FINRA General Securities Representative 3 — Questions and Answers
Question 1: A customer in the 32% federal tax bracket purchases a municipal bond yielding 4.5%. What is the taxable equivalent yield?
- 5.76%
- 6.62% (Correct answer)
- 4.86%
- 3.06%
Correct answer: 6.62%
Taxable equivalent yield = 4.5% / (1 − 0.32) = 4.5% / 0.68 = 6.62%.
Question 2: Which of the following describes a 'fill or kill' (FOK) order?
- Execute as much of the order as possible and cancel the rest
- Execute the entire order immediately or cancel it completely (Correct answer)
- Execute the order at the close of trading only
- Execute the order over the course of the trading day
Correct answer: Execute the entire order immediately or cancel it completely
A fill or kill order requires the entire order to be executed immediately; if not, it is cancelled in full.
Question 3: Under Regulation T, the initial margin requirement for purchasing equity securities is:
- 25%
- 30%
- 50% (Correct answer)
- 75%
Correct answer: 50%
Regulation T, set by the Federal Reserve, requires an initial margin deposit of 50% of the purchase price of equity securities.
Question 4: An investor buys a 10-year Treasury bond with a 5% coupon at a price of 110. Which statement is TRUE about the yield?
- The yield to maturity equals the coupon rate
- The yield to maturity is greater than the coupon rate
- The yield to maturity is less than the coupon rate (Correct answer)
- The current yield equals the yield to maturity
Correct answer: The yield to maturity is less than the coupon rate
When a bond is purchased at a premium (above par), its yield to maturity is less than the coupon rate.
Question 5: Which of the following is NOT a characteristic of exchange-traded funds (ETFs)?
- They trade on an exchange throughout the day
- They typically have lower expense ratios than actively managed mutual funds
- They are priced once daily at the close of the market (Correct answer)
- They can be sold short
Correct answer: They are priced once daily at the close of the market
ETFs trade throughout the day on exchanges at market prices, unlike mutual funds which are priced once per day at NAV.
Question 6: A customer wants to hedge a long portfolio of blue-chip stocks against a market decline. Which strategy is most appropriate?
- Buy call options on the S&P 500 index
- Buy put options on the S&P 500 index (Correct answer)
- Sell put options on individual holdings
- Write covered calls on unrelated stocks
Correct answer: Buy put options on the S&P 500 index
Buying index put options provides downside protection by gaining value as the market declines, offsetting losses in the portfolio.
Question 7: Which regulatory body sets the minimum maintenance margin requirement for long stock positions in margin accounts?
- The SEC
- The Federal Reserve
- FINRA (Correct answer)
- The Treasury Department
Correct answer: FINRA
FINRA Rule 4210 sets the minimum maintenance margin at 25% for long equity positions, though individual firms may impose higher requirements.
FINRA General Securities Representative 3
A customer in the 32% federal tax bracket purchases a municipal bond yielding 4.5%.
What is the taxable equivalent yield?