FINRA Series 6 Free Practice Questions Quiz 61

Business risk is defined as the possibility that a company’s financial performance could have a negative impact on the returns to the company’s investors. Business risk can be influenced by a number of factors, including sales/revenue that don’t meet expectations, shrinking margins, or increased pressure from competitors.
Business risk is applicable to fixed income securities as well, given that the company’s financial performance will impact the coupon rate on future fixed income issues. As the company issues higher coupon securities, the value of the older, lower coupon debt instruments will fall

Liquidity risk is defined as the possibility that the lack of liquidity within a security can have a negative impact for investors. One characteristic common to low liquidity is a wide spread between bid and ask prices. As investors who are forced to sell their positions receive lower prices due to the spread, those investors who are still holding their positions now see lower valuations. Liquidity risk is more relevant to equity investors than to fixed income investors, as fixed income investors are at least entitled to receive coupon payments and principal repayment at the scheduled maturity of the security. However, equity securities have no scheduled maturity and the only way for an investor to realize earnings on an equity investment is to sell that position.

An increase in interest rates would result in a decrease in price of a debt security. Future cash flows expected from the debt security would be discounted back to the present date at a higher rate, making the security less valuable compared to other alternatives now available in the marketplace. An increase in interest rates would have no impact on the par value of a debt security. The par value of a debt security is set at the date of issue and does not change over the life of the security.
An increase in market interest rates would decrease the duration of a debt security, which is a measure of the average time to receive all cash flows from a debt security. Because an increase in market interest rates represents an increase in the discount rate applied to future cash flows, the increase has the effect of weighting the duration more toward near-term cash flows and decreasing the duration. An increase in market interest rates would decrease the premium or increase the discount of a debt security. The premium/discount is the difference between the current price of the debt security and the par value of the security.

The primary tools that the government can use to enact fiscal policy include changing taxes, interest rates, and government spending.

The acronym UGMA stands for a Uniform Gift to Minors Account. UGMA accounts allow adults to open and manage a trade account for the benefit of an underage individual. The adult who manages the UGMA is called a custodian. All assets within a UGMA are held in the custodian’s name until the minor reaches the age of majority. The age of majority depends on the laws of each state. The custodian of the account has full rights over that account until the minor reaches the age of majority. A custodian may manage several accounts and a minor may be the principal in multiple accounts. However, any single account can have only one custodian and one minor. The custodian has a fiduciary responsibility to ensure the account is maintained properly for the benefit of the minor.

If the form is rejected, action must be taken by the applicable firm within 5 business days.

The member that receives the instructions must validate (declare valid) the request or claim that the request is not valid (take issue) within one business day.

Records to be preserved by certain exchange members, brokers and dealers (Rule 17a-4) – every broker and dealer is to keep general records for six years.

Regulation S-P (Privacy of Consumer Financial Information) contains at its core three main purposes or functions:
1. The regulation requires financial institutions to notify its customers of its privacy practices
2. The regulation prohibits financial institutions from disclosing nonpublic personal customer information to third parties, unless the institution has disclosed its practices to the customer and the customer has failed to opt out of such disclosure
3. The regulation provides certain industry standards for financial institutions regarding privacy practices and disclosure of customer information.
Regulation S-P (Privacy of Consumer Financial Information) provides for certain exceptions to the disclosure and privacy policies. A good working knowledge of these exceptions is important to avoid confusion or miscommunication around practices that might otherwise be considered violations of the regulation. For instance, the regulation provides that the initial privacy notice must be provided at the beginning of the customer relationship, which is defined to occur at the time of share purchases.

The PATRIOT Act was established for all forms of business following the terrorist attacks of September 11, 2001. The PATRIOT act was established to help businesses, especially financial institutions, prevent funneling of funds to terrorist organizations. The PATRIOT Act requires that financial institutions establish and maintain a customer information program (or CIP). The minimum required information for collection for CIPs consists of the customer’s name, address, social security number, and date of birth. Per the requirements of the USA PATRIOT Act, it is the responsibility of the FINRA member opening a new account to confirm that the customer is who they say they are (usually via some form of government issued identification), retain the method used to determine the customer’s identity, and ensure that the person is not on the Office of Foreign Assets Control (OFAC) list. The OFAC list contains the names of individuals and organizations with ties to terrorism.