Your FREE Securities Industry Essentials (SIE) Practice Test 2026 – 580+ Q&A

Correct answer: Fixed and stated as a percentage of its par value

A preferred stock's annual dividend payment is its fixed rate of return, unlike that of common shares where the dividend is subject to variation.

Correct answer: 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.

Correct answer: Dividends

A company distributes profits to its shareholders in the form of dividends, declared at the discretion of the board of directors (BOD). Spin-offs distribute shares of a separate subsidiary rather than profits, royalties are paid to owners of intellectual property for its use, and interest is paid to a company's creditors and bondholders, not to its shareholders.

Correct answer: Preferred stock

Common and preferred stock are examples of an equity security. Bonds of any type by comparison are certificates of indebtedness—debt instruments.

Correct answer: Low dissolution priority

Low dissolution priority refers to being paid last in the event of a corporate dissolution (bankruptcy). Obviously, this is not a benefit. However, price appreciation and the receipt of dividends are potential benefits and limited liability is guaranteed, only being able to lose what one has invested.

Correct answer: Market price less than $5 per share and unlisted

Penny stocks are generally defined as those with a market price below $5 per share that are not listed (traded) on any exchange or Nasdaq.

Correct answer: Interest payments

Interest payments are paid to bond holders but not on common stock. Common shareholders may receive dividends if declared by the board of directors. They may also expect to vote on certain critical issues facing the company such as its leadership. Common shareholders have a liability limited to the amount invested.

Correct answer: Common stock that has historically paid dividends

Securities that have an agreed rate of return, such as bonds, notes, money market instruments, and other debt instruments, are deemed fixed-income securities. Preferred stock acts in many ways like a bond in that it has a fixed dividend rate, making it a fixed-income security. Common stock may or may not pay a dividend depending on the board of directors. Common stock is not deemed a fixed-income security.

Correct answer: Freely transferrable

Common stock is freely transferable to anyone who wants to buy it or receive it as a gift. In this regard, shareholders have the right to sell or give away their shares without permission of the corporation.

Correct answer: $5 per share.

Securities and Exchange Commission (SEC) rules define penny stocks as those that are unlisted on an exchange or Nasdaq trading at less than $5 per share.

Correct answer: Market risk and current income risk

In owning common shares, the investor stands to lose current income through dividend reduction or suspension (current income risk), as well as capital loss, should the market price decline (market risk).

Correct answer: Ex-dividend

Declaration, record, and payment dates are determined by the board of directors (BOD), but FINRA, or the exchange, determines the ex-dividend date.

Correct answer: Limited liability and voting rights

Common stockholders enjoy limited liability in that they can only lose what was invested. They are in no way responsible for any debt of the corporation. Voting rights are one of the key benefits for common shareholders.

Correct answer: Limited access to a company's books and records

By virtue of owning the company's common stock, shareholders have a limited right to review the company's books and records. For example, they have the right to examine the minutes of meetings of the board of directors (BOD).

Correct answer: Shares can be sold or given away without the permission of the corporation.

Shareholders have the right to sell or give away their shares without permission of the corporation.

Correct answer: Preferred shares

Both common and preferred shares are equity securities. Each of the other choices represents a debt instrument.

Correct answer: Common stock

All corporations will issue common stock, of which there can be only one class, but not all corporations issue preferred stock. Corporations that choose to issue preferred shares can issue more than one class.

Correct answer: A disclosure statement is required, but not a suitability statement.

Established customers are exempt from the suitability statement requirement but not from the disclosure requirements when penny stocks are being solicited. An established customer is someone who has held an account with the broker-dealer for at least one year (and has made a deposit of funds or securities); or has made at least three penny stock purchases of different issuers on different days.

Correct answer: Confirm that a margin account has been established

According to penny stock rules, registered representatives must provide disclosure information to all penny stock buyers which customers must sign. In addition, they must determine suitability based on financial information, investor experience, and objectives supplied by the buyer. Investors who are not considered established customers (new customers, as in this case) must sign a suitability statement as well. No rule prohibits penny stock purchases on margin, but there is no requirement that they be done in a margin account either.

Correct answer: Common shareholders only

One of the differences between common and preferred shareholders is that preferred shareholders generally have (with few rare exceptions) no voting rights.

Correct answer: Record date

Shareholders must be owners of the stock on or before the record date in order to receive the current dividend.

Correct answer: During the dissolution of corporate assets, common shareholders will be paid if there are any funds left after debtholders and preferred shareholders are paid.

A residual right means: During the dissolution of corporate assets, common shareholders will be paid if there are any funds left after debtholders and preferred shareholders are paid. They stand last in line. They are not paid on par with preferred shareholders, because preferred has priority over common. They are not paid on par with debtholders, because all creditors rank ahead of every equity holder. They are not ahead of subordinated debt either, since even subordinated creditors outrank stockholders.

Correct answer: The shareholder can vote by proxy.

When unable to attend, the shareholder can vote by proxy, authorizing another party to cast the votes, usually by mail or online. A stock power is a form that transfers ownership of shares, not voting authority; a broker may vote uninstructed street-name shares only on routine matters, not as the holder's own vote; and the transfer agent keeps ownership records but does not vote shares.

Correct answer: Annually

While a company can supply this information as often as they want to shareholders, it is only required that an audited report be received on an annual basis.

Correct answer: A say in the company's management but are not involved in the day-to-day details of its operations

By electing a BOD, stockholders have a say in the company's management but are not involved in the day-to-day details of its operations

Correct answer: An unlisted stock valued at less than $5 per share

A penny stock is an unlisted (not listed on a U.S. stock exchange) security offered at less than $5 per share.

Correct answer: The board of directors (BOD) but is not guaranteed

The decision to pay a dividend rests with the board of directors (BOD) but is not guaranteed; the board may declare, raise, cut, or skip it. Shareholders elect the board but do not vote on dividends, and neither the CEO nor the CFO declares dividends, even when cash allows.

Correct answer: Are solicited

Unsolicited transactions (those not recommended by the broker-dealer or registered representative) are exempt from the penny stock rules. Solicited transactions are nonexempt, and the rules therefore apply.

Correct answer: Carry no guarantee of payment in any amount

While the potential to share in the company's profits by receiving dividends is considered one of the benefits of equity ownership, one of the risks is the possibility of dividend income decreasing or ceasing entirely. Dividends are not guaranteed in any way.

Correct answer: Interest rate risk

Investors in common stock face market risk, in that the market value of the security may fall, and business difficulties may lead to possible reduction or elimination of the dividend—and even bankruptcy leading to loss of principal. If the firm is bankrupted, a company's debt and preferred shares are considered senior securities and will have residual rights to corporate assets upon dissolution prior to common shareholders. Interest rate risk applies to preferred shares, bonds, and other fixed-income securities, but common stock generally bears little risk due to fluctuations in interest rates.

Correct answer: Utility company stock

Utility company stock is the classic quarterly income holding, because operating utilities declare a cash dividend every three months. Investment grade corporate bonds and long municipal bonds both pay their coupon semiannually, so the income arrives twice a year rather than four times. Zero coupon Treasuries make no periodic payment at all; the whole return is collected in one sum at maturity.

Correct answer: Hold the rights for a possible long-term capital gain

A long-term capital gain would require a holding period of more than one year. Rights expire four–six weeks after issue, so this would not be possible.

Correct answer: Four years

The rule requires customer complaints to be kept on file for four years.

Correct answer: Restricted

Restricted securities are those acquired through some means other than a registered public offering. Securities purchased via a private placement are an example. These securities may not be sold (are restricted) until they have been held fully paid for six months.

Correct answer: The right to purchase shares in an amount that would keep a shareholder's proportionate ownership in the corporation unchanged when a company issues additional shares

A preemptive right is the right to purchase shares in an amount that would keep a shareholder's proportionate ownership in the corporation unchanged when a company issues additional shares. It is limited to a pro rata amount, not any quantity wanted at the prevailing market price; a vote to increase authorized shares is a separate voting right; and a long-dated fixed-price right attached to bonds or preferred describes a warrant.

Correct answer: Declaration date, ex-dividend date, record date, pay date

The declaration date is the day the board of directors meets to declare the dividend. The ex-dividend date is the first day that a purchaser of the stock is too late to get the dividend. The record date is the day the shareholder must be on the records of the company to receive the dividend, and the checks are mailed on the pay date.

Correct answer: Both Mr. and Mrs. Smith are considered control persons.

If a 10% or more interest is held by immediate family members, then all those family members owning voting stock are control persons. In this instance the combined ownership is more than 10% (2% + 9% = 11%).

Correct answer: Six months

Restricted securities may not be sold until they have been held fully paid for a period of six months. This applies to both affiliates and nonaffiliates, but affiliates would be subject to volume restrictions.

Correct answer: The investor is an established customer.

Established customers are exempt from the penny stock suitability statement requirement. An established customer is someone who has held an account with the broker-dealer for at least one year (and has made a deposit of funds or securities); or has made three purchases of qualifying penny stocks that occurred on separate days and involved different issuers. No one is exempt from the risk disclosure requirements.

Correct answer: Stock acquired in the OTC market by a corporate affiliate

The holding period rule applies only to unregistered stock, which may or may not be control stock. Unregistered stock results from either private placements or the exercise of a corporate stock option. Because this question asked which securities were not subject to the Rule 144 holding period, only stock acquired in the OTC market by a corporate affiliate is the correct answer. However, the affiliated person is subject to volume restrictions.

Correct answer: No holding period, but volume limits always apply

Control stock would be registered shares held by an affiliate. There is no holding period, but there will always be volume limits for as long as the individual is an affiliate.

Correct answer: At least three separate penny stock purchases

Under penny stock rules, investors are established customers if they have deposited funds or securities in an account for at least one year before the penny stock transaction, or have purchased at least three different penny stocks from the same broker-dealer.

Correct answer: Declared, increased, reduced, or suspended by the board of directors (BOD)

Common dividends may be declared, increased, reduced, or suspended at the discretion of the BOD. Shareholders have no vote on these dividend matters.

Correct answer: A warrant

A rights certificate is a very short-term security that grants the holder the right to buy the common stock of the company at a price lower than the current market price. A warrant is a long-term security that grants its owner the right to purchase securities from the issuer at a specified price that is higher than the current market price at the time the warrants are issued and at some point, in the future. Note that while the exercise price is higher than the current market value when the warrants are issued, it is hoped that the exercise price will be below current market value when the warrants are eventually exercised.

Correct answer: Rights are short term; warrants are long term.

The true statement is that rights are short term; warrants are long term. Rights usually expire within weeks, while warrants run for years. Warrants, not rights, are the sweeteners issued with new bonds, so the bond claim is reversed. Rights carry a subscription price below market, while warrants are issued with an exercise price above it, so the premium claim is also reversed. Rights are transferable and trade during the offering, so calling them non-tradable is wrong.

Correct answer: 2%.

The stated MAS preferred dividend is 4%, participating up to 6%. In this year, when it has been determined that they should receive the full participating dividend, they will receive the additional participating 2%.

Correct answer: Callable preferred

Callable preferred is a benefit to the issuer—not the investor—so callable has to pay a higher dividend than the others because the other features are neutral or benefit the investor.

Correct answer: American depositary receipts

American depositary receipts let a foreign issuer reach U.S. equity investors: the issuer's shares are deposited with a U.S. bank's foreign branch, which issues receipts that trade and settle in the United States in dollars. European depositary receipts are aimed at European investors, Japanese depositary receipts let foreign companies reach Japanese investors rather than the reverse, and global depositary notes are debt instruments, not equity.

Correct answer: Rights are short term; warrants are long term.

Stock rights, also known as preemptive rights or subscription rights, are issued to current stockholders in the event more stock is to be sold. This allows them to purchase the new stock at below the current market price for a period of four to six weeks before the stock is offered to the public. Hence, they are short term. Warrants may be issued at any time and allow the holder to purchase the stock at a price above the current market, for a period of typically two years or more. Hence, they are long term. The hope with warrants, of course, is that the market price will rise above the exercise price before the warrant expires.

Correct answer: Purchase 125 shares at double the discount

Stock rights can be exercised in whole or in part, sold in whole or in part, or allowed to expire, in any combination, so the investor may buy all 250 shares at the offered discount, sell some rights and let the rest expire, or purchase a few shares and let the rest expire. What the investor cannot do is purchase 125 shares at double the discount, because the subscription price is fixed by the offer and cannot be traded for a deeper discount on fewer shares.

Correct answer: No voting or preemptive rights

Preferred shareholders have no voting rights, nor do they have preemptive rights, which is the right to maintain the same percentage ownership in the corporation should additional shares be issued.

Correct answer: These securities are created to attract a U.S. investor base.

ADRs are a type of equity security designed to simplify foreign investing for Americans. An ADR is created when common shares are purchased in the foreign company's home market. These shares are then deposited in a foreign branch of a U.S. bank and a receipt (the ADR) is created. The ADR trades in the U.S and is denominated in U.S. currency making the process of buying a foreign stock much easier for an American investor. ADRs are subject to U.S. securities regulations.

Correct answer: Purchasing power risk

Remember that the fixed dividends received by preferred shareholders are a stated percentage of par value. Purchasing power risk is the possibility that the income produced via the fixed dividend received will not purchase as much in the future for preferred shareholders as it does today due to inflation.

Correct answer: Owners of preferred shares must be paid before any payment is made to common shareholders

When the BOD declares dividends, owners of preferred shares must be paid before any payment is made to common shareholders. This is known as the dividend preference allotted to preferred shareholders. There is no relationship between the amounts paid to preferred shareholders and common shareholders.

Correct answer: These dividends may be taxable by the foreign government and by the United States

A dividend on the underlying foreign share is usually reduced by a withholding tax imposed in the issuer's home country, and the same dividend is then reportable income here, so two taxing authorities can reach it. The amount withheld abroad is normally claimed as a credit against the U.S. liability, which relieves the double burden without cancelling either government's claim. A treaty may lower the foreign rate, but it does not make the dividend exempt and it does not remove the American tax.

Correct answer: Rights will be distributed to existing stockholders with an exercise price lower than the current market value.

Preemptive rights entitle existing common stockholders to maintain their proportionate ownership shares in a company by buying newly issued shares before the company offers them to the general public. They are offered with an exercise price lower than the current market value and are issued (typically) for a period of four to six weeks (30–45 days). Existing shareholders who receive rights have three options: they may be exercised, sold in the secondary market, or allowed to expire at the end of their subscription.

Correct answer: Adjustable rate preferred stock

An adjustable rate preferred resets its dividend as market interest rates move, so the payment rather than the price does the adjusting and the shares trade in a narrow range. Fully participating, straight noncumulative and callable cumulative preferreds all carry a dividend fixed in dollars, so the only way the market can reprice them for a new interest rate is by moving the share price itself.

Correct answer: Those persons who own 5% or more of the total beneficial interest of a company's common stock

Control securities are those owned by directors, officers, or persons (which include corporations, trusts, etc.) who own or control 10% or more of the issuer's equity securities. Those persons who own 5% or more of the total beneficial interest of a company's common stock are not deemed control persons under this rule.

Correct answer: Any shares sold will be subject to volume restrictions if still an affiliate

Although held fully paid for six months, the sales of these shares would be subject to volume restrictions for as long as this individual is an affiliate. If the individual was not an affiliate, the shares held fully paid for six months could now be sold completely unrestricted.

Correct answer: Foreign stocks in U.S. markets.

ADRs facilitate the trading of foreign stocks in U.S. markets.

Correct answer: Adjustable rate preferred stock

Because the dividend on an adjustable rate preferred is reset to current interest rates, it is the return that fluctuates rather than the price, and the shares stay unusually stable. A convertible junior preferred takes its price cue from the common stock, while cumulative callable and participating senior preferreds pay a stated fixed dividend, so a change in rates has to be absorbed through the market price.

Correct answer: Trades are executed domestically in U.S. dollars.

ADRs are often listed on a securities exchange such as the NYSE or Nasdaq and trade throughout the day. Trades in these securities are dollar denominated. ADRs trade and settle in the same fashion as a traditional U.S.-based common stock.

Correct answer: Fall

Because it pays a fixed dividend, preferred stock is interest-rate sensitive. As rates rise, prices of preferred stocks tend to fall and vice versa.

Correct answer: 1%

Rule 144 pertaining to the sale of restricted or control stock allows for the sale of 1% of the outstanding shares or the weekly average of the last four weeks' trading volume (whichever is greater), every 90 days.

Correct answer: Four times a year

Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks' trading volume with each Form 144 filing. The filing is good for 90 days (three months), which would allow for as many as four filings per year.

Correct answer: Subject to volume restrictions within any 90-day period

Rule 144 stipulates that after holding restricted stock fully paid for six months, an affiliate may begin selling shares but is subject to volume restrictions within any 90-day period.

Correct answer: Cumulative preferred stock

Cumulative preferred stock accrues payments due its shareholders that have been missed in the event dividends are reduced or suspended.

Correct answer: Common shareholders only

A preferred shareholder's priority standing is over common shareholders only. Every creditor ranks ahead of preferred stock in a liquidation, so the answer cannot include lenders: unsecured creditors and unsecured lenders, though junior to secured debt, are still paid before any shareholder, and an answer naming shareholders and lenders wrongly puts preferred stock ahead of debt.

Correct answer: Could receive an additional 2% over the stated 4% dividend if the board declares it

Preferred stock paying 4% and participating to 6% means the holder could receive an additional 2% over the stated 4% dividend if the board declares it. The stated rate is 4%, not 6%, so an extra 2% beyond 6% overstates the cap. An extra 6% confuses the 6% ceiling with the add-on. Arrears belong to cumulative preferred, not to the participating feature.

Correct answer: The board of directors (BOD)

The additional participating amount paid to participating preferred shareholders is declared by the board of directors (BOD), just as any dividend is. Neither a vote of the common holders nor a vote of preferred holders decides it, and the issuer's CEO and its CFO manage the company but cannot declare dividends.

Correct answer: The order in which preferred shareholders are paid in the event of a bankruptcy liquidation

Priority at dissolution refers to the priority that preferred stockholders have over the claims of common stockholders on any assets remaining after creditors have been paid when assets are being liquidated.

Correct answer: Convertible

Fixed-dollar investments, such as bonds and preferred stock, are subject to inflation risk, which is the risk that the fixed interest or dividend payments will be worth less over time in terms of purchasing power. The ability to convert to common stock, which tends to keep pace with inflation, offsets this risk.

Correct answer: 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.

Correct answer: The profit is taxed as a capital gain payable to the United States alone

Buying an ADR at one price and selling it higher produces a capital gain, and a capital gain on an ADR is taxable only in the United States; the issuer's home country does not reach the trading profit. Ordinary income treatment is wrong because the security was bought and sold rather than held for a payment. Foreign withholding and the credit that offsets it belong to dividends paid on an ADR, not to the gain realized on the sale.

Correct answer: Common shares

Which of the following securities is the underlying asset used to create an American depositary receipt (ADR)?

Correct answer: $24

If the company is going to pay a common stock dividend, it must pay the preferred dividends first, including all dividends in arrears (missed). There are $16 due in back dividends for the two years missed, in addition to $8 this year, for a total of $24.

Correct answer: Participating

In addition to the fixed stated dividend, participating preferred stock offers its owners the possibility of receiving a share of corporate profits that remain after all dividends and interest due other securities are paid.

Correct answer: $2.40.

For preferred shares, the annual dividend is stated as a percentage of par. In this case, 4% of par value of $60 equals $2.40.

Correct answer: Currency risk is still a factor when purchasing an ADR.

ADRs are issued and pay dividends in U.S. dollars eliminating the complications of currency conversion. However, ADRs are still subject to currency risk. Why? The company pays dividends in its home currency, and the issuing bank pays out those dividends in U.S. dollars. When the exchange rate changes, the amount these dividends (in U.S. dollar terms) will fluctuate as well. Also, the value of the ADR itself will rise and fall with the value of the underlying foreign stock which is partially due to currency swings.

Correct answer: The Treasury bill (T-bill) rate

The dividend on an adjustable-rate preferred stock is tied to a particular benchmark interest rate, and the Treasury bill rate is a common benchmark. The CPI, the PPI, and the DJIA are not interest rates.

Correct answer: Characteristics of both equity and debt securities

Preferred shares are equity securities, but not only do they have the characteristics of equity securities, they share some of the characteristics of debt securities as well. The most notable characteristic is that a preferred stock's annual dividend represents its fixed rate of return, like the fixed rate of return for a bond (debt security).

Correct answer: The 7% shares are likely to be called.

With benchmark rates near 3%, the 7% shares are likely to be called, because the issuer can retire the costly 7% issue and refinance with preferred paying a lower rate. A fixed-rate preferred dividend cannot simply be cut to 3%; the issuer's remedy is the call. Only adjustable-rate preferred floats with benchmark rates, and these shares pay a fixed 7%. Holders would not put back a security paying well above market, and nothing says these shares carry a put.

Correct answer: Dividend payments will cease on the call date

When a corporation calls in preferred shares, the shares stop trading and dividend payments cease on the call date.

Correct answer: All must have preference over the issuer's common stock

Whatever their differences, all must have preference over the issuer's common stock for dividends and for assets in a liquidation. Series need not rank at parity with the issuer's other series, since senior and junior preferred are common; cumulative features vary by series; and par or liquidation values such as $25 and $100 differ from series to series.

Correct answer: Par value

A preferred stock dividend is stated as a percentage of its par value, which is assumed as $100 for preferred shares, unless it has been stated differently.

Correct answer: A premium

A bond purchased at a premium will have a current yield below the coupon rate.

Correct answer: I and II

Costs to maintain shareholder records, costs to provide services to shareholders, and the investment adviser's fees are all expenses to the fund. The costs paid in the form of sales charges (loads) to an underwriter or broker-dealers selling mutual funds to the public may never be treated as an expense to the fund. They are expenses to the investor.

Correct answer: Both must pay principal as it comes due.

All bonds must pay principal when due. Income bonds, however, are not required to pay interest when due unless the earnings of the issuer are deemed to be sufficient and the board of directors (BOD) declares that interest payments be made.

Correct answer: Equity securities represent ownership in an issuing company.

Equity securities represent ownership in an issuing company. Convertible bonds are debt until the holder actually converts them into stock, long call options are derivatives that give only the right to buy shares, and attached warrants likewise give only a right to buy stock later, so none of these three represents ownership until shares are acquired.

Correct answer: By telephone call or by mobile text message

A common shareholder may vote by appearing at the meeting and voting the shares in person, or may vote in absentia by returning a proxy. The proxy itself can reach the company on paper through the mail or electronically through an online submission, and either delivery produces a valid vote. What the shareholder cannot do is substitute an informal message for the proxy, so placing a telephone call or sending a text message in place of the proxy is not one of the ways the vote may be cast.

Correct answer: To declare dividends

Common shareholders do not have the right to declare dividends; that is a decision of the board of directors (BOD). Shareholders do have the right to inspect the books and records, to sell their shares freely, and to vote their shares, in person or by proxy, for directors and major corporate matters.

Correct answer: A board of directors (BOD) elected by shareholders

A company's business operations are overseen by a board of directors (BOD) elected by shareholders. Corporate officers run day-to-day operations but are appointed by the board, not elected by shareholders or selected by bondholders, who are creditors with no vote. A board of trustees elected by preferred holders describes no standard corporate structure; preferred stock usually carries no voting rights.

Correct answer: Maintain their proportionate ownership in the corporation

In the event a corporation wants to issue additional shares of stock, the preemptive right given to existing shareholders allows the shareholders to maintain their proportionate ownership in the corporation by purchasing shares before the shares are available to new investors.

Correct answer: Entitlement to receive profits through dividends when distributed and the right to vote for who will serve on the board of directors (BOD)

Each share of stock entitles its owner to a portion of the company's earnings through dividends when distributed and a proportionate vote in major management decisions such as electing individuals to the BOD.

Correct answer: Stockholders may never be part of the management of the company

While stockholders have a voice in how the company is run, that voice is exercised through their vote for those who serve on the board of directors. Essentially, by electing a board of directors, stockholders have a say in the company's management but are not involved in the day-to-day details of its operations. However, there is no prohibition preventing a manager or director from owning stock in the company; their position is not directly related to their ownership of company stock.

Correct answer: Offer a warrant on the stock with each bond

Warrants are sometimes offered as sweeteners attached to bond issues to improve the marketability of bond. Rights offerings and stock dividends do not apply in this case, and selling the bonds at a discount would be self-defeating because the issuer wouldn't be able to raise the needed capital.

Correct answer: 25 shares

Stock rights (also known as preemptive rights or subscription rights) give current shareholders the ability to preemptively purchase enough shares to maintain their proportionate ownership of the corporation. This prevents their dividend and voting power from being diluted. The shares outstanding in this case will go from 1,000,000 to 1,250,000. This investor must thus go from owning 100 shares out of 1,000,000 to 125 shares out of 1,250,000. This would require that the investor be able to purchase an additional 25 shares.

Correct answer: Replace a higher, fixed-rate issue with a lower issue after the call date

By issuing a callable preferred stock, a corporation can call in a high dividend payment issue and replace it with a lower one when interest rates have fallen. This feature allows the company to take advantage of reduced interest rates by calling in high-rate preferred issues and replacing them with lower ones.

Correct answer: This is a 3.5% preferred class

An annual dividend of $3.50 simply tells you that this is a 3.5% preferred class of stock ($3.5\% \times$par ($100) $=$$3.50) or ($3.50 $\div$par ($100) $= 0.035$). The current market value is not used to calculate the fixed dividend, nor does this dividend amount tell us what common shareholders received.

Correct answer: Diversification

ADRs are a type of equity security designed to simplify foreign investing for Americans. ADRs provide Americans with an easy way to invest in foreign companies that might otherwise be difficult or impossible to own. This overseas exposure provides investors with additional diversification within their portfolio.

Correct answer: Could receive an additional 3% over the stated 3% dividend if the board declares it

If a preferred stock is described as 3% preferred participating to 6%, the company pays its holders up to 3% in additional dividends in profitable years if the board of directors declares it.

Correct answer: $4.00.

With noncumulative preferred stock, missed or skipped dividends need not be paid or made up. However, in order to pay common shareholders in any year, preferred shareholders must receive their full dividend for that year. While it can be paid in one annual payment, quarterly, or however the board approves it to be paid, the total in this case would be $4.00. $4\% \times$$100 par value $=$$4.00.

Correct answer: ADR

An ADR, or American depositary receipt, gives U.S. investors exposure to a foreign issuer's common stock, trading in the United States in dollars. A GDR is a global depositary receipt offered mainly in markets outside the United States, an EDR is a European depositary receipt aimed at European investors, and a CDR is a Canadian depositary receipt for Canadian investors.

Correct answer: Callable

The issuer can pay off callable preferred at any time after the call protection period, and dividends will cease.

Correct answer: Par value or higher

In return for the call privilege, the corporation may pay a premium exceeding the stock's par value at the time of the call. It's reasonable that a shareholder would expect to receive at least par value or higher in the event of a call.

Correct answer: A corporation issuing common shares must issue at least one class of preferred shares

No corporation is required to issue any class of preferred stock. Preferred shareholders have no voting rights or preemptive rights but are paid before common shareholders in the event of a corporate dissolution.

Correct answer: Convertible

Convertible preferred shares can be converted into shares of the issuer's common stock. In this light, the value of a convertible preferred stock is linked to the value of the common stock and the convertible preferred share price tends to fluctuate in line with the common.

Correct answer: Pays past and current preferred dividends before paying dividends on common stock

Dividends in arrears (those missed) on cumulative preferred have the highest priority of dividends to be paid. Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Bond interest, however, is always paid before any dividends, preferred or common.

Correct answer: ADR pricing is dollar-based and fluctuates throughout the day.

Many ADRs are listed on exchanges such as the NYSE or Nasdaq. ADRs trade throughout the day and settle in the same manner as would the shares of a U.S.-based company. ADRs are priced in U.S. dollars.

Correct answer: Callable

With callable preferred stock, to compensate for the possibility that the shares may be called, the issuer pays a higher dividend than with straight preferred. Cumulative and convertible preferred have positive characteristics that would justify a lower fixed dividend than straight.

Correct answer: Less than that of the issuer's common shares

While the growth potential of both common and preferred shares can be tied to a company's financial well-being, preferred share growth is generally less than that of the common shares. The trade-off is that the preferred shares have preference with dividends received, enjoy a fixed rate of return via those dividends, and have a priority claim over common shareholders in the event of bankruptcy and the dissolution of assets.

Correct answer: When interest rates rise, the prices for preferred shares can fall

Preferred shares, like debt securities, are sensitive to and have an inverse relationship to interest rates. Rates up, prices down. Rates down, prices up.

Correct answer: Accumulate on the company's books until paid

Past-due dividends on cumulative preferred shares accumulate on the company's books until paid, and all arrears must be paid before common holders receive anything. Lapsing at year-end or expiring unless paid that year describes noncumulative preferred, and arrears are not a legal debt like bond interest, since the board is never obligated to declare them.

Correct answer: Adjustable preferred stock

The dividend on an adjustable preferred is pegged to a benchmark such as a Treasury yield and is reset periodically, so a rising rate environment feeds straight into a higher annual payment. The other features do not respond to rates that way. A callable preferred pays a fixed dividend and is most likely to be called away when rates fall, which works against the holder rather than for him. A convertible preferred pays a fixed dividend and takes its extra value from the common stock behind it. A participating preferred pays more only when company earnings are strong enough to share.

Correct answer: The price of the bond move higher

Prices of bonds trading in the secondary market have an inverse relationship to interest rates. As interest rates rise in the marketplace, the prices of bonds trading in the secondary market will fall, and as interest rates fall in the marketplace, the prices of bonds trading in the secondary market will rise. Once the coupon rate is established by the issuer, it remains unchanged throughout the life of the bond.

Correct answer: A borrower's position

Issuers of bonds are borrowing money from the purchaser of the bond.

Correct answer: A premium

A bond priced at $1,200 against $1,000 par is trading above par, which is called trading at a premium. Below par describes a discount bond, the reverse of this case. At parity is a convertible-bond term for a bond worth exactly its conversion value, and a markup is the dealer's charge over its cost, not the bond's position against par.

Correct answer: Its market price

The CY measures a bond's annual coupon payment (interest) relative to its market price, as shown in the following equation: $\text{annual coupon payment} \div \text{market price} = \text{current yield}$.

Correct answer: 5.6%.

Current yield is determined by dividing annual interest (coupon) payment by the current market price of the bond ($50 $\div$ $900 $= 5.6\%$). Years to maturity is not a factor in calculating current yield.

Correct answer: Stated, nominal, and coupon yields

The interest rate the issuer has agreed to pay the investor is the coupon yield. The coupon yield is also called the stated or nominal yield.

Correct answer: Stock dividends

A stock dividend is payment of additional shares of the issuer to the stockholder rather than payment of cash. The price of the stock is adjusted so that the total value of the outstanding stock is the same before and after the dividend is paid. Stock dividends are thus not taxable.

Correct answer: The annual income divided by the market price

Current yield equals the coupon rate (annual income) divided by the current market price. This is a very common formula on the test.

Correct answer: 20%

The formula for total return is dividends plus capital gains divided by amount invested.

Correct answer: A $25 capital loss

The investor paid $950 and sold for $925, so the result is a $25 capital loss. Measuring from the $1,000 par value gives a mistaken $75 figure, whether labeled a capital loss or a nominal loss; netting the coupons against the price drop gives total return, not a $95 nominal gain.

Correct answer: 5%.

The formula for current yield is the stated rate (coupon rate) divided by the current market price. $60 $\div$ $1,200 $= 5\%$.

Correct answer: At a discount from par value

Current yield is the annual coupon divided by the price paid, so the price is what moves the yield away from the coupon rate. A four percent coupon throwing off a five percent current yield means the buyer paid less than par for that stream of interest, and a price below par is a discount. A price above par would push the current yield below the four percent coupon, so a premium gives the opposite result. A bond bought at par yields exactly its coupon rate, and the accrued interest added at settlement is a separate adjustment that does not change that relationship.

Correct answer: Nothing; it does not change.

The coupon rate (the fixed rate, the nominal rate, the stated rate) is fixed when the bond is issued and does not change.

Correct answer: A term bond

With a term bond, the entire offer matures at the same time. A serial bond has portions maturing over a period of years. A balloon is a hybrid of a term and a serial maturity. Series is not a type of bond maturity.

Correct answer: Yield to call, yield to maturity, current yield, nominal yield

The order from low to high is yield to call, yield to maturity, current yield, nominal yield.

Correct answer: Bond prices have an inverse relationship to interest rates.

Bond prices have an inverse relationship to interest rates: when rates rise, outstanding bond prices fall, and when rates fall, prices rise. Coupons on existing fixed-rate issues do not reset. Bond yields move in the same direction as market rates, not opposite to them. Face value, or par, is fixed for the life of the bond and does not move in step with prevailing market rates.

Correct answer: Term, serial, or balloon maturities

The three types of maturities that bonds can typically be issued with are term, serial, or balloon maturities. Note that there is no series maturity type.

Correct answer: The call feature benefits the issuer; the put feature benefits the investor.

The call feature allows the issuer to call in old bonds at a high rate of interest and then issue new bonds at a lower rate, similar to refinancing a high interest rate loan. The put feature allows the investor to sell the bond back to the issuer at par when the bond market value has declined, thus avoiding a loss.

Correct answer: The price of the issuer's stock

Bond prices can be impacted by the usual market forces that impact securities in general, such as supply and demand. Additionally bond prices, they have an inverse relationship to interest rates.

Correct answer: At a discount

Bonds are redeemed at par. When a bond is purchased at a discount (less than will be received at the time the bond matures), that discounted amount will increase the overall return of the bond, making it greater than the coupon rate. If the discount bond is called before it matures, the increased return due to the discount purchase would still occur but would now be accelerated.

Correct answer: Can be any length of time

While 5- to 30-year maturities are common, the length of time to maturity can be shorter or longer.

Correct answer: Term

Term bonds are structured so that the principal of the entire issue is all payable on the same date—the maturity date.

Correct answer: The number of bonds issued

Yield expresses the interest a bond pays in relation to what it costs, so anything that moves the price or the perceived risk moves the yield. Prevailing rates set the return available on competing bonds and reprice every existing bond against them. The issuer's rating measures default risk, and weaker credit has to pay more. Time left to maturity pulls the price toward par as redemption approaches. How many bonds the issuer chose to sell reflects how much capital it needed on the day of the offering, and that decision does not itself set the return the bond pays.

Correct answer: A bond

A bond is best described as a certificate stating a borrower's obligation to pay back a specific amount of money on a specific date to an investor. A bond certificate also states the borrower's obligation to pay the investor a specific rate of interest for the use of the funds.

Correct answer: The interest rate the issuer has agreed to pay the investor

The coupon rate, or nominal yield, is the interest rate the issuer has agreed to pay the investor, fixed when the bond is issued. Annual interest divided by market price is current yield. The rate of return earned if one holds the bond to maturity is yield to maturity. The market yield investors now demand on a similar bond changes daily and does not alter the coupon.

Correct answer: Maturity

The features most commonly attached to a bond issue would be having the bond be callable, puttable ( a bond with a put feature), or convertible. Each of these features in its own way might make the issue more attractive to an investor. All bonds have a stated maturity, and as such, this would not be considered an additional feature.

Correct answer: Yield to maturity will be less than the call yield

A bond bought below par returns the discount to the holder along with the coupon, and the sooner the bond is redeemed the faster that discount is earned. A call shortens the period over which the same discount is collected and so raises the annualized return, which makes yield to call the highest yield on a discount bond. Yield to maturity sits below it, and both sit above the current yield, which in turn sits above the coupon. The two yields are equal only for a bond trading at par, where there is no discount to accelerate.

Correct answer: Priority at liquidation and payment of dividends

The two benefits preferred holds over common are priority at liquidation and payment of dividends: preferred is paid ahead of common in both cases. Preferred never has priority over bondholders, because all creditors rank ahead of equity; preferred dividends are not promised or guaranteed; and preferred normally carries less board voting power than common, not more.

Correct answer: The stated or nominal yield

The coupon rate is also called the stated or nominal yield. It is the rate of interest the issuer has agreed to pay the investor for use of the funds loaned to the issuer.

Correct answer: Current yield (CY) equals yield to call (YTC).

For any bond priced at par, all of the yields are equal; nominal = CY = YTM = YTC if callable.

Correct answer: Coupon payment divided by the current market price

Current yield asks what the bond pays now in relation to what it costs now, so the numerator is the annual coupon payment and the denominator is the current market price. Dividing that same coupon by the stated nominal, or par, value instead produces the nominal or coupon yield, a fixed figure that never changes once the bond is issued and that ignores what the buyer actually paid. Yield to maturity is already a yield rather than a cash payment, so it cannot serve as a numerator, and dividing one yield by a price or by par gives a figure with no meaning.

Correct answer: Portions of bond principal scheduled to mature at intervals over a period of years until the entire balance has been repaid

A serial bond issue schedules portions of the principal to mature at intervals over a period of years until the entire balance has been repaid.

Correct answer: Debentures

Debentures are unsecured. Mortgage bonds are backed by property. Equipment trust certificates are backed by equipment. Collateral trust certificates are backed by securities.

Correct answer: Face value or the amount a bond will be redeemed for at maturity

Par value (usually $1,000) is the face value of a bond or the amount a bond will be redeemed for by the investor at maturity.

Correct answer: A specific rate of return the borrower pays the investor for use of the funds

Interest is the rate of return above the principal sum received by a lender (investor) from a borrower. Interest is rate of return the investor receives for use of the funds over the life of the loan.

Correct answer: The maturity date

The date that the principal amount of a loan is due to be paid back to an investor is known as the maturity date.

Correct answer: Par value, usually $1,000 for a bond

The coupon rate on a bond is calculated as a percentage of par value. While par value can be any amount the issuer determines it to be, it is usually $1,000 for bonds and should be assumed to be so, unless it is indicated otherwise.

Correct answer: Less than the coupon

When a bond purchased at a premium (105) is called before it matures, the accelerated premium loss is reflected in the calculated yield to call (YTC). In this light, remember that the YTC is always the lowest of all possible yields for premium bonds, less than the coupon, CY, and YTM.

Correct answer: 6.55%

For a bond trading at a premium (102), the ranking of yields from lowest to highest is yield to call (YTC), YTM, current yield, and nominal yield. Therefore, the YTM for this bond must be less than the nominal yield of 7%.

Correct answer: 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.

Correct answer: The major portion of the principal debt is paid on the final maturity date

With a balloon maturity, the issuer repays part of the bond's principal before the final maturity date over scheduled serial maturity dates, but pays off the major portion of the bond principal on the final maturity date.

Correct answer: Its market price

The CY measures a bond's annual coupon payment (interest) relative to its market price, as shown in the following equation: $\text{annual coupon payment} \div \text{market price} = \text{current yield}$.

Correct answer: Inverse

As interest rates (yields) increase, the price of outstanding debt decreases and vice versa. The resulting relationship is called an inverse relationship.

Correct answer: $17.50

A bond with a nominal yield of 3.5% pays $35 in interest annually ($3.5\% \times$$1,000 par value). Given the bond makes semiannual interest payments, each of those payments would be in the amount of $17.50.

Correct answer: Higher than the coupon rate

The coupon rate, the stated rate, the fixed rate, and the nominal rate all mean the same thing. It is the amount the bond will pay each year. On a discount bond the current yield is always higher than the coupon rate.

Correct answer: 5%.

The formula for current yield is the stated rate (coupon rate) divided by the current market price: $40 $\div$ $800, which in this case equals 5%.

Correct answer: $20 cost base, $8 capital gain.

On a per-share basis the investor reports a $20 cost base, $8 capital gain: the $20 purchase price is the basis, and $28 minus $20 is the gain. The $2,000 paid and the $2,800 sale with an $800 gain are the totals for all 100 shares, not per-share figures, and treating the $28 sale price as the basis wrongly produces no gain at all.

Correct answer: Lower than the coupon rate

When a bond trades at a premium (above par), its current yield is lower than the coupon rate, because the fixed annual coupon is divided by a market price higher than $1,000 par.

Correct answer: Russell 2000® Index

The Russell tracks 2,000 small company stocks.

Correct answer: Bonus received from employment

A bonus received from employment is earned income because it is paid for work performed. A pension or an annuity from a former employer is retirement income rather than pay for current work, and benefits paid for unemployment replace wages but are not earned income, so none of the three counts as earned income.

Correct answer: Running a business

Running a business produces earned income, not investment income, so it is the exception. Owning a bond fund pays interest distributions, owning REIT shares pays dividends, and selling at a gain produces a capital gain; all three are forms of investment income.

Correct answer: Capital gains and income

Upon the purchase of a security, the investors may receive dividends or interest, which are forms of income, or they may sell the security for a different price than was paid for it, which represents a capital gain or loss.

Correct answer: The Standard & Poor's 500 Composite Index

The Standard and Poor's 500 tracks five hundred of the largest domestic companies weighted by market value, which is why it is quoted as the benchmark for large-capitalization stocks. The Russell 2000 is drawn from the smaller end of the Russell universe and serves as a small-capitalization measure. The Wilshire 5000 is a total-market index built to capture the whole investable domestic equity market rather than one capitalization band. The Dow Jones utility average follows a narrow group of utility issues and measures a single sector instead of the broad large-cap market.

Correct answer: They track single stocks rather than hypothetical portfolios

Indexes such as the DJIA or the S&P 500 are hypothetical portfolios, not single stocks. While there's no single standard or benchmark, an index can be used as a performance standard one can monitor and therefore judge the performance of a portfolio or investment against. When we refer to the stock market's performance in general, we are most likely referring to the performance of an index or average that tracks stocks or bonds. These benchmarks can serve as an indicator of the overall direction of the market as a whole, or the direction of individual market sectors.

Correct answer: Dividends earned on mutual funds

Earned income includes wages, salary, tips, bonuses, and income from active participation in a trade or business.

Correct answer: 5%

Current yield is defined as the annual income (or coupon rate) from a bond divided by the bond's current market price ($60 $\div$ $1,200 $= 0.05$ or 5%). Accordingly, the current yield (5%) is lower than the coupon rate (6%) because the bond is trading at a premium.

Correct answer: $67.25

The breakeven for a put, whether bought or written, is the strike price minus the premium: 70 − 2.75 = $67.25. Above that price the premium received covers any loss on assignment, and below it the writer loses money. $72.75 adds the premium to the strike, which is the call formula, and the current price of 71 is irrelevant to breakeven, so $68.25 is wrong.

Correct answer: $800

An option buyer can never lose more than the premium paid, so the maximum loss is 4 × 100 × 2 contracts = $800. $400 is the loss on only one contract, and $6,200 is the maximum gain, (35 − 4) × 100 × 2, reached if the stock falls to zero. $7,000 treats the full exercise price as money at risk, which is a put writer's exposure, not a buyer's.

Correct answer: A GHI 55 put

A put is in the money when the market price is below the strike, and its intrinsic value is strike minus market: 55 − 52 = $3, so the GHI 55 put has $3 of intrinsic value. The GHI 49 put is out of the money because the stock is above 49, even though the two prices are $3 apart. The GHI 55 call is out of the money, and the GHI 50 call has $2 of intrinsic value.

Correct answer: Buy 1 KLM 40 call

A short seller loses money as the stock rises, so buying a KLM 40 call locks in the right to buy the shares back at $40 and caps the loss. Buying a put is the hedge for a long stock position and adds even more bearish exposure here. Writing a put against a short position only brings in premium and gives no protection against a rally.

Correct answer: The index call settles in cash and the stock call in shares

Index options are settled in cash, with the writer paying the difference between the index value and the strike, because the underlying index cannot be delivered. Equity options settle by physical delivery of 100 shares per contract, with the stock purchase settling T+1 after exercise. Assuming both deliver shares is the most common error, carried over from equity options.

Correct answer: ODD at or before approval; signed agreement within 15 days after approval

FINRA Rule 2360 requires the ODD to be delivered at or before the time the account is approved for options trading, and the signed options agreement to be obtained within 15 days after approval. Reversing the two deadlines is the most common error. The customer may trade before the signed agreement comes back, so the agreement is not a precondition for the first trade.

Correct answer: $900

In a covered call the most the investor can make is the stock's rise to the strike plus the premium kept: ($55 - $48) + $2 = $9 a share, or $900. Above $55 the shares are called away, which is why a covered call caps upside in exchange for income. $700 forgets the $2 premium, $500 subtracts the premium as if it had been paid rather than received, and $200 counts only the premium.

Correct answer: $24.40

Because the sales charge is a percentage of the POP, the POP equals NAV divided by (1 - sales charge %): $23.00 / 0.9425 = $24.40. Adding 5.75% of the NAV ($23.00 x 1.0575 = $24.32) understates it, because it computes the charge on NAV instead of on the offering price. Prices below $23.00 come from subtracting or dividing out the charge, but a buyer always pays more than NAV.

Correct answer: The fund collects the higher sales charge owed, usually from escrowed shares

A letter of intent lets an investor pay the breakpoint rate up front, and the fund holds some shares in escrow; if the full amount is not invested in time, the fund retroactively collects the correct, higher sales charge, typically by redeeming escrowed shares. The letter is not binding in the sense that the investor need not keep buying, but that does not let the investor keep a discount that was never earned. The 90-day figure is the usual backdating window at the start of a letter, not an extension at the end.

Correct answer: Breakpoint selling

Splitting a purchase so the client stays below a sales-charge discount level is breakpoint selling, which FINRA prohibits; $52,000 in one family would have earned the 3.50% rate. It is not switching, because switching means selling one fund to buy another in a different family, and nothing is being sold here. Selling dividends is urging a purchase just before a distribution, and churning is excessive trading.

Correct answer: Class A, as its reduced front-end charge is paid once while C's 1% fee is yearly

For a large, long-term purchase, Class A is usually cheapest: the $60,000 qualifies for a reduced front-end load, and its 12b-1 fee is low for the whole holding period. Class C's roughly 1% annual fee is charged every year, so over 20 years it costs far more than a one-time discounted load. Class B offers no breakpoint discounts and carries a higher 12b-1 fee until it converts, so it is generally unsuitable at this size.

Correct answer: All $20,000 is ordinary income, plus a 10% penalty

Withdrawals from a non-annuitized contract come out of earnings first, and here there is $30,000 of gain, so all $20,000 is ordinary income, plus a 10% penalty because the owner is under 59½. Annuity gains are never capital gains, however long the contract is held. Basis-first treatment, and the pro-rata split that gives $6,667, apply only in other situations: basis first is how Roth IRA contributions come back, and a pro-rata exclusion ratio applies once payments are annuitized.

Correct answer: The grandmother may switch the beneficiary to his sister with no federal tax

The account owner, not the beneficiary, controls a 529, so the grandmother may switch the beneficiary to his sister with no federal tax because a sibling is a member of the beneficiary's family. The grandson has no power to change the beneficiary, whether to a sibling or to a friend, and a friend would not qualify as family anyway. A 529 does not pass to the beneficiary at the age of majority the way an UTMA or UGMA custodial account does.

Correct answer: A Coverdell education savings account

A Coverdell education savings account is a trust or custodial account opened at a bank or brokerage, not an interest issued by a state, so it is not a municipal fund security. Local government investment pools, state ABLE programs and 529 college savings plans, whether direct-sold or adviser-sold, are all municipal fund securities under MSRB rules. Candidates often lump Coverdells in with 529s because both are education savings vehicles.

Correct answer: They aren't deductible on the federal return, though some states allow one

They aren't deductible on the federal return, though some states allow one, usually only for contributions to the state's own plan. The annual gift tax exclusion limits contributions that avoid gift tax and has nothing to do with deductibility. Saying no return allows a deduction ignores the many state deductions, even though the point that growth is tax-deferred is correct.

Correct answer: It flows through to the investor and can offset other passive income

A DPP pays no entity-level tax, so it flows through to the investor and can offset other passive income, because a limited partnership interest is a passive activity. It cannot offset wages or salary, which is the half-right answer that ignores the passive activity rules. The loss does not stay inside the partnership like a corporate net operating loss, and it is not used up against the general partner's fees.

Correct answer: A tenants-in-common (TIC) interest

A tenants-in-common (TIC) interest is an undivided fractional ownership of the real estate itself, held on the deed, so it can be like-kind replacement property in a Section 1031 exchange. A real estate limited partnership unit is an interest in a partnership, not in real property, so it does not qualify even though the partnership owns real estate. REIT shares, listed or non-traded, are securities of a trust, not real property, and cannot complete a 1031 exchange.

Correct answer: REIT Y is likely to fall more, since its income comes from fixed loan payments

As a mortgage REIT, REIT Y is likely to fall more, since its income comes from fixed loan payments, which are now set below the new market rates, so its assets lose value like bonds. Mortgage REITs are generally more rate-sensitive than equity REITs, and lending new money at higher fixed rates does not offset the drop in value of the existing loan book. Equity REIT X can raise rents only as leases renew, so a sharp rate rise does not lift its price, but its rental income is not locked in at below-market rates the way a fixed loan book is, so it is not the one hit harder.

Correct answer: An interest in a property partnership

Only an interest in a property partnership, a direct participation program, passes depreciation and other losses through to investors for use against passive income. A REIT passes through income but not losses. Its losses stay inside the trust, whether it is non-traded or listed, or holds property or mortgages. A real estate mutual fund is a registered investment company and cannot pass losses through to shareholders either.

Correct answer: Higher up-front fees and a value estimated periodically

A registered non-listed REIT typically carries higher up-front fees and a value estimated periodically: selling commissions and offering costs come out of the purchase, and because the shares do not trade there is no market price. FINRA rules require broker-dealers to show a per-share estimated value at least annually. The tempting lower-fee option assumes that no exchange means no commission, but listed REIT shares are bought at market with ordinary brokerage costs.

Correct answer: holds real estate loans, so its share price is more sensitive to interest rates

A mortgage REIT holds real estate loans, so its share price is more sensitive to interest rates than an equity REIT's: it earns interest, while an equity REIT owns property and earns rent. Neither kind of REIT can pass losses through to investors; that is a feature of direct participation programs, not REITs. Owning buildings describes an equity REIT, and every REIT must distribute at least 90% of taxable income, with most of its dividends taxed as ordinary income rather than qualified dividends.

Correct answer: A single customer with $225,000 of income in each of the last two years, expecting the same

A single customer with $225,000 of income in each of the last two years, expecting the same, meets the individual income test of more than $200,000 in each of the two most recent years with a reasonable expectation of the same this year. The $1.4 million net worth falls to $700,000 once the primary residence is excluded, below the $1 million test, and $90,000 of income does not help. The couple's $260,000 is under the $300,000 joint-income test, and the customer who now expects only $150,000 fails because the income must be expected to continue in the current year.

Correct answer: sells its interests privately to a limited number of qualified buyers

A hedge fund avoids registration because it sells its interests privately to a limited number of qualified buyers, relying on the private-fund exclusions in Section 3(c)(1) (100 or fewer beneficial owners, no public offering) or 3(c)(7) (qualified purchasers only, no public offering) of the Investment Company Act. Being a limited partnership or LLC owned by its investors is a common hedge fund structure, but legal form does not create the exclusion. Leverage, short selling and performance fees are typical hedge fund features, but they are results of being unregistered, not the reason the fund need not register.

Correct answer: The bid-ask spread on each purchase or sale of shares

The ETF investor pays the bid-ask spread on each purchase or sale of shares, because ETF shares trade on an exchange rather than being bought from and redeemed by the fund. Both funds deduct an annual expense ratio, which includes the adviser's management fee, though the ETF's is often lower. A sales charge built into the public offering price is a mutual fund load; ETFs do not charge one, and a no-load fund does not either.

Correct answer: a loss of 4%

The ETF ends with a loss of 4%: it gains 20% on Monday (100 to 120) and loses 20% on Tuesday (120 to 96). The index itself loses only 1% (100 to 110 to 99), so doubling the index's two-day result to a 2% loss is wrong because the fund resets daily and compounds. Adding plus 20% and minus 20% to get no net change ignores that Tuesday's loss is taken on a larger balance.

Correct answer: A 25-year zero-coupon bond rated AA

Interest-rate risk is greatest for bonds with long maturities and low coupons, so the 25-year zero-coupon bond rated AA, which pays everything at the end, moves the most when rates change. A lower BB rating adds credit risk, not interest-rate sensitivity, and a 5-year zero matures too soon to swing as much.

Correct answer: Reinvestment risk

A zero-coupon security makes no interim payments, so there are no coupons to reinvest at uncertain future rates; the STRIPS avoids reinvestment risk. It does not avoid interest-rate risk, since a long zero is actually the more rate-sensitive of the two, and both carry purchasing-power risk while neither carries meaningful default risk as Treasuries.

Correct answer: Reinvestment risk, as an early call returns cash that earns closer to 4%

When rates fall well below a callable bond's coupon, the issuer is likely to call it and refinance, leaving the holder with reinvestment risk: the cash returned can only earn closer to 4%. Interest-rate risk works the other way here, because falling rates push bond prices up, and extension risk is the rising-rate problem in which repayment comes later than expected.

Correct answer: Extension risk, as homeowners pay more slowly and principal comes later

When rates rise, homeowners stop refinancing and prepayments slow, so principal returns later than expected and the investor is stuck longer at a below-market rate: extension risk. Prepayment risk and the reinvestment risk that follows from it are the falling-rate problems, and the agency backing limits default risk.

Correct answer: Holding it as a small slice of a broadly diversified portfolio

A single-company setback is nonsystematic risk, which diversification reduces by keeping any one stock a small slice of the portfolio. Index puts are a hedge against a broad market decline and pay nothing when the market is flat, and a low beta measures market sensitivity, not exposure to a company-specific event.

Correct answer: $24,000

Stocks grow from $120,000 to $180,000, so the portfolio is worth $260,000 and the 60% stock target is $156,000; selling $24,000 of stock and buying bonds restores 60/40. Selling the full $60,000 gain resets the original dollar amounts rather than the target percentages, which leaves the portfolio underweight in stock.

Correct answer: A 20-year zero-coupon Treasury bond

A 20-year zero-coupon Treasury bond pays no coupons, so there is nothing to reinvest, and its long maturity with no coupon gives it the most price sensitivity to rate changes. The 20-year 3% noncallable bond also carries heavy interest-rate risk, but its semiannual coupons must be reinvested at whatever rates prevail. The 2-year zero has no reinvestment risk either, but its short maturity keeps its interest-rate risk low.

Correct answer: Interest-rate risk

Interest-rate risk is systematic: when market rates rise, the prices of essentially all outstanding bonds fall together, so owning more issuers does not help. Industry-sector risk sounds market-wide, but spreading the holdings across many industries is exactly what reduces it. Credit and business risk are issuer-specific, so they shrink as the portfolio is spread across more issuers.

Correct answer: $18.40 plus a commission

After its offering, a closed-end fund's fixed number of shares trades on the exchange at a price set by supply and demand, here a discount to NAV, and an agency purchase adds a commission. Paying NAV plus a sales charge is forward pricing for an open-end fund, which issues new shares directly. A sales charge applies only in a closed-end fund's initial offering, not to an exchange trade.

Correct answer: $15.20

Forward pricing fills a redemption at the next NAV computed after the request is received. The request arrived after Monday's 4:00 p.m. pricing, so the next NAV is Tuesday's $15.20. Monday's $15.40 is tempting because it is the same day, but it was computed before the request arrived, and redemptions are at NAV, not POP, because only buyers pay the sales charge.

Correct answer: The contract owner bears the investment risk of the separate account

A variable annuity's premiums go into a separate account invested in subaccounts, and because the contract owner bears that investment risk, the contract is a security. A guaranteed minimum rate of return is the mark of a fixed annuity backed by the insurer's general account. Mortality and expense fees are charged on a variable annuity, but they pay for insurance guarantees and do not make it a security, and tax deferral applies to fixed annuities too.

Correct answer: Selecting the individual securities that the fund buys and sells

The investment adviser, not the board, selects the individual securities the fund buys and sells. The board oversees the fund's service providers: it approves the advisory contract and the principal underwriting contract and renews them each year, and it declares the fund's distributions. Approving the underwriting contract is the most tempting choice because the underwriter seems to answer to the sponsor, but the 1940 Act requires board approval of it.

Correct answer: The units usually have no active secondary market in which they can be sold

DPP units are generally unlisted, and there is usually no active secondary market, so a client who needs principal within a year may be unable to sell or may sell only at a steep discount; that is the core suitability problem under FINRA Rule 2310. The program does not promise an annual redemption at NAV, which is the most tempting wrong picture of a non-traded product. Units are not locked up until the leases expire (they can be transferred, usually with general partner consent), and no sponsor resets a daily buyback price.

Correct answer: Shares of an equity REIT listed on a national stock exchange

A listed equity REIT pays out most of its rental income and can be sold any trading day at the market price, so it delivers income and quick cash together. The non-traded NAV REIT is the tempting pick, but its monthly redemptions are capped and can be limited or suspended when requests pile up, so cash is not assured on short notice. An interval fund repurchases only a set percentage of shares at scheduled intervals, and a TIC interest has no ready market.

Correct answer: The issuing bank defaulting on its unsecured promise to pay

An ETN is an unsecured debt obligation of the issuing bank, so the investor can lose even if the index rises when that bank defaults; this issuer credit risk is the ETN's defining extra risk. A swap dealer default is the most tempting wrong answer, but swap counterparty risk belongs to a fund that gets exposure through swaps; an ETN holder owns only the bank's promise. Custodian and futures-clearing risks also attach to a fund's holdings, not to a note.

Correct answer: About 12.0%

The market fell 320 points from 4,000, or 8%, and a beta of 1.5 means the stock tends to move 1.5 times the market: 8% x 1.5 = about 12%. Measuring the drop against the ending level (320 / 3,680 = 8.7%) and then applying beta gives the tempting 13.0%, and 8.0% or 8.7% forgets to apply beta at all.

Correct answer: $3,000 taxed as ordinary income, plus a $300 penalty

Each 529 withdrawal is part contributions and part earnings in the same proportion as the account, so 30% of the $10,000 is earnings: $3,000 taxed as ordinary income, plus a $300 penalty (10% of the earnings). The contributions come back tax-free because they were made with after-tax dollars. Taking the earnings out first ($6,000) or taxing the whole $10,000 ignores the pro-rata rule, and the 10% penalty applies only to the earnings portion, not the full withdrawal.

Correct answer: Capital market

Capital markets are a source of financing for corporations, municipalities, and governments. Capital can be raised by issuing equities or debt and offering the securities to investors in an initial public offering (IPO) or an additional public offering (APO). Note that bonds might be issued by a municipality or the federal government to raise money, but corporations (as noted in this question) do not issue government bonds, either federal or municipal.

Correct answer: A private placement offering

A private placement offering is sold to a limited group of investors and is exempt from the registration requirements of the Securities Act of 1933. A best efforts primary offer describes how the underwriter sells, not an exemption, and still requires registration. An all-or-none primary offer is simply a best efforts variant that must still be registered, and a Rule 415 shelf offering is itself a form of registration.

Correct answer: Life insurance policies

Life insurance policies are insurance contracts, not securities, so they are sold by licensed agents and have no exchange market. Shares of life insurers are ordinary listed stock, shares of a listed REIT trade like any equity, and closed-end fund shares trade on an exchange rather than being redeemed by the fund.

Correct answer: Issuer transactions occur in the primary market.

The primary market is where securities are sold to the investing public through issuer transactions. It is regulated by the Securities Act of 1933. The NYSE is an example of a secondary market where price is determined by supply and demand.

Correct answer: An issuer transaction

The primary market is where securities are sold to the investing public by the issuer wishing to raise capital. These are known as primary market or issuer transactions.

Correct answer: Corporations, municipalities, and the federal government can all use the capital markets

The capital markets are where long term financing is raised, and all three classes of issuer use them: corporations sell stock and bonds, municipalities sell notes and bonds, and the federal government sells Treasury securities. None of the three is shut out, so any statement that bars one of them is false. Money market instruments are the short term end of the same funding picture rather than a separate channel reserved for government borrowers.

Correct answer: Require full and fair disclosure in connection with the sale of securities to the public

The primary purpose of the Securities Act of 1933 is to require full and fair disclosure in connection with the sale of securities to the public when they are first issued. Periodic reports from issuers whose securities trade in the secondary market, registration of exchanges and broker-dealers, and the bans on insider trading and manipulation all come from the Securities Exchange Act of 1934, which governs secondary trading rather than new issues.

Correct answer: There is no limit to the number of primary offerings a corporation can issue.

While a corporation can have only one IPO, there is no limit to the number of SPOs or APOs it can issue. IPOs, SPOs, and APOs are all primary offerings—those where the offering proceeds go to the issuer.

Correct answer: A new issue not specifically exempted from the Act must be registered before sale

The Securities Act of 1933 requires that a new issue be registered with the SEC before it may be sold to the public, unless the issue is one the Act specifically exempts. Exempt issues are the whole point of that exception, so a rule reaching both exempt and nonexempt issues is too broad. The SEC clears a registration statement for disclosure and never passes on the merits of an offering, and federal registration is separate from qualification with a state administrator.

Correct answer: Institutional investors

Institutional investors are the overwhelming majority of buyers in private placements, although private placement securities may be sold to small numbers of wealthy individuals who meet certain criteria (accredited investors).

Correct answer: Securities Act of 1933 regulating issues that must be offered by prospectus

Nonexempt securities are those that must be registered with the Securities and Exchange Commission (SEC) under the Securities Act of 1933. The Securities Act of 1933 mandates that offerings of these securities must be made by prospectus.

Correct answer: It is a full and fair disclosure of all material information and facts regarding the issuance of securities.

The Securities and Exchange Commission (SEC) requires full and fair disclosure of all material information and facts regarding the issuance of securities. This disclosure is done via a prospectus, which is required to provide investors enough information to make fully informed buying decisions.

Correct answer: A primary offering

When an issuer offers stock and the proceeds from the sale are added to the company's capital, it is called a primary offering. By contrast, a secondary offering is one in which one or more shareholders in the corporation sell all or a portion of their equity holdings to the public. The proceeds of a secondary offering are paid to the selling shareholder(s), not the company.

Correct answer: Life insurance

Equities (stocks), bonds, currencies, and derivative products like options can be offered and traded in the financial markets. Insurance is not an asset that can be traded in the financial markets.

Correct answer: An additional public offering (APO).

The first time that a company issues shares to the public, it engages in an IPO. Later offerings are known as subsequent primary offerings (SPOs) or APOs. The IPO and any SPO or APO are all issuer transactions and are, therefore, done in the primary market.

Correct answer: A primary offering

A primary offering is one in which the proceeds raised go to the issuing corporation, municipality, or government. The corporation in this case looks to increase its liquid capital by offering bonds. Primary offerings of bonds may be made by an issuer publicly, as is the case, or privately. This question points to an additional public offering (APO) of securities, not an initial public offering.

Correct answer: The Exchange Act.

The Exchange Act is the Securities Exchange Act of 1934 and covers the secondary markets. The Securities Act of 1933 covers the primary market and requires full and fair disclosure on new issues by providing a prospectus to the investor.

Correct answer: Working as a salesperson who works for the issuing firm's underwriter

Restricted persons include Financial Industry Regulatory Authority (FINRA) member firms and their associated persons, such as a salesperson working for an underwriter, plus immediate family members. Immediate family members do not include aunts and uncles or grandparents.

Correct answer: Not purchase shares of a new issue

Persons characterized as restricted persons are prohibited from purchasing shares of new issues in any quantity. If one is already restricted, working for a bank or a broker-dealer does not exempt them from the rule.

Correct answer: Both persons are considered restricted

Working for a broker-dealer, the registered representative is considered restricted. While grandparents of restricted persons are generally not considered restricted, anyone being provided financial support and/or living under the same roof as a restricted person (as is the case here) is also restricted.

Correct answer: The Securities Act of 1933 provides criminal penalties for fraud.

The Securities Act of 1933 (also known as the Paper Act, Full Disclosure Act, New Issues Act, Truth in Securities Act, and Prospectus Act) ensures that the investing public is fully informed about a security and its issuer when the security is offered on the primary market. The act provides criminal penalties for fraud in the issuance of new securities. The SEC review period, known as the cooling-off period, must last a minimum of 20 days before the SEC releases the securities for sale to the public (effective date). Solicitations and the acceptance of orders may never occur before the effective date.

Correct answer: Limiting the number of shares of an initial public offering (IPO) that may be purchased by the issuing company's employees

No rule limits the number of shares that an issuer can direct to persons who are employees of the issuer.

Correct answer: A shelf registration

The Securities Act of 1933 permits issuers to quickly raise money in the capital markets when needed or when market conditions are just right. For example, if a company files a shelf registration statement with the Commission, there is no intention to immediately sell the securities. However, when the right time arrives—either interest rates are at a likely low point or funds are needed to complete a project—the company can in essence, take the securities from the shelf without the delay of registering with the Securities and Exchange Commission (SEC), as that has already been done. Shelf registration (shelf offering) is available for both primary and secondary offerings.

Correct answer: Take orders

During the cooling off period, sales are not allowed.

Correct answer: Distributing a red herring

No selling or soliciting is allowed during the cooling off period. Distributing a red herring (a preliminary prospectus) is allowed.

Correct answer: Marketed by all public sector and private sector issuers

Capital market securities are brought to market by governments and their agencies and by private corporations alike, so both sectors appear on the issuing side. On the buying side individuals and institutions both trade them freely, which is why no restriction to a single class of buyer holds up. Money market instruments are the short term securities of those same issuers, so confining the trading to that market misstates where stocks and bonds change hands.

Correct answer: The officer may not purchase a new issue because he is considered a restricted person.

Under the rules regarding the purchase of new issues, bank officers would generally be characterized as restricted persons. They may not, therefore, purchase new issues.

Correct answer: A new issue initial public offering (IPO) at the public offering price

As restricted persons, officers of broker-dealer firms or other institutional investors are prohibited from purchasing a new issue (IPO) at the public offering price.

Correct answer: In the primary market, the issuer receives the proceeds of each sale

A primary market transaction is an issuer transaction: the securities are sold to the public for the first time and the money raised goes to the issuer on each sale. Once trading moves to the secondary market the issuer is no longer a party, so proceeds pass between investors and never back to the company or its agent. Investor to investor trading is the definition of the secondary market, and a fixed public offering price belongs to the primary distribution rather than to secondary trading.

Correct answer: The Securities Act of 1933

In a public offering, securities are offered and sold to the investing public. Public offerings of securities are regulated under the Securities Act of 1933.

Correct answer: The Securities Act of 1933.

The Securities Act of 1933, also known as the Paper Act or Prospectus Act, is the bedrock of all modern securities law. It requires issuers looking to make a public offering of securities to provide full and fair disclosure of all material facts about the company and the securities being offered. The company does this by registering its securities with the U.S. Securities and Exchange Commission (SEC), often with the aid of accountancy firms, securities attorneys, and underwriters. Part of the registration process for newly offered securities is the publishing of a prospectus which all prospective investors must receive at or prior to purchase.

Correct answer: Issuer transactions occur in the primary market and shares carry the public offering price

The primary market is where an issuer sells its own securities, and those sales are made at a stated public offering price fixed in the registration statement rather than by bidding. Supply and demand set the price in the secondary market, so pairing issuer transactions with a supply and demand price joins the wrong half of each definition. Exchanges are secondary markets, and a public offering price does not govern the trades made there.

Correct answer: Description of how the proceeds will be used

A prospectus will not contain performance predictions, may not imply endorsement of the SEC, nor will it contain guarantees of gains or guarantees against loss.

Correct answer: Individual owning 5% of a member firm

Rules prohibit member firms from selling public offering stock in equities to any account in which restricted persons are beneficial owners. Restricted persons include Financial Industry Regulatory Authority (FINRA) members, employees of member firms, finders and fiduciaries acting on behalf of the underwriters, portfolio managers, and any person owning 10% or more of a member firm. Also included are the immediate family members of any restricted persons.

Correct answer: Corporate securities can only be offered in public securities offerings

Both stocks and bonds can be made available to the investing public through an offering. Different types of offerings are identified by who is selling the securities—an issuer or another investor. Securities offered by corporations for sale to the investing public are sold to investors through either public or private securities offerings.

Correct answer: The Securities Act of 1933

The Securities Act of 1933, is also known as the Paper Act, Prospectus Act, or New Issues Act. This federal law requires that issuers who want to raise capital by making a public offering of securities to the public, provide full and fair disclosure of all material facts about the company and the securities being offered.

Correct answer: Securities Act of 1933

Companies looking to offer securities to the public must provide a prospectus to those who are approached to purchase the shares. This requirement ensures that the investing public is fully informed about a new security and its issuing company.

Correct answer: The Securities Act of 1933

The Securities Act of 1933 requires the registration of most new issues; the Securities Exchange Act of 1934 created the SEC; the Securities Investor Protection Act of 1970 created the SIPC; the Securities Market Improvement Act of 1975 created the MSRB.

Correct answer: Indications of interest before the effective date

A preliminary prospectus cannot be distributed before the registration date. Between the registration and effective dates, it is used to solicit or gauge indications of interest. After the effective date, sales can be solicited and a final prospectus would be available and must be used to do so.

Correct answer: The offer to sell the securities

A tombstone is an announcement that a distribution is coming rather than a selling document, so it can never carry an offer to sell; an offer may be made only by prospectus. The announcement is permitted to identify the underwriters taking part, state how many shares are being brought to market and give the offering date, because those are descriptive facts rather than solicitation.

Correct answer: A nonbinding declaration of the interest in buying once the issue is effective

An indication of interest is a nonbinding declaration of the interest in buying once the issue is effective; it comes from the investor and commits no one. It is not a conditional interest that turns binding once the deal is effective, because the investor must still confirm an order. It is not an allocation of shares the issuer makes, and it is not an offer from the issuer to sell, since both of those flow from the selling side rather than from the investor.

Correct answer: The accuracy and adequacy of the registration documents is the responsibility of the underwriters

While underwriters (broker-dealers and investment bankers) may assist the issuer in preparing and filing the registration statement, the accuracy and adequacy of the registration documents is the responsibility of the issuer. Full disclosure is also made on a number of issues, including but not limited to names and addresses of company officers and a description of how the sale proceeds will be used.

Correct answer: Mandated to be in the final prospectus by the Securities and Exchange Commission (SEC)

Commonly known as the Securities and Exchange Commission's disclaimer, the SEC mandates that it be found in the final prospectus.

Correct answer: A preliminary prospectus

A preliminary prospectus is also known as a red herring. The red herring does not include key information about the issue such as price and the number of shares offered. The term is derived from the disclaimer printed in red on the cover page.

Correct answer: It is made available between the registration date and the effective date.

The preliminary prospectus (red herring) is a prospecting tool used to gauge indications of interest. It is made available to those who request it between the registration date and the effective date (cooling-off period). Receiving it is not a commitment to purchase shares and making it available is not a commitment to sell shares to the recipient. No final price would be found on a preliminary prospectus.

Correct answer: The names of the company's officers

Information on a tombstone, those advertisements allowed to be placed prior to the effective date, is limited to; name of issuer, type of security, number of shares to be sold, public offering price or expected range, and names of the underwriters or group.

Correct answer: A red herring may be given to prospective investors

During the minimum 20-day cooling-off period, tombstone ads may be published, and a preliminary prospectus, also known as a red herring, may be distributed to prospective investors. Sales literature may not be distributed and indications of interest are not binding on either the investor or broker-dealer.

Correct answer: Agreement among underwriters

The agreement among underwriters is not a part of a prospectus.

Correct answer: Only if the restricted interest does not exceed 10%

A restricted person may hold a beneficial interest in an account that buys a new equity issue at the public offering price so long as restricted persons own no more than 10% of the account. Above that share the whole account is treated as restricted and is shut out of the issue. The rule is neither a flat prohibition nor a free pass, and 15% sits above the level the rule allows.

Correct answer: An issue of shares by a public company that is already listed on an exchange

A follow-on public offer (FPO) is an issue of shares by a public company [registered and reporting to the Securities and Exchange Commission (SEC)] that is currently listed on an exchange and has previously gone through the IPO process. FPOs are popular methods for companies to raise additional equity capital in the capital markets through a stock issue.

Correct answer: A primary offering

A primary corporate offering is one in which the proceeds raised go to the issuing corporation. Primary offerings of bonds may be made by an issuer to the general public as an initial public offering (IPO) or, as is the case here, in an additional public offering (APO). Both are primary offerings.

Correct answer: Private nonpublic securities offerings

Securities offered privately rather than to the public are exempt from the registration provisions of the Securities Act of 1933, which is why private placements are used by issuers that want to avoid registration. Initial public offerings, additional public offerings and shelf offerings are all public distributions and all of them must be registered before any sale is made.

Correct answer: Requiring the licensing of persons affiliated with broker-dealers

Licensing of individuals associated with broker-dealers is mandated under the Securities Exchange Act of 1934. The Securities Act of 1933 protects investors who buy new issues regulating, among other things, registration of new issues, underwriting, full disclosure, and the potential for fraud in the issuance of securities.

Correct answer: An aunt or an uncle

Rules regarding restricted persons define immediate family as spouses, parents, siblings, in-laws, and children. Aunts and uncles and grandparents are excluded (not considered immediate family).

Correct answer: Shares are created by the corporation and sold by existing shareholders

A split offering, also called a combination offering, brings two blocks of stock to the public at once: newly created shares that come from the corporation and outstanding shares released by shareholders who already hold them. If every share came from existing holders the deal would be a secondary offering, and if every share were newly created it would be a primary offering. A rights subscription is an offer made to current shareholders rather than a sale to the public.

Correct answer: 10%.

If the beneficial interests of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue.

Correct answer: The capital market

The issuance of stock or bonds by corporations to raise new funds takes place in the capital market.

Correct answer: The grandparent of a restricted person

Immediate family to a restricted person is a restricted person. This includes parents, in-laws, spouses, siblings, children, or any other individual to whom the person provides material support. Aunts and uncles as well as grandparents are not considered immediate family. If, however, one of these individuals lives in the same household as a restricted person, that individual would be a restricted person.

Correct answer: Never exceed the number of shares authorized

A corporation's bylaws state the maximum number of shares authorized to be issued. Therefore, issued shares, those in the hands of public shareholders (outstanding shares) can never exceed the number of shares that were authorized. While those outstanding shares can therefore never be greater than the number of shares issued they could equal the number of shares issued.

Correct answer: Is not restricted, so it may buy this issue at the offering price

An account is treated as restricted only when restricted persons hold more than 10% of its beneficial interest. Mrs. Jones holds 1% of the investment club's account, far below that level, so the club is not a restricted account and it may buy shares of an initial public offering at the public offering price like any other customer. Being unrestricted carries no waiting period, and the 10% figure governs ownership of the account rather than the size of a purchase.

Correct answer: 14 days.

When the issuer submits the corrections necessary to satisfy the deficiency letter, the 20-day cooling-off period picks up where it left off; in this case, from six days, which means that the issue should be effective 14 days later.

Correct answer: Any inherent risks associated with the offering or the issuer offering the securities

While any inherent risks associated with the issuer or the securities the issuer is offering would be expected to be shown in a prospectus, they would not be expected to be found nor is it required that they be shown in a tombstone advertisement. Each of the remaining answer choices shows information expected to be shown in these ads.

Correct answer: A brokerage report shows the security is properly undervalued.

Brokerage reports may not be distributed while a security is in registration. Expected dates for pricing and road shows (due diligence meetings) may be communicated to potential buyers. The underwriters are named in the issue's registration statement.

Correct answer: SEC approval.

The SEC neither approves nor disapproves a final prospectus; they allow the issue to become effective. Beware of any approval language when referring to a regulator.

Correct answer: Resumes where it had left off

The SEC neither approves nor disapproves a final prospectus; they allow the issue to become effective. Beware of any approval language when referring to a regulator.

Correct answer: One that is unsolicited

Purchases and sales that are unsolicited (unsolicited transactions) are exempt under the blue-sky (state securities) laws. Municipal bonds and U.S. government bonds are examples of exempt securities, not transactions.

Correct answer: The Securities Act of 1933 provides criminal penalties for fraud.

The Securities Act of 1933, which provides for criminal penalties for fraud in the issuance of new securities, ensures that investors are fully informed about a security and its issuer when the security is offered to the public. The SEC review or cooling-off period must last a minimum of 20 days before the SEC releases the securities for sale to the public (effective date). Solicitations and the acceptance of orders may never occur before the effective date.

Correct answer: Distribute sales literature about these offered securities

Nothing that promotes the issue may be circulated during the cooling off period, so sales literature and advertising material about the securities are barred until the registration is effective. What underwriters may do in that window is limited to informational activity: running a tombstone announcement, handing out the preliminary prospectus and recording indications of interest from the subscribers who read it.

Correct answer: 20 calendar days after the date the SEC has received it.

Once the registration statement has been received by the SEC, a cooling-off period begins and it must last at least 20 calendar days. This allows the registration to become effective as early as 20 calendar days after the date the SEC has received it.

Correct answer: Give a red herring to prospective investors

During the cooling-off period, red herrings (preliminary prospectuses) may be distributed and tombstone advertisements may be published. Indications of interest can be taken but are nonbinding on all parties. Sales literature may not be distributed during the cooling-off period.

Correct answer: The SEC's own verification of the offering's factual accuracy

A final prospectus carries the SEC disclaimer stating that the Commission has neither approved nor disapproved the securities and has made no representation about the accuracy or adequacy of the information, so a verification of accuracy is the one item a reader will never find in it. The document is required to disclose how the money raised will be used, the risks a purchaser takes on and the date the registration became effective.

Correct answer: The final prospectus has been filed with the Securities and Exchange Commission (SEC) and is available on the SEC's website for investors to see

Beyond physical delivery of a paper prospectus, access equals delivery is the industry standard for meeting the final prospectus delivery requirements. It is deemed to be satisfied when the final prospectus has been filed with the SEC and is therefore available on the SEC's website for investors to log in and see. This standard does not apply to delivery of a preliminary prospectus before the effective date.

Correct answer: A firm commitment

In a firm commitment underwriters contract with the issuer to buy its securities, acting as principals rather than agents. They are committing to purchase any unsold shares for the syndicate account. In this type of underwriting, it is the underwriters who are at risk for any shares they cannot sell to the public, not the issuer. The issuer knows that ultimately all of the securities will be sold, and all of the capital needed will be raised.

Correct answer: A syndicate

A syndicate is two or more broker-dealers (investment bankers) which work with an issuer through, for example, the registration process in the case of corporate securities and bring the issuer's securities to the market by selling them to investors. There are syndicates that specialize in underwriting municipal bonds. The members of a syndicate are also known as the underwriters or collectively the underwriting group.

Correct answer: Are permitted before the effective date

Tombstone ads are the only form of advertising that is permitted from the time the registration statement is filed with the Securities and Exchange Commission (SEC) and the effective date of the offering. While they are not mandatory for new issues, they can be used as an announcement and description of the securities to be offered, showing only minimal information. They are not an offer to sell the securities.

Correct answer: Firm commitment underwriting

In a firm commitment the underwriter buys the entire issue from the issuer into its own inventory and then resells it, so the underwriter carries the risk of any shares that go unsold. A best efforts underwriter acts only as an agent and returns whatever it cannot place. A mini-max offering sets a floor and a ceiling on the amount that may be sold, and a standby underwriter agrees to take only the shares that current holders decline in a rights offering.

Correct answer: New shares come from the corporation and existing shares from their holders

A combination offering splits the shares sold to the public between two sources: some are newly issued by the corporation and the rest are outstanding shares released by shareholders who already own them, which is exactly why the offering is called a split. A distribution made up entirely of new shares is a primary offering, and one made up entirely of outstanding shares is a secondary offering. Delivering new shares to bondholders describes a conversion rather than a public offering.

Correct answer: Obtain a written representation that the buyer is not a restricted person

When receiving an order to buy a new equity issue, a member must obtain a written representation that purchasers are in compliance with rules regarding sales of new issues to restricted persons (i.e., they are not restricted persons).

Correct answer: Mini-max

A mini-max offering is a best efforts underwriting setting a floor or minimum, which is the least amount the issuer needs to raise in order to move forward with the underwriting, and a ceiling or maximum on the dollar amount of securities the issuer is willing to sell.

Correct answer: 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.

Correct answer: A municipal advisor

A municipal advisor is a person that provides advice to or on behalf of a municipal entity with respect to municipal products or the issuance of municipal securities.

Correct answer: $1 million, excluding the net equity in a primary residence

A natural person is an accredited investor with a net worth of $1 million or more, and the net equity in the primary residence is left out of that calculation, so counting the home at full value overstates the figure. Net worth is measured across all of the investor's assets and liabilities rather than the holdings in a brokerage account alone. The $200,000 figure belongs to the separate income test, which looks at annual income in each of the two most recent years.

Correct answer: An all or none (AON)

In an AON underwriting, the issuing company has determined that it wants the underwriter to sell all of the shares required to raise all of the capital needed or cancel the underwriting. Because of the uncertainty over the outcome of an AON offering, any funds collected from investors during the offering period must be held in escrow pending final disposition of the underwriting.

Correct answer: An underwriter

A broker-dealer (investment banker) that works with an issuer to bring the issuer's securities to the market by offering the securities for sale to investors is best described in this context as an underwriter.

Correct answer: Securities sold to the public by the issuer

When an issuer is selling its securities, that is a primary market transaction.

Correct answer: Advises municipalities on selling securities

A municipal advisor acts under contract with a municipality, providing advice on the structure and sale of the municipality's securities. A municipal advisor may not switch from that role to the role of an underwriter on an issue the advisor has consulted on.

Correct answer: The final prospectus and aftermarket delivery obligations

The access equals delivery rule applies to the final prospectus and aftermarket prospectus delivery obligations. It does not apply to preliminary prospectuses. No prospectus can be delivered before the registration date.

Correct answer: Sale of $10 million of corporate bond by a broker-dealer acting as an underwriter

Market makers are broker-dealers who sell out of their own account in the secondary market. Underwriters are broker-dealers who help issuers bring their securities to market in the primary market.

Correct answer: Best efforts underwriting

In a best efforts underwriting the underwriters (syndicate) buy securities from the issuer acting simply as an agent, not as principal. This means that the underwriter is not committed to purchasing the shares and is therefore not at risk. The underwriter acts as an agent contingent on its ability to sell shares in either a public offering or a private placement.

Correct answer: After the cooling-off period

Sales can only be solicited after the cooling-off period (upon the effective date). Solicitations of all sales must be done with a final prospectus.

Correct answer: The effective date

The effective date is when the SEC clears an issue to be sold to the public; the registration becomes effective. At no time does the SEC approve, disapprove, or make any representation that the information in the registration documents is accurate.

Correct answer: The Securities Act of 1933

The Securities Act of 1933 is also known as the Prospectus Act. With limited exceptions, companies looking to offer securities to the public must provide a prospectus to those who are approached about purchasing those securities. A prospectus is a disclosure document that provides key information about the company.

Correct answer: Meets the full and fair disclosure requirements of the Securities Act of 1933

A prospectus is a disclosure document meant for distribution to the public. It must constitute full and fair disclosure of all material facts about the issuer and the security. Only a preliminary prospectus or tombstone ads can be used during the cooling-off period.

Correct answer: May be used to gather indications of interest

The preliminary prospectus (red herring) can be used as a prospecting tool, allowing issuers and underwriters to gather nonbinding indications of interest. It must be made available and is intended to be distributed to any customer who expresses interest in the securities during the cooling-off period. There is no final price shown in a preliminary prospectus.

Correct answer: The state level

These are state laws that pertain to the issuance and trading of securities within that state. They are known as blue-sky laws because of a statement made by a Kansas Supreme Court justice who referred to "speculative schemes that have no more basis than so many feet of blue sky."

Correct answer: Be placed by the issuer directly or by the underwriters

Tombstone advertisements can be placed by either the issuer or the underwriters and are the only ads that can be placed before the registration's effective date. They are not an offer or solicitation to sell the securities.

Correct answer: Distribute a preliminary prospectus to the investing public.

During the cooling-off period, underwriters may distribute a preliminary prospectus to the investing public to gauge interest. They may not take full payment for the shares, mail sales brochures about the issue, or send written confirmations of sales, because no sales or binding orders are allowed until the registration becomes effective.

Correct answer: Capital markets provide intermediate to long-term financing.

The capital market serves as a source of intermediate to long-term financing. The money market, on the other hand, provides short-term financing.

Correct answer: Seek civil penalties in federal court and refer the theft to the Justice Department for criminal charges

The SEC is a civil enforcement agency: it can sue in federal court or bring administrative proceedings for penalties, disgorgement and bars, but it cannot prosecute crimes, so it refers criminal conduct to the Department of Justice. FINRA is a self-regulatory organization with no power to bring criminal charges. The two options that have the SEC filing criminal charges itself describe authority it does not have.

Correct answer: The MSRB wrote the rule, and FINRA examines the firm and enforces it

The MSRB writes the rules for municipal securities dealers, including fair pricing, but it has no examination or enforcement staff of its own. For securities firms, FINRA (along with the SEC) examines and enforces MSRB rules; for bank dealers, the federal bank regulators do. Having the MSRB enforce its own rules is the most common confusion, because most rule-writers are also enforcers.

Correct answer: $530,000

The individual account and the IRA are separate customer capacities, each with its own $500,000 limit. In the individual account the cash is capped at $250,000, so it is protected for $100,000 plus $250,000, or $350,000; the IRA's $180,000 is fully protected, for a total of $530,000. Treating both accounts as one customer under a single $500,000 limit gives $500,000, which is the most tempting wrong answer.

Correct answer: Bank reserves fall, short-term rates rise, and prices of existing bonds fall

When the Fed sells Treasuries, buyers pay with money that leaves the banking system, so reserves fall, money tightens and short-term rates rise. Because bond prices move inversely to rates, prices of existing bonds fall. Thinking that a Fed sale pumps money into the economy leads to the opposite chain, with reserves and bond prices rising.

Correct answer: The Fed sells Treasuries in the open market and Congress raises income tax rates

Selling Treasuries drains bank reserves and pushes rates up (tight monetary policy), and raising taxes takes spending power out of the economy (tight fiscal policy), so both slow growth. Buying Treasuries is easing, not tightening. Raising the discount rate does tighten, but more federal spending or lower taxes is expansionary fiscal policy that works against it.

Correct answer: The rate banks charge their most creditworthy business borrowers

The prime rate is the rate commercial banks charge their most creditworthy business borrowers, and each bank sets it, usually moving it in step with the fed funds target. The overnight rate between banks is the fed funds rate itself, which is market-set around the Fed's target rather than a rate a bank sets for its customers. The discount rate is set by the Fed, and Treasury note yields are set by auction demand.