Closed book

According to Regulation T, when purchasing an option contract the transaction must be paid for within: 1 business day 3 business days 5 business days 7 business days

5 business days

Prior to the maturity of a variable-rate demand obligation, an investor has the right to receive the: Current market value Par value Par value plus accrued interest Par value less accrued interest

Par value plus accrued interest

A customer has a federal tax rate of 35% and a state tax rate of 7%. Which of the following investments would afford him the BEST after-tax yield? A 6.25% in-state municipal bond A 6.25% out-of-state municipal bond A 9.95% investment-grade corporate bond A 10.25% mortgage bond

The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The mortgage bond is a type of corporate bond, therefore, choices (c) and (d) are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 42% for the in-state bond and the federal rate of 35% for the out-of-state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 42% combined tax rate. The municipal bond has a yield of 6.25%. 6.25% (Municipal Bond Yield) / 58% (100% - 42%) = 10.78% Equivalent Taxable Yield The out-of-state municipal bond has the same coupon but the equivalent taxable yield is 9.62% (6.25% / 65%). The in-state municipal bond has the best or highest after-tax yield.

Which TWO of the following statements are TRUE concerning a Health Savings Account? The contribution is made in pretax dollars The contribution is made in after-tax dollars The funds grow tax-free if used to pay qualified medical expenses The funds grow tax-deferred if used to pay qualified medical expenses I and III I and IV II and III II and IV

a A Health Savings Account (HSA) is a tax-advantaged account that can be used by individuals to pay for qualified medical expenses. An HSA is not open to all individuals. It is generally open only to those persons who are not enrolled in any type of health plan other than a qualified, high-deductible health plan. Contributions are made in pretax dollars (which are limited under IRS guidelines), grow tax-free, and withdrawals are tax-free if used to pay qualified medical expenses. All funds withdrawn that are used for nonqualified medical expenses are taxable and subject to a 20% IRS tax penalty.

How long after a new issue is registered for sale will it be shown on the Nasdaq system? On the effective date 10 days after the effective date 30 days after the effective date 45 days after the effective date

a A new issue will appear on the Nasdaq system on the effective date of the issue. The effective date, which is determined by the SEC upon completion of the registration process, is the first date that the securities may be sold to the public.

A 65-year-old individual is in need of immediate cash to pay for repairs on his house and takes a lump-sum distribution from a nonqualified variable annuity. This withdrawal will be: Partially treated as ordinary income Partially treated as capital gain Taxed at the investor's tax bracket Taxed at a reduced tax rate I and III only I and IV only II and III only II and IV only

a A nonqualified variable annuity is purchased independently by individuals and is not related to their employment. Any contribution into a nonqualified contract is made with after-tax dollars. Therefore, only the appreciated value portion of withdrawals would be taxed as ordinary income and the remainder would be considered as return of capital (amount invested), which is not taxed. If a withdrawal is made prior to age 59 1/2, the ordinary income portion of the withdrawal is assessed a 10% penalty.

A registered representative's broker-dealer is an underwriter of an initial public offering of stock. The RR's father-in-law may purchase: The IPO from a different broker-dealer The IPO from the RR's broker-dealer Only a limited quantity of the IPO from any broker-dealer The IPO but only from a member of the selling group

a A restricted person is not permitted to purchase any shares of a new issue unless an exemption applies. There is no exemption for restricted persons to purchase limited quantities of an IPO. An immediate family member of an employee (an RR) of a member firm may be a restricted person. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm. An exception exists if a nonsupported, immediate family member buys the IPO from a different broker-dealer. There is no requirement to purchase the shares only from a selling group member.

Mr. Smith is associated with two other partners in an insurance partnership. He opens a cash account for the partnership. If Mr. Smith dies, what will the firm do as far as the partnership account is concerned? Freeze the assets of the account Allow the account to continue trading as is Open new separate accounts for the remaining partners Await instructions from the executor of Mr. Smith's estate

a If Mr. Smith died, the firm would freeze the assets of the account. The firm would then await the proper legal documents needed to release the assets.

An investor purchased stock at $40/share that currently has a market price of $60/share. The investor thinks that the long-term prospects for the stock are attractive, but that the price will decline temporarily. The customer could take advantage of the temporary decline, by: Selling a call Buying a call Selling a put Setting up a spread in the underlying stock

a If the investor were to sell a call and the price declined, the call will expire and he will generate premium income. The long stock position will still be maintained, and the investor will profit if the anticipated price advance occurs.

Which of the following risks for an agency-backed CMO is LEAST important to an investor in a rising interest-rate environment? Prepayment risk Credit risk Interest-rate risk Extension risk

a Prepayment risk is associated with a falling interest-rate environment in which mortgage holders refinance or repay their mortgages at a faster rate. The holder of a CMO, therefore, receives a larger portion of the principal earlier than anticipated and is forced to reinvest at lower rates. Many CMOs are created from government agency mortgage-backed securities (MBS), which have a minimal amount of credit risk. Some CMOs are constructed without this backing and, therefore, credit risk is a greater concern. CMOs, as with most fixed-income securities, carry interest-rate risk. Extension risk is the opposite of prepayment risk, where interest rates are rising and the CMO holder receives a smaller portion of her principal back.

An investor is in the 28% tax bracket. Which of the following investments will afford him the BEST after-tax yield? A 5% municipal bond A 5 3/4% corporate bond A 6 1/2% Yankee bond A 6 3/4% convertible bond

a The 5% municipal bond will offer the best after-tax yield because the interest income is completely free from federal income taxes. The other investments are types of corporate debt subject to federal income taxes and 28% of the income received will be taxable. The taxable equivalent yield of the 5% municipal bond is 6.94%. This is calculated by dividing the 5% municipal yield by the complement of the tax bracket which is 72%. The result is greater than the other choices.

An investor buys a 5% municipal bond at 102 1/2. The bond has a yield to maturity of 4 1/2%. If the investor holds the bond to maturity, he will have a loss for tax purposes of: 0 $25 $50 $100

a The IRS requires that a premium paid for a municipal bond be amortized over the life of the bond. At maturity, the investor will have an adjusted cost (after amortization) of par ($1,000). Since this is the amount received at maturity, there is no loss for tax purposes.

A newly issued bond has a provision that it cannot be called for five years after the issue date. This call protection would be MOST valuable to a recent purchaser of the bond if: Interest rates are falling Interest rates are rising Interest rates are stable The yield curve slopes downward

a The call protection provision of five years would be most valuable to a recent purchaser of the bond if interest rates are falling. If interest rates fall, outstanding bond prices will rise. Issuers of bonds will call or retire bonds when interest rates decline, and will issue new bonds with lower rates of interest. Bonds are usually callable at a small premium above par value. If the bonds are not callable, the investor can realize the full benefit of an increase in the market price of the bonds.

Pennsylvania Power Company has announced that it will refund $800 million of its outstanding 6 1/4% bonds that were to mature in 2040. The bonds will be refunded at 106.75% of par value from the proceeds of an $800 million refunding issue. The refunding issue has a 4 1/2% coupon rate and matures in 2030. Bondholders who own 6 1/4% bonds maturing in 2040 will receive: $1,067.50 plus accrued interest The new 4 1/2% bonds being issued plus accrued interest $1,000 plus accrued interest The new 4 1/2% bonds being issued without accrued interest

a The company is refunding the bonds at 106.75% of its par value. The bondholders who own the 6 1/4% bonds will receive 106.75% of the $1,000 par value (106.75% x $1,000) for a total of $1,067.50 plus accrued interest.

In May, a customer sells an STC July 40 listed call for a $6 premium and buys an STC July 30 listed call for $10. The customer has created a: Bullish spread Bearish spread Debit spread Credit spread I and III I and IV II and III II and IV

a The investor bought the more expensive call. Therefore, this is a debit spread. A call debit spread is a bullish strategy.

An investor purchased $200,000 of 6% general obligation bonds on margin. The customer has a debit balance of $50,000 and is paying interest of 10% yearly on the debit balance from the purchase of the municipal bonds. How much interest expense may the investor use as a deduction for federal income tax purposes? None $5,000 $10,000 $12,000

a The investor may not use any of the interest expense as a deduction against ordinary income. Interest charges on money borrowed to purchase federally tax-exempt municipal securities may not be used as an interest expense deduction for federal income tax purposes. The investor is already receiving the benefit of tax-free interest income from the municipal bond and the IRS will, therefore, not allow the interest expense to be deducted as well.

LRR Corporation has earned $1.10 per share in each of the last four quarters and has paid out 20% of its earnings in the form of a cash dividend. If the stock is selling at $48 a share, what is its price/earnings ratio? 10.9 13.6 21.8 43.6

a The price/earnings ratio is found by dividing the market price of $48 by the annual earnings per share. The annual EPS is $1.10 x 4 = $4.40., The price/earnings ratio is 10.9 ($48 / $4.40 = 10.9). The amount of the dividend is not relevant in calculating the price/earnings ratio.

Someone who wants to hedge a portfolio of preferred stocks will buy: Yield-based call options Yield-based put options S&P 500 call options S&P 500 put options

a The prices of preferred stocks are inversely related to the movement of interest rates, as are bonds. If the investor is concerned that rising interest rates will erode the value of the preferred stock portfolio, the purchase of an option that does well when interest rates rise will provide an effective hedge. Yield-based call options increase in value when interest rates rise, creating a viable hedge.

A customer opens a new margin account and buys 100 shares of XYZ Corporation at $40 per share. She then writes a call option against the position and receives a $2 premium. The customer must deposit cash in the account of: $1,800 $1,900 $2,000 $2,100

a The purchase of $4,000 worth of stock would require a $2,000 deposit (50% of $4,000 = $2,000). Since the call is covered, there is no margin requirement. The customer received $200 in premiums. This would be deducted from the $2,000 margin call, requiring a cash deposit of $1,800.

On September 14, a customer purchases an ABC December 60 call and sells an ABC November 60 call. The customer: Has engaged in a debit spread Has engaged in a credit spread Wants the spread to widen Wants the spread to narrow I and III only I and IV only II and III only II and IV only

a To determine whether the customer wants the spread to widen or narrow, it is necessary to determine whether the spread is a debit or credit spread. The premium for an option is determined by two factors: the in-the-money amount of the option (intrinsic value) and the time value. Since both options have the same strike price, the intrinsic values (in-the-money amount) are equal. Therefore, any difference in premium is the result of a difference in time value. Since the December contract has longer to go until expiration than the November contract, it has more time value. Therefore, the premium for the December contract will be larger than for the November contract. Since the customer purchased the December contract (higher premium), it is a debit spread and will profit if the spread widens.

A customer has a restricted margin account. The customer sells $7,000 worth of securities and on the same day buys $5,000 worth of other securities. The Regulation T margin requirement is 50%. The customer may: Withdraw cash equal to the margin requirement on the net amount Not withdraw anything because the account is restricted Withdraw the entire $2,000 net amount Withdraw 50% of $7,000

a When a customer buys and sells securities in a restricted margin account on the same day, it is called a same-day substitution and the transactions are netted against each other. In this question, the sale of $7,000 and the purchase of $5,000 result in a net sale of $2,000. The entire amount will be used to reduce the customer's debit balance, and the customer's SMA will be credited with an amount equal to the net sale proceeds multiplied by the Reg T requirement ($2,000 x 50% = $1,000). If desired, the customer may then borrow this amount.

Which of the following statements regarding the Roth IRA is NOT TRUE? Contributions are tax-deductible Qualified distributions are not included in an individual's gross income Qualified distributions are not subject to the 10% early withdrawal penalty An individual may contribute up to $5,500 per year

a While contributions to traditional IRAs are tax-deductible under certain conditions, contributions to a Roth IRA are nondeductible. Individuals may contribute up to $5,500 per year if they have earned income and if they meet certain income eligibility requirements. Qualified distributions are tax-free and are not subject to the 10% early withdrawal penalty.

Rosewood Securities LLC has been accused of buying and selling securities for the purpose of creating artificial trading activity. Which of the following choices BEST describes this activity? Churning Matched orders Capping Stabilization

b A matched order is also known as painting the Tape. It is an illegal activity based on a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity. The intention of this activity is to lure unsuspecting investors into trading the stock because of the appearance of unusual trading volume. The manipulators have already taken a position in the stock, and hope to influence the market (illegally) to make their position profitable through this fake heavy trading volume. Churning is a violation in which a salesperson effects a series of transactions in a customer's account that are excessive in size and/or frequency in relation to the size and investment objectives of the account. A salesperson churning an account is normally seeking to maximize her income (in commissions, sales credits or markups) derived from the account. Capping is a situation where a manipulator is attempting to stop a securities price from rising.

The penny stock rules would apply under which of the following circumstances? The stock is listed on Nasdaq The stock is quoted on the OTC Bulletin Board The transaction is not recommended by the broker-dealer The customer is an active trader in penny stocks

b A penny stock, according to SEC rules, is a stock that sells for less than $5.00, that is not listed on Nasdaq or the NYSE. A stock quoted on the OTC Bulletin Board or OTC Pink Market (Pink Sheets) that has a bid price of less than $5.00 is defined as a penny stock. Penny stock rules would not apply under the following conditions. The customer is defined as an existing customer, which is a person who has maintained an account with a broker-dealer for more than one year, or has previously engaged in 3 or more transactions involving penny stocks (i.e., an active trader of penny stocks) In nonrecommended or unsolicited transactions In transactions by a broker-dealer that is not a market maker in that security In transactions by an institutional accredited investor

A brokerage firm would like to increase its marketing efforts in option transactions through the use of certain retail communications. All of the following methods are considered forms of retail communications, EXCEPT: Newspapers and magazines The Options Clearing Corporation risk disclosure document Radio, telephone messages, and television Newsletters, sales material, and research reports

b All are forms of retail communications when referring to options except the Options Clearing Corporation (OCC) risk disclosure document. The OCC risk disclosure document discusses the rules and regulations of options trading, as well as the risks involved in options trading. The OCC risk disclosure document must accompany or precede certain types of printed or written communication by firms concerning options. Also, the method of acquiring an OCC risk disclosure document must be mentioned in options retail communications used prior to an options disclosure document being delivered. Newspapers, magazines, radio, telephone messages, television, newsletters, sales material, and research reports are ways to advertise about options. They all must mention the risks involved with options and be in good taste, as well as adhere to generally accepted standards of truthfulness.

Which TWO of the following new issues may be purchased by an employee of a broker-dealer under the New Issue Rule? An exchange-traded fund An initial public offering in which the RR's firm is not an underwriter A new issue of common stock in which the broker-dealer is the managing underwriter Convertible debt I and III I and IV II and III II and IV

b An employee of a broker-dealer is considered a restricted person and may not purchase new issues under FINRA rules. New issues under the rule are defined as initial public offerings (IPOs) of equity securities sold under a registration statement. Exemptions from the definition of an IPO include all debt offerings, investment company offerings such as mutual funds and exchange-traded funds, and preferred stock. Whether the broker-dealer is participating as an underwriter does not alter the restrictions.

Before accepting a DVP order from a customer, a broker-dealer must: Notify FINRA Obtain the name of the customer's agent from the customer Receive approval for the trade from the contrabroker Notify the appropriate banking regulator

b Before accepting a DVP (delivery versus payment) or RVP (receipt versus payment) order from a customer, a broker-dealer must receive the name of the customer's agent and the customer's account number. The order ticket must be marked DVP or RVP.

If a customer wishes to open an account to trade options, the account must be approved: 15 days prior to the time an initial order is accepted Prior to the time an initial order is accepted No later than the time the confirmation is mailed to the customer for his initial transaction Within 15 days of the acceptance of the initial order

b If a customer wishes to open an account to trade options, the account must be approved by an ROP prior to the time an initial order is accepted.

If an investor wrote one OEX March 725 put option and the option was exercised when the index was 722.00, the writer is obligated to deliver: 100 shares of the OEX index $300 $72,200 $72,500

b If a stock index option is exercised against the writer, the writer is obligated to deliver the cash difference between the exercise price and the index value as of the close of trading on that day if the option is in-the-money. The exercise price of the put option is 725 and the lower index value is 722.00. The writer is obligated to deliver the cash difference of $300 Exercise price 725 x $100 = $72,500 Index value 722.00 x $100 = - 72,200 Difference $300

A registered representative buys stock in a customer's margin account instead of the customer's retirement account. Which of the following actions should be taken? Request a cancel and rebill without principal approval Request a cancel and rebill after receiving principal approval Contact the trader who executed the order and enter a new order Cancel the order and take no other action

b If a transaction is executed but the wrong account is used, the error can be corrected without placing a new order. This is done by transferring the transaction to the correct account number with the permission of a registered principal. This transfer process is sometimes referred to as a cancel and rebill. In some cases, an error is made using the correct account number for the client but the wrong account (e.g., a margin account instead of a retirement account). The same process of cancel and rebill is also used to correct this situation.

A bond with an 11% coupon is purchased at 103. The maturity of the bond is 20 years. The bond is callable in 10 years at par. The yield will be: Higher if called Higher if held to maturity The same if called or if held to maturity Determined by the issuer

b If the bond is held to maturity, the investor will be able to amortize the premium over a longer period, thereby realizing a higher yield. If the bond is called in ten years, the premium is amortized over half the time, resulting in a lower yield. A bond purchased at a premium and callable at par will always have a lower yield to call than to maturity. The opposite is true for a bond purchased as a discount callable at par. The yield to maturity will be lower than the yield to call.

A registered representative opens an option account for a customer on October 1 and buys 5 ABC November 30 calls at 4. On October 16, the premium of the calls has decreased to 2 and the registered representative has not received a signed options agreement. The registered representative may: Not accept any orders from the customer until the signed options agreement is received Accept an order to sell the 5 ABC November 30 calls that were previously purchased Accept an order to buy 5 additional ABC November 30 calls Accept an order to buy 5 XYZ December 40 calls

b If the customer does not return the options agreement within 15 days of the approval of the account, the customer is permitted only to close out existing positions. Since the account was approved on October 1, the customer must sign the options agreement and return it to the firm by October 16. As of October 16, the customer may only open new options positions after the signed form is returned to the firm.

Which TWO of the following choices would be the most suitable purchasers of municipal zero-coupon bonds? An investor who does not seek present additional cash flow An investor who seeks the tax benefits of long-term capital gains An investor who needs cash for living expenses A custodian account where the parent of the minor child is in the highest tax bracket I and III I and IV II and III II and IV

b In a custodian account, the minor is technically liable for taxes. Depending on the amount of income generated in the account and the age of the minor, taxes are calculated at the parents' rate. Therefore, parents may consider the purchase of municipal bonds in the custodian account for tax advantages. The zero-coupon bond will not produce cash flow during the holding period. This would be desirable for those who do not need cash income. (Funds are needed at a later date in the custodian account.) The zero-coupon municipal bond would be suitable for other accounts besides the custodian account, such as upper tax bracket earners during their peak earning years. Zero-coupon bonds are subject to annual accretion of the investor's cost basis. As such, at maturity, the investor's cost basis equals the par value of the bond. (There are no capital gains.) The accretion of the municipal bond is treated as interest income which, in the case of the municipal bond, is federally tax-free. This is a tax advantage, but it is not a long-term capital gain.

Which TWO of the following statements are TRUE regarding brokered CDs sold by registered representatives? These instruments are insured by the FDIC if the issuer declares bankruptcy These instruments are covered by SIPC if the issuer declares bankruptcy These instruments are insured by the FDIC if the broker-dealer declares bankruptcy These instruments are covered by SIPC if the broker-dealer declares bankruptcy I and III I and IV II and III II and IV

b Long-term brokered CDs generally have maturities from 2 to 20 years and are not considered money-market securities. These instruments are issued by banks and, although sold by broker-dealers, they are insured up to certain limits by the FDIC if the issuing bank declares bankruptcy. If the broker-dealer that sold the brokered CD to the client declares bankruptcy, SIPC coverage will apply since these products are defined as securities.

A customer purchases 10 MMS May 20 puts at 2 in a cash account when the market price of MMS is 24. Which TWO of the following statements are TRUE regarding this transaction? The settlement date for the transaction is one business day The settlement date for the transaction is three business days The Regulation T payment date is three business days The Regulation T payment date is five business days I and III I and IV II and III II and IV

b Option transactions settle on the next business day between brokerage firms and the Options Clearing Corporation. According to Regulation T, payments for transactions in cash and margin accounts must be made by the customer within two business days following the regular-way settlement date. Since regular-way transactions settle in three business days, customers have five business days in which to pay for purchases. Therefore, while option transactions settle next day, the Reg T payment requirements are based on a regular-way transaction. Hence, customers have five business days in which to pay for option purchases.

A broker-dealer is preparing sales literature on CMOs. Which TWO of the following statements must be disclosed? The term collateralized mortgage obligation must be included within the name of the product The basis point spread above a comparable Treasury security the client will receive in interest must be included The lower of the yield to call or yield to maturity must be included The government agency backing only applies to the face value of the securities I and III I and IV II and III II and IV

b Retail communications (e.g., sales literature) and correspondence about collateralized mortgage obligations (CMOs) are subject to special rules. The term collateralized mortgage obligation must be included within the name of the product and it must disclose that the government agency backing only applies to the face value of the securities (not any premium paid). If the client paid a premium to purchase a CMO, only the par value would be backed by the entity backing the security. The actual coupon rate, not the spread above Treasuries, needs to be disclosed. Due to the prepayment risk of CMOs, the yield to average life would be disclosed, not the yield to maturity or yield to call.

Stagflation is best defined as a period where the economy is experiencing which TWO of the following events? Inflation for a long period Deflation for a long period Low unemployment High unemployment I and III I and IV II and III II and IV

b Stagflation is defined as a prolonged period of a high rate of inflation together with a high rate of unemployment. This does not happen too often since high unemployment usually leads to a period of low inflation or even deflation (falling prices) and the possibility of a recession. A period of low unemployment usually leads to rising prices and increased inflation.

Which TWO of the following statements are TRUE relating to the notes issued by the Federal Farm Credit Banks Consolidated System? They are issued at a discount They are issued at par They are interest-bearing They are non-interest-bearing I and III I and IV II and III II and IV

b The Federal Farm Credit Banks issue consolidated systemwide notes that are issued at a discount (as with T-bills) and are non-interest-bearing. Bonds are also issued that are interest bearing (have a stated interest rate). Interest is subject to federal taxation but is exempt from state and local taxation.

An investor purchases an ABC Corporation October 50 put and pays a premium of $7. The underlying security declines to $40 per share. For tax purposes, the proceeds of the sale are: $4,000 $4,300 $4,700 $5,700

b The proceeds of the sale for tax purposes are $4,300 ($5,000 strike price minus the $700 premium paid for the option equals the proceeds of the sale). The cost basis of the stock purchased is $4,000. The customer's profit is then $300.

When raising capital, which TWO of the following securities are required to register with the SEC under the Securities Act of 1933? A REIT that will be listed on the NYSE Commercial paper issued by a finance company maturing in one month A Eurodollar bond issued by a U.S corporation An American Depositary Receipt issued by a British company I and III I and IV II and III II and IV

b There is no specific exemption under the registration provisions of the Securities Act of 1933 for ADRs or REITs. They both issue shares of common stock and, if sold to the public in the U.S., require SEC registration. Corporate debt with a maturity of 270 days or less (i.e., commercial paper) is exempt from registration. Securities initially offered outside the U.S., for example Eurodollar bonds, are also exempt from SEC registration.

Evelyn has established the following position. Long 1 DEF May 50 call at 2 Short 1 DEF May 40 call at 6 She expects to profit in which TWO of the following situations? Both options expire unexercised Both options are exercised DEF rises in value DEF falls in value I and III I and IV II and III II and IV

b This position is referred to as a credit call spread. Evelyn has received more for establishing the position because the short call has a strike price less than the long call. If both calls expire unexercised, Evelyn will keep the difference. If DEF falls below $40 per share, neither call will be exercised, resulting in a profit for Evelyn.

Upon written request, duplicate account statements would be required under which TWO of the following circumstances? The customer is an employee of a member firm and is opening a brokerage account at a bank The customer is an employee of a mutual fund and is on the board of directors The customer is an employee of a bank and is opening an account at a broker-dealer The customer is an employee of a member firm and is opening a brokerage account at a financial institution I and III I and IV II and III II and IV

b Upon the written request by the employing member firm, duplicate account statements must be sent if an employee of a member firm opens a brokerage account at another member, investment adviser, bank, or other financial institution. There is no requirement to send duplicate statements if the customer is an employee at a financial institution.

As a retirement vehicle, which of the following choices would probably provide the greatest protection of purchasing power? Fixed annuities Variable annuities Corporate bonds Mortgage-backed securities

b Variable annuities, theoretically, provide the greatest protection against loss of purchasing power. The payout is based on the securities (mostly equity securities) in the separate account, which historically have increased in inflationary periods. This provides for a larger cash payout to offset the effects of inflation. The other choices given have a fixed payout and do not offer protection against the loss of purchasing power in inflationary periods.

A municipal bond with an 8% coupon and eight years to maturity is purchased for 106. If the bond is sold six years later, what will be its cost basis? 100 101.50 104.50 106

b When a bond is purchased at a premium (above par value), the premium must be amortized (reduced) over its life. The premium in this example is six points, which must be amortized over its 8-year life. It must be amortized 3/4 point each year (6 points divided by 8 years to maturity). After six years, it will be reduced by 4 1/2 points (3/4 x 6). Its cost basis will, therefore, be 101 1/2 (106 original cost - 4 1/2 points amortized premium).

An investor has sold a stock short. If the present market value is $2.00 per share, the minimum maintenance requirement will be: 50% $2.50 per share $2.00 per share 30%

b When selling short securities that have a market value less than $5 per share, a minimum maintenance requirement of $2.50 per share or 100% of the market value, whichever is greater, applies. Since $2.50 a share is greater than $2.00 per share, this is the correct answer.

As it relates to a Nasdaq market maker, the term spread is BEST defined as which of the following? The difference between the price that an issuer will receive for its securities and the price that the public will pay for the securities The difference between the price at which a firm will buy a security and the price at which it will sell a security The amount of profit that a firm will make when it buys a security from or sells a security to a customer The amount of the firm's markup or markdown to a customer who buys or sells a security

b When used in reference to a Nasdaq market maker, the spread represents the difference between the price at which the firm is willing to buy (bid) and the price at which the firm is willing to sell (ask or offer) a security. For example, if the bid price is $21.20 per share and the offer price is $21.30 per share, the market maker's spread is $.10. Choice (a) is the spread or profit that an underwriter makes when it sells an IPO to a customer. Choice (c) is a market maker's profit based on its inventory cost for a security (i.e., the price at which it purchased a security from a customer compared to the price at which it was sold to a different customer. The markup or markdown is the difference between the prices the customer paid or received compared to the best bid or offer price of all Nasdaq market makers (the inside market). For example, if the inside market is $25.50 - $25.70 and the customer paid $25.90 to purchase the stock, the markup is $.20

Mr. Smith, a self-employed computer analyst, has total annual earnings of $125,000. What is the maximum deductible contribution he can make to his Keogh plan? $2,000 $5,500 $25,000 $53,000

c A Keogh plan allows a maximum annual contribution of 100% of compensation or $53,000, whichever is less. (For 2014, the limit was $52,000.) This question is asking the amount deductible. The amount deductible is limited to the lesser of 20% of compensation or $53,000 (also $52,000 for 2014). A self-employed individual may make a deductible contribution of 20% of self-employed income, up to a maximum of $53,000, to a Keogh account. Twenty percent of Mr. Smith's income ($125,000) is $25,000.

An e-mail sent to 40 persons, 20 retail investors and 20 institutional investors, within a 30-calendar-day period would be considered: Institutional correspondence An institutional communication Correspondence A retail communication

c A retail communication is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30-calendar-day period. A retail investor is considered any person who does not meet the definition of an institutional investor. Correspondence is defined as any written or electronic message that is sent by a member firm to 25 or fewer retail investors within a 30-calendar-day period. While the communication was sent to 40 persons, only 20 were retail investors, which by definition is correspondence.

A customer sells short 1,000 shares of DT at $60 a share on Monday, October 14 and deposits the Regulation T margin requirement. If on October 23 the stock is trading at $75 a share, which of the following statements is TRUE? The account will be closed by the broker-dealer The account will be adjusted on October 23 and no margin maintenance call will be issued The account will be adjusted on October 23 and a margin maintenance call will be issued The account will be adjusted on October 24 and a margin maintenance call will be issued

c A short margin account is marked to the market once a day (daily) to make sure the account is above the maintenance requirement. The initial Regulation T margin requirement is 50% of $60,000, or $30,000. If the market value increases to $75 a share, the equity in the account will decline to $15,000. The current equity in the account is 20% of the short market value ($15,000 / $75,000), which is below the required 30% and, therefore, a margin maintenance call will be issued.

An individual owns 800 shares of stock at an original cost of $55 per share. If the company distributes a 15% stock dividend, what is the client's cost basis per share? $63.25 $55.00 $47.83 $47.75

c A stock dividend is not a taxable event when received. The investor must adjust her cost basis. The investor would now own 920 shares (800 shares x 1.15). The new cost basis would be $47.83 (original cost of $44,000 [800 shares x $55] divided by 920 shares).

Which of the following organizations enforces municipal securities regulations for broker-dealers? The FRB The FDIC FINRA The MSRB

c Although the MSRB creates rules governing municipal securities broker-dealers, its rules are enforced by other regulatory bodies. The appropriate regulatory agencies are the: The SEC or FINRA for broker-dealers Comptroller of the currency for federal banks The FRB for state banks that are members of the FRB The FDIC for member banks of the FDIC

Richard Smith, a variable life insurance policyholder, dies. Which of the following statements best describes the tax consequences of his variable life insurance policy? There are no tax consequences to his beneficiary and the death benefit is not included in his taxable estate There are gift taxes due from his beneficiary in the year he died The value of the policy will be included in Richard's estate for tax purposes The policy proceeds are federally taxable to the beneficiary

c Although there are no tax consequences to Richard Smith's beneficiary, the death benefit is included in his estate for tax purposes.

What information would an analyst be MOST concerned with when evaluating a revenue bond? The population growth of the municipality Debt to assessed valuation A rate covenant Property taxes

c An analyst would be most concerned with rate covenants. This is an agreement made by the municipal issuer to maintain rates high enough to cover maintenance and operating charges and to meet annual debt service requirements. The other terms are applicable to general obligation bonds.

With no other securities position, a customer sells short 100 shares of ABC at $40 and sells 1 ABC October 40 put for $500. The customer will break even when the price of the stock is at: $35 $50 $45 $40

c An individual who sells short risks a loss if the price of the stock rises. If the price rises to $50 and the stock is bought in the open market to cover, the loss will be $1,000 minus the premium, for a net loss of $500. If the market price rises to 45, the loss of $500 is exactly matched by the premium income of $500 and the investor breaks even. The breakeven point for a short seller who writes a put is the market price of the short sale plus the premium.

An investor, age 52, with funds in a 401(k) plan, is leaving her employer and wants to transfer the funds to an IRA account at your firm. Which of the following statements is TRUE? There will be a 10% penalty There will be a 50% penalty There will be no penalty There will be no penalty but the amount transferred will be taxable

c An investor may transfer funds from one retirement account to an IRA or other retirement account without incurring taxes or penalties. A transfer is a situation where a plan's assets move directly from one trustee to another. There is no limit to the number of these transactions. An investor who withdraws money from an IRA before reaching the age of 59 1/2 will pay a 10% tax penalty on the amount withdrawn, in addition to being liable for ordinary income taxes on the withdrawal. The amount of the early withdrawal will be added to the investor's taxable income for that year.

Company R has announced a tender offer for Company T. A shareholder of Company T is long 1,000 shares of stock and has written 5 covered calls against the stock. For the purpose of tendering shares, the shareholder may tender: 1,000 shares 800 shares 500 shares 300 shares

c An investor who holds stock in a company that is the subject of a tender offer may tender only stock that he holds long. If a shareholder has written call option positions against the long stock, the options positions will reduce his net long holdings in the stock.

Treasury arbitrage restrictions generally prohibit issuers of municipal securities from: Selling municipal securities with coupon rates that are lower than Treasury securities Selling municipal securities with coupon rates that are higher than Treasury securities Investing bond proceeds in higher-yielding Treasury securities Investing bond proceeds in lower-yielding Treasury securities

c Because of the tax exemption allowed on municipal bond interest, municipalities are normally able to issue bonds with coupon rates below those of Treasury securities. This presents an excellent arbitrage opportunity. A municipality can borrow at a low rate of interest and invest the money in higher-yielding risk-free Treasury securities. Congress has enacted laws, known as Treasury arbitrage restrictions, that prevent state and local governments from misusing the tax exemption.

A fundamental analyst could use a corporation's balance sheet to determine all of the following metrics, EXCEPT: Net working capital Common stock ratio Cash flow Debt-to-equity ratio

c Cash flow (net income or loss plus depreciation expense) is found by using an income statement. All of the other choices are derived from the balance sheet.

For tax purposes, which of the following is NOT deducted from rental income in a real estate program? Depreciation Maintenance Mortgage amortization Property tax

c Expenses that are deducted from rental income in a real estate program include maintenance, property tax, depreciation, and mortgage interest. Paying off (amortizing) the principal of a mortgage is not an expense and may not be deducted from rental income for tax purposes.

A customer owns 20 ABC Corporation October 30 calls in a margin account. The customer exercises the calls and on the same day sells the stock at $32. The customer will need to deposit what amount in the account? No cash deposit is required $15,000 $30,000 $60,000

c If a client exercises an option in a margin account, he is required to meet the Reg T deposit on the underlying shares. The client owns 20 ABC Corporation October 30 calls and if he exercises the contract he purchases $60,000 worth of stock. (100 shares per contract x 20 contracts = 2,000 shares. 2,000 shares x 30 strike price equals $60,000.) Under Reg T, the client must meet the deposit requirement of 50% ($30,000) on this purchase. This requirement must be met even if the shares are sold the same day the contract is exercised.

An investor does not expect the price of XYZ stock to change in the immediate future and wishes to generate income. The best strategy is: Sell a call Sell a put Sell a straddle Buy a straddle

c If the market price does not change, neither side of the straddle will be exercised. The premium on both the put and the call will be income to the investor.

The FRB initial margin requirement is 50%. A customer's initial transaction in a margin account is a purchase of 100 shares of XYZ at $15 per share. The customer would need to deposit what amount in this new account? $375 $750 $1,500 $2,000

c Securities purchased in a new margin account require a minimum equity of $2,000. If the securities are worth less than $2,000, then the securities must be paid for in full. In this example, the purchase is for $1,500, requiring the customer to deposit the full amount of the purchase.

The Bond Buyer contains a 20-Bond Index and an 11-Bond Index. The bonds included in the 11-Bond Index have an average rating of: AAA- AA AA+ A+

c The 11-Bond Index contains general obligation bonds with an average rating on S&P of AA+ and on Moody's of Aa1. The 20-Bond Index has an average rating on S&P of AA and on Moody's of Aa2.

Which TWO of the following statements are TRUE regarding the maintenance requirements for selling short stock that is trading at less than $5 per share? The maintenance requirement for shorting a stock at $2.00 per share is 100% of the market value The maintenance requirement for shorting a stock at $2.00 per share is $2.50 per share The maintenance requirement for shorting a stock at $4.00 per share is 100% of the market value The maintenance requirement for shorting a stock at $4.00 per share is $2.50 per share I and III I and IV II and III II and IV

c The industry maintenance requirement, when shorting stock that is trading at less than $5.00 per share, is the greater of $2.50 per share or 100% of the market value. When shorting stock less than $2.50 per share, the maintenance requirement is $2.50 per share, while the maintenance requirement for shorting stocks between $2.50 and $5.00 per share is 100% of the market value.

Which of the following positions best enables an investor to take advantage of a significant appreciation in DEF stock? A debit DEF call spread A credit DEF put spread Long a DEF straddle Short a DEF straddle

c The long straddle offers an investor the ability to realize unlimited gains since the client is long a call option. The gains are determined by the amount the stock appreciates. While a debit call spread is bullish, the gain is limited to the difference between the strike price on the long call and the strike price on the short call. The credit put spread is also bullish, but the gain is limited to the net premium received. The short straddle exposes an investor to unlimited risk if the stock rises.

A designated market maker places a GTC order in his book to buy 1,000 shares of XYZ at $30. XYZ declares a 50% stock dividend. The designated market maker should adjust the order when the stock sells ex-dividend to: 1,000 shares at $20 1,000 shares at $30 1,500 shares at $20 1,500 shares at $30

c The order must be adjusted to reflect the change in XYZ stock. The number of shares will be increased to reflect the dividend and will now be 1,500 shares (1,000 shares plus 50% of 1,000). The price of ABC will be adjusted downward to $20. The total value of the order before the dividend (1,000 shares at $30 = $30,000) must equal the value after the dividend (1,500 shares at $20 = $30,000).

A customer's margin account has a market value of $15,000, a debit balance of $8,000, and SMA of $1,000. If the customer sold $1,000 of securities, what is the maximum amount the customer is permitted to withdraw after the sale? None $1,000 $1,500 $2,000

c This account is restricted since the equity ($7,000) is less than the Reg T requirement of the account's market value ($15,000 x 50% = $7,500). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds multiplied by the Reg T requirement of 50%. In this question, the sale of $1,000 worth of stock will result in a $500 credit to the customer's current SMA ($1,000). The customer is then at liberty to borrow the total SMA of $1,500.

A registered representative is sending an e-mail to both existing individual and potential customers promoting the broker-dealer's products and services. Which TWO of the following statements are TRUE? This is considered correspondence This is considered retail communication This activity requires principal approval prior to use This activity should be reviewed I and III I and IV II and III II and IV

c This activity is considered retail communication since there is no limit mentioned in the question as to the audience expected to be reached by the RR. Retail communication is any written or electronic communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. If the communication is directed to 25 or less individuals, it is considered correspondence. If the retail communication makes a recommendation, or promotes a product or service, prior principal approval is required.

An investor has made the following purchases of XAM stock: Shares bought at $39 in May 2013 Shares bought at $56 in September 2013 Shares bought at $36 in January 2014 Shares bought at $36 in June 2014 The investor sells some of his XAM shares in March 2015 at $51. Based on the various purchases, which shares may be sold to result in the greatest gain with the lowest tax liability? Sell from the shares that were purchased in May 2013 Sell from the shares that were purchased in September 2013 Sell from the shares that were purchased in January 2014 Sell from the shares that were purchased in June 2014

c When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. To find which shares should be sold to generate the largest gain with the lowest tax liability, let's consider each possibility separately. Choice (a) results in a 12-point long-term gain. Choice (b) results in a long-term loss, not a gain. Choice (c) results in a 15-point long-term gain. Choice (d) results in a 15-point short-term gain (due to the shares having been held for one year or less). Since the tax rate on long-term gains (20%) is lower than the tax rate on short-term gains (as ordinary income), selling the shares that were held the longest is the best option. Although the sale of shares that were purchased in January 2014 will result in the same gain as the sale of shares that were purchased in June 2014, the tax liability will be lower.

A broker-dealer owns 100 shares of ABCO stock, which it purchased at 28. If the stock is sold to a customer, the broker-dealer will base a markup on: The inventory cost of 28 The highest bid on the Nasdaq system The lowest offer on the Nasdaq system A price that is fair and reasonable

c When selling stock to a customer, a markup should be based on the lowest offer on the Nasdaq system, not the price the dealer paid to purchase the stock (dealer's inventory cost).

On February 22, an investor sells ABC stock at $31 for a 3-point loss. On March 10, the investor purchases ABC stock at a price of $27. For tax purposes, the investor's cost basis for the stock purchased on March 10 is: 24 27 30 31

c When the wash sale rule is activated, the investor must add the loss to the new cost of the stock regardless of whether the stock is repurchased at a price that is higher or lower than the original cost. In this example, the investor's cost basis for tax purposes is found by adding the 3-point loss to the new cost of $27.

Which of the following activities does NOT take place during the cooling-off period? The due diligence meeting Issuing a red herring Stabilizing the issue Blue-Skying the issue

c Which of the following activities does NOT take place during the cooling-off period? The due diligence meeting Issuing a red herring Stabilizing the issue Blue-Skying the issue

An investor must pay accrued interest for a secondary market purchase of: Zero-coupon bonds Series EE savings bonds Tax anticipation notes Treasury bills

c Zero-coupon bonds and Treasury bills are original issue discount securities and trade without accrued interest. While Series EE bonds are also OID securities, they do not trade in the secondary market. Tax anticipation notes (TANs) are typically interest-bearing securities and trade with accrued interest.

The transfer of bonds from one party to another may be accomplished by an endorsement on the back of the bond certificate or through a: Letter of credit Legal opinion Bid form Bond power

d A customer who sells a security is required to sign the certificate. The usual method of endorsing a stock (or bond) certificate is to sign on the back and then mail the certificate to the broker-dealer. In order to safeguard the certificate, the seller can send the certificate by registered mail. An alternate method is for the customer to send the certificate, unsigned, in one envelope and to send a signed bond (or stock) power in a separate envelope. In this way, if the certificate were to fall into unauthorized hands, it would have no value since it would not be negotiable.

Under the Investment Company Act of 1940, which TWO of the following choices are considered investment companies? A bank holding company A face-amount certificate An insurance company A management company I and II I and IV II and III II and IV

d A face-amount certificate and a management company are two types of investment companies. The third type is a unit investment trust. The Investment Company Act of 1940 does not consider holding companies and insurance companies to be investment companies.

A fundamental analyst, evaluating the common stock of a corporation, will examine all of the following choices, EXCEPT the: Sales of the corporation Management of the corporation Current amount of earnings paid as dividends to shareholders Current amount of short interest positions for the stock

d A fundamental analyst will examine all the factors listed relating to a common stock except the current amount of short interest positions for the stock. Short interest is a statistic examined by a technical analyst. It represents the total amount of shares sold short that will be covered in the future.

Which of the following option positions is an example of a combination? Buy an XYZ June 60 call and sell an XYZ June 65 call Buy an XYZ June 60 call and buy an XYZ June 60 put Sell an XYZ June 60 call and sell an XYZ June 60 put Buy an XYZ June 60 call and buy an XYZ June 65 put

d A long straddle is defined as the simultaneous purchase of two options that have the same expiration and strike price, but consist of one call and one put. A short straddle is defined as the simultaneous sale of two options that have the same expiration and strike price, but consist of one call and one put. Choice (b) is a long straddle and choice (c) is a short straddle. A combination is similar to a straddle, however, the strike prices and/or expirations must be different. Choice (d) is a long combination. A spread is defined as the simultaneous sale and purchase of two options of the same class (same stock and same type of option), but it will have different strike prices and/or expirations. Choice (a) is a spread.

Which TWO of the following choices BEST describe a gasoline tax? Graduated taxes Flat taxes Progressive taxes Regressive taxes I and III I and IV II and III II and IV

d A regressive tax is flat (i.e., the tax rate remains constant regardless of the taxable amount). Examples of regressive taxes are sales taxes and gasoline taxes. A progressive tax is graduated (i.e., the tax rate increases as the taxable amount increases). Income taxes, estate taxes and gift taxes are progressive.

A customer has a cash account that has securities valued at $320,000 and $180,000 in cash. The customer and a spouse also have a joint account with securities valued at $120,000 and $270,000 in cash. If the member firm were to become bankrupt, the coverage under SIPC would be: Full coverage of cash and securities for both accounts $500,000 for the individual account and $290,000 for the joint account $500,000 for the individual account and $390,000 for the joint account $500,000 for the individual account and $370,000 for the joint account

d Both the individual account and the joint account are considered separate customers and will each receive independent coverage of $500,000, of which no more than $250,000 may be for cash. In the individual account, full coverage will be provided of $500,000 ($320,000 of securities and $180,000 in cash). In the joint account, the full value of the securities is covered. However, only $250,000 of the cash in the account is covered. The total coverage for the joint account would be $370,000 ($120,000 + $250,000). For the balance of $20,000 cash, the customer will become a general creditor of the broker-dealer.

Mrs. Jones owns stock from which she received $3,000 in cash dividends. Mr. Jones owns stock from which he received $400 in cash dividends. How much of the cash dividends received are Mr. and Mrs. Jones liable for when filing their joint return? 0 $400 $2,600 $3,400

d Cash dividends received by individuals are fully taxable and, therefore, the entire $3,400 total of dividends is liable for taxes.

Which TWO of the following choices are differences between exchange-traded funds (ETFs) and exchange-traded notes (ETNs)? ETFs may be traded in the secondary market and ETNs cannot ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note and ETFs do not have issuer credit risk ETF returns are based on the performance of an index and ETNs pay a fixed coupon rate ETNs have a maturity date and ETFs do not I and III I and IV II and III II and IV

d ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it could negatively impact the value of the ETN, regardless of how its underlying index performs.

A notice of sale appears showing that RFQ corporation is selling 800,000 units at $60 per unit. Each unit consists of 2 shares of preferred stock and a warrant for 1/2 share of common stock. If all of the warrants are exercised, how many shares will be outstanding? 400,000 shares of preferred and 400,000 shares of common 800,000 shares of preferred and 400,000 shares of common 800,000 shares of preferred and 800,000 shares of common 1,600,000 shares of preferred and 400,000 shares of common

d Each unit was composed of 2 shares of preferred stock and a warrant for 1/2 share of common stock. There will immediately be 1,600,000 (800,000 x 2) shares of preferred outstanding. If the warrants are exercised, there will be 400,000 (1/2 of 800,000) shares of common stock outstanding.

During a period of stable interest rates, which bond has the most potential to show a significant change in price? A 7%, 30-year U.S. Treasury Bond An 8%, 5-year high-grade corporate bond A 6%, 6-month Revenue Anticipation Note A 7 1/2%, 10-year convertible subordinated debenture

d If interest rates are stable, most bond prices will have little movement. However, a convertible debenture could show significant price appreciation or depreciation if the underlying equity changes in value because of the potential to convert. This keeps the bond price in the vicinity of conversion parity. Parity is achieved when the value of the bond equals the value of the common stock derived from conversion.

An employee of a municipal securities firm would like to open an account with another municipal securities firm. Which of the following statements regarding the employee and the account is NOT TRUE? The employer must receive duplicate copies of all transactions made in the account The employee must abide by all trading instructions from the employer regarding the account The employer must be notified in writing of the employee's intention to open the account The employee may not purchase new issues offered on a negotiated basis

d MSRB member firm employees may open an account with a competing firm, provided they abide by the requirements addressed in choices (a), (b), and (c). The employee may purchase new issues or any other type of municipal security.

Which of the following expenditures is a violation under industry rules concerning gifts and gratuities? Taking a client to a dinner valued at $80 per person Attending a concert with your client valued at $105 per ticket Giving a $300 wedding gift to your brother who is employed at a member firm Giving two tickets to your client to attend a basketball game valued at $65 per ticket

d Member firm personnel may not give, or permit to be given, a gift of material value exceeding $100 per recipient per year to personnel employed by another member firm. Exempt from the $100 limit are occasional meals, tickets to sporting and cultural events, reminder advertising (boxes of pens, key chains, etc.), and expenses related to legitimate business travel. In order for the activity to be considered an expense, the RR must attend the event, not give the tickets to another person or persons. The value of two tickets ($130) exceeds the $100 limit. An exemption is provided if the gift is given to another family member for an event related to a family relationship (e.g., a wedding).

Which of the following Moody's ratings is the most speculative? Aa A Baa Ba

d Of the choices given, Ba is the most speculative. The highest Moody's rating is Aaa.

Which of the following choices gives the best indication of current interest rates on revenue bonds? Visible supply Placement ratio List of 20 bonds List of bonds with 30-year maturities

d The Bond Buyer computes the Revenue Bond Index which is the average yield of 25 revenue bonds with 30-year maturities.

A client buys 100 shares of SAR at $58 a share and writes 2 SAR October 60 calls at 3. Which of the following statements is TRUE? The breakeven point is $56 The maximum profit is $600 The maximum loss is $5,200 The maximum loss is unlimited

d The client's maximum loss is unlimited since two calls were written against 100 shares of stock. This client is writing a covered call and an uncovered call and the maximum loss on an uncovered call is unlimited. This position is referred to as ratio writing or a variable hedge, and the objective is to increase the income from writing more calls than stock owned. If the market price trades at or below $60, the client will have a $600 versus a $300 profit since two calls were written. The breakeven point is found by taking the purchase price of $58 and subtracting the total premiums of 6, which equals $52. The maximum profit is $800, which is found by taking the difference between the purchase price and the strike price and adding the premiums received from writing the call options (60 - 58 + 3 + 3).

A registered representative is provided with the following financial information concerning a company: Debt of $225 million, par value of the common stock $40 million, paid-in capital of $70 million, and retained earnings of $750 million. The common stock ratio is: 21% 26% 74% 79%

d The common stock ratio is found by dividing total shareholder equity by a company's total capital. Shareholder equity is equal to the par value of the common stock + paid-in capital + retained earnings, and the total capital is found by adding the debt to shareholder equity. The common stock ratio is 79% [par value of the common stock is $40 million + paid-in capital of $70 million + retained earnings of $750 million = $860 million / $1,085 million ($225 million + $860 million)]. The common stock ratio is used to analyze the capital structure of a company.

A customer contacts a registered representative and wants to invest a large sum of money in four different mutual fund families. Which of the following statements is the MOST important disclosure the RR should make to the client? The customer will not be able to diversify his assets The customer will not be able to switch mutual funds within each family The customer will not be able to receive a single account statement The customer will not be able to receive sales breakpoints

d The term fund family or fund complex is used to define a single investment company or mutual fund company with many different types of mutual funds that a customer may choose to purchase. The objective is to provide a large number of mutual funds providing a broad range of suitability for investors. A customer may be able to invest a large sum of money with one fund family, receive a sales breakpoint (reduced sales charge), diversify his assets, and have the ability to switch between mutual funds. The most important disclosure that should be made to the client is that there is no advantage to allocating his investment in four different fund families, thereby losing the possibility of receiving a reduced sales charge (sales breakpoints). The ability to receive a single account statement is not an important disclosure and this information is usually provided to clients that have different fund families with a single broker-dealer.

A municipal bond with a 6% coupon is priced at a 7.20 basis. If the bond's yield to maturity increases by 40 basis points, the yield to maturity is: 5.60% 6.40% 6.80% 7.60%

d The term priced at a 7.20 basis refers to a serial bond that is priced to yield 7.20 or a YTM of 7.20%. If the bond's basis increased by 40 basis points, the new yield to maturity is 7.60%. The 6% coupon rate is relevant if the question asked about whether the bond was trading at a discount or a premium. Since the YTM is greater than 6%, the bond is trading at a discount.

Bergen County has issued Build America Bonds to improve its transportation system. Which TWO of the following statements are TRUE concerning these bonds? The bonds are federally tax-free The bonds are federally taxable The issuer will receive a federal tax credit The issuer will receive a federal reimbursement I and III I and IV II and III II and IV

d These are an example of Direct Pay Build America Bonds (BABs). BABs are a type of municipal bond that pays taxable interest but the Treasury will reimburse 35% of the interest paid on the bonds to the issuer, which reduces the cost of borrowing. This would allow municipal issuers to compete with corporate issuers when raising capital.

A registered representative sends an electronic communication to 75 of her existing customers, explaining that account statements are now available online. Which TWO of the following statements are TRUE? This is considered correspondence This is considered a retail communication This activity requires principal approval prior to use This activity should be reviewed I and III I and IV II and III II and IV

d This activity is considered a retail communication since the registered representative is sending the communication to more than 25 customers. A retail communication is any written or electronic communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period. If the communication is directed to 25 or fewer individuals, it is considered correspondence. If the retail communication does not make a recommendation, or promote a product or service, prior principal approval is not required. FINRA does not consider announcing the availability of online account statements as promoting a product or service. This activity should, however, be reviewed and supervised by the broker-dealer.

In which TWO of the following situations is a customer NOT considered covered when writing a put option? The customer has cash equal to the exercise value of the contract The customer is long a call option The customer is short the underlying security The customer is long the underlying security I and III I and IV II and III II and IV

d To write a covered put option in a cash account, the customer must have cash in the account equal to the total exercise value of the contract. If the writer is short the underlying stock, the put is considered covered for margin purposes, but this transaction may not be written in a cash account, only in a margin account. Since the question did not specify the type of account, both choices (I) and (III) allow the customer to be considered covered.

When purchasing a new issue of stock in a cash account, when must payment be made under Reg. T? On the settlement date Two business days after the trade date When the securities are delivered Two business days after the settlement date

d Two business days after the settlement date

customer sells short 400 shares and the company declares a 10% stock dividend. When the customer covers the short position, the customer will be required to deliver: 40 shares 360 shares 400 shares 440 shares

d When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends declared are the responsibility of the customer who sold the stock short. In this example, the company declares a 10% stock dividend. Therefore, a customer who sold short 400 shares will be required to deliver 440 shares (400 shares x 10% = 40 additional shares) when he covers the short sale.

An investor writes an ABC June 70 put at 4. If the option is exercised, the investor will have: A capital loss of $400 A capital gain of $400 Sale proceeds of $6,600 for the stock sold in the exercise A cost basis of $6,600 for the stock acquired in the exercise

d When a put is exercised, the premium received by the writer is treated as a reduction in the cost of the underlying stock. The strike price of the put (70), minus the premium received by the writer (4), equals the writer's cost basis in the underlying stock (66). The writer will have a gain or loss depending on the stock's price when it is sold.

A mutual fund buys stock from the portfolio of an insurance company. This is a trade executed in the: Over-the-counter market Exchange market Third market Fourth market

d When an institutional investor such as a mutual fund buys stock from the portfolio of an insurance company (another institution), it is considered a trade executed in the fourth market. This is the name given to the so-called market where institutions trade with other institutions.

When pricing a bond, what information is NOT required? The coupon rate The maturity date The settlement date The number of bond years

d When pricing a bond (determining the yield when price is known or determining the price when yield is known), the coupon, settlement date, and maturity are required. The number of bond years is used to determine the net interest cost when an underwriter is bidding on a new issue of municipal bonds.

A customer sells $1,000 worth of stock in a restricted margin account. All of the following statements are TRUE, EXCEPT the: Market value of the account will be reduced SMA will be increased Debit balance will be decreased Equity will be increased

d When securities are sold in a restricted account, the customer is permitted to withdraw an amount equal to the FRB initial margin requirement (currently 50%). This amount is first credited to the SMA and may then be withdrawn. The full amount of the sale is used to reduce the debit balance. The market value will decrease since securities were sold. The equity will remain the same since the market price and debit balance were reduced by the amount of the sale. If the customer withdraws the amount credited to the SMA, the debit balance will increase and the equity will decrease.