General Securities Sales Supervisor (Series10) Practice Exam

Which statement about yield disclosure on customer confirmations is true?

1. For trades at par, yield disclosure is always required

2. For dollar price trades, the higher of yield to maturity or yield to call is shown

3. The lower of yield to maturity or yield to call is shown for dollar price trades

4. Yield disclosure is not needed for any type of trade

The correct answer is: The lower of yield to maturity or yield to call is shown for dollar price trades

The correct statement regarding yield disclosure on customer confirmations is that the lower of yield to maturity or yield to call is shown for dollar price trades. This requirement is in place to provide investors with a conservative estimate of the potential yield they could expect from a bond under various scenarios. When a bond is trading at a price other than par, investors need clarity on how yields may differ depending on whether the bond is held to maturity or called prior to that date. Since yields can be affected by the call provisions of a bond, showing the lower yield ensures that investors are aware of the worst-case scenario regarding their returns. This approach aims to offer a more accurate and potentially protective disclosure to clients about the bond's performance under two common scenarios. This practice aligns with regulatory guidelines which mandate that disclosures should be made with the investor's best interest in mind, particularly in terms of transparency regarding potential yields on investments. Therefore, it is crucial for brokers and dealers to communicate these details to help clients better understand the risks and returns associated with their trades.