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Stabilizing is a term generally used in Wall Street to refer to the practice of:
price fixing of a new issue
maintaining a market price at or near the POP of a new issue for the sole purpose of protecting the stock from decline during a new offering.
preventing losses for investors who buy IPOs
none of the above
Question 1 Explanation:
Stabilizing implies keeping the price steady, which SEC allows in a new issue if done in accordance with strict guidelines of SEC---anti-manipulation guidelines.
Regulation SHO severely restricts short selling during the cooling offer period of a follow-on offering. Which of the below is true?
shorting stock of a company undergoing a follow on offering is prohibited during the registration period.
an investor cannot buy the new shares in a follow on deal if they have sold the outstanding shares of that issuer during the cooling off period.
an investor may buy the new issue shares on the offering so long as any short sale has been covered at least one business day prior to the effective date.
none of the above
Question 2 Explanation:
SHO are the first 3 letters of the word ‘short.’ Answer C. best describes the basics of this regulation.
The maximum coverage offered per separate customer under SIPC insurance was set by Congress at:
$250,000 for cash and securities combined
$500,000 for securities and cash combined
$1,000,000 for securities and cash with no more than $250,000 for cash claims
$500,000 for cash and securities coverage with no more than $250,000 for securities claims
Question 3 Explanation:
SIPC was never intended to guarantee customers against investment loss. It’s an insurance program providing ½ million dollars of account insurance in the event a customer’s brokerage firm goes bankrupt, with the maximum CASH coverage the same as bank FDIC coverage: $250K.
Recommending a limited partnership DPP investment to a customer would be a defendable recommendation for a client:
seeking flow-through tax benefits
who is not risk averse
who does not have an immediate need for liquidity
any of the above
Question 4 Explanation:
Investors seeking ‘tax shelter’ or ‘tax advantage’ are often suitable for the flow through benefits of DPPs (direct participation program--- limited partnerships).
When growth is the principal objective of the investor, each of the below could be suitable except:
growth mutual fund
Question 5 Explanation:
Defensive: stable, utilities, basic food, the basic needs of life, these are NOT growth industries.
Exercise of an equity put option involves the writer:
selling the underlying instrument at the strike price
buying the underlying instrument at the strike price
selling the underlying instrument at the strike price less premium
buying the underlying instrument at the strike price less premium
Question 6 Explanation:
When an investor shorts/writes/sells a put option, they agree to be OBLIGATED to BUY the underlying instrument at the strike price.
The hours of operation of the Chicago Board Options Exchange are:
9:30 am to 4:00 pm CT
8:00 am to 8:00 pm ET
8:30 am to 3:00 pm CT
7:00 am to 7:00 pm CT
Question 7 Explanation:
NYSE hours and CBOE hours are the same. 9:30 to 4 ET for the NYSE is the same as 8:30 to 3:00 CT. Make sure you KNOW your time zones!
The primary difference between a stock dividend and a cash dividend is:
stock dividends provide the corporate shareholder with additional shares in lieu of cash.
cash dividends are tax-free if reinvested in additional shares
cash dividends are tax-deferred if reinvested in additional shares
stock dividends are taxable upon receipt
Question 8 Explanation:
The term ‘STOCK’ dividend tells you this is a distribution, NOT of cash, but of more shares of STOCK.
A customer complaint is formally defined as a:
any communication from a customer or a legal representative of a customer regarding misconduct
any written communication from a customer or legal rep of a customer regarding an allegation of a violation of one or more securities rules or federal regulations
a written allegation of a violation submitted by a customer
none of the above
Question 9 Explanation:
A written allegation: this is formally known as a complaint.
The least liquidity in the securities shown below would be found:
in securities traded on the Pink Quote system
in securities listed on regional stock exchanges
in general obligation issues
Question 10 Explanation:
Pink sheets: the Pinks: the Pink quotes: All these terms in your textbook speak of thinly traded, closely-held, low daily volume stocks, where liquidity is not especially present when compared to NYSE and NASDAQ stocks.
Among the reasons a corporate Board would declare a stock split
is to increase corporate net worth
is to decrease the annual dividend
is to reduce individual shareholders’ percentage ownership
is to make the stock more affordable
Question 11 Explanation:
The stock split lowers the market price of a stock, which makes buying a round lot (100 sh.) more ‘affordable.’
Sweeteners as that term is used in the investment banking community refers to issue enhancements which include:
any of the above
Question 12 Explanation:
Each of these when associated with a bond issue makes the bond more attractive from a client’s point of view.
The Securities & Exchange Commission was formed as part of
the Securities Act of 1933
the Securities & Exchange Act of 1934
the New Deal legislation
none of the above
Question 13 Explanation:
SEC was formed in 1934.
Which of the following investment instruments trades on an exchange at a market price not directly related to its net asset value?
open end investment company
private hedge fund
put and call option contracts
closed-end investment company
Question 14 Explanation:
Only the closed-end investment company trades at supply & demand pricing on an Exchange, and has no specific relationship to the fund’s underlying asset value.
When a corporation announces that it is seeking additional equity capital through a sale of additional authorized but unissued shares,
this is a secondary distribution
this is a primary distribution
this is an IPO
this is a split offering
Question 15 Explanation:
The ‘trick’ with this question is that anytime a company is selling NEW previously unissued shares from their Authorized shares maximum, those shares are NEW ---- Primary distribution means the shares being sold are NEW, never before issued, not previously owned by anyone.
Among the differences between an introducing broker-dealer and a clearing carrying broker-dealer is that clearing firms:
Maintain possession and control of securities and introducing firms do not.
Are members of all major securities exchanges and introducing firms are not.
Are permitted to engage in investment banking and underwriting of new issues of securities and introducing firms are not.
All of these are differences.
Question 16 Explanation:
The terms ‘clearing’ and ‘carrying’ have to do with a brokerage firm’s performance of certain functions most other firms are not permitted to do, such as have physical possession and custody of customers’ cash and securities.
Pre-emptive Rights and Stock Warrants have a number of similarities. Which of the below represent characteristics these products have in common?
I. Each has a fixed price at which the holder may purchase shares of the issuer’s common stock.
II. The fixed exercise price for both products is initially set at a level below the current market value of the common stock.
III. These products are tradable on securities exchanges
IV. Both have relatively short-term expiration dates
I, II, and III
I and IV
II and IV
I and III
Question 17 Explanation:
Pre-emptive Rights entitle a corporate shareholder to purchase shares in an additional share offering at a favorable below market price. Warrants enable the holder of the warrant to buy more shares at an exercise price which when first set, tends to be higher than CMV at that time. Warrants are normally quite long term whereas rights typically expire in 30 days or less. Both are tradable on organized stock exchanges, such as the NYSE.
When reviewing the definitions of broker-dealers and investment advisers, one would find that:
Broker-dealers can engage in securities transactions for compensation.
Investment advisers engage in providing advice relating to the advisability of investing or not investing in securities for compensation
An investment advisory firm must have an account at a broker-dealer in order to have the recommended transactions executed.
All of these
Question 18 Explanation:
Each of these answers is a true statement.
Keynesian economic theory deals with:
Controlling the economy through regulating money supply.
Controlling the economy through budget/government spending and taxation policies
Incentivizing responsible financial behaviors through Congressional legislation and agency regulations
None of the above
Question 19 Explanation:
Though a very simplistic way of describing Keynesian theory, it focuses on government taxation and spending policies, which are fiscal in nature. Answer A would be more appropriate if we were asking about monetary policies, which would be the work of the Federal Reserve.
A significant number of public investors do not have a solid understanding of how common stock is offered to the public. Two methods are the secondary offering and the follow-on offering. Which of the below are true statements regarding these methods?
Secondary offerings involve the sale of new shares other than the first time a company is going public (IPO).
A follow-on is an offering of new shares other than the initial public offering (IPO).
Secondary and Follow-on are two different terms for the same investment banking activity.
Secondary offerings involve the resale of outstanding shares at market bid and ask pricing.
Question 20 Explanation:
The term Secondary Offering is used to describe a situation in which already-issued shares are being resold into the marketplace, usually by insiders, officers, and directors of a company. The shares being sold are NOT new shares coming from the company. A follow-on offering, also called an APO (additional public offering) is where a company is issuing and selling more new shares to the public.
FINRA has promulgated various rules and procedures pertaining to the operation of broker-dealers and departments within member firms. The M&A Department:
Is tasked with supervising Managed accounts and Asset Allocation accounts.
Is in charge of rules governing the Member and Associated persons.
Creates the firm’s procedures pertaining to Merger and Acquisition activity
Deals with Market making and inventory Acquisition for the firm.
Question 21 Explanation:
M&A means mergers and acquisitions. This department assists companies in their efforts to buy another company or sell their company to an interested buyer.
Mitigation of the risk of loss in a bearish market can be achieved by customers with vulnerable long stock positions placing:
Sell limit orders
Buy stop orders
Sell stop orders
Question 22 Explanation:
A client who owns stock is exposed to 100% loss of invested principal, unless the client engages is one of a number of strategies designed to mitigate/reduce the risk of loss. One such strategy is the sell stop order, in which the client picks a price at which he or she will exit/liquidate their stock position if the stock falls to that price level, ‘stopping’ the loss from getting any worse.
All investors with short option positions:
Have a contractual obligation to perform in accordance with the contract terms if the option is exercised.
Pay a premium in order to acquire the contractual rights associated with the option.
Must be considered suitable for short sales of stock in order to be permitted to engage in shorting options.
May close out the position by taking a long position in a corresponding option contract.
Question 23 Explanation:
Any investor who writes a call or a put option, also known as selling an option, also known as ‘shorting’ an option, is obligated to perform in accordance with the terms of the contract, but only if the option is exercised by the person who had purchased the option, referred to as the holder of the option, or the long option position.
All of the following are full disclosure documents used in the sale of securities with the exception of:
Notice of Sale
Question 24 Explanation:
A notice of sale is an advertisement published by a municipality in order to get bids from interested broker-dealers who wish to underwrite the sale of that issuer’s upcoming bond offering. The other answers are different names for documents which make full disclosure to purchases of securities.
SIPC is an insurance organization designed to protect investors against loss:
When their brokerage firm makes provably unsuitable recommendations
When their brokerage firm fails to notify them of an impending stock market decline
When their broker-dealer goes bankrupt
When their brokerage firm loses or misplaces their securities.
Question 25 Explanation:
Securities Investor Protection Act of 1970 created an insurance entity called the Securities Investor Protection Corporation. Its purpose is to provide protection to customers of bankrupt brokerage firms in the event the customers’ cash and or securities have not been found during the bankruptcy proceedings. It is not investment insurance.
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