FINRA General Securities Representative 2 — Questions and Answers
Question 1: A customer instructs her broker to sell 500 shares of XYZ 'at the market.' If the current best bid is $42.10 and the best ask is $42.20, at what price should the order execute?
- $42.20
- $42.10 (Correct answer)
- $42.15
- The order cannot be filled at market
Correct answer: $42.10
A market sell order executes at the best available bid price, which is $42.10.
Question 2: Under FINRA rules, which of the following is considered a 'restricted person' prohibited from purchasing shares in a hot IPO?
- A retail customer with a long-standing account
- A broker-dealer employee and member of their immediate family (Correct answer)
- An institutional investor with no affiliation to the underwriter
- A hedge fund with no broker-dealer ownership
Correct answer: A broker-dealer employee and member of their immediate family
FINRA Rule 5130 restricts broker-dealer employees and their immediate family members from purchasing new issue equity securities in a public offering.
Question 3: A convertible bond with a conversion ratio of 25 is trading at par ($1,000). The stock is trading at $38. What is the conversion premium?
- 5.26% (Correct answer)
- 2.63%
- 4.00%
- 6.67%
Correct answer: 5.26%
Parity value is 25 × $38 = $950; conversion premium = ($1,000 − $950) / $950 = 5.26%.
Question 4: Which money market instrument is an unsecured, short-term promissory note issued by a corporation to finance short-term liabilities?
- Banker's acceptance
- Commercial paper (Correct answer)
- Treasury bill
- Federal funds
Correct answer: Commercial paper
Commercial paper is an unsecured short-term debt instrument issued by corporations, typically with maturities up to 270 days.
Question 5: A customer buys 1 ABC Jan 50 Call for $3 and simultaneously sells 1 ABC Jan 60 Call for $1. What is the maximum gain on this bull call spread?
- $200
- $800 (Correct answer)
- $600
- $400
Correct answer: $800
Max gain = (difference in strikes − net debit) × 100 = (10 − 2) × 100 = $800.
Question 6: Under SEC Rule 144, which of the following is required before an affiliate can sell restricted securities?
- Filing a Form S-1 registration statement
- Holding the securities for at least 6 months and complying with volume limitations (Correct answer)
- Obtaining written approval from FINRA
- Converting the securities to registered shares first
Correct answer: Holding the securities for at least 6 months and complying with volume limitations
Rule 144 requires affiliates to satisfy a 6-month holding period and volume restrictions before selling restricted securities.
Question 7: A registered representative receives a tip from a friend who works at a pharmaceutical company that the FDA is about to approve a major drug. Trading on this information would violate which regulation?
- Regulation T
- SEC Rule 10b-5 (insider trading) (Correct answer)
- FINRA Rule 4511
- Securities Act of 1933 Section 11
Correct answer: SEC Rule 10b-5 (insider trading)
Trading on material nonpublic information (inside information) violates SEC Rule 10b-5, which prohibits fraud and deception in securities transactions.
FINRA General Securities Representative 2
A customer instructs her broker to sell 500 shares of XYZ 'at the market.' If the current best bid is $42.10 and the best ask is $42.20, at what price should the order execute?