SIE Practice Exam 2

Short term debt reacts the least in price when rates change.

Non-systematic risk is business risk — the risk of putting all your eggs in one basket, in one company, in one business sector…..and if that business does badly, you lose. Diversification is a good way of mitigating this risk.

When a bond is trading at a discount (market price lower than par value), the YTC will be the highest yield, then YTM, then CY, and the nominal yield the lowest yield.

Each of these when associated with a bond issue makes the bond more attractive from a client’s point of view.

Front-running is defined as trading on material non-public information ahead of an imminent block sale in the same or related securities.

Exchange traded funds; Exchange traded Notes; Equity Linked Notes are all traded on the NYSE.

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.

Industrial development bonds are issued by governments for the benefit of private corporations. Revenue streams raised by the facilities pay principal and interest. They are a form of conduit bond. Projects funded by IDRs include parking garages, factories, industrial parks, and sports stadiums.

Investors would now be facing reinvestment rate risk, as bonds have been called and it will be difficult to find another investment offering the same return that was available prior to the bond being called.

An investor must own stock as of the date of record in order to receive a dividend payment. To own stock by the record date, it must be purchased before the ex-dividend date which is 1 business day before the record date. By purchasing before the ex-date, there are two business days for settlement to occur, in accordance with regular way settlement process.

Freeriding is the prohibited practice of entering a trade to buy securities, then selling them the following day without having had sufficient funds in the account to pay for the trade.

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.

Investors sell their shares at the net asset value price next calculated after the order is received, which is the concept of forward pricing.

Defensive: stable, utilities, basic food, the basic needs of life, these are NOT growth industries.

Firms must verify customer information at least once every 36 months. The point of this requirement is to ensure that the account is still appropriate and the information on file is still accurate.

A firm may hold customer mail upon written request. Mail can be held for up to three months.

Rights are short-term instruments that allow a shareholder to purchase the stock below its market price for a period that usually expires after 4-6 weeks. They are issued to existing shareholders in proportion to their ownership interest, so that if exercised, they allow the shareholder to maintain their percentage of ownership, or protect against dilution. Warrants are long term instruments and are often used as sweeteners in corporate bond issues. They do not protect shareholders from dilution.

Stock splits and reverse splits do not change the total value of investors’ holdings. For example, if the investor owned 800 shares at $1 per share before the 1-for-10 reverse split, he/she will own 80 shares at about $10 per share after the event.

The “third market” is where exchange listed securities trade in the OTC market, typically handled by a broker-dealer through its own trading system.

Outside business activity requires the firm to be notified of the full details of the activity. It does not, however, require permission from the firm. Borrowing money from family members does not require permission from a broker dealer.

Investors seeking ‘tax shelter’ or ‘tax advantage’ are often suitable for the flow through benefits of DPPs (direct participation program— limited partnerships).

A “breakpoint sale” is a violation that occurs when a registered rep does not disclose to the customer the opportunity to take advantage of a sales charge discount, or “breakpoint”.

Since the ‘money market’ includes short term debt instruments only, and since ADRs represent ownership (equity) in foreign stocks, ADRs are not debt.

Statements III and IV are two of the ways to obtain a reduced sales charge (breakpoint). Switching from one fund to another under the same sponsorship(exchange privilege) carries no sales charge at all, so a reduction is irrelevant. Reinvesting distributions is a wonderful practice, and will help reach a breakpoint, but ONLY under the ROA (rights of accumulation) program, not the 13 months LOI approach.

When an investor shorts/writes/sells a put option, they agree to be OBLIGATED to BUY the underlying instrument at the strike price.

Closed-end company shares trade in the secondary market on exchanges. Their prices are determined by market supply and demand and therefore may be priced at a premium or discount to their NAV.

Accrued interest is measured from the last interest payment date (coupon date) up to but not including the settlement date of the trade. Settlement date is not included in these accrued interest computations because legal ownership of the bond changes on settlement date and this is the date from which the new owner of the bond begins earning his own interest.

JoeBrokerDealer will be subject to the ban for two years after the contribution was made even if the MFP leaves the firm. JaneBrokerDealer is also subject to the ban for the same period, even though the contribution was made while the MFP was associated with another municipal securities firm.

A stock split doesn’t affect the total value of stock owned. In this example, the shares are worth $9,000 before and after the split. But three times as many shares are owned. To calculate the new number of shares, multiply the shares by the first number of the split and divide by the second number of the split: 100 shares x 3 / 1 = 300 shares. Because the $9,000 is now divided among 300 shares, the new stock price will be $30 per share.

The credit quality of an exchange-traded note is based on the creditworthiness of the issuer, usually an investment bank that structures the note and sets its terms. Importantly, the credit quality is not based on the underlying portfolio for which the performance of the investment is based upon.

Investment grade ratings end with the BBB rating. Below that are speculative grade ratings. BB+ would be the higher speculative rating from among these multiple choice answers. Ba1 is a Moody’s rating, not S&P.

Exchange traded funds trade on exchanges at market prices determined by supply and demand – the same as regular corporate stocks.

One of the most attractive benefits of a variable annuity is tax-deferred growth during the accumulation period. All dividends, interest, and capital gains earned during the accumulation period may be reinvested tax-free.

Because zero coupon bonds pay no interest until maturity, their prices fluctuate more than other types of bonds in the secondary market. Variable bonds have little price fluctuation because their rates adjust to current interest rates. Also, long-term bonds are generally more volatile than short-term bonds.

A market order gives the broker instructions to buy or sell a specified quantity of securities immediately, as soon as the order reaches the market. A full execution of the order is assured but the execution price is unknown.

Investors make after-tax contributions to 529 Plans. The earnings in the plan grow tax- free and any distributions for qualified educational expenses are tax-free at the federal level. Additionally, registered representatives must disclose that there may be certain tax benefits for opening a plan inside your state of residency, for example, tax deductions off of your state income taxes. Conversely, if an individual invests in a 529 Plan outside of their state, their state of residency might make they pay taxes on the growth of the plan.

Passive losses may be used to offset earnings from other passive sources only. They cannot be used to offset investment income or ordinary income.

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.

REITs can avoid double taxation on profits passed through as dividends to shareholders by concentrating their investments in real estate. At least 75% of total assets must be in real estate, and at least 75% of gross income must be derived from real estate. Also, they must pass through at least 90% of their gains to shareholders.

An individual who is retired, or in the later stages of life, would not be likely to make an investment that could result in the complete loss of their capital, or one that would require a long-term investment horizon.