STC Series 7 Greenlight Exam 2 Questions and Answers

Your firm is the managing underwriter of an initial public offering. How many days must the firm's research analyst wait before issuing a research report on this IPO? A. There is no waiting period and research may begin anytime after the effective date B. Three days C. 10 days D. 25 days - Answer- C. 10 days If a firm is involved in an underwriting of an initial public offering and is the manager or comanager, it must maintain a quiet period of 10 days following an IPO or three days following a secondary offering. During this time, the firm may not issue research reports on its investment banking clients' stock. If the firm was a syndicate member or selling group member, the firm would need to wait 10 days. A customer contacts his RR to discuss whether selling short is a suitable strategy. If the customer inquires as to when borrowed stock must be returned, the RR should respond: A. There's no specific time limit, but the broker-dealer can demand that the shares be returned at any time B. There's no specific time limit and the broker dealer cannot demand that the shares be returned at any time C. Within two business days D. Within five business days - Answer- A. There's no specific time limit, but the broker-dealer can demand that the shares be returned at any time In order for a customer to sell short, the shares must be borrowed from the broker-dealer. There's no specific time limit by which the shares must be returned; however, the broker-dealer reserves the right to demand the return of the shares at any time. Which of the following is NOT monitored by a technical analyst? A. Advance/decline data B. Chart patterns C. Market momentum D. Dividend payout ratios - Answer- D. Dividend payout ratios Asset allocation based on a client's risk tolerance and investment objectives is called strategic asset allocation. In theory, it is the best mix of assets given the client's goals and level of risk aversion, giving it a long-term outlook. Strategic asset allocators tend to view the market as efficient and market timing as ineffective. By contrast, those who believe securities markets are not perfectly efficient may try to use an active strategy to alter the portfolio's asset mix, to take advantage of anticipated economic events. This market timing approach is sometimes called tactical asset allocation. Stocks are considered in good deliverable form if: A. Both the certificates and the stock power are included with a signature guarantee B. The stock power has been notarized C. The stockholder endorses the certificate with his legal name without a signature guarantee D. Validated by the broker-dealer - Answer- A. Both the certificates and the stock power are included with a signature guarantee Technical analysts use price and trading volume information. Advance/decline data, chart patterns, and market momentum calculations are all methods used in analyzing this type of information. Dividend payout ratios would be important to a fundamental analyst Which of the following statements is TRUE concerning gift and estate taxes paid by a husband and wife? A. Gifts between spouses are unlimited and no gift or estate taxes will be paid when one spouse passes away B. Gifts between spouses are unlimited and there is no gift tax, but estate taxes must be paid when one spouse passes away C. Tax-free gifts between spouses are limited to $15,000 per year, but taxes are not due on any excess until one spouse passes away D. Tax-free gifts between spouses are limited to $15,000 per year and taxes must be paid on any excess in the year the gift is given - Answer- A. Gifts between spouses are unlimited and no gift or estate taxes will be paid when one spouse passes away There is no limit on the amount of a gift between spouses. A husband or wife may give any amount to a spouse without incurring a tax liability. An estate tax may be levied on the value of a decedent's assets, but there will not be any estate tax due when one spouse dies if all the assets are passed along to the surviving spouse. The entire estate may pass tax-free to the survivor. If assets are distributed to persons other than the decedent's spouse, the estate may be taxed if the amount exceeds the allowable limits established by current tax law. Gift taxes must be paid by a donor, not the recipient of the gift. An individual may give a gift of $15,000 per person, per year ($30,000 for joint returns) without incurring a gift tax. The donor must pay the gift tax on amounts given over this figure. All of the following actions may create a taxable event Except? A. An investor liquidates her mutual fund shares and reinvests the proceeds in a different fund in the same family B. A dividend is paid but the investor forgoes the cash and chooses to reinvest the funds in additional shares of the same fund C. An individual receives the death benefit from her father's variable annuity D. Rolling the funds of one annuity into another annuity - Answer- D. Rolling the funds of one annuity into another annuity Switching from one mutual fund to another in the same family is considered by the IRS to be a sale of an existing asset and a new purchase. This would generate a taxable event. Reinvestments in the same fund are still taxable but add to a client's cost basis. An annuity death benefit may generate a taxable event for the recipient if she receives an amount above the contributions put into the contract by the deceased. Section 1035 of the IRS code does allow the transferring of assets from one annuity contract into another annuity contract without tax liability. Which of the following statements is NOT considered misleading regarding a variable annuity communication? A. Telling a client that a variable annuity is a mutual fund B. Representing that a variable annuity will meet short-term liquidity needs C. Telling a client about the negative impact of an early redemption D. Making a representation that a death benefit guarantee applies to the investment return of the annuity - Answer- C. Telling a client about the negative impact of an early redemption FINRA is concerned about misleading communications regarding product identification, liquidity, and claims regarding guarantees. A firm should not imply that the underlying account is a mutual fund. Annuities should be purchased with long-term goals in mind, not short-term liquidity needs. Death benefits may be guaranteed, but investment results may not. It would be advisable to inform a potential investor of surrender charges incurred as a result of early redemption. All of the following documents must be accompanied or preceded by an OCC risk disclosure document, EXCEPT: A. Options research reports B. A standardized options worksheet discussing straddles C. Options advertising that appears in the newspaper D. Options sales materials discussing projections - Answer- C. Options advertising that appears in the newspaper Options advertising is a type of retail communication, which must make the offer to send the OCC risk disclosure document upon the customer's request. Options retail communications must be approved by a registered options principal (ROP) prior to use. Options-related retail communications that discuss projections, must be approved by a ROP prior to use and preceded or accompanied by a risk disclosure document. Which of the following statements is TRUE about revenue bonds? A. Interest is usually paid from the earnings of the facility for which the bond was issued B. Interest is subject to federal taxes C. Revenue bonds are considered safer than general obligation bonds D. The state public utility commission must approve each interest payment - Answer- A. Interest is usually paid from the earnings of the facility for which the bond was issued The interest on a revenue bond is usually paid from the earnings of the facility for which the bonds were issued. The interest is exempt from federal income tax and revenue bonds are considered riskier than general obligation bonds. State public utility commissions set utility rates within the state but they do not approve municipal revenue issue payments. Relative to a corporate bond purchased at a discount, place the following in the proper order from lowest to highest yield. I. Current yield II. Nominal yield III. Yield to maturity A. I, II, and III B. II, I, and III C. III, I, and II D. III, II, and I - Answer- A bond trading at a discount has a nominal yield that is less than its yield to maturity. Current yield falls between the nominal yield and yield to maturity. A bond trading at a premium has a nominal yield which is higher than the yield to maturity, with the current yield in between the other two yields. Which of the following choices would be LEAST suitable for an investor seeking liquidity? A. Preferred stock of a financial services company B. A mutual fund that invests in international markets C. A real estate investment trust (REIT) D. A hedge fund using leverage - Answer- D. A hedge fund using leverage Of the choices listed, the hedge fund would be the least suitable since it does not offer liquidity. Hedge funds are not subject to the same regulations for requiring access to their funds as are mutual funds. The shares are not redeemable on a daily basis and are not suitable for an investor requiring a certain degree of liquidity. The preferred stock and REIT are exchange-traded and may be sold at any time A registered representative uses text messaging on a cell phone in order to communicate with customers of her firm when she's out of the office. In this case, which of the following is TRUE? A. This type of communication with customers is prohibited. B. The broker-dealer is required to approve any communication with customers when the RR uses this type of device. C. The broker-dealer is permitted to allow its RRs to use this type of communication as long as the records are maintained by the firm. D. The broker-dealer is not required to maintain any records of the messages. - Answer- C. The broker-dealer is permitted to allow its RRs to use this type of communication as long as the records are maintained by the firm. According to FINRA rules, broker-dealers must supervise all written and electronic correspondence that their RRs have with customers (including text, e-mail, and instant messages). Additionally, these records must be maintained by the firm for a minimum of three years. If a firm permits its RRs to communicate with customers through non-firm email addresses and other electronic devices, it's required to supervise and retain those communications. In fact, some firms prohibit or block its RRs from accessing non-firm electronic platforms for business purposes. An increase in which of the following metrics would cause the price of a bond to drop? A. The bond's rating B. The bond's liquidity C. The issuer's financial strength D. The general level of interest rates - Answer- D. The general level of interest rates Interest rates and bond prices are inversely related. When interest rates increase, bond prices will fall. When interest rates decrease, bond prices will rise. Any of the other choices would usually have a positive effect on a bond's price. If market interest rates increase, the prices of outstanding bonds A. Will remain unchanged B. Will revert to their call price C. Will increase D. Will decrease - Answer- Bonds are subject to interest-rate risk. Interest-rate risk implies that as market rates increase, investors will not be interested in purchasing existing bonds at par since they're able to obtain higher yields by purchasing new bonds. Therefore, existing bonds will need to be offered at a discounted price in order to attract purchasers. In other words, if interest rates increase, outstanding bond prices will decrease. Conversely, if interest rates fall after a bond has been issued, the bond will likely trade at a premium to par. A customer is considered covered if he holds which of the following positions in the same account as 5 short October 40 call options? A. Short 400 shares of the underlying stock B. Short 500 shares of the underlying stock C. Long 400 shares of the underlying stock D. Long 500 shares of the underlying stock - Answer- D. Long 500 shares of the underlying stock If a customer already owns stock and is shorting a call he is said to be covered on the transaction since he already owns the shares that must be delivered if the call option is exercised. A seller or writer of a call option is obligated to deliver stock. Each option contract is based on 100 shares or one round-lot of stock. Since the customer is shorting or selling 5 calls, the customer needs to own or be long at least 500 shares. The strike or exercise of 40 is not relevant. If the customer does not have the shares, he is said to be exposed, uncovered, or naked. Relative to a convertible bond, which of the following choices will produce a desirable arbitrage situation? A. The stock is at parity with the bond B. The stock is at a premium to parity and the bond is trading at par C. The stock is at a discount to parity and the bond is trading at par D. The yield on the bond equals the yield on the stock - Answer- B. The stock is at a premium to parity and the bond is trading at par An arbitrage situation occurs when there is a price difference in comparable securities. If the stock is selling above parity, the value of the stock received from converting the bond is more than the value of the bond. An investor could sell the stock short and buy the bond, and then convert the bond and use the stock to cover the short position. For example, a bond convertible into 25 shares is trading at 104 and the stock is selling at $42. If an investor sold 25 shares short at $42 (equaling $1,050), that would be worth more than the value of the bond ($1,040) In most cases, municipal bond investors may obtain which TWO of the following choices? I. Reduced interest-rate risk by investing in issues with different maturities II. A federal tax exemption by investing in private activity bonds III. A state and local tax exemption by investing in bonds in their state of residency IV. A reduced risk of default by investing in bonds in their state of residency A. I and III B. I and IV C. II and III D. II and IV - Answer- A. I and III Municipal bond investors can obtain reduced interest-rate risk by investing in issues with different maturities. Bonds with short-term maturities will only experience a small decline in price if the general level of interest rates increases. Although most municipal bonds are exempt from federal income tax, they are not exempt from state income tax unless the owner is a resident of the state that issued the bonds, and the state elects not to tax the purchaser of the bond. The interest on municipal private activity bonds is subject to federal income tax if the investor is subject to the alternative minimum tax (AMT). The risk of default is not reduced by investing in bonds in the investor's state of residency. Pennsylvania Power Company has announced that it will refund $800 million of its outstanding 6 1/4% bonds that were to mature in 2040. The bonds will be refunded at 106.75% of par value from the proceeds of an $800 million refunding issue. The refunding issue has a 4 1/2% coupon rate and matures in 2030. Bondholders who own 6 1/4% bonds maturing in 2040 will receive: A. $1,067.50 plus accrued interest B. The new 4 1/2% bonds being issued plus accrued interest C. $1,000 plus accrued interest D. The new 4 1/2% bonds being issued without accrued interest - Answer- A. $1,067.50 plus accrued interest The company is refunding the bonds at 106.75% of its par value. The bondholders who own the 6 1/4% bonds will receive 106.75% of the $1,000 par value (106.75% x $1,000) for a total of $1,067.50 plus accrued interest. Which TWO of the following securities may be included in the STRIPS program to create zero-coupon securities? I. Treasury bills II. Treasury notes III. TIPS IV. Treasury bonds A. I and III B. I and IV C. II and III D. II and IV - Answer- D. II and IV Treasury STRIPS are created when Treasury notes and Treasury bonds are separated (stripped) of their coupons. Treasury bills and Treasury Inflation-Protected Securities (TIPS) are not permitted to be stripped. You are seeking information on insider purchases. Which of the following filings would be the BEST source for such information? A. Form 4 B. Form 144 C. Form 13F D. Schedule 13D - Answer- A. Form 4 Form 4 is filed by any insider of a corporation who buys or sells shares of his company. The form must be filed no later than the second business day following the transaction. Form 3 is filed when a person initially becomes an insider. Form 5 is an annual filing by insiders. An insider is defined as any person who is an officer, director, or owner of more than 10% of the equity. The filings apply to insiders of an SEC registered company. Form 144 would only be filed in the sale (not purchase) of securities. Schedule 13D is used to report acquisitions of more than 5% of the equity of a company. Rule 13f-1 of the Securities Exchange Act of 1934 requires quarterly filings (13F) by institutional investment managers who exercise investment discretion over at least $100,000,000 in equity securities. A client's market order to sell is executed at $21.35; however, the client is told that it was executed at $21.85. In this case, the customer will: A. Cancel and rebill the original order B. Receive $21.85 C. Receive $21.35 D. File a complaint - Answer- C. Receive $21.35 When a market order is executed, the customer is responsible for the actual execution price, regardless of how it has been reported. If the order was reported to have been executed at one price, but was executed at another price that's either higher or lower, the actual execution price must be accepted. A security that has been delisted by the NYSE or Nasdaq: A. May be quoted on the OTC Bulletin Board B. Automatically is eligible for listing on any other national securities exchange C. May not be quoted by any broker-dealer D. May only be quoted by a broker-dealer if the issuer receives prior SEC approval - Answer- A. May be quoted on the OTC Bulletin Board A company that fails to meet the maintenance requirements of securities listed on the NYSE or Nasdaq will become delisted. When this occurs, the company may be quoted (but not listed) on the OTC Bulletin Board or the OTC Pink Market, Inc. (the electronic Pink Sheets). Quotes on the OTCBB or the OTC Pink Market by broker-dealers are permitted without prior approval from the SEC. A 28-year old individual has income of $60,000 per year, has outstanding college loans, and recently inherited $100,000. If the individual is worried about taxes and wants to know how b