The provision that allows a bond issuer to purchase bonds from customers prior to the maturity date
on the bond is known as a:
B
Explanation:
Step by Step Explanation:
Call Provision: This allows the issuer to redeem bonds before their maturity date, usually at a
premium to the par value, which benefits the issuer in a declining interest rate environment.
Put Provision: Allows bondholders, not issuers, to sell the bond back to the issuer.
Conversion: Relates to convertible bonds that can be converted into equity.
Defeasement: Refers to the removal of a bond issuer’s obligation by setting aside cash or securities
to cover the debt.
Reference:
SEC Guide on Callable Bonds: SEC Callable Bonds.
Which of the following types of accounts permits an investor to borrow money from a broker-dealer
to help pay for a trade?
B
Explanation:
Step by Step Explanation:
Margin Accounts: Allow investors to borrow funds to purchase securities, with the securities serving
as collateral for the loan.
Cash Accounts: Require full payment for securities purchased.
IRAs: Do not permit borrowing due to their tax-advantaged status.
DVP/RVP: Settlement mechanisms, not account types for borrowing.
Reference:
FINRA Rule 4210 (Margin Requirements): FINRA Rule 4210.
A rating agency downgrades a corporation's credit rating. Which of the following effects is this action
most likely to have on the yield and price of the corporation's outstanding bonds?
C
Explanation:
Step by Step Explanation:
Credit Downgrade: Increases perceived risk, causing bond prices to drop and yields to rise.
Yield-Price Relationship: Yields move inversely to bond prices. Lower prices lead to higher yields as
investors demand more return for increased risk.
Reference:
SEC Guidance on Bond Ratings: SEC Bond Ratings.
Which of the following responses best describes a short sale?
B
Explanation:
Step by Step Explanation:
Short Sale Definition: Involves selling borrowed securities with the expectation of repurchasing them
at a lower price.
Investor Ownership: Short sales do not involve securities already owned by the seller.
Other Options: None of the other choices accurately define a short sale.
Reference:
SEC Regulation SHO (Short Selling): SEC Short Sales.
A registered representative who is terminated from a broker-dealer must notify FINRA of a
residential address change for what period of time after termination?
B
Explanation:
Step by Step Explanation:
FINRA Rule 1122: Requires that registered representatives update their residential address with
FINRA for two years post-termination.
Purpose: This ensures accurate records for potential regulatory inquiries during the statutory two-
year period when a terminated individual remains subject to FINRA’s jurisdiction.
Reference:
FINRA Rule 1122 (Filing False or Misleading Information): FINRA Rule 1122.
A registered representative (RR) owns 500 shares of a thinly traded security. A customer of the firm
calls the RR to place a sell order for 10,000 shares of the same security. The RR sells his shares before
entering the customer's order to sell. Which of the following activities has the RR just engaged in?
B
Explanation:
Step by Step Explanation:
Front Running Definition: Occurs when a broker executes a personal trade ahead of a customer’s
order to profit from the anticipated market movement.
Thinly Traded Security: Front running is particularly impactful in low-liquidity securities.
Other Options:
Selling Away: Involves unapproved securities transactions outside the employing firm.
Insider Trading: Involves trading on material non-public information.
Market Manipulation: Encompasses activities like wash trading or spoofing, not specific to this
scenario.
Reference:
FINRA Rule 5270 (Front Running of Block Transactions): FINRA Rule 5270.
Under SEC Regulation D, which of the following parties is considered an accredited investor?
C
Explanation:
Step by Step Explanation:
Definition of Accredited Investor: As per SEC Regulation D, Rule 501, an accredited investor includes:
Individuals with a net worth exceeding $1 million (excluding primary residence equity).
Individuals with an annual income exceeding $200,000 (or $300,000 jointly with a spouse) for the
past two years.
Elimination of Incorrect Answers:
$500,000 threshold (option B) is too low to qualify under Regulation D.
Option D is incorrect as it requires assets of $5 million, not $2.5 million.
Reference:
SEC Regulation D, Rule 501 (Accredited Investor Definition): SEC Regulation D.
Which of the following is the primary risk of using asset allocation models without periodic
rebalancing?
C
Explanation:
Step by Step Explanation:
Rebalancing: Ensures that a portfolio remains aligned with its target allocation. Without rebalancing,
outperforming assets can become overweighted, increasing exposure to specific risks.
Incorrect Options:
Inflation: Impacts purchasing power but isn’t tied to rebalancing.
Marketability: Refers to liquidity and isn’t linked to allocation models.
Interest Rate Risk: Relates to fixed-income investments and isn’t directly addressed by allocation
models.
Reference:
SEC Investor Bulletin on Asset Allocation: SEC Asset Allocation.
An associated person at a member firm receives a complaint from a customer involving allegations of
forgery. Once the complaint is received, which of the following actions is required?
A
Explanation:
Step by Step Explanation:
FINRA Rule 4530: Requires member firms to report certain events, including allegations of forgery, to
FINRA promptly.
Incorrect Options:
Option B: Maintaining a record does not substitute for required reporting.
Option C: Arbitration isn’t required before reporting.
Option D: Reporting is mandatory irrespective of internal investigations.
Reference:
FINRA Rule 4530 (Reporting Requirements): FINRA Rule 4530.
The financial risk that a given security is not readily tradable in the market without impacting the
market price is known as:
C
Explanation:
Step by Step Explanation:
Liquidity Risk: Refers to the difficulty of selling a security quickly without significantly affecting its
price. This is common in thinly traded securities or complex instruments.
Other Risks:
Credit Risk: Relates to the possibility of default by the issuer.
Market Risk: Pertains to overall price changes due to market conditions.
Prepayment Risk: Associated with mortgage-backed securities and early repayment of loans.
Reference:
SEC Investor Bulletin on Risks: SEC Risk Guidance.