Practice Test 3

Multiple Choice Questions

1. Municipal bonds settle regular way in:

a. one day
b. three days
c. five days
d. seven days

2. Which of the following federal laws requires the full disclosure of all material information about new security issues?

a. The Securities Act of 1933
b. The Glass-Steagall Act
c. The Securities Exchange Act of 1934
d. Regulation T

3. Corporate bonds which are secured by securities held by a trustee are called:

a. Guaranteed bonds
b. Debentures
c. Collateral trust bonds
d. Equipment trusts bonds

4. Which of the following statements is TRUE regarding the payouts received from a ten-year certain annuity that has already begun making payments?

a. If the purchaser dies seven years after payments begin, the annuity will not make any more payments
b. The annuity will stop making payments after ten years, even if the purchaser is still alive
c. The annuity will not stop making payments after ten years, if the purchaser is still alive
d. If the purchaser is still alive after ten years, payments will go to the beneficiary

5. If ABC has 4,000,000 shares currently outstanding, what will the holder of 20,000 shares receive if ABC plans to issue an additional 200,000 shares through a rights offering?

a. 2,000 rights to buy 1,000 shares
b. 2,000 rights to buy 400 shares
c. 20,000 rights to buy 1,000 shares
d. 20,000 rights to buy 400 shares

6. In technical analysis, a consolidating market has what type of trend line?

a. Erratic
b. Sideways
c. Upwards
d. Downwards

7. Once shelf registration is obtained, the issuer may delay selling all or part of its stock for up to:

a. 180 days
b. 270 days
c. 1 year
d. 2 years

8. Which of the following is the appropriate response to a customer who has placed a trade but wishes to cancel the trade because of a subsequent negative move in the stock?

a. The customer owns the stock and must submit payment
b. The broker-dealer will repurchase the securities
c. The registered rep will repurchase the securities
d. The customer should be assured that the stock will recover

9. Which of the following is TRUE with regard to IDRs?

a. The municipality is responsible for payment of the debt
b. They are not subject to the substantial user requirement
c. They have few similarities with private activity bonds
d. They do not need voter approval to be issued

10. What is the ad valorem tax on a property with an assessed value of $550,000, a current market value of $535,000, and a tax rate of 16 mills?

a. $8,800
b. $9,600
c. $10,400
d. $12,800

Multiple Choice Answers

1. B: The settlement date is defined as the day on which ownership officially changes from the buyer to the seller, and the issuer updates its records to reflect the new ownership. Current ownership will determine who has a claim to the next interest payment when it becomes due. Municipal securities settle regular way in three business days after the trade date, which is the same as common stock transactions. “Regular way” is often referred to as “T plus 3.” Transactions for cash settle the same business day.

2. A: The Securities Act of 1933 is the federal law that defines the rules issuers must follow when selling new securities. The Glass-Steagall Act prohibited commercial banks from underwriting securities; the repeal of this law led to banks expanding into multiple areas and has been offered as one of the roots of the financial crisis of 2008. The Securities Exchange Act of 1934 is the federal law that defines the rules governing the treatment of outstanding securities. The Securities Exchange Act of 1934 created the SEC, which regulates the various exchanges and the over-the-counter market. Regulation T regulates the maximum amount of credit that can be extended to customers for cash and margin accounts.

3. C: As the name suggests, a collateral trust bond is collateralized by securities owned by the issuer and held by the trustee. The collateral pool stands in reserve until the issuer misses an interest payment, at which time the trustee sells some of the securities to satisfy the debt service payment. Debentures are backed by the faith and credit of the issuer. Guaranteed bonds are backed by another entity, such as a parent company, which is obligated to make any missed payments on behalf of the issuer. Equipment trust certificates are secured directly by equipment owned by the issuer.

4. C: When purchasing a period-certain annuity, the annuity is guaranteed to make payments for at least as long as the period-certain states. If the purchaser of a period-certain annuity dies prior to the lapse of the specified period, payments are made for the duration of the specified period to the purchaser’s designated beneficiary. However, if the purchaser lives beyond the period specified by contract in the period-certain annuity, the annuity will continue to make payments for as long as the purchaser is alive, with payments stopping immediately upon the death of the purchaser.

5. C: There are two steps to answering this question. The first is to know that rights are issued on a 1-to-1 basis for shares held – a customer will receive one right for every share of stock that he or she owns. The next step in the question is to know that a rights offering will be anti-dilutive, meaning that if the company is issuing 5% more stock (200,000 / 4,000,000 = 5%), then every current share holder will be granted a proportional increase in the number of shares they can purchase (20,000 shares * 5% = 1,000 shares). When these two steps are combined, the right number of rights and shares gives you answer C.

6. B: If the stock market is consolidating, it is trading in a very narrow range and the trendline will be sideways. The term consolidating comes from the idea that there are roughly an equal number of buyers and sellers who are “consolidating” their positions by bouncing the traded shares back and forth. Consolidation periods are often followed by breakouts, a period during which the narrow range that has persisted over an extended period of time is replaced by a wider range in which the indexes make large moves up or down. Technical analysts tend to believe that the longer the consolidation period, the more severe the breakout is likely to be when it occurs.

7. D: This is another very straightforward question that is regularly on the test because it forms the basis of understanding much of the other material. In a sense, it is the opposite of those questions where the test-writers purposefully try to confuse you by giving you far too much information. A shelf-registration gives the issuer the ability to delay the sale of all or a portion of the securities for up to two full years. A shelf-registration gives the issuer the ability to be nimble in planning the precise timing of the offering, without the delay of the registration process.

8. A: As soon as the trade is executed, the customer is obligated by contract to complete the transaction, regardless of any subsequent moves in the price of the stock, positive or negative. Neither the broker-dealer nor the registered rep is permitted to repurchase the shares (there is the implication that the repurchase would take place at the original purchase price), because this would essentially allow brokers and registered reps to guarantee or backstop customer stock trades. The rep may not assure the customer that the stock will recover because this is guaranteeing performance that may or may not be true.

9. D: An IDR (industrial development revenue bond) is issued to build a facility for a private user or corporation, but they do not need specific voter approval. Because the facility, owned by a third-party, is responsible for earning the revenue needed to make principal and interest payments, the municipality is not directly responsible for the payments. Furthermore, IDRs are, in fact, subject to the substantial user rule, which prohibits substantial participants in the project from buying their own bonds and receiving tax-free payments from the project.

10. A: There are a few keys to getting the correct answer to this question. Firstly, you have to know that the assessed value, rather than the current market value, is used when calculating taxes. Secondly, it is important to know that a mill is equal to 0.001 or one-thousandth when performing the calculation. These two facts are the key, and if you know them, the question is easy. Therefore, in the instance of this question, the taxes are calculated by multiplying the assessed value of the property ($550,000) by 16 by a mill ($550,000 * 16 * 0.001 = $8800).