Finra Series-63 Exam - Topic 2 Question 11 Discussion

Actual exam question for Finra's Series-63 exam

Question #: 11
Topic #: 2

Rich Quick is a broker-dealer registered in the state of Massachusetts. He occasionally trades on abnormalities he observes in bond yield spreads for his own account, short selling a bond that appears to be overpriced based on its yield and buying a bond that is identical in almost every respect except for the price, which is less than that of the other bond. He has been able to earn arbitrage profits 95% of the time when he does this. Rich Quick

Ais in violation of securities laws. Arbitrage is a prohibited activity.

Bis skilled if he is able to earn profits 95% of the time using this strategy.

Cis trading on insider information, which is a violation of securities laws.

Dengaged in a fraudulent activity.

Show Suggested Answer

Suggested Answer: B

If Rich Quick is able to earn profits 95% of the time by trading on abnormalities he observes in bond yield spreads, he is skilled. There is nothing illegal in what he is doing. Arbitrageurs attempt to earn profits when they observe what they believe to be mispriced securities, and this is an accepted activity. Rich is not using insider information; bond yields are publicly available information.

by Isaiah at Jul 06, 2025, 12:28 PM

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Stacey

2 months ago

I think he might be crossing some legal lines here.

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Erasmo

2 months ago

95% success rate? That's impressive!

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Brande

3 months ago

Definitely not insider trading; he's just spotting price differences.

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Margery

3 months ago

Wait, isn't arbitrage legal? This seems off.

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Freeman

3 months ago

Sounds like he's just doing smart trading to me.

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Renea

3 months ago

I think option A is definitely wrong because arbitrage isn't prohibited, but I'm torn between B and C. If he's not using insider info, then maybe he's just really skilled?

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Lisbeth

4 months ago

I feel like I read somewhere that trading on yield spreads is common, but I can't remember if there are specific regulations against it. Could he be violating any laws?

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Rebeca

4 months ago

This question reminds me of a practice question about market manipulation. I think if he's consistently profiting, it might raise some red flags, but I don't recall the exact rules.

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Devora

4 months ago

I remember studying that arbitrage is generally legal as long as it's not based on insider information, but I'm not entirely sure if Rich's strategy crosses any lines.

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Lai

4 months ago

This is a tricky one. Arbitrage can be a valid trading strategy, but the high success rate and the fact that it's for the broker-dealer's own account makes me suspicious. I'm leaning towards option A or D, but I want to make sure I fully understand the legal implications before committing to an answer.

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Shawana

4 months ago

Hmm, I'm a little unsure about this one. On the one hand, the broker-dealer seems to be taking advantage of market inefficiencies, which could be considered a legitimate trading strategy. But the high success rate and the fact that he's trading for his own account raises some red flags. I'll need to think this through carefully before selecting an answer.

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Virgilio

5 months ago

Okay, this one seems pretty clear-cut to me. Earning profits 95% of the time by exploiting price differences in nearly identical bonds? That's got to be a violation of securities laws, probably insider trading or some kind of fraudulent activity. I'm going with option C or D on this one.

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Claudia

5 months ago

This question seems straightforward, but I want to make sure I understand the key details before answering. The broker-dealer is trading on bond yield spreads, which could potentially be considered arbitrage. I'll need to review the rules around arbitrage to determine if this is a violation.

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