SIE Simulated Exam 2 (questions and answers)

An investor purchased and then sold a security eight months later for a gain. This gain is considered to be a short-term gain, and it will be taxed at a more favorable rate than long-term gains. Positions closed within 12 months or less are considered short term. When a gain is realized, it will be taxed at the same rate as the taxpayer's other ordinary income. By contrast, a long-term capital gain is taxed at a favorable long-term rate. If the dollar price of a municipal bond is 101 and the basis is 6.10, the nominal yield is greater than 6.10. For bonds trading at a premium (101), the nominal yield (or coupon) is higher than the basis (YTM). For bonds at a premium, yields from lowest to highest are yield to call (YTC), YTM, current yield, and nominal yield. Selling long is equivalent to which of the following? Selling to close When a customer owns a position and then sells that position, that is referred to as selling long or selling to close. A REIT can avoid being taxed as a corporation would by Under the guidelines set by the Internal Revenue Code, a REIT can avoid being taxed as a corporation by receiving 75% or more of its income from real estate and distributing 90% or more of its net investment income to its shareholders. Which of the following is a self-regulatory organization (SRO)? Financial Industry Regulatory Authority (FINRA) FINRA is considered the primary SRO in the securities industry. Rising employment due to an increase in demand for goods and services would be associated with periods of inflation. During inflationary periods, prices are rising due to a rising demand for goods and services. This will have the effect of creating more employment. Conversely, when the economy slows down, employment generally falls and claims for unemployment benefits will rise. Which of the following are fixed at the time a bond is issued? Nominal yield Coupon, nominal, or stated yield is set at the time of issue and is a fixed percentage of the bond's par value. Which of the following statements about rights and warrants is true? Rights are short term; warrants are long term. A security with a termination, maturity, or expiration date that is one year or less from the date of issue is said to be short term. Rights offerings have a lifetime of four to six weeks, which makes them short term. If the end date is more than a year from the issue date, the security is long term. Warrants have expiration dates typically two to five years from the date of issue, which makes them long term. For investors, changes made to the tax code by the government are known as a form of legislative risk. Legislative risk results from changes in the law, not regulations. Changes in tax laws are one example. Your client is about to retire and wants to rearrange his portfolio in order to have predictable income. Which of the following would not be a good investment vehicle? Adjustment bonds Income bonds, also known as adjustment bonds, are issued when a company is reorganizing and coming out of bankruptcy. Income bonds pay interest only if the company has enough income to meet the interest payment. Therefore, the interest payments are not predictable, and they are not suitable for customers seeking income. A minimum four-year record retention is required for customer complaints. Copies of customer complaints require a minimum retention of four years. An investor has entered into a contract to pay an investment company a specific sum of money in exchange for the company's agreement to pay the investor a specific (larger) sum of money on a specific date in the future. The investment company must be a face-amount certificate company. A face-amount certificate company offers the investor a certificate with a face amount on it. The investor buys it for a discount from the face amount, with the agreement being that the company will pay the investor the face amount on a specific date in the future. Capital markets can be characterized by all of the following except they are utilized by the public sector only. In capital markets, both public and private sectors sell securities (stocks and bonds) to raise funds to finance both long-and short-term initiatives. Both individuals and institutions can trade securities in these markets. If after a registered representative terminates the firm learns of something that should have been reported to the Central Registration Depository, how long does the firm have to make an amendment if that information would cause statutory disqualification? 10 days The rule requires notification within 10 days if the information involves statutory disqualification. A registered representative wants to place advertisements in his daughters youth athletic league quarterly sponsorship booklet. He wants to convey in the weekly bulletin at his church that he specializes in retirement planning and 529 plans. Which of the following statements regarding these advertisements is true? Pre-approval by a principal of the broker-dealer is required. Any piece promoting securities services and/or products intended to be received by more than 25 retail customers within any 30 calendar-day period must be preapproved by a principal before use. Given the intended placements of the piece there is no way to determine the exact number of retail customers who will be exposed to it and within what time frames and therefore it must be regulated as retail communications. It fits neither the definition of correspondence or institutional communications. If a broker-dealer suspects that a transaction involves funds derived from illegal activity, a suspicious activity report (SAR) would be triggered at what threshold? At least $5,000 in funds or other assets The threshold for triggering a suspicious activity report (SAR) is at least $5,000 in funds or other assets. Do not confuse this with a Currency Transaction Report (CTR), which is triggered by amounts greater than $10,000. One of the Financial Industry Regulatory Authority (FINRA) Conduct Rules is concerned with private securities transactions. Under that rule, it would be correct to state that I. f the member approves the registered representative participating in a transaction for compensation, it must treat the transaction as if it is being done on its own behalf by entering the transaction on its own books and supervising the associated person during the transaction. II. as long as no compensation to the registered representative is involved, notification to the member is not required. III. sale of a securities product to the registered representative's mother where there is only nominal compensation is not covered under the rule. IV. if the member disapproves of the registered representative's participation in a transaction for compensation, the associated person may not participate in it. I and IV FINRA divides private securities transactions into two categories. If the associated person will receive compensation, the rules are more comprehensive requiring approval or disapproval. If approved, the firm must record the transaction on its books and records and supervise as if it were executed on behalf of the member firm. Trades with immediate family members are not included if there is no compensation. In other transactions where there is no compensation, written notice to the employer member is still required. A corporate stock is purchased on Friday, April 2, regular way. When will the trade settle? Tuesday, April 6 For corporate securities, regular way settlement is the trade date (Friday, April 2) plus two business days; therefore, the trade will settle on Tuesday, April 6. When an employee is either terminated from, or willfully leaves, a member firm, Form U-5 must be filed. Under these circumstances, which of the following is true? Under either circumstance, the employing firm is responsible for filing Form U-5. Whenever a registered employee leaves a member firm under any circumstance, it is the employing member firm that is responsible for filing Form U-5. For tax purposes, investment income is taxed at either ordinary income tax or capital gains tax rates. Investment income is that which is earned from one's investments. Sometimes called portfolio income, it would include dividends, interest, and capital gains derived from the sale of securities. For tax purposes, investment income will generally be taxed at one of two rates: ordinary income tax rate or capital gains tax rate. A mutual fund can offer all of the following to investors except physical custody of the fund's portfolio cash and securities. The services mutual funds offer may include retirement account custodianship, investment plans, check-writing privileges, transfers by telephone or online, withdrawal plans, and a number of other services and privileges. However the Act of 1940 requires that each investment company place portfolio cash and securities with a custodian for safekeeping. Firms applying for Financial Industry Regulatory Authority (FINRA) membership are required to I. agree to be in compliance with all federal securities laws. II. pay dues, assessments, and other charges the association levies. III. pass the appropriate qualification exam(s). IV. attend a FINRA annual conference no less frequently that once every three years. I and II Firms must agree in their membership application that they will comply with all federal securities laws and make payment of dues and assessments when requested. Although qualification exams must be passed by individuals representing the firm, there is nothing requiring the firm itself to do so, nor is attendance at FINRA conferences required. The bid price represents I. the price the broker-dealer is willing to pay when buying a security. II. the price the customer will pay when buying a security. III. the price a customer will receive when selling a security. IV. the price the broker-dealer will receive when buying a security. I and III The broker-dealer buys at the bid and sells at the ask. The customer buys at the ask and sells at the bid. Who benefits most from a defined contribution plan? Younger employees Younger employees have more time for the money to grow. An investor has a cash account with $300,000 in securities and $40,000 in cash. The investor also has a restricted long margin account containing securities with a market value of $220,000 and equity of $60,000. What is the extent of this investor's Securities Investor Protection Corporation (SIPC) coverage? $400,000 Coverage under SIPC may not exceed $500,000 in cash and securities, of which up to $250,000 may be cash. In the cash account, his coverage is $300,000 in securities plus $40,000 in cash. In the long margin account, the coverage is only the equity, which is $60,000. Total: $300,000 + $40,000 + $60,000 = $400,000. LO 9.d Who must reconfirm a good 'til canceled order for it to stay in force more than six months? The customer who placed the order Good 'til canceled orders historically have been canceled at the end of April and October. Some firms will cancel them more frequently, but for the order to stay in effect longer than six months, the customer would need to reinstate the order. Fiscal policy I. is the most efficient means for solving short-term economic issues. II. is not considered the most efficient means to solve short-term economic issues. III. is reflected in the budget decisions enacted by our president and Congress. IV. is reflected in the money supply decisions enacted by the Federal Reserve Board (FRB). II and III Fiscal policy is reflected in the budget decisions enacted by our president and Congress. This political process takes time for conditions and solutions to be identified and implemented and is therefore not considered the most efficient way to solve short-term economic issues. A stock currently has a market value of $75 per share. If a put option on the stock has an exercise price of $60, the put option is out of the money. This put option has a zero intrinsic value and is therefore out of the money by the 15 points difference by which the market price exceeds the strike price. A put option has intrinsic value or is in the money when the current market price of the underlying asset is less than the exercise price (in this example, $60). Which type of shares allow the investor to buy and sell the shares at NAV and have a 12b-1 fee of 0.25% or less? No load No load funds have no sales charge and are limited to a 12b-1 fee of 0.25% annually. Class C shares charge a level load built into the expense ratio, usually as a 12b-1 fee. Class B shares have back-end loads that reduce over time (Contingent deferred sales charge, or CDSC). Class A shares charge an upfront load. Section 529 plans are considered municipal fund securities. They must therefore be sold by offering circular. Municipal bonds are sold by offering circular, a document similar to a prospectus used in the sale of municipal securities. Because Section 529 plans are state sponsored, they must be sold by offering circular. A customer investing in common equity securities could realize all of the following except protection of principal investment. While common shareholders could realize potential capital appreciation, current income via dividend declarations and a potential hedge against inflation, protection of the initial investment is not guaranteed. Common shareholders have limited liability, meaning that while they cannot lose more than was initially invested, they could still lose all of it. Which of the following would be associated with loans made to member banks of the Federal Reserve? Discount rate Loans made to member banks of the Federal Reserve are made by the Federal Reserve Board (FRB) at the discount rate. The call loan rate and the prime rate are rates at which banks lend to broker-dealers and corporate customers, respectively. Although margin is controlled by the FRB, it has no bearing on this question. Interest-rate risk cannot be reduced by diversification. Interest-rate risk is one of the systematic risks that cannot be reduced by diversification. It is the risk that fluctuating interest rates will impact bond prices. Primarily, when interest rates are rising, bond prices will be pushed lower. Which of the following would cause a change in the net asset value (NAV) of a mutual fund share? I. Many shares are redeemed. II. Securities in the portfolio are sold for a capital gain. III. The fund pays a small dividend. IV. The market value of the portfolio declines. III and IV Paying a dividend would reduce the net assets of the fund without reducing the number of shares outstanding, which would reduce the NAV per share. A decline in the market value of the portfolio would have the same effect. Sales and redemptions of shares change the net assets but also change the number of shares outstanding to the same degree, leaving the NAV per share unchanged. Selling securities for a capital gain simply replaces securities in the portfolio with an equivalent amount of cash, leaving the NAV unchanged. A convertible feature for preferred shares allows the owner to exchange the shares for a fixed number of shares of the issuing corporation's common stock. The conversion feature for preferred shares has fixed terms allowing the owner to convert the shares (exchange them) for a specified number of the same issuers common shares. Your customer is aware that a corporate action has taken place where the adjustment to the number of shares owned and the stock price will not be standardized but instead is unique to fit the circumstances and terms of the corporate action. Of those listed, which is most likely to be such an action? Merger or acquisition Adjustments are standardized for corporate actions such as forward and reverse splits (even or uneven) and dividend payments (cash and stock). However, some corporate actions require adjustments that are unique to each situation, not standardized. These would include mergers, acquisitions, takeovers, spinoffs, or any of these where options contracts are traded on the issuer's securities. An investor has received insider information from a research scientist that a chemical company has just invented a new polymer that could be very useful in making strong, light girders in building construction. The investor buys several thousand shares of the company's stock through his registered representative. Several months later, when the patent comes out, the investor sells the stock for a substantial capital gain. Which of the following is least likely to be found liable under the Insider Trading Act? The CEO of the chemical firm In this scenario, the tipper was the research scientist and the tippee was the investor. They certainly may be held liable. The registered representative (and his firm) may be held liable if it can be shown they had knowledge that insider information was being used. As offered in this question scenario, there is no reason given to think the CEO of the chemical firm was involved. Regular way settlement for Treasury bonds is T+1 All U.S. government issues settle next business day (T+1). An investor has purchased Class A mutual fund shares. The net asset value (NAV) per share of the fund is the price the investor will receive upon redemption of the shares. The NAV per share of a mutual fund is calculated by dividing the net assets of the fund by the number of shares outstanding. When purchasing Class A shares, NAV plus a sales charge is paid. When redeeming the shares, the investor simply receives NAV. Remember that for purchases and redemptions of mutual fund shares, the next calculated NAV per share is used, a practice known as forward pricing. Therefore, when purchasing or redeeming shares, because mutual funds use forward pricing, the investor can never be certain of the exact price that will be paid or received when entering the order.