its earnings per share, fund employee stock option plans, or use shares to pay for a merger or acquisition.

Chapter 2: Corporate and Municipal Debt Securities

(A) One bond point is worth $10.00; 1.25 points, therefore, is worth: $12.50 × 10 bonds = $125.
(D) Bonds registered as to principal only will still require the investor to clip coupons.
(A) The real interest rate will determine the return after inflation.
(D) Bearer bonds are issued without a name on them, meaning that whoever has possession of the bond may clip the coupons and claim the interest.
(C) All of the choices listed are reasons a corporation would attach warrants to their bonds, except to increase the number of shares outstanding.
(B) A mortgage bond is secured by real estate.
(D) Collateral trust certificates have pledged securities, which they own, issued by another company as collateral for the issue.
(C) An investor who has purchased an 8% corporate bond will receive the principal payment plus the last semiannual interest payment at maturity for a total of $1,040.
(B) The parity price of the stock is found by using the following formulas: No. of shares = PAR/CVP, 1,000/20 = 50, parity price = CMV of bond/No. of shares = 1,100/50 = 22.
(A) The YTM for a bond purchased at a premium is found using the following formula: (Annual income − annual premium)/(price paid + par)/2 60/1,100 = 5.45%.
(C) The parity price is found by determining the number of shares that can be received upon conversion par/conversion price = 1,000/25 = 40 shares, then the parity price equals the current market value of the convertible/No. of shares, 1,200/40 = $30.
(C) Of all the choices listed, only an industrial revenue bond pays interest; all of the other choices are issued at a discount.
(A) An investor would expect to realize the largest gain by purchasing bonds when rates are high. The bond with the longest time left to maturity will become worth the most as interest rates fall.

Chapter 3: Government and Government Agency Issues

(A) The minimum dollar amount to purchase a GNMA pass-through certificate is $1,000.
(C) T-bonds are quoted as a percentage of par to 32nds of 1%. A quote of 103.16 = 103 16/32% × 1,000 = $1,035.
(A) The EE savings bonds are sold at a discount and at maturity are redeemed at face value, which includes the interest income.
(B) Interest earned by investors on FNMA securities is taxable at all levels: federal, state, and local.
(C) The investor purchased the Treasury bond at 95.03 or 95 3/32% of $1,000 = $950.9375.

Chapter 4: Investment Companies

(C) An investor in a mutual fund portfolio has an undivided interest in that portfolio and is not an investor or stockholder in the fund company itself.
(C) A breakpoint sale is a violation committed by a representative who is trying to earn a larger commission by not informing the investor that a breakpoint sales charge reduction is available at a slightly higher dollar level.
(A) The investor will redeem the shares of the growth portfolio at the NAV and will purchase the shares of the biotech portfolio at the NAV because XYZ offers conversion privileges; (500 × 22.30)/17.10.
(C) A mutual fund's custodian maintains books and records for accumulation plans.
(A) A 12B-1 fee may be up to ¼ of 1% of the NAV.
(D) The ex date is set by the NYSE/FINRA for a closed-end fund just like for a stock.
(C) A mutual fund calling itself a diversified fund is limited to owning no more than 10% of any one company.
(C) New shares will be created for the investor as soon as the mutual fund company receives the money. The investor becomes an owner of record on that day.
(D) Employees with access to cash and securities must be bonded.
(A) A fund with a portfolio turnover ratio of 25% replaces its portfolio every four years.

Chapter 5: Variable Annuities and Retirement Plans

(D) An investor may always make a contribution to their IRA as long as they have earned income.
(D) The individual would expect the death benefit to go down and the cash value to go up. The AIR is only concerned with the death benefit, not the cash value. As long as the performance of the separate account is positive, the cash goes up.
(C) This is a nonqualified plan, meaning the money is deposited after taxes so the retiree will only pay taxes on the growth.
(D) The maximum amount that a couple may contribute to their IRAs at any one time is $20,000. Between January 1 and April 15, a contribution may be made for the prior year, the current year, or both; $5,000 × 2 × 2 = $20,000.
(C) The retirement account is qualified, which means the investors have deposited the money pretax, therefore, all of the money is taxed when it is withdrawn.
(A) A 529 plan would allow the investor to make a lump sum deposit.
(A) The money has been deposited in a Roth IRA after taxes. It is allowed to grow tax deferred. If you are over 59.5 and the money has been in the IRA for at least five years, then it may all be withdrawn without paying taxes on the growth.
(B) A fixed annuity does not provide protection from inflation. If inflation rises, the holder of a fixed annuity may end up worse off due to the loss of value of the dollar.
(D) The maximum contribution for a SEP IRA is the lesser of 25% of the postcontribution income or $49,000.

Chapter 6: Fundamental and Technical Analysis

(A) The company's EPS is determined by dividing the earnings available to commons holders by the number of outstanding shares or $2,000,000/2,000,000 = $1.
(D) Everything that a company owns (assets) minus everything that a company owes (liabilities) results in the corporation's net worth and the stockholders' equity.
(B) The current yield is found by multiplying the quarterly dividend by 4: $.70 × 4 = $2.80; then divide it by the market price: $2.80/20 = 14%.
(D) Capitalization refers to the overall picture of a company's financial situation, including its assets, liabilities, company's net worth, and the stockholders' equity as shown on its balance sheet.
(C) A high beta security is the most volatile and therefore the most risky.
(A) A high short interest is considered bullish.
(D) Systematic risk is inherent in any investment in the market. An investment may decline in value simply because prices in the overall market are falling.

Chapter 7: Economic Fundamentals

(C) During an inflationary period, the price of a Treasury bond will fall the most. The fixed-income security with the longest maturity will change the most in price as interest rates change.
(D) Rising interest rates are bearish for the stock market.
(B) The main theory of economics is one of supply and demand; if the supply outpaces the demand, the price of the goods will fall.
(D) The discount rate is the rate that is actually controlled by the Federal Reserve Board. All of the other rates are adjusted in the market place by the lenders as a result of a change in the discount rate.
(C) Falling inventories are a sign of a pick up in the economy.
(A) A bank may borrow money from another bank to meet their reserve requirement and it will pay the other bank the federal funds rate.
(A) The two tools of the government are monetary policy which is controlled by the Federal Reserve Board and controls the money supply, and fiscal policy which is determined by the president and Congress and controls government spending and taxation.
(D) Fiscal policy is controlled by the president and Congress.
(C) The Federal Reserve sets all of those except government spending.
(A) A decline in the gross domestic product must last at least two quarters or six months to be considered a recession.

Chapter 8: Recommendations, Professional Conduct, and Taxation

(B) This is known as painting the tape, matched purchases, or matched sales.
(D) An industrial revenue bond may subject some wealthy investors to the alternative minimum tax.
(B) Of all the investments listed, only the Ginnie Mae pass-through certificate will provide income. Ginnie Maes pay monthly interest and principal payments.
(D) This client is concerned about legislative risk: The risk that the government will do something that adversely affects your investment.
(A) The investor has a large position in a thinly traded stock; as a result, the investor is subject to a large amount of liquidity risk.
(B) An investor who is concerned with the changes in interest rates would be least likely to purchase long-term bonds. As interest rates change, the price of the long-term bonds will fluctuate the most.
(B) Bankers' acceptances are money market instruments and short term; Series HH government bonds can only be exchanged for mature Series EE; and convertible-preferred stock is a security with risk. A 90-day T-bill is considered a risk-free investment.
(D) Using the pending dividend to create an urgency on the part of the investor to purchase this stock is a perfect example of this violation, and the results are listed in answers A, B, and C.
(D) An investor in a low tax bracket seeking current income would be best suited for a corporate bond fund.
(B) This is a violation known as trading ahead.
(D) An investor seeking protection from interest rate risk will most likely be best suited for a portfolio of Treasury bills. As the bills mature, the investor can roll over their position into the newly issued bills with new interest rates.
(B) Of all the choices listed, only the Treasury bond pays interest. Commercial paper and bankers' acceptance are issued at a discount. An income bond will only pay interest if the company has enough income to do so.
(D) The greatest risk when purchasing a CMO is the risk of early refinancing or prepayment risk.
(C) Treasury STRIPS are government-issued zero-coupon bonds. They are issued at a discount and mature at par or $1,000. For the exam, they are the best answer for college expense planning if the question is asking for an investment recommendation, not the type of account that it is deposited into.
(D) Showing a client the past performance for a mutual fund that has only been around for three years is in line with the regulations. All of the other choices are violations.
(A) If an investor may lose part or all of his capital, it is called capital risk.
(C) A money market fund is the best recommendation for investors who will need access to their funds in the next few years.

Chapter 9: Securities Industry Rules and Regulations

(D) The Securities Exchange Act of 1934 regulates the secondary market.
(C) The SEC is the ultimate industry authority in regulating conduct.
(A) All of the choices listed must be included, except for the name of the principal who approved the ad for use.
(D) The Maloney Act of 1938 was an amendment to the Securities Exchange Act of 1934 and established the NASD as the self-regulator organization for the over-the-counter market. The NASD is now part of FINRA.
(D) All of the items listed are considered to be retail communication if even a single individual investor can see any part of the choices listed.
(D) A principal is designated to supervise all of the actions of a firm and its employees; a principal must prevent any violation of industry, state, or federal laws or regulations but need not approve all transactions prior to their execution.
(B) Brokerage firms must maintain their advertising for at least three years.
(D) Generic advertising may not contain information about past recommendations.
(D) All of the parties listed may be held liable to the purchasers of the new issue.
(D) All of the items listed must appear in the tombstone ad.

Chapter 10: Trading Securities

(A) When acting as a market maker, the firm is trading for its own account and is acting as a dealer.
(D) In order to establish a short position you would enter a sell stop order for the security. Buy orders would not be used to sell short and AON is not a sell order. AON stands for “all or none” and sets a volume limit for the order. An AON modifier may be attached to either buy or sell orders.
(D) An allied member may not trade on the floor. They are only allowed to call themselves a member and have electronic access to the exchange.
(C) Firms that act as market makers in Nasdaq securities are trying to make the spread that is the difference between the bid and the ask.
(D) Mini/maxi and best efforts are types of underwriting commitments, not types of orders.
(C) A technical analyst would want to buy the stock when it breaks through resistance.
(A) Selling stock short will expose an investor to unlimited risk because there is no limit to how high the stock price can go.
(A) The inside market is the highest bid and the lowest offer.
(B) An investor who purchases a straddle is neither bullish nor bearish.
(B) The order has been elected since the stock has traded though the stop price. The order has now become a limit order to sell the stock at 160.

Chapter 11: Options

(B) Your maximum gain when you sell an option with no other positions in the account is always the premium received; 5.70 × 1,000 = $5,700.
(C) With the opening sale of a naked option, the maximum gain is always the premium received.
(B) To gain some protection and take in premium income, you would sell 100 XYZ Oct 45 calls.
(D) I is incorrect in that an option is a contract between two parties, which determines the time and price at which a security may be bought or sold.
(C) Call sellers and put buyers are both bearish. They want the value of the stock to fall.
(B) Option trades settle the next day.
(B) The OCC or Options Clearing Corporation issues all standardized options.
(D) The investor made $3,900. The options are worth $7,000 at expiration; they paid $3,100; the profit, therefore, is $3,900.
(A) The Options Clearing Corporation issues all option contracts and guarantees their performance.

Chapter 12: Definition of Terms

(C) A minor is not considered a person because they may not enter into a legally binding contract.
(C) The pledge of securities as collateral for a margin loan is not considered a sale. All of the other choices constitute a sale including a bonus security attached to another security, such as a warrant.
(D) A qualified purchaser must have at least $5,000,000 in assets. A family-owned business with $5,000,000 in investments is also a qualified purchaser.
(C) All of the choices listed are institutional investors except an employee benefit plan with $800,000 in assets. In order for the plan to be an institutional investor, it must have more than $1,000,000 in assets.
(B) A trust indenture is the contract between a corporate issuer of debt securities and a trustee and is not a security.
(D) A gift of assessable stock is considered to be a sale. Assessable stock can require the owner to make additional payments.
(A) The publisher of a market report that is based on market events is an investment adviser.
(D) A family-owned business with at least $5,000,000 is a qualified purchaser.
(B) XYZ is a federally covered security and is given an exemption from state registration because it trades on a U.S. exchange.
(D) An interest in any of the items listed is a security.
(B) Only the company and the publisher of the market letter are investment advisers. Individuals are investment adviser representatives.
(D) The promise of a profit is not one of the requirements of the Howey test.
(D) A broker is a “person” who executes an order for their own account or for the account of others.
(D) An offer of securities is made through a prospectus.
(C) A corporation that issues securities or simply proposes to issue securities is considered an issuer.
(D) An individual representing an out-of-state broker dealer is required to register as an agent.
(A) A broker dealer with no office in the state who only conducts business with customers who do not reside in that state or who are in that state for less than 30 days and an out-of-state broker dealer that only conducts business with other broker dealers are not considered broker dealers in that state.
(D) A stock that is traded on the OTCBB is not a federally covered security. Only Nasdaq global and capital market securities are federally covered.
(C) A guarantee of interest or principal may be issued by all of those listed except an investment adviser.
(C) An offer has been made when a representative has made a recommendation.

Chapter 13: Registration of Broker Dealers, Investment Advisers, and Agents

(D) A broker dealer may not employ anyone as an agent unless they are duly registered.
(C) A broker dealer that meets the SEC's net capital requirement is exempt from the requirement.
(C) An investment adviser is limited to giving advice to five clients or less during a 12-month period under the de minimus exemption.
(D) All of the partners must register because all of them act in a sales capacity by managing portfolios at the time the firm initially registered. Partners who do not act in a sales capacity are not required to register.
(C) Commissions paid by the adviser would be considered an expense of the adviser, not soft-dollar compensation.
(C) An investment adviser with between $100,000,000 and $110,000,000 may select either federal or state registration, depending on the prospects for receiving additional funds.
(D) At the time a client enters into a new advisory relationship, all of the choices must be disclosed except the representative's compensation.
(C) An agent is exempt from registration if they represent an exempt issuer. A Canadian corporation is not an exempt issuer.
(D) A person who gives advice as to the value of securities would be considered to be an investment adviser.
(D) When an agent changes employment, the old employer, the new employer, and the agent all must notify the administrator.
(C) A broker dealer may also be registered as an investment adviser and may be a corporation or an individual.
(C) An investment adviser must keep books and records at the principal office for two years and readily accessible for five years.
(C) A Canadian broker dealer in good standing with a Canadian securities regulator can register through a simplified registration process.
(C) An investment adviser may receive all of the choices listed except a percentage of the customer's profits as long as it is all disclosed to the customer.
(D) If a firm becomes insolvent, all agents' registrations are canceled.
(C) An investment adviser who does not have custody of client funds is not subject to the $35,000 requirement.
(C) The investment adviser must register in this case. An exemption is given to advisers who have given advice to five or less individuals in 12 months.
(A) Investors who open wrap accounts will be charged one fee for advice and execution. The investor must receive Schedule H at the time the account is opened.
(A) All registrations expire on December 31.

Chapter 14: Securities Registration, Exempt Securities, and Exempt Transactions

(C) This is an example of an exempt transaction. All transactions with financial institutions are exempt, regardless of the security involved.
(B) This is known as a manual exemption.
(B) A registered representative may sell an unregistered nonexempt security though a private placement.
(C) All unsolicited orders are exempt transactions. An unsolicited order is placed by the customer without any advice from the representative.
(B) Commercial paper must be issued in denominations exceeding $50,000 with a maturity of less than 270 days.
(C) These are examples of isolated nonissuer transactions.
(C) Securities given a federally covered exemption are exempt from state registration.
(A) Transactions with owners of a security are not exempt transactions.
(D) A security listed on a foreign exchange is not an exempt security.
(A) A state registration becomes effective after 10 days provided no stop order has been issued. A securities state registration may not become effective before its federal registration.
(B) A private placement may be sold to no more than 10 nonaccredited investors in a 12-month period under the Uniform Securities Act.
(B) State registration through coordination becomes effective at the same time as the federal registration.
(C) A recommendation to an investor involving a NYSE-listed security is not an exempt transaction.
(A) A security is not registered by application.
(C) A federally covered security is not required to register at the state level.

Chapter 15: State Securities Administrator: The Uniform Securities Act

(C) A state securities administrator may not require an issuer to file reports more than quarterly.
(B) An agent may be denied a registration based on lack of training or a criminal record. An agent may not be denied a registration solely based on the public interest or lack of experience.
(C) All three administrators would have jurisdiction over this transaction: New York because that is where the offer originated, Florida because that is where the offer was directed, and New Jersey because that is where the client accepted the offer.
(B) The administrator may take action against both the firm and the agent.
(B) The administrator must hold a hearing within 15 days of receiving a written request.
(D) An administrator may do all of the choices listed and an individual may be found in contempt of court for displaying contumacy.
(D) An administrator may not order an injunction. Only a court may order an injunction. The administrator may ask a court for an injunction, but the court must order it.
(C) The Uniform Securities Act was designed to be enforced and administered by the state.
(B) If an investor has been offered rescission, they must accept it within 30 days and the offer must pay the investor interest for the time that the money was invested.
(A) An individual who willfully violates the Uniform Securities Act may be fined $5,000, up to three years in prison, or both.
(B) An investor who discovers a violation has two years from the discovery or three years from the triggering event, whichever occurs first, to take action.
(A) All of the choices listed are violations except buying warrants and selling the issuer's common stock short. This is an example of an arbitrage transaction.
(B) Implying that one security is safer than another due to its exchange listing is a violation.
(D) An agent may not be denied a registration solely on the basis of the public interest.
(C) A client is not entitled to treble damages.
(C) It is highly unlikely that an administrator would try to take action against another regulator.
(D) A customer who has rejected an offer of rescission has forfeited his rights of recovery.
(C) An administrator may not take action against an issuer's registration because they do not think that the industry has good prospects for the issuer.
(B) The withdrawal of a registration will become effective after 30 days, as long as no action is being taken against the broker dealer.
(B) An offer of securities is not subject to the jurisdiction of the administrator in the state where the issuer is headquartered.