FIN 659: Special Topics in Finance

(Security Industry Essentials)

Assignment I

Spring 2020

Due: Mar 8th, 11:59pm.

Instructions:
This exercise includes chapter 1, 3, 4, 5, 11
The total exercise credit for this homework is only 85 points:
Another 15 credits will be given as effort, which makes the total credit to be 100.
Late submission of homework will incur a penalty of 20 credits.
Assignments more than two days late won’t be accepted
Multiple Choices (85 questions; 1 points each)

1. Which of the following disclosure documents is used for a private placement?

A. Official statement
B. Prospectus
C. Free writing prospectus
D. Offering memorandum

2. Which of the following securities are required to be registered under the Securities Act of 1933?
A. Eurodollar bonds
B. American Depositary Receipts (ADRs)
C. Municipal securities
D. Securities issued by the federal government

3. Who is responsible for creating the official statement for a municipal bond offering?
A. The issuer
B. Bond counsel for the issuer
C. The underwriting syndicate
D. Bond counsel for the underwriting syndicate

4. All of the following statements are TRUE about closed-end investment companies, EXCEPT that the:
A. Number of outstanding shares is constant
B. Shares are sold at the current market price
c. Shares may not sell below the current net asset value
D. Shares may be listed on the NYSE

5. If a bond is called at 103.75, how much will an investor receive?

A. $1,037.50 plus accrued interest
B. $1,037.50
C. $1,037.75
D. It depends on the current market price of the bond

6. In a Chapter 11 bankruptcy proceeding, which of the following has the highest priority claim?
A. Equity holders
B. Unsecured debt holders
C. Secured debt holders
D. Administrative claim holders

7. Which of the following is used as the disclosure document for a private placement?
A. Red herring
B. Free writing prospectus (FWP)
C. Offering memorandum
D. Term sheet
8. The investment banking department of a broker dealer is generally involved in which of the following
activities?
A. Coordinating the offering of securities between the issuer and investors to raise capital.
B. Working with the broker dealer's trading desk by placing orders for new issues with investors.
C. Acting as an agent for customers who are involved in secondary market trades.
D. Acting as a principal for customers who are involved in secondary market trades.

9. An individual is interested in an investment that offers annual income, has the potential of appreciating
in value if interest rates decline and, in the event that the issuer fails to make a payment, having the
missing amount added to future distributions. For this investor, which of the following securities is the
most suitable?
A. Callable preferred stock
B. Cumulative preferred stock
C. Participating preferred stock
D. Convertible preferred stock

10. If ABC Brokerage (a broker-dealer) purchases 600 shares of stock from a customer and places the
securities into its inventory, it likely acted as a(n):
A. Dealer
B. Designated market maker
C. Agent
D. Underwriter

11. Which of the following approvals is required before a municipality can begin making payments on a
moral obligation bond?
A. Approval by a majority of legal age voters
B. Approval by the state legislature
C. Approval by the bond trustee
D. Approval by the appropriate state agency

12. Keystone Chocolate Co. plans to sell, only in the state of Pennsylvania, shares of a new issue. In order
to qualify for a registration exemption under Rule 147, what percentage of the corporation's assets must
be located in Pennsylvania, and what percentage of its revenues must be derived from Pennsylvania
sources, at the time of the offering?
A. 70%
B. 80%
C. 90%
D. 100%

13. All of the following are likely to be found in the portfolio of a money-market fund, EXCEPT:
A. Bank certificates of deposit
B. Treasury bills
C. Treasury bonds that have a short time to maturity
D. Common stock
14. Last year, a company failed to pay the full dividend to its preferred shareholders, but now wants to
pay a cash dividend on its common shares. Which preferred stock must be paid all of the dividends in
arrears before the dividend can be paid on its common shares?
A. Participating preferred
B. Convertible preferred
C. Callable preferred
D. Cumulative preferred

15. An investor who is searching for a quote on a non-listed stock may find it on:
A. Nasdaq
B. NYSE
C. OTCBB
D. OCC

16. What's an investment adviser?

A. A person who buys or sells securities
B. A person in the business of giving investment advice for a fee
C. A person who holds funds or securities
D. A person who manages and keeps track of an issuing company's shareholders

17. XYZ corporation has 7,000,000 shares of common stock ($1 par value) authorized, of which
5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price
of XYZ is 20. The market capitalization of XYZ common stock is:
A. $4,500,000
B. $5,000,000
C. $90,000,000
D. $100,000,000

18. Which of the following securities would be subject to federal securities registration requirements?
A. Securities offered through a private placement
B. GNMA securities (government agency securities)
C. Municipal bonds
D. Mutual fund shares

19. What's the required minimum net worth for an investor to be considered accredited?
A. $1 million, excluding their primary residence
B. $1 million, including their primary residence
C. $200,000, including their primary residence
D. $200,000, excluding their primary residence

20. DCH, Inc., an investment banker, has entered into a firm-commitment underwriting with ABC
Company to sell 10,000,000 shares of stock. What are the requirements of this arrangement for the
investment banker?
A. Sell as much as possible and return anything left unsold to ABC Company
B. Sell at least a minimum percentage as stipulated by ABC Company
C. Sell all the shares or cancel the offering
D. Sell the entire issue or retain any shares left unsold

21. For corporate bonds, accrued interest is calculated based on:

A. Actual calendar days in every month and 365 days in the year
B. 30 days in every month and 360 days in the year
C. Actual calendar days in every month and 360 days in the year
D. 30 days in every month and 365 days in the year

22. Which of the following statements is TRUE regarding warrants?

A. Warrants receive dividends when the common stock receives dividends
B. Warrants can be perpetual
C. Warrants are only issued by blue-chip corporations
D. Warrants are guaranteed by the Options Clearing Corporation

23. The minimum denomination for negotiable certificates of deposit is:

A. $100,000
B. $10,000
C. $5,000
D. $1,000

24. A client wants to invest $250 a month and have broad exposure to the U.S. equity market. Which of
the following recommendations is the most suitable for this client?
A. A managed closed-end fund
B. An S&P 500 Index mutual fund
C. An S&P 500 Index exchange-traded fund
D. An DJIA exchange-traded fund

25. Which of the following disclosure documents is used for a public offering of corporate securities?
A. Offering memorandum
B. Free writing prospectus
C. Official statement
D. Prospectus

26. A customer owns shares of restricted stock and now intends to sell them. If the proper forms are filed
with the SEC, the customer may sell these shares:
A. At any time
B. Over a 35-day period
C. Over a 90-day period
D. Over a 180-day period

27. A type of security that is issued in the U.S. by foreign governments and corporations, trades in U.S.
markets, and is denominated in U.S. dollars is called a:
A. Global mutual fund
B. Eurodollar bond
C. Yankee bond
D. Repurchase agreement

28. The call premium of a bond refers to the amount:

A. An investor must pay above par to buy a callable bond
B. Over par value that the issuer must pay to exercise the call privilege
C. The issuer must add to the semiannual interest payments to offset the call feature
D. Added to the price at issuance to compensate for the call privilege

29. The day-to-day business activities of a unit investment trust (UIT) are the responsibility of the:
A. Trustee
B. Board of directors
C. Investment adviser
D. Distributor

30. A broker-dealer is clearing its trades through another broker-dealer but is not disclosing specific
information regarding its clients. Who is responsible for maintaining the account records?
A. The clearing broker-dealer.
B. The introducing broker-dealer.
C. The broker-dealer appointed by FINRA to prepare the records
D. Both the clearing and introducing broker-dealers

31. The third market is concerned with:

A. Securities listed on an exchange that are traded directly between institutional investors
B. Securities listed on an exchange, but traded in the OTC market
C. Listed securities trading on an exchange
D. OTC equity securities trading on an exchange

32. The value of the conversion feature on a convertible bond is determined by:
A. Its interest rate
B. Its maturity date
C. The stock price
D. The bond's trustee

33. Which of the following entities is considered an eligible purchaser for a Rule 147 offering?
A. A corporation that has its principal office located in the state of the offering
B. A partnership in which 90% of the partners are located in the state of the offering
C. A trust that is organized for the specific purpose of purchasing the securities and is located in the state
of the offering
D. A qualified institutional buyer that has one of its offices located in the state of the offering
34. An investor would have the right to buy the stock of a corporation for the longest period of time by
purchasing a:
A. Right
B. Call option
C. Put option
D. Warrant

35. The most recent transaction in ABC 6.50x 2050 was at 95. This bond is trading at:
A. A discount
B. A premium
C. Par
D. The yield to maturity

36. A company based in Europe with offices located in New Jersey would like to have its stock traded on
the NYSE. This would most likely be accomplished through the issuance of:
A. Bankers' Acceptances
B. Eurodollar bonds
C. Yankee bonds
D. American Depositary Receipts

37. Which statement best summarizes the difference between a primary and secondary distribution?
A. A primary distribution can only be made for equity issues, while a secondary distribution can only be
made for debt issues.
B. A primary distribution must be made at the current market price, while a secondary distribution must
be made at a fixed public offering price (POP).
C. A primary distribution can only be made if the issuance exceeds a specified dollar amount, while a
secondary distribution can be made for issues of any size.
D. A primary distribution involves the sale of new shares by the issuer, while a secondary distribution
involves the sale of shares that are already issued and outstanding.

38. All of the following statements are TRUE concerning both auction rate securities (ARSs) and
variable-rate demand obligations (VRDOs), EXCEPT:
A. Interest rates are set at specified intervals
B. They are often issued by municipalities
C. They are long-term securities with short-term trading features
D. They have a put feature allowing the holder to redeem the security at par

39. When warrants are issued, the exercise price is:

A. Lower than the current market price of the stock
B. Higher than the current market price of the stock
C. Equal to the current market price of the stock
D. Based on the average price of the stock over the last year

40. Common and preferred stock are similar in that:

A. Both have a fixed dividend
B. The dividends for both must be declared by the board of directors
C. Both are guaranteed to receive an annual dividend
D. Both have an equal vote on corporate issues

41. Government-sponsored enterprise securities are comparable to direct government obligations with
regard to all of the following statements, EXCEPT:
A. They trade in the over-the-counter market
B. All are government guaranteed
C. Short-term securities are quoted on a discount yield
D. Long-term securities are quoted as a percentage of par

42. Which of the following securities is NOT backed by the credit of the U.S. government?
A. Treasury bills
B. Treasury STRIPS
C. Government National Mortgage Association (GNMA) bonds
D. Federal National Mortgage Association (FNMA) bonds

43. U.S. government agency issues are:

A. Exempt from federal taxes.
B. Exempt from registration under the Securities Act of 1933.
C. Issued in bearer form only.
D. General obligations of the federal government.

44. During periods of rising interest rates, an investor can expect:

A. The nominal rate of outstanding bonds to fall
B. Short-term bond yields to fall more than long-term bond yields
C. Long-term bond prices to fall more than short-term bond prices
D. Short-term bond prices to fall more than long-term bond prices

45. A corporation that intends to issue new shares within the next two years and wants to satisfy the
registration provisions in advance could use:
A. Regulation A
B. Rule 147
C. Shelf registration
D. Regulation D

46. Preferred dividends:

A. Must be satisfied before common dividends
B. Must be satisfied after common dividends
C. Must be satisfied before bond interest payments
D. Must be satisfied each year

47. Which of the following statements is NOT TRUE regarding a private placement?
A. There is a limit to the number of nonaccredited investors who may purchase the securities
B. The securities are exempt from registration
C. Solicitation of investors may not be permitted
D. It is usually a very liquid investment

48. What's a general obligation (GO) bond?

A. A bond that's backed by the taxes of the U.S. government
B. A bond that's backed by the revenues of a local corporation
C. A bond that's backed by the revenues of a project which is operated by a local municipality
D. A bond that's backed by taxes imposed by a local municipality

49. Which of the following organizations provides clearing services for equity securities?
A. The National Securities Clearing Corporation (NSCC)
B. The Fixed Income Clearing Corporation (FICC)
C. The Options Clearing Corporation (OCC)
D. A transfer agent

50. If a bond offering is issued with a call provision, it's MOST beneficial to:
A. Investors who want to hold the bond until maturity
B. Investors who want steady income until maturity
C. An issuer that wants to make interest payments on the bonds until maturity
D. An issuer that does not want to make the same interest payment until maturity

51. The call premium of a bond refers to the amount:

A. An investor must pay above par to buy a callable bond
B. Over par value that the issuer must pay to exercise the call privilege
C. The issuer must add to the semiannual interest payments to offset the call feature
D. Added to the price at issuance to compensate for the call privilege

52. Which of the following securities is an example of a collateralized time draft?

A. Commercial paper
B. American Depositary Receipts
C. Bankers' acceptances
D. Eurodollars

53. A quote of 5.90 - 5.75 is a quote for which of the following securities?
A. Treasury bills
B. Treasury notes
C. Treasury bonds
D. A mortgage-backed security

54. Which of the following securities assist in financing importing and exporting operations?
A. Bankers' acceptances (BAs)
B. Treasury bills
C. Eurodollar CDs
D. American Depositary Receipts (ADRs)

55. A market maker is quoting a stock as follows: Bid 23.50, Offer 23.70. This means that the market
maker will:
A. Buy shares at 23.50 and sell shares at 23.70
B. Buy shares at 23.70 and sell shares at 23.50
C. Sell shares at a price higher than 23.70 and buy shares at a price lower than 23.70
D. Buy and sell shares at a price between 23.50 and 23.70

56. A customer has an account with a discount broker-dealer that specializes in online trading. If the
customer is being charged a commission, the firm is MOST likely acting in which of the following
capacities?
A. Agent
B. Principal
C. Market marker
D. Underwriter

57. A corporation has raised money to use for expansion of its plant within the next six months. In which
of the following securities should the corporation invest the funds until they are used?
A. High-quality commercial paper
B. Long-term municipal zero-coupon bonds
C. U.S. Treasury bonds
D. High-quality preferred stocks

58. A husband and wife have combined earnings of greater than $300,000 in each of the last two years. If
it's reasonably expected that this level of income will remain the same, the couple is considered:
A. A qualified investor
B. An accredited investor
C. An institutional investor
D. A qualified institutional buyer (QIB)

59. Of the choices listed, which one is Moody's lowest rating for a municipal note?
A. MIG 1
B. MIG 3
C. Aaa
D. D

60. Who derives the MOST benefit from a call provision attached to a bond offering?
A. Bondholders
B. Issuers
C. Preferred stock holders
D. Common stock holders
61. A corporation that has filed for bankruptcy is to be liquidated. Which of the following securities
issued by that corporation has seniority in the liquidation process?
A. Mortgage bonds
B. Debenture bonds
C. Common stock
D. Participating preferred stock

62. Which of the following statements is TRUE regarding the approval of an official statement?
A. The SEC provides approval.
B. FINRA provides approval.
C. The MSRB provides approval.
D. Official statements are not required to be approved by a regulator.

63. Which of the following represents the correct ranking of securities from longest to shortest life?
A. Rights, options, warrants
B. Options, warrants, rights
C. Warrants, options, rights
D. Warrants, rights, options

64. Which of the following statements is correct regarding official statements?

A. They must be filed with the SEC.
B. They must be filed with the FINRA.
C. They may be found on the SEC's EDGAR system.
D. They may be found on the MSRB's EMMA system.

65. Which of the following statements is NOT TRUE concerning a clearing corporation?
A. It provides trade comparison and reporting services.
B. It is responsible for automated book-entry changes in the ownership of securities.
C. It assists broker-dealers in transferring assets in a customer account to another broker-dealer.
D. It offers customers the ability to have real-time trade matching.

66. Which document attests to the validity of a municipal bond issue?

A. Registration statement
B. Legal opinion
C. Free writing prospectus (FWP)
D. Prospectus

67. A town has started the construction of public sewers. This project is likely paid by a(n):
A. Special assessment bond
B. Industrial development bond
C. Moral obligation bond
D. Equipment trust certificate

68. A U.S. Treasury bond is selling in the market at 95.18. The dollar value of this bond is:
A. $951.80
B. $955.62
C. $958.75
D. $952.18

69. The OTC Bulletin Board (OTCBB) is BEST defined as:

A. A quotation system for securities that are not listed on either the NYSE or Nasdaq
B. An exchange for securities that are not listed on either the NYSE or Nasdaq
C. An execution system for securities that are not listed on either the NYSE or Nasdaq
D. A quotation system for securities that are listed on the NYSE or Nasdaq and traded in the OTC market

70. If a corporation believes that its stock is undervalued, which of the following actions will cause the
share price to rise?
A. Issuing additional shares
B. Issuing preemptive rights
C. Issuing bonds with a warrant attached
D. Buying back some of the shares

71. If a company is utilizing a shelf registration, it is only required to file one registration statement to
cover all of the securities to be issued during the next:
A. Six months
B. One year
C. Three years
D. Five years

72. A corporation has a 9% cumulative preferred stock issue outstanding. The company paid a $7
dividend in 2012 and $8 in 2013. If the company wants to pay a common stock dividend in 2014, the
cumulative preferred stockholders must first receive a dividend of:
A. $12
B. $9
C. $3
D. 0

73. Which of the following statements BEST describes a banker's acceptance (BA)?
A. It facilitates the trading of foreign stocks in the United States
B. It helps to finance foreign trade between importers and exporters
C. It is used by a municipal issuer in raising funds to meet a seasonal need for cash
D. It is issued by nondomestic banks and is secured by Eurodollar deposits

74. During a period of stable interest rates, which type of preferred stock tends to be the most volatile?
A. Non-cumulative
B. Cumulative
C. Participating
D. Convertible
75. For an Industrial Development Bond (IDB), the primary source that backs the bond is:
A. The issuing authority only
B. The leasing corporation only
C. The issuing authority and the leasing corporation
D. The treasurer of the city or town of issuance

76. A convertible bond has a conversion price of $50 and is currently selling in the market at $1,100. The
conversion ratio is:
A. 20
B. 22
C. 55
D. 50

77. A grant anticipation note is normally paid from:

A. Proceeds from the issuance of long-term bonds
B. Funds received from the federal government
C. Revenues received at a future date
D. Receipts of future property taxes

78. Preemptive rights provide which of the following benefits to their holders?
A. The ability to vote when they cannot attend the shareholders' meeting.
B. A guarantee that bonds can be purchased at a predetermined price from the issuer.
C. Their proportionate ownership will not be diluted if additional shares are issued.
D. That dividends will continue to be paid on their common stock.

79. A bondholder can find the details regarding the terms and features of her bond from the:
A. Notice of Sale
B. Underwriting agreement
C. Legal opinion
D. Indenture

80. If an issuer intends to sell restricted stock under the provisions of Rule 144A, which of the following
investors is permitted to make the purchase?
A. Qualified institutional buyers (QIBs)
B. Non-accredited investors who have already invested in the restricted stock of the same issuer
C. Institutional investors
D. Accredited investors

81. For a bond owner, in which of the follow situations is call protection most valuable?
A. When bond prices are fluctuating.
B. When bond prices are stable.
C. When bond prices are falling.
D. When bond prices are rising.
82. An investor has purchased a Bristol County Public Power System revenue bond. Which of the
following statements is TRUE concerning this investment?
A. Earnings from the bond are exempt from federal, state, and local taxes
B. Payment of principal and interest is ultimately the responsibility of Bristol County
C. If the power system declares bankruptcy, the bonds will go into default
D. The assets of the power system secure the bond

83. Who has the responsibility to investigate the accuracy of the information in a prospectus for a DPP?
A. The managing underwriter
B. FINRA
C. The IRS
D. The SEC

84. All of the following must be included in a preliminary prospectus according to the Securities Act of
1933, EXCEPT:
A. A written statement on the left border of the preliminary prospectus (red herring) that states that the
prospectus may be subject to changes
B. The purpose for which the funds are being raised
C. The final offering price
D. The financial status and history of the company

85. Which of the following may NOT occur during the waiting period of the securities registration
process?
A. The underwriter publishes a tombstone ad
B. An underwriter sends a red herring to a potential customer
C. An RR accepts a cash deposit for the offering from an interested customer
D. An RR discusses the offering with a customer over the phone

Answer sheet: 14.D

1.D 15.C
2.B 16.B
3.A 17.C
4.A 18.D
5.A 19.A
6.C 20.D
7.C 21.B
8.A 22. B
9.B 23.A
10.A 24.B
11.B 25.D
12.B 26.C
13.D 27.C
28.B 71.A
29.A 72.A
30.B 73.B
31.B 74.D
32.C 75.B
33.A 76.A
34.D 77.B
35.A 78.C
36.D 79.A
37.D 80.A
38.D 81.D
39.B 82.C
40.B 83.A
41.B 84.C
42.D 85.C
43.B

44.C
45.C
46.A
47.D
48.D
49.A
50.D
51.B
52.C
53.A
54.A
55.A
56.A
57.A
58.B
59.B
60.B
61.B
62.C
63.C
64.D
65.B
66.B
67.A
68.A
69.A
70.D