The annual interest on a bond is calculated based on thecoupon rateand the bond’s par value.

Coupon rate = 4.0%.

Annual interest = $10,000 (par value) × 4.0% =$400.

A is correctbecause the coupon rate determines the annual interest.

B,C, andDare incorrect because they reflect incorrect calculations. The current yield, YTM, and tax-equivalent yield do not affect the bond’s fixed coupon payments.

FINRA Rule 3270 requires registered representatives to disclose all outside business activities that involve compensation or could reasonably be perceived as a conflict of interest.

C is correctbecause serving as a board member for a publicly traded company is a business activity requiring disclosure, even if compensation is indirect.

Ais incorrect because volunteer work for charities does not require disclosure.

Bis incorrect because acting as a trustee for a personal or family estate is generally not considered an OBA.

Dis incorrect because unpaid board membership for a not-for-profit entity does not typically require disclosure.

SEC Regulation A provides a registration exemption for smaller public offerings but includes a "bad actor" disqualification. If certain key parties, such as the issuer, underwriter, or affiliates, have been involved in securities violations, the exemption is forfeited.

B is correctbecause underwriters are considered essential participants, and their status as bad actors disqualifies the offering.

A,C, andDare incorrect because custodians, transfer agents, and clearing corporations are not included in the "bad actor" provisions of Regulation A.

Step by Step Explanation:

Cost Basis in Reverse Split: The total cost basis remains unchanged in a reverse stock split. Only the number of shares and price per share adjust.

Pre-Split: 1,000 shares at $5 each = $5,000.

Post-Split: 200 shares at $25 each = $5,000.

Incorrect Options:

A, B, and D: Do not reflect the unchanged total cost basis.

References:

IRS Guidance on Stock Splits: IRS Stock Split Info.

FINRA’s Continuing Education (CE) requirements include the Regulatory Element, which must be completed:

Within 120 days of the second anniversary of a registered representative’s initialregistration.

Every three years thereafter (changed to every two years as of 2023).

C is correctbecause registered persons must complete the CE Regulatory Element after their initial requirement and then every two years.

AandBare incorrect because CE is not required annually or semiannually.

Dis incorrect because CE is not tied to customer complaints.

Open-end mutual funds are redeemable securities, meaning investors can sell their shares back to the fund at the NAV.

D is correctbecause mutual funds allow redemption at NAV.

A,B, andCare not redeemable securities.

Step by Step Explanation:

FINRA Rule 3150: Permits firms to hold customer mail only with written instructions specifying the duration, which cannot exceed three months unless there are exceptionalcircumstances.

Incorrect Options:

A: Holding mail is not prohibited if done in compliance with FINRA rules.

C & D: Oral instructions or RR discretion are not sufficient; written authorization is mandatory.

References:

FINRA Rule 3150 (Holding of Customer Mail): FINRA Rule 3150.

Step by Step Explanation:

PIPE Offerings: Typically priced below the current market value to incentivize institutional investors to participate in these transactions.

Discount: The discounted price compensates for the potential illiquidity and risk associated with PIPE offerings.

POP/Market Value: These do not apply to private offerings structured as PIPE transactions.

References:

SEC PIPE Offering Guidance: SEC PIPE Offerings.

The announcement of negative regulatory changes introducesunsystematic risk, specific to the technology sector. Diversification into unrelated sectors can reduce exposure to this risk.

A is correctbecause uncorrelated holdings reduce portfolio risk.

Bis incorrect because adding more microchip companies increases exposure to sector-specific risk.

Cdoes not address the core issue of over-concentration.

Dis the opposite of mitigating risk.

When bond yields rise, the price of existing bonds falls. This inverse relationship exists because the fixed coupon payments of the bonds become less attractive compared to new bonds issued at higher yields.

B is correctbecause the bond’s market value decreases as its yield increases.

Ais incorrect because bond values decrease, not increase, with rising yields.

Cis incorrect because the face value (par value) remains unchanged.

Dis incorrect because changes in yield directly affect the bond’s market price.

Step by Step Explanation:

Interest Rate Risk: Treasury securities are sensitive to changes in interest rates. When rates rise, Treasury prices fall, exposing investors to price risk.

Incorrect Options:

Credit Risk: Virtually nonexistent for Treasuries, as they are backed by the U.S. government.

Liquidity Risk: Treasuries are highly liquid.

Prepayment Risk: Applies to mortgage-backed securities, not Treasuries.

References:

SEC Bond Risk Disclosures: SEC Treasury Risks.

Currency devaluation reduces the value of a country’s currency relative to others, making its exports cheaper and more competitive internationally. This stimulates demand for the country’s goods and services.

D is correctbecause devaluation reduces export costs, encouraging foreign buyers.

Ais incorrect because devaluation can increase inflation by raising the cost of imported goods.

Bis incorrect because GDP often rises due to increased export demand.

Cis incorrect because imports become more expensive after devaluation, reducing demand.

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.

References:

SEC Guidance on Bond Ratings: SEC Bond Ratings.

A transfer agent is responsible for maintaining accurate records of shareholder purchases, redemptions, and account balances. They also handle the issuance and cancellation of shares and ensure shareholders receive appropriate distributions.

D is correctbecause maintaining shareholder records is a core duty of a transfer agent.

Ais incorrect because underwriting is the responsibility of a broker-dealer.

Bis incorrect because distributing the prospectus is handled by the fund’s distributor.

Cis incorrect because custody of securities is the role of a custodian, not the transfer agent.

Step by Step Explanation:

Low Liquidity: Hedge funds often impose lock-up periods and restrict redemptions, leading to low liquidity for investors.

Incorrect Options:

B: Hedge funds typically have high minimum investment requirements, often $1 million or more.

C: Hedge funds employ diverse strategies, not just fixed income.

D: Hedge funds are generally opaque about their strategies and holdings to protect their competitive advantage.

References:

SEC Investor Bulletin on Hedge Funds: SEC Hedge Funds.

Step by Step Explanation:

FINRA Rule 3240: Permits borrowing or lending arrangements between RRs and customers under specific conditions, including familial relationships, provided the arrangement complies with the firm’s policies.

Incorrect Options:

A: FINRA approval is not required; firm approval is.

B: A written agreement alone is insufficient without firm approval.

C: Commercially reasonable terms are not the sole criterion for permissibility.

References:

FINRA Rule 3240 (Borrowing from or Lending to Customers): FINRA Rule 3240.

Passive ETFs track an index and require minimal management, leading to lower expenses compared to actively managed ETFs.

D is correctbecause passive ETFs are cost-efficient and have lower fees.

Ais incorrect because index ETFs have low turnover since they replicate an index.

Bis incorrect because ETFs are priced continuously throughout the trading day.

Cis incorrect as ETFs aim to match, not outperform, the index.

Purchasing a put option allows the customer to sell the stock at a predetermined price (the strike price) if the share price declines. This strategy protects against downside risk while maintaining upside potential.

C is correctbecause a put acts as insurance, locking in a minimum sale price.

Ais incorrect because selling a put exposes the investor to additional risk if the stock declines.

Bis incorrect because selling a call generates income but does not protect against downside risk.

Dis incorrect because purchasing a call is a bullish strategy unrelated to protecting existing positions.

An option is considered "at the money" when the current price of the underlying asset (or index level) equals the option’s strike price.

B is correctbecause the index level equals the strike price.

Ais incorrect because "in the money" requires the option to have intrinsic value (e.g., for a call, the index level must be above the strike price).

Cis incorrect because "out of the money" applies when the index level is below the strike price (for calls) or above it (for puts).

Dis incorrect because "at the money" options have no intrinsic value.

Coverdell Education Savings Accounts (ESAs) require that all funds be distributed by the time the beneficiary reaches 30 years old. If the funds are not used for qualified educational expenses, they may be subject to taxes and penalties.

B is correctbecause funds must be distributed by age 30 unless transferred to another eligible family member.

Ais incorrect as age 21 is not relevant for Coverdell ESAs.

Cis incorrect because age 59 ½ applies to retirement accounts like IRAs.

Dis incorrect because there is a distribution deadline for Coverdell accounts.

FINRA Rule 4511 requires member firms to retain records, including electronic communications, in anon-rewriteable, non-erasable format(often referred to as WORM: Write Once, Read Many). This ensures that records cannot be altered or deleted once stored.

D is correctbecause firms must store records in a tamper-proof format.

A,B, andCare incorrect because these formats do not guarantee compliance with the tamper-proof requirements set forth by FINRA and the SEC.

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.

References:

SEC Investor Bulletin on Asset Allocation: SEC Asset Allocation.

Restricted stock refers to securities acquired through private placements, such as those offered under Regulation D. These securities are not registered with the SEC and are subject to holding period restrictions before resale.

A is correctbecause Regulation D offerings involve private placements, resulting in restricted stock.

Bis incorrect because IPOs involve publicly traded shares, not restricted stock.

CandDare incorrect because restricted stock is not obtained through warrants or exchange-traded options.

The Securities Act of 1933 requires securities offered to the public to be registered with the SEC unless they qualify for an exemption. Open-end investment companies (mutual funds) are not exempt and must register.

D is correctbecause mutual funds are publicly offered and require registration.

Ais incorrect because private placements are exempt under Regulation D.

Bis incorrect because municipal securities are exempt under Section 3(a)(2).

Cis incorrect because U.S. government securities are also exempt under Section 3(a)(2).

Step by Step Explanation:

Consumer Discretionary Sector: Includes products and services that are not essential, such as luxury items, travel, and entertainment. Revenues increase as disposable income risesduring economic expansion.

Consumer Staples and Utilities: These sectors are defensive and less impacted by economic cycles.

Healthcare: Also less correlated with economic cycles due to its essential nature.

References:

SEC and FINRA Guidance on Sectors: Investopedia Sector Overview.

Step by Step Explanation:

Priority in Bankruptcy: Preferred stockholders have a higher claim on a company’s assets than common stockholders during liquidation. Common stockholders are residual claimants.

Dividend Priority: Preferred stockholders are entitled to fixed dividends before common stockholders receive any dividends.

Incorrect Options:

A & B: Common and preferred stocks are treated differently in bankruptcy and dividend payments.

C: Common stock dividends are subordinate to preferred stock dividends.

References:

SEC Guidance on Stockholder Rights:SEC Stock Rights.

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.

References:

FINRA Rule 4210 (Margin Requirements): FINRA Rule 4210.

Step by Step Explanation:

FINRA Rule 2210: Firms are prohibited from suggesting or implying FINRA's endorsement or approval in any advertising materials.

Approvals: Even if a principal or FINRA approves the content, such a statement remains impermissible.

Key Point: FINRA's role is to regulate, not to endorse firms or their marketing.

References:

FINRA Rule 2210 (Communications with the Public): FINRA Rule 2210.

Regulation S-P mandates that broker-dealers disclose how they collect, protect, and share customers’ nonpublic personal information. The privacy notice must include:

The categories of information collected.

The firm’s policies for safeguarding data.

Opt-out rights for sharing information with unaffiliated third parties.

D is correctbecause privacy notices must describe policies for protecting customer information.

A,B, andCare incorrect because they do not relate to the required elements of Regulation S-P privacy notices.

Equity securities represent ownership in a company, and preferred stock is a type of equity security that pays dividends and has priority over common stock in liquidation.

A is correctbecause preferred stock is an equity security.

Bis incorrect because commercial paper is a short-term debt security.

Cis incorrect because certificates of deposit (CDs) are fixed-income banking products.

Dis incorrect because exchange-traded notes (ETNs) are unsecured debt securities.

Step by Step Explanation:

General Obligation (GO) Bonds: Backed by the full faith and credit of the issuing municipality, relying on its taxing power for repayment.

Revenue Bonds: Supported by revenues from a specific project or source.

Treasury Bonds: Issued by the federal government.

Corporate Bonds: Issued by corporations, not municipalities.

References:

SEC Municipal Bond Guide: SEC GO Bonds.

Step by Step Explanation:

Nonpublic Information: A customer’s net worth is nonpublic personal information that requires confidentiality under Regulation S-P.

Incorrect Options:

A, B, and D: Names, addresses, and phone numbers may be public unless linked to specific financial or personal details.

References:

SEC Regulation S-P (Privacy of Consumer Financial Information): SEC Regulation S-P.

During the "quiet period" after filing the registration statement, issuers are restricted in what they can communicate to the public to avoid influencing the market.

C is correctbecause promotional statements, such as those supporting the company’s valuation, are prohibited during this time.

A,B, andDare factual, non-promotional statements and are permitted.

When a firm acts in a principal capacity, it trades securities for its own account, buying or selling directly to or from its inventory. The firm’s role differs from an agency capacity, where it acts as an intermediary.

A is correctbecause principal capacity involves selling directly from the firm's inventory.

B,C, andDare incorrect because these scenarios describe agency transactions, where the firm facilitates trades between two parties.

The primary market deals with the issuance of new securities, which is regulated under the Securities Act of 1933. This act requires issuers to provide full disclosure of material information to investors to ensure transparency and fairness in new offerings.

A is correctbecause the Securities Act of 1933 governs initial offerings.

Bis incorrect because the Securities Exchange Act of 1934 regulates secondary market trading.

Cis incorrect because the Investment Advisers Act of 1940 pertains to investment advisers.

Dis incorrect because the Investment Company Act of 1940 governs mutual funds and other investment companies.

529 savings plans are state-sponsored education savings accounts that offer tax-advantaged growth. Key features include:

Contributions are not federally tax deductible (some states offer state-level deductions).

No income limitations for contributions.

The account owner, not the beneficiary, controls the plan.

Assets can be transferred tax-free to another family member’s 529 plan.

D is correctbecause tax-free rollovers are allowed for family members of the current beneficiary.

Ais incorrect as contributions are not universally tax deductible.

Bis incorrect as there are no income limitations for contributing.

Cis incorrect because the account owner, not the beneficiary, controls the assets.

Step by Step Explanation:

Outside Business Activity Definition: Per FINRA Rule 3270, an OBA involves compensated business activities outside the scope of the RR’s role at their firm. Passive investments are excluded because they do not require active involvement.

Incorrect Options:

A, B, and C: Selling real estate, selling insurance, and refereeing are considered OBAs as they involve active participation and compensation.

References:

FINRA Rule 3270 (Outside Business Activities): FINRA Rule 3270.

A secondary market transaction occurs when securities are bought and sold between investors, typically on an exchange.

C is correctbecause securities purchased on a registered exchange are secondary market transactions.

Ais incorrect as open-end mutual fund shares are purchased directly from the issuer.

Brefers to the primary market.

Dis also incorrect as private placements occur in the primary market.

Open-end mutual funds do not trade on secondary markets. Instead, shares are continuously issued or redeemed by the fund at the net asset value (NAV), calculated at the market close.

D is correctbecause investors purchase and redeem shares directly through the fund or authorized brokers.

Ais incorrect because mutual funds do not have a predetermined dissolution date.

Bis incorrect because mutual fund shares are priced at the NAV calculated once daily after the market closes.

Cis incorrect because secondary market trading applies to closed-end funds and ETFs, not open-end mutual funds.

Step by Step Explanation:

Backing Away: Refers to the failure of a market maker to honor a firm quote when a customer attempts to trade at that price. It is a violation of market rules.

Incorrect Options:

Freeriding: Involves selling securities before paying for them in a cash account.

Interpositioning: Involves unnecessary intermediaries in trades, which can harm customers.

Market Manipulation: Covers a range of deceptive practices, such as wash trading or spoofing, not specific to honoring quotes.

References:

FINRA Rule 5220 (Firm Quote Rule): FINRA Rule 5220.

CMOs are divided into tranches, which are portions of the pool of mortgage-backed securities. Each tranche has its own characteristics, including coupon rate, maturity date, and credit rating, tailored to meet the needs of different investors.

C is correctbecause tranches represent slices of the investment with specific terms.

Ais incorrect because the yield depends on prepayment rates and interest rate changes.

Bis incorrect as average life is an estimate, not a defining characteristic of a tranche.

Dis incorrect because underwriting is unrelated to the definition of a tranche.

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.

References:

SEC Regulation SHO (Short Selling): SEC Short Sales.

Step by Step Explanation:

Closed-End Funds: Trade on exchanges like stocks, and the investor receives the bid price (market price) minus any applicable commissions.

Incorrect Options:

A & B: NAV applies to open-end mutual funds, not closed-end funds.

D: POP applies to initial sales of mutual fund shares.

References:

SEC Guidance on Closed-End Funds: SEC Closed-End Funds.

"Regular way" settlement refers to the standard settlement cycle for securities transactions, which is T+2 for most stocks and bonds. This timeline is set by regulators to ensure orderly processing of trades.

D is correctbecause regular way settlement follows the preset T+2 cycle.

Ais incorrect because cash settlement occurs the same day as the trade.

Bis not a recognized term for settlement types.

Cis incorrect because next-day settlement applies only to specific securities (e.g., Treasury securities).

Step by Step Explanation:

DVP Process: Ensures that payment occurs simultaneously with the delivery of securities, mitigating counterparty risk. Cash payment is made before or at the time of delivery.

Incorrect Options:

A: The T+5 timeline is not standard for DVP.

C: Payment must occur at delivery, not after.

D: Settlement date agreements with the issuer are irrelevant for DVP.

References:

FINRA Guidelines on DVP/RVP Transactions: FINRA DVP Info.

Step by Step Explanation:

Warrants: These are long-term options issued by a company that give the holder the right to buy shares at a specific price before expiration. They are typically attached to bond or stock offerings to make them more attractive.

Incorrect Options:

A: Warrants do not pay interest.

B: Refers to callable bonds, not warrants.

D: Describes municipal bonds, not warrants.

References:

SEC Guide to Warrants and Options: SEC Warrants Information.