A company sells brand-new shares to the public for the first time in an initial public offering (IPO). In which market does this sale take place?
The primary market The primary market is where issuers sell new securities to raise money, and the money goes to the issuer. An IPO is the classic example. Later trades between investors happen in the secondary market.
The Federal Reserve wants to tighten the money supply to fight inflation. Which open market action fits that goal?
Selling U.S. Treasury securities When the Fed sells Treasuries in the open market, buyers pay with money that leaves the banking system. Banks have less to lend, and interest rates tend to rise. That slows the economy and works against inflation.
In which type of underwriting does the underwriter buy the entire issue from the issuer and take the risk of any securities it can’t sell?
Firm commitment In a firm commitment, the underwriter buys the whole issue from the issuer and resells it to the public. If some securities don’t sell, the underwriter is stuck with them. The issuer gets its money either way.
Which right do common stockholders usually have?
The right to vote for the board of directors Common stockholders are owners, and owners usually get to vote for the board of directors. Dividends on common stock aren’t guaranteed, common stock has no maturity date, and common holders are paid last in a liquidation.
Market interest rates rise sharply. What usually happens to the market price of existing fixed-rate bonds?
It falls Bond prices and interest rates move in opposite directions. When new bonds pay more, older bonds with lower coupons are worth less, so their prices fall until their yield matches the market.
What mainly backs a municipal general obligation (GO) bond?
The full faith, credit and taxing power of the issuer A GO bond is backed by the full faith and credit of the state or local government, which means its power to raise taxes. Revenue bonds are different: they’re paid only from the income of a specific project, like a toll road.
A corporation goes bankrupt and is liquidated. In which order are these groups normally paid?
Bondholders, preferred stockholders, common stockholders Creditors come before owners. Bondholders are creditors, so they’re paid first. Preferred stockholders come next, which is part of what “preferred” means. Common stockholders are last and often get nothing.
An investor buys 1 XYZ 50 call for a premium of $3. Ignoring commissions, what is the most the investor can lose?
$300 The buyer of an option can lose no more than the premium paid. One standard equity option covers 100 shares, so a $3 premium costs $300. If the option expires worthless, that $300 is the whole loss.
An XYZ 60 put is in the money when XYZ’s market price is:
Below $60 A put gives the right to sell at the strike price. It’s in the money when the stock is below the strike, because you could sell at $60 something worth less than $60.
Which organization issues and guarantees listed options contracts in the United States?
The Options Clearing Corporation (OCC) The OCC is the clearing house for listed options. It issues the contracts and stands between buyer and seller, guaranteeing that each side’s obligations are met.
Which statement describes an open-end investment company (mutual fund)?
It continuously sells new shares and redeems shares at net asset value Open-end funds don’t have a fixed number of shares. They issue new shares whenever investors buy and redeem shares when investors sell, based on net asset value (NAV), plus any sales charge on purchases.
What does a breakpoint on Class A mutual fund shares give an investor?
A lower front-end sales charge on a larger purchase Class A shares usually carry a front-end sales charge. Breakpoints are dollar levels at which that sales charge gets smaller. Investing enough to reach a breakpoint means less of the money goes to the sales charge.
A stock is trading at $27. A customer enters a buy limit order at $25. When can the order be filled?
At $25 or lower A buy limit sets the highest price the customer will pay. The order fills only at $25 or better, and for a buyer better means lower. If the stock never drops to $25, the order isn’t filled.
What is the standard (regular-way) settlement cycle for most U.S. stock and corporate bond trades?
T+1 Since May 28, 2024, regular-way trades in U.S. stocks and corporate bonds settle one business day after the trade date, which is written as T+1. Before that date, the standard was T+2.
In money laundering, what is the stage called when illegal cash first enters the financial system, for example by being deposited at a bank?
Placement Placement is the first stage, when dirty money is put into the financial system. Layering comes next: moving the money around to hide where it came from. Integration is last, when the money comes back looking legitimate.
An accountant at a public company learns at work that next week’s earnings report will be far worse than expected. She sells her shares before the news is released. What is this?
Insider trading She traded on material, nonpublic information that she learned through her job. That’s insider trading, and it’s illegal no matter how many shares are involved or whether she already owned them.
A registered representative knows an institutional customer is about to place a very large buy order in a stock. Before entering it, the rep buys the same stock for his own account. What is this called?
Front running Trading for yourself ahead of a customer’s block order, to profit from the price move that order will cause, is front running. FINRA rules prohibit it.
Under FINRA’s rule on new equity issues, which of these people is generally restricted from buying shares in an initial public offering (IPO)?
A registered representative of a broker-dealer FINRA Rule 5130 restricts broker-dealers from selling new equity issues to “restricted persons.” Employees of broker-dealers, such as registered representatives, are restricted persons. The other people listed have no link to the securities industry.
Which form does a broker-dealer file to register an associated person, such as a new representative, with FINRA?
Form U4 Form U4 is the Uniform Application for Securities Industry Registration or Transfer. The firm files it to register a person, and it must be updated when key information changes, such as certain legal or financial events.
A broker-dealer fails and can’t return customer assets. How much protection does SIPC give each customer, in a separate capacity?
Up to $500,000, including up to $250,000 in cash SIPC protects up to $500,000 per customer in each separate capacity, and no more than $250,000 of that can be for cash. It covers missing securities and cash when a member firm fails, not losses from falling market prices.
United States · Exam