Chapter Exam Review - Attempt #5 - Incorrect Answers

A new client is considering opening a cash account at a broker dealer. Which of the following statements is NOT accurate regarding a cash account?

("NOT ACCURATE" FOR CASH ACCOUNT) C) - The "CUSTOMER MUST SIGN" a new account report form. Explanation: - The customer does not need to sign the new customer report form because it is only needed to be signed by the principal of the firm when opening the cash account. Even the RR does NOT need to sign the new account report form. D) is not correct because - A cash account requires that purchase of stock, bonds , or options be paid in full using regular way settlement.

A domestic company that exports goods to Europe and is paid in euros would use what option strategy to protect against a devolution of the euro?

A) Buy Euro Puts Explanation: The US exported would buy puts to protect against a drop in the value of the EURO. An easy way to remember this is: Memory Trick: Acronym "EPIC" - EXPORTERS (Buy) PUTS - IMPORTERS (Buy) CALLS Addition to hedging foreign currency as importer or exported using EPIC, the SPOT PRICE of a foreign currency will: Increases - The value of calls will increase, and the value of puts will decrease. Decreases - The value of puts will increase, the value of calls will decrease.

A RR recommends a 529 Education savings plan to a customer who lives in Kansas and wants to start saving for daughters college expenses. Which of the following characteristics of this plan is an important consideration?

A) Contributions may be deductible from state taxes if the child attends school in Kansas. Explanation) - Tax deductible for in state tuition - No tax deduction for out of state edu expenses. - May be used on all "higher education" such as college, private school, religious school, tuition for elementary or secondary public school. - Contributions are AFTER TAX dollars - Not tax deductible at the federal level, due to after tax contributions. - Contribtutions are not restricted by the income of the parents, but MAY BE SUBJECT TO GIFT TAX IF IN EXCESS of a specified annual level.

An investor is long stocks in a margin account with a total market value of $3,500. Due to a DROP IN PRICE of one of the holdings, the account EQUITY FALLS to $1,700. What action is the investor required to take to satisfy margin account requirements? Key Takeaway: - No other exercise takes place when the equity in margin account falls, no additional funds are required to meet the Minimum Equity Requirement.

A) NOTHING - No action is required! Explanation) When a decline in the market value of an investors security holdings causes the equity in an account to fall below the $2,000 MINIMUM EQUITY REQUIREMENT and **NO NEW TRANSACTIONS ARE EXECUTED**, the investor is NEITHER required to deposit money, NOR liquidate securities to raise the account value to $2,000.

A RR who has discretionary authority on his clients accounts calls the client to discuss shutting the asset allocation go his clients portfolio, reducing her equity exposure. The client agrees, but one month later notices that the registered representative just placed the related trades a week ago, rather than on the date of the conversion, resulting in steep losses in the portfolio. which of the following statements is true? Key Takeaway: - Discretionary Authority allows the registered representative to make investment decisions on behalf of the client.

A) The Registered Representative is PERMITTED to make investment decisions related to the account. Explanation: With discretionary authority the RR has full authorization to buy or sell with prior written authorization that was approved by the firm as discretionary authority. In this case the RR discussed the portfolio changes with the client, but was NOT obligated to trade on the date of the discussion.

Which of the following is NOT a characteristic of a money market mutual fund?

A) The total return must be comprised of 50% dividends, and interest, and 50% capital gains. Explanation: - Short Term Instruments (12 months or less) average weighted maturity of 90 days or less). - Offer Minimal Credit Risk - Invest a MIN of 95% of fund assets in securities that are rated in the top two categories of a NRSRO (Nationally recognized statistical ratings organization). NOTE - There is no percentage of income which must be earned from dividends and interest from the money market mutual fund.

Three and Six-month US Treasury Bills are sol at auctions conducted:

A) Weekly Explanation: Three and Six Month US Treasury Bills (T-BILLS) are sold at WEEKLY auctions conducted by the Federal Reserve.

A pension fund wants to increase the yield on a portfolio of blue chip stocks. Which of the following option strategies would best meet the funds goal?

A) Writing covered calls and selling index options against the portfolio. Explanation: Writing covered calls and selling index options against the portfolio will provide protection while taking in income. Writing covered calls also takes in income but not as much as writing covered calls and selling index options against the portfolio. Selling naked calls and puts also will take in income as well, but the strategy is much too speculative for a pension fund.

A technical analyst with a large Wall Street brokerage firm plots the stock price history or ABC company on a chart to try to forecast the future price movements. The price form a "head and shoulders top" pattern. Based on this pattern, the analyst would conclude that the stock prices are:

B) Bearish Explanation: The Head And Shoulders Top Formation pattern is BEARISH BECAUSE IT SHOWS THE PRICES DECLINING.

Among the "securities" exempt from registration with the SEC under the Federal Securities Act of 1933 are:

B) Choices 1,2,3 ONLY Choices to choose from: #1 - Whole Life Insurance #2 - Endowment Policies #3 - Fixed Annuities #4- Variable Annuities Explanation: Choices 1,2,3 are issued by Life Insurance Companies and have fixed, guaranteed values. They are regulated by state insurance laws. Although they are not technically "Securities", they are included on the list of 'Exempt Securities' in the '33 Act. Regarding choice 4, Variable Annuities are defined as a "Security" according to the SEC.

Your client holds 1 listed XYZ August 50 call. A CASH DIVIDEND of $2.50 per share is declared. On the EX-DATE, the terms of the call are:

B) Exercise Price: $50, Number of Underlying Shares per contract of XYZ: 100 Explanation: LISTED OPTIONS are not affected by CASH dividends on the common stock, thus there would NOT be any adjustment made to this option.

Which of the following option positions represent a combination?

B) LONG 1 ABC July 30 call, and LONG 1 ABC October 30 Put. Explanation: A combination is a: LONG CALL + LONG PUT + Diff Expiration Month/Strike Price (Or Both) Short Call + Short Put + Diff Expiration Month/Strike Price (Or Both) ... NOTE - DIFFERENT STRIKE PRICE OR EXPIRATION MONTH, OR BOTH. The only choice that fits this description is LONG 1 ABC July 30 call, and LONG 1 ABC October 30 Put, where as every other option had one long and one short option.

Which of the following tax is considered a source of debt service for municipal revenue bonds rather than general obligation bonds?

B) License and taxes paid by businesses Explanation) Special taxes are often levied to pay debt service for municipal revenue bonds. A Tax on Revenue Bonds: - License taxes paid by businesses The other choices would apply to General Obligation Bonds on state and local government entities such as: - Income Tax - Limited Tax Bonds - Ad Valorem Taxes These always pay general obligation bonds on state and local government entities!

Which of the following is NOT a component of the balance sheet?

B) Net Revenue Explanation: This balance sheet formula (also known as the balance sheet equation) is expressed as "Assets = Liabilities + Net Worth." Revenue and Expenses items are found on the income statement.

Which of the following statements is FALSE regarding variable annuity contracts?

B) The principal is guaranteed by the insurance company. Explanation: Variable annuity payments will vary. The word "guarantee" generally refers to a commitment made by third party to pay if the primary obligor fails to pay, but in the context of variable annuities it simply refers to the party responsible for payment, this would be the insurance company that issued the variable annuity. The Insurance Company Promises (guarantees) to pay annuity payments, but NOT THE PRINCIPAL AMOUNT. When the annuitant annuities, he/she loses control of the principal.

Your branch used variable annuities. During the course of the day to day business, a principal at an OSJ (Office of Supervisory Jurisdiction) gets an application that comes across her desk for a 1035 exchange. Assuming the paperwork is complete and there are no discrepancies, review by this principal for approval or rejection must take place with regards to the exchange recommendation within what time period? Key Takeaway: - How long does principal have to approve or reject a 1035 exchange with regards to a Deferred Variable Annuities assuming the paperwork is complete with no discrepancies?.

B) The principal must review the application within 7 BUSINESS DAYS. Explanation: When a complete and correct 1035 exchange application comes across the desk of a principal at an OSJ, the principal has 7 BUSINESS DAYS from the date when the OSJ receives the application to review the application for approval or rejection.

In a managed offering limited partnership interest are distributed by:

B) Wholesalers Explanation: - In a manger offering partnership interest in a DPP are distributed by wholesalers or creators of the partnership.

On Municipal Bonds traded REGULAR WAY between dealers, the settlement is NORMALLY ONE:

Business day later in clearing house funds. Explanation: - Municipal Bonds normally settle in 1 BUSINESS DAY IN CLEARING HOUSE FUNDS!

Assume a customer buys 1 ABC May 60 Call @ 6and sells 1 ABC May 70 Call @3 when ABC stock is selling at $63 per share. What is the customers breakeven price for the stock?

C) 63 Explanation: USE T CHART: B- 600 S+ 300 = -300 Long 1 May 60 Call (FOR A CALL): Strike Price + Premium Debit 60+3 = 63 Breakeven of the Call Options when the stock is trading at $63 per share. On a Spread, the breakeven is always determined from the strike price on the LONG. A Call Spread Breakeven: LONG Strike Price - Plus (+) Premium Debt OR LONG Strike Price - Minus (-) Premium Credit A Put Spread Breakeven: LONG Strike Price - Minus (-) Premium Debit LONG Strike Price - Plus (+) Premium Credit

Which of the following, when it is executed, represents a contract between municipal issuer and an underwriting syndicate, in a competitive bid underwriting:

C) BID FORM Explanation: Bid forms are used between a municipal issuer and a syndicate.

A beginning investor has limited funds, but wants IMMEDIATE EXPOSURE TO A VARIETY OF INVESTMENT STYLES. The investor should consider which of the following funds?

C) Fund of funds Explanation) A fund of funds invests in other mutual funds. With a small investment an investor gains exposure to several different mutual funds with different investment objectives. Alternately, the investor would need more money to invest the required minimum in several different funds to achieve the same exposure.

Principal payments of a CMO are:

C) Paid in varying amounts over the life of the CMO Explanation: - CMO pay investors MONTHLY - Part of the payments is interest and part is principal. - At the start, the principal amount of every payment is SMALL, but as the mortgages are almost paid off, the principal payments are LARGER. Therefor, the payments of Principal/Interest are paid off monthly over the life of the CMO in varying amounts that begin to increase near the end of the life of mortgages.

A Registered Representative opens a new account for a customer by telephone and receives an order to sell 300 shares of ABC at the market, regular way. Under FINRA Rules, the RR must do which of the following before executing the transaction?

C) Receive reasonable assurance from the customer that the stock will be delivered in good deliverable form within two business days from the trade date. Explanation: The RR must receive reasonable assurance that the stock can be delivered by settlement date, which is T+2 for a regular way trade. NOTE - I gotta be able to recognize when the customer has discretionary authority or not. When discretionary authority is active with customer then the RR can solicit buy/sell orders at any time with on behalf of the customer within suitability and reason. Without discretionary authority the RR must receive reasonable assurance from the customer that the stock will be delivered in good deliverable form within two business days from trade date when regular way trade takes place and RR must notify customer disclosure before the transactions takes place about delivery of the stock before regular way settlement takes place, BEFORE THE execution of the TRANSACTION buy/sell order.

Which of the following statements is TRUE of a variable annuity contract written with a "10 Year Period Certain" provision? Key Takeaway: - Period Certain provision allows for the continuation of payments to beneficiary on the death of annuitant if payments didn't reach the total payout amount.

C) The annuitant or the beneficiary will receive payments for a minimum of 10 years. A life annuity with a period certain will pay the annuitant a monthly income for a lifetime regardless of how long or short that life time is. But, if the annuitant dies before expiration of the period certain (EX) 10 years), the annuity payments will continue to be paid to the designated beneficiary for the remainder of the period certain. So, either the annuitant or the beneficiary will receive annuity payments for atlas the period certain, in this case 10 years.

Assume a customer buys 100 shares of ABC at $50 per share and buys 1 ABC July 50 put at 3. Which of the following statements about this scenario is TRUE?

C) The customer has limited loss potential and unlimited profit potential. Explanation: The investors profit potential in this scenario is unlimited, because the 100 shares of ABC can appreciate UNLIMITED amount. The stock portion has LIMITED LOSS POTENTIAL, which is limited to the customers initial investment of $5,000. The addition of the put, which the customer can choose to exercise or not to exercise, only furthers the limited loss in this scenario, allowing the investor to sell at $50/share for a premium of $300 through to the July Expiration. Overall loss potential if the put expired and the stock went to $0 is limited to $5,300.

One of your clients is somewhat new to options trading with multiple positions. They understand how options work, but sometimes ask questions relation to specific positions. They put on the following options position: - Purchase 1 MNO July 50 Put for 4 - Sell 1 MNO July 60 Put for 11 This client calls in and asks their RR to explain a scenario where this position could lose money. Which of the following describes a scenario where the client will lose money on this position?

C) The spread between the two contracts widens and becomes greater than 7 points. Explanation: When a spread is performed at a "Net Credit", the investor expects/wants the spread to NARROW so that the options will expire. Here, the investor sells at 11 and buys at 4 in the initial spread, for a credit fo 7 points. Therefor, if the spread widens by more than the net credit (7 Points), the investor would lose money on the position. Key Takeaway - Find the original investment of net debit or net credit by the investor to determine the credit or debit. S+ 11 B- 4 = +7. Positive = Net Credit Therefor, with a net credit we want the spread to NARROW, and want expiration of the two options to make profit. The widening of the options would cause less profit, and the potential for the Sell Call option to be exercised leading in depreciation of profit potential.

To be considered good delivery, a bond with mutilated coupons must be authenticated by the: Key Takeaway: - Issuer - Transfer Agent

C) Transfer Agent Explanation: Broker Dealers CANNOT authenticate or validate certificates, that is done by the issuer or transfer agent.

A highly leveraged oil and gas limited partnership with recourse debt may: - Never generate income - Produces losses greater than an investors original investments - Not liquid - Trigger an IRS audit

D) ALL 1-2-3-and 4 Explanation: A highly leveraged oil and gas limited partnership with recourse debt could experience all four of the choices offered. - Never generate income - Produces losses greater than an investors original investments - Not liquid - Trigger an IRS audit

An Investor Establishes The Following Option Positions: Long 1 ABC June 100 Put @7 Short 1 ABC June 90 Put @3 Which of the following best describes this position?

D) Bearish Debit Spread Explanation: B-7 S+3 =-4 NET DEBIT (DEBIT=NEGATIVE) - THE DIFFERENCE BETWEEN THE PREMIUMS RESULTS IN A NET MINUS , SO IT IS A DEBIT. - SINCE IT IS A BUY AND SELL ON THE SAME STOCK, IT IS A SPREAD. - It is a BEARISH SPREAD because the PURCHASED OPTION HAS A HIGHER STRIKE PRICE THAN THE ONE SOLD. (Bear - BUY HIGH).

Prior to repurchasing its own shares in the open market, a corporation would usually be required to:

D) Get approval of the Board of Directors Explanation: A corporation would usually be required to get approval of the Board of Directors of the company.

In forming a selling group, members are chose based upon:

D) MARKETABILITY Explanation: The selling group does NOT share in the financial responsibility of underwriting, so their financial, so their financial strength would not be as important as their ability to market the securities.

A brokers recommendation to purchase a speculative security on the basis that its price will triple in six months is not fraudulent if:

D) RR never makes the recommendation Explanation: RR are NEVER allowed to make predictions of what the future will bring regarding any security recommended. NOTE - I had this correct and I second guessed myself because the wording of the question. I need to trust my gut. I know that predictions or "guarantees" are NEVER allowed by RR's. I was confused because it mentioned a "brokers" recommendation, and I was thinking that they may have different regulation around brokers dealers making predictions, but regardless the RR NEVER makes the recommendation would make this not fraudulent because it would not have reached the public or influenced someones account based on a a prediction of the future.

A sinking fund provision would probably be required for which of the following?

D) TERM BOND Explanation: Term bonds all mature at one time. It would be prudent (safe/necessary) for the issuer of term bonds to set aside money regularly, in a sinking fund, for the payment of these bonds, thereby assuring the ability to pay back all of the principal at maturity.

When a mutual fund is inherited, what is the cost basis used by the individual who inherits the fund?

D) The new owner uses the NAV of the fund upon the previous owners date of death. Explanation) When securities are acquired by inheritance, the cost basis of such securities is the value of the date of death of the donor-decedent. In a rising market, this would result in a "Step Up" in basis. Reason I got it wrong: My answer was the new owner uses the cost basis of the deceased owner with is true, but with a question asking about a MUTUAL FUND inherited, the new owner will yes take the cost basis of deceased owner, but its the NAV of the mutual fund that is used for the basis. When the mutual fund securities rise, it results in a STEP UP in the cost basis as the new owner takes control of the deceased inheritance.

One of your customers performs the following options transactions: Sells 1 ABC August 30 call @ 2 Buys 1 ABC November 30 call @ 5 What type of options position is created by these two options transactions.

D) This is a calendar spread. Explanation) The options position is a spread because of the purchase and sale of the calls. The calendar portion of the spread comes from the differing expiration months (August and November). NOTE - I was looking at the premiums being different and went with a options combination. The premiums can be different in any type of option spread/combination/horizontal etc... but what makes this only a calendar spread is because of the two different months. Everything is the same EXCEPT the action by the investor which is always one of each with a spread, one Buy option and one sell option.

An investor considering the purchase of a viable annuity contract should be concerned about all of the following EXCEPT: Key Takeaway: "Variable" part of an annuity will FLUCTUATE and the amount payment into the variable annuity will be fixed so the investor will choose the $$ paid into the annuity.

EXCEPT: C) Payment deposits may increase or decrease Explanation) With variable annuities, investors choose the amount of payment they will make into the account and that does not change.

All of the following correctly define a type of market EXCEPT:

EXCEPT: C) The money market deals in short-term debt and equity instruments. Explanation: Money Market Instruments do NOT include equities. Equity instrument ( common and preferred stock ) are considered to be Capital Market Instruments.

The risks associated with investing in a Business Development Company (BDC) include all of the following EXCEPT:

EXCEPT: C) Exchange Risk The exchange risk refers to the foreign currency exchange rate risk. That risk is typically not involved in a BDC investment. Other THREE choices that are RISKS ASSOCIATED WITH INVESTING in a Business Development Company include: #1 - Credit Risk - as BDC's are SUB PRIME LENDERS. Many other companies that they lend to are rated "Junk". #2 - Market Volatility Risk - BDC share prices are VERY VOLATILE. #3 - The Leverage Risk - BDC's borrow at low interest rates and lend at high interest rates. Borrowing too much could be a problem to the BDC because the BDC's investment portfolio is relatively ILLIQUID. (BDC's INVESTMENT PORTFOLIO IS NOT VERY LIQUID)!

In forming an account, a municipal syndicate account letter will identify all of the following EXCEPT:

EXCEPT: D) The final reordering terms relating to the issue. Explanation: Re-offering terms are NEVER contained in a syndicate letter, since the initial offering terms have not yet been determined when the letter is sent.

Which of the following statements concerning the designated market maker is INCORRECT?

INCORRECT as it does not apply to the concerns of the DMM -C) The DMM will reduce the execution price of market orders by the amount of the dividend distribution on the Ex Date. Explanation: All choices are correct except the DMM will reduce the execution price of market orders by the amount of the dividend distribution on the ex date. This is incorrect because the DMM will reduce only BUY LIMIT orders and SELL STOP orders.

FOREX MARKET (decentralized marketplace)

In the FOREX MARKET (decentralized marketplace) established for the trading and conversion of various currencies that exist in the world. It facilitates international's trade and provides a market for foreign and US currencies. Speculation in the forex market causes liquidity by providing more investors who are buying and selling base and counter currencies. The SPOT PRICE or CASH PRICE of each currency is used to determine the value of each currency being traded. Trading takes places 24 hours a day, beginning from Sunday at 5PM eastern time and closes on Friday at 5PM eastern time.

A new client is considering opening a cash account at a broker dealer. Which of the following statements is NOT accurate regarding a cash account? Key Takeaway: - Cash Account opening requires only signature from the Principal or Branch Office Manager (BOM)! - REQUIRED! - RR signature / Client Signature - NOT REQUIRED!

NOT ACCURATE: C) The customer must sign a new account report form. Explanation: This is NOT true because a Cash Account that purchases for stocks, bonds or options, be paid for in full using regular way settlement. The signature of the customer and RR are NOT required, but the signature of a Branch Manager or Principal IS REQUIRED!

Which of the following is NOT calculated using ADVANCE/DECLINE MEASUREMENTS?

NOT CALCULATED by A/D Measurement: A) The turnover of shares of a particular company The advance/decline measurement calculates PRICE MOVEMENTS.