Final Exams

If a stock's price breaks out through a resistance level, it is expected that the price of the stock will: Arise Bfall Cremain stable Dbecome volatile

The best answer is A. A "resistance" level is a price above the current market, through which a stock's price tends not to rise. Thus, the stock is said to have "resistance" at this price, meaning it is resisting further price rises, because investors are willing to sell at this price. If a stock breaks the resistance level, this is strongly bullish, since all of the ready sellers have been "cleaned out" and there are still buyers for the stock. If there are many more buyers than sellers, prices will rise.

Which CMO tranche receives no payments until maturity? AZ-Tranche BCompanion Tranche CPAC tranche DTAC tranche

The best answer is A. A Z-tranche is a "Zero" tranch. It gets no payments until all prior tranches are retired. Then it is paid off at par. It acts like a long-term zero-coupon bond, so it is most susceptible to interest rate risk. The other tranches receive payments earlier in their life, so they are less susceptible to interest rate risk.

An open-end management company is a: Amutual fund Bpublicly traded fund Cfixed unit investment trust Dreal estate investment trust

The best answer is A. A mutual fund portfolio is managed by an investment adviser and the fund continuously issues and redeems its common shares - so it is an "open- end" management company.

A customer who sells a "put spread" believes that the market will: Arise Bfall Cremain neutral Dbe volatile

The best answer is A. A sale of a "put spread" is similar to simply selling a put. In a rising market, the puts expire "out the money" and the profit is the premium received. The difference is that a short put gives ever increasing downside loss potential - all the way to "0" - in return for the premium received. A short put spread gives limited downside loss potential in return for a lower premium received.

A customer sells 1 ABC Jan 70 Call @ $6 and sells 1 ABC Jan 70 Put @ $5 when the market price of ABC is $71. At which market prices is the position unprofitable? I $57 II $59 III $81 IV $84 AI and IV only BII and III only CII and IV only DI, II, III, IV

The best answer is A. A short straddle is the sale of a call and the sale of a put on the same stock at the same strike price and expiration. If the market moves up, the call will be exercised. If the market moves down, the put will be exercised. If the market stays at the strike price, then both contracts expire "at the money," and the premiums collected represent the maximum gain. Since $11 in premiums was collected, the market must move down by more than 11 points to lose on the put; or must move up by more than 11 points to lose on the call. Thus, the position is unprofitable if the market moves below $70 - $11 = $59 per share; or moves above $70 + $11 = $81 per share. The position would be profitable above the breakeven point of $59; or below the breakeven point of $81 per share. To summarize, the breakeven formulas for a short straddle are: Upside Breakeven= Call Strike Price + Combined Premium Downside Breakeven= Put Strike Price - Combined Premium

Active asset managers select investments based primarily upon: Ainefficient market pricing of the investment Befficient market pricing of the investment Cminimum time needed to achieve projected investment returns Dminimum number of investments needed to achieve projected investment returns

The best answer is A. Active asset managers believe that by performing fundamental analysis, they can find undervalued companies - that is, companies that are not "efficiently priced". Passive asset managers believe that the market is basically efficient, and that one cannot consistently find "undervalued securities" - so why bother? Instead, just invest in an asset that mimics the index - that is, an index fund. This will do as well as the "market" with much lower expenses that those associated with "active" asset management.

Which of the following customers is allowed a breakpoint on mutual fund purchases? AA corporate treasurer buying for investment BAn investment club account buying for the club participants CA partnership account where the partnership is formed to buy mutual funds DAn investment adviser omnibus account

The best answer is A. An individual or corporation making a purchase is considered to be "one" purchaser and qualifies for the breakpoint. People cannot "join together" to obtain a breakpoint on a mutual fund purchase. Therefore, investment clubs cannot group purchases for a breakpoint; nor can investment advisers group their customers' purchases; nor can a partnership be formed to buy mutual funds at a breakpoint.

A Day order placed "market - at the open": I must be executed that day II may be executed at the opening on the next day III will be executed at the opening market price or canceled IV will be executed as close to the opening price as possible AI and III BI and IV CII and III DII and IV

The best answer is A. An order placed "market - at the open" receives an execution at the opening price that trading day, or is canceled.

Which statement is TRUE about donations into accounts opened under the Uniform Gifts to Minors Act? AAny adult can donate into a custodial account for a minor BOnly a relative of the minor may donate into a custodial account for a minor COnly a parent of the minor may donate into a custodial account for a minor DOnly a minor may donate into a custodial account for a minor

The best answer is A. Any adult can donate into a custodial account for a minor. The adult does not have to be related to the minor.

Which of the following statements are TRUE regarding municipal interest income and the expenses associated with holding municipal bonds? I Municipal interest income is not taxable by the Federal government II Municipal interest income is taxable by the Federal Government III All expenses associated with keeping municipal bonds are not tax deductible IV All expenses associated with keeping municipal bonds are fully tax deductible AI and III BI and IV CII and III DII and IV

The best answer is A. Because municipal interest income is not taxable by the Federal government, all expenses associated with keeping municipal bonds are not tax deductible. These expenses include interest on loans used to finance the purchase of municipal bonds, safe deposit box charges for holding the bonds, etc.

Bonds quoted on a percentage of par basis are generally: Aterm bonds Bseries bonds Cserial bonds Dshort term maturities

The best answer is A. Bonds quoted on a percentage of par basis are term bonds. Municipal bonds quoted in basis points (yield quotes) are serial bonds.

A retired customer that has a portfolio of blue chip stocks is looking to supplement his retirement income. An appropriate recommendation would be to: Asell covered calls Bsell naked calls Csell covered puts Dsell naked puts

The best answer is A. Covered call writing is the most popular retail income strategy in a flat market, and is appropriate for conservative investors that are looking for extra income. The customer sells calls against stock that is already owned, getting premium income. If the stock stays flat, the calls expire and the customer keeps the premium. If the stock rises, the calls are exercised and the stock is called away at no loss to the customer. If the market falls, the calls expire and the customer loses on the stock (which he would have lost on anyway!).

A long time customer has purchased securities in a margin account and is experiencing a temporary cash shortfall. The customer tells the registered representative that he cannot pay on settlement; and the registered representative offers to lend the customer the necessary funds. This action is: Aprohibited Ballowed with the permission of the branch manager Callowed only if the loan will be repaid within 30 days Dallowed without restriction

The best answer is A. FINRA prohibits registered representatives from either lending money personally to a customer or borrowing money personally from a customer. There are certain exceptions to the prohibition if the customer is a spouse, "significant other" or family member, but this is not the case here.

The prohibited practice of "spinning" is defined under FINRA rules as an arrangement where a: A member firm gives officers of public companies IPO allocations in return for receiving underwriting business from that company B customer who promises additional business to a representative receives a new issue allocation that is sold in the market at a profit within 30 days of the issue's effective date C member firm that is an underwriter gives other retail member firms IPO allocations in return for receiving directed brokerage from those firms in the future D member firm offers to provide research about a company that is choosing an underwriter to do its IPO, if it is selected to be the underwriter

The best answer is A. FINRA prohibits the "spinning" of IPO shares. This is a "quid pro quo" arrangement where a member firm gives officers of public companies IPO allocations in return for receiving underwriting business from that company (since the officers are in a position to direct that business to the member firm). An executive officer or director of a publicly held company cannot receive a new issue allocation if the company is currently an investment banking client of the member; if the member has received investment banking compensation from the company in the past 12 months; or if the member expects to be retained by the company to provide investment banking services to the company in the upcoming 3 months. Whether the member firm has covered the company in its research reports in the past 12 months, or if it intends to cover the company in its research reports, is not considered a "quid pro quo" under this rule. Choice B is the practice of "flipping" a new issue that is profitable - selling it soon after issuance in the market. This is not a prohibited practice, but investment banks frown on customers who "flip" - they want purchasers of new issues to be long term investors. Choice C is the prohibited practice of giving another member firm an IPO allocation - IPOs can only be sold to the general public - not to FINRA member firms, the officers or member firms or member firm employees. Choice D is quite normal. The underwriter for a company that is "going public" will typically follow up with research reports on the company after the offering is completed (though the first research report cannot be issued until 10 days elapse from the effective date).

If a country is exporting more, then the country's: AGDP is increasing BGDP is decreasing CInflation rate is increasing DInflation rate is decreasing

The best answer is A. GDP is Gross Domestic Product - the sum of all goods and services produced within a country. If a country exports more, it is producing more within that country and GDP increases. If a country imports more, it is producing less within that country and GDP decreases.

If a corporation issues new stock at a price above par value, the excess above par is termed: Apaid in surplus Bretained earnings Cearned surplus Dadjusted par value

The best answer is A. If a corporation sells stock at a price above par value, the par value received is shown on the balance sheet as "par value," while the excess funds are credited to the corporation's capital surplus account. Other names for the excess paid above par value are: additional paid in capital or paid in surplus. Retained earnings and earned surplus are different names for the same account - corporate earnings that are not paid out as dividends are credited annually to retained earnings.

A technical analyst has been charting the price movements of ABC stock. The stock has been fluctuating in price between $56 and $61 per share for the past 3 months. If the analyst expects a breakout through the resistance level, which order should be placed? ABuy ABC @ $62 Stop GTC BBuy ABC @ $62 GTC CBuy ABC @ $61 Stop GTC DBuy ABC @ $57 Stop GTC

The best answer is A. If a stock moves through a resistance level, it is breaking out to the upside. In this example, the resistance level is at $61. If the stock moves through this price, it is expected that it will move sharply upward. To buy above the current market, a buy stop order must be used. Therefore, the order to buy ABC @ $62 Stop GTC is appropriate. Once the long stock position is established, the customer believes the price will skyrocket, so that it can be sold at a higher price for a profit. A buy limit order cannot be used, since these are orders to buy lower than the current market.

An employee of a CBOE member firm wishes to open an options account at another CBOE member firm. Which of the following statements are TRUE? I Prior written approval must be obtained from the employer member II Prior written approval must be obtained from the CBOE III Duplicate confirmations must be sent to the employer member IV Duplicate confirmations must be sent to the CBOE AI and III BI and IV CII and III DII and IV

The best answer is A. If an employee of a CBOE member firm wishes to open an options account at another CBOE member firm, then prior written approval must be obtained from the employer member; and duplicate confirmations must be sent to the employer member.

A customer sells 1 XMI Dec 530 Put @ 8 when the index is at 529.00. The customer is exercised when the index closes at 525.00. The writer is obligated to: Adeliver cash Breceive cash Cdeliver stock Dreceive stock

The best answer is A. If an index option is exercised, the writer is obligated to pay the holder the "in the money" amount in cash the next business day.

A corporate bond was issued on Jan 1, 2010, that matures on Jan 1, 2030. The trust indenture allows the corporation to call the bond starting in 2020 at a price equaling 100 1/2 plus an additional 1/4 point premium for every 6 month period remaining until maturity. If the bond is called on Jan 1, 2026, the redemption price will be: A102 1/2 B102 C101 1/2 D100 1/2

The best answer is A. If the bond is called on Jan 1, 2026, it has 4 years left to maturity. This is the same as 8 - six month periods. For each six month period prior to maturity that the bond is called, 1/4 point is added to the call price (total equals 2 points). Since the call price is 100 1/2 plus the additional premium of 2 points, the total call price is 102 1/2.

A customer sells 1 ABC Jan 60 Call @ $5 and buys 1 ABC Jan 70 Call @ $1 when the market price of ABC is $62. The maximum potential gain is: A$400 B$600 C$1,000 Dunlimited

The best answer is A. If the market falls below $60, the calls will expire "out the money" and the customer will keep the credit of $4 points or $400. This is the maximum potential gain.

Customer "A" buys a Credit Default Swap (CDS) from Customer "B," with the reference loan being one made to Customer "C." If Customer "C" defaults, then: ACustomer A benefits BCustomer B benefits CCustomer C benefits Dany benefit to a specific party is based on the terms of the contract

The best answer is A. In a Credit Default Swap (CDS), the buyer pays a premium to the seller, where the seller agrees that if the reference loan defaults, the seller will pay the face amount of the loan to the buyer. The buyer pays an annual "insurance-like" premium for this. If the loan does not default, the seller wins - collecting the premiums without having to make a payout. If the loan does default, the buyer wins - since the seller must pay the buyer the face amount of the loan in cash.

An investor believes that interest rates will be flat or falling into the future; and that prices may deflate. The MOST appropriate investment is: ALong term U.S. Government bonds BReal estate CGold DLarge Capitalization stocks

The best answer is A. In periods of deflation, interest rates fall. A fixed income security's price will go up as interest rates fall. Furthermore, since prices are deflating, the fixed interest payments received are able to buy more and more over time. This is the best investment choice. In times of deflation, real estate prices fall; as do gold prices. Stock prices tend to fall as well, since companies are forced to cut their prices to maintain sales volume.

A customer holds 10 ABC Jan 100 Call contracts. ABC Corporation is paying a $1 per share cash dividend. On the ex date, the customer will hold: A10 ABC Jan 100 Calls covering 100 shares each B10 ABC Jan 99 Calls covering 100 shares each C10 ABC Jan 101 Calls covering 100 shares each D10 ABC Jan 101 Calls covering 99 shares each

The best answer is A. Listed option contracts are not adjusted for cash dividends. They are only adjusted for 2:1 and 4:1 stock splits. For other types of stock splits and stock dividends, there is no adjustment to the contract. However, if the contract is exercised, the "deliverable" is adjusted accordingly.

Most of the registration statement filed with the SEC is information that is found in the: APreliminary Prospectus BUnderwriting Agreement CTrust Indenture DAnnual Report

The best answer is A. Most of the registration statement filed with the SEC for a new issue is found in a copy of the prospectus; much of which is financial information about the issuer.

Municipal dollar bonds are generally: Aterm bonds Bseries bonds Cserial bonds Dshort term maturities

The best answer is A. Municipal dollar bonds (quoted on a percentage of par basis) are term bonds. Municipal bonds quoted in basis points (yield quotes) are serial bonds.

The SEC requires financial reports from all of the following EXCEPT: Amunicipal issuers Bcorporate issuers Cmunicipal broker-dealers Dcorporate broker-dealers

The best answer is A. Municipal issuers are exempt from the provisions of the Securities Acts, as are all other governmental issuers. The SEC has authority over corporate issuers, and requires financial reports from corporations. Broker-dealers, including municipal broker-dealers, are registered through FINRA under SEC oversight; and their financial reports are filed with both FINRA and the SEC.

The bid price of a mutual fund is $14.30 and the ask price is $15.50. The fund has the following breakpoint schedule: Purchase Amount Sales Charge $0- $10,000 7.75% $10,001- $25,000 7.25% $25,001 - over 6.50% The fund charges a redemption fee of 1/2%. A customer who redeems 200 shares this day will receive: A$2,846 B$2,846 less a commission C$2,860 D$2,860 less a commission

The best answer is A. Mutual funds are redeemed at NAV less a redemption fee (if any). No commissions are charged on purchases or redemptions. The redemption fee of 1/2% must be deducted to get the net proceeds. $14.30 NAV x .995 x 200 shares = $2,846

Which of the following statements are TRUE regarding new issues of U.S. Government agency securities? I The securities are sold through a selling group appointed by the Agency II The securities are sold through a selling group appointed by the Federal Reserve III The securities are sold at par IV The securities are sold at a par plus a mark-up AI and III BI and IV CII and III DII and IV

The best answer is A. New issues of agency securities are sold through a selling group that is appointed by the Agency. The group typically consists of large banks and broker-dealers. The group sells the issue at par to the public.

An investor wishes to buy a new issue of U.S. Government agency bonds. You recommend that the customer purchase Federal Farm Credit System bonds with a 10 year maturity. An investor who purchases the new issue can expect to pay: Apar value Bpar value less a discount Cpar value plus a mark-up Dpar value plus a commission

The best answer is A. New issues of agency securities are sold through a selling group that is appointed by the Agency. The group typically consists of large banks and broker-dealers. The group sells the issue at par to the public. Out of the proceeds, a selling concession is paid to the selling group by the agency. In contrast, direct U.S. Government obligations are sold through auction.

A corporation has issued 50,000,000 shares of common stock at $.50 par. The corporation has 10,000,000 shares of Treasury Stock on its books. The aggregate par value of the outstanding shares is: A $20,000,000 B$40,000,000 C$80,000,000 D$100,000,000

The best answer is A. Outstanding stock is: Issued stock (50,000,000 shares) minus Treasury stock (10,000,000 shares) = 40,000,000 shares outstanding at $.50 par = $20,000,000.

Which Collateralized Mortgage Obligation tranche has the MOST certain repayment date? APlanned Amortization Class BTargeted Amortization Class CPlain Vanilla Tranche DZero Tranche

The best answer is A. Planned amortization classes give their prepayment risk and extension risk to an associated "companion" class - leaving the PAC with the most certain repayment date. TACs are like a "one-sided" PAC - they protect against prepayment risk, but not against extension risk. Plain vanilla CMO tranches are subject to both risks, while zero-tranches are like "wild cards" - whatever is left over is what you get!

Which statement is TRUE when comparing preferred stock to common stock: A Preferred dividends are paid before common BBoth preferred and common stock has voting rights CPreferred shareholders have a junior claim to assets upon liquidation after common shareholders DPreferred interest is paid semi-annually

The best answer is A. Preferred stock has preference over common as to the payment of dividends and as to assets upon liquidation. Preferred dividends (NOT interest) are, in most cases, paid semi-annually, as compared to common stock dividends that are paid quarterly. Preferred stock lacks voting rights.

An order for a New York Stock Exchange listed issue is routed by the member firm to an Electronic Communications Network (ECN) rather than to the exchange floor. This practice is permitted: Aif the price offered by the ECN is better Bonly if the customer consents Conly if an attempt to fill the order on the NYSE fails Donly if the NYSE is closed

The best answer is A. SEC rules require that execution must occur at the "best market." If a stock is traded in multiple markets, then the order must be routed by the member firm to the market that is posting the best quote.

ABC Corporation has declared a rights offering to stockholders of record on Tuesday, June 22nd. Under the offer, shareholders need 20 rights to subscribe to 1 new share at a price of $60. Fractional shares can be rounded up to purchase 1 full share. A customer owning 240 shares wishes to subscribe. The market price of the stock is currently $73. The customer can buy: A12 shares for $720 B12 shares for $876 C240 shares for $14,400 D240 shares for $17,520

The best answer is A. Since 20 rights are needed to buy 1 new share, the customer holding 240 shares, and therefore receiving 240 rights can buy 240 / 20 = 12 shares at $60 each = $720 total for 12 shares.

A 50 1/2 year old self-employed individual has a balance of $200,000 in his HR 10 plan. This balance is composed of $140,000 of contributions and $60,000 of earnings. The individual decides to withdraw $100,000 from the plan. Which statements are TRUE? I The entire withdrawal is taxed as ordinary income II Since half the account balance has been withdrawn, the withdrawal is taxed at 50% of ordinary rates III The entire withdrawal is subject to a 10% penalty tax IV Since half of the account has been withdrawn, the withdrawal is subject to half of the 10% penalty tax AI and III BI and IV CII and III DII and IV

The best answer is A. Since this individual is younger than age 59 1/2, any distribution from the Keogh plan is subject to both ordinary income tax plus the 10% penalty tax. If the distribution is made after age 59 1/2, it is subject only to ordinary income tax - there is no penalty tax. Please note that 100% of all distributions from Keoghs are taxable - these are tax qualified plans where all of the investment dollars were never taxed. Once distributions commence, both the original investment (that was never taxed), and the tax deferred build-up, are now taxable in full.

Stand-by underwritings are a(n): Afirm commitment underwriting Bbest efforts underwriting Call or none underwriting Dagency underwriting

The best answer is A. Stand-by underwritings are used in connection with rights offerings. If all of the new shares are not subscribed by the existing shareholders, the issuer has an underwriter stand-by on a firm commitment basis to purchase any unsubscribed shares. Thus, the issuer is assured of selling all of the new shares. Best efforts and all or none are types of underwritings where the underwriter is not liable for any unsold shares - the underwriter is acting as agent for the issuer helping in the sale of the offering.

Which of the following is a TRUE statement about managed wrap accounts? The customer is charged: Aa single annual fee based on total assets in the account for account transactions and maintenance Ba commission for each transaction performed Ca commission for each recommendation that results in a transaction Dboth a commission on each transaction performed and an annual maintenance fee based on total assets in the account

The best answer is A. Wrap accounts are a type of customer account, where all services performed by the broker are "wrapped" into a single account; and a single annual fee based as a percentage of assets under management is charged. There is no commission charge for each transaction performed in such an account; all services are covered in the single "wrap" fee. Also note that "wrap" accounts, because they charge a flat annual fee and not commissions, are defined as investment adviser products. These must be sold through an investment adviser subsidiary of a broker-dealer, and the representatives that sell them must be registered as "IARs" - Investment Adviser Representatives - in each State where they offer the product.

An investor has 500 shares and is voting for 3 open board seats. Which statement is correct if the election employs the statutory voting method? AStatutory voting gives the shareholder a proportionate voting weight and allows her to cast a maximum of 500 votes for a favored director. BStatutory voting gives the shareholder a proportionate voting weight and allows her to cast a maximum of 1500 votes for a favored director. CStatutory voting gives the shareholder a disproportionate voting weight and allows her to cast a maximum of 500 votes for a favored director. DStatutory voting gives the shareholder a disproportionate voting weight and allows her to cast a maximum of 1500 votes for a favored director.

The best answer is A. Statutory voting is also know as proportionate voting. Under the statutory method, the number of shares held (500) is the number of votes that the shareholder can apply to each directorship. Under the cumulative method, the shareholder can accumulate all votes that he has for all directorships (3 x 500) and apply them to favored individuals. Cumulative voting gives the shareholders disproportionate voting weight as compared to statutory voting and is considered to be an advantage for the small investor.

Establishing the structure of a portfolio to meet specific financial goals is called: AStrategic allocation BTactical allocation CRebalancing DRisk adjustment

The best answer is A. Strategic portfolio management is the determination of the percentage allocation to be given to each asset class - for example a portfolio might be strategically allocated as follows: Money Market Instruments 10% Corporate Bonds 30% Large Cap Equities 50% Small Cap Equities 10% Changing these percentages as conditions change is part of ongoing strategic asset management. Tactical asset management is the permitted variance within each allocation percentage. For example, Large Cap equities are allocated 50%, but the manager may be tactically allowed to lower this percentage to, say, 40% or raise it to 60%. Thus, if the manager believes that Large Cap equities will underperform the market, he or she can lower the allocation to 40%; and if the manager believes that they will outperform the market, he or she can raise the allocation to 60%. This gives the manager some ability to "time the market" when conditions are overbought or oversold.

Under the "penny stock rule," an established customer that is exempt from the rule is defined as a person who has effected a securities transaction or made a deposit of funds or securities with that broker-dealer more than: A1 year previously B2 years previously C3 years previously D5 years previously

The best answer is A. Suitability statements are not required under the "penny stock rule" for so-called "established customers." These are customers who have either had cash or securities in custody of that broker-dealer for at least 1 year; or customers who have bought 3 or more "penny stock" issues previously from that broker-dealer.

If the actual interest rate earned in the separate account underlying a variable annuity contract is higher than the "AIR" the annuity payment: Awill increase Bwill decrease Cis unaffected Dis capped to a maximum amount

The best answer is A. The "AIR" is the "Assumed Interest Rate." This is used as an illustration of the annuity payment that will be received if the separate account grows at the AIR. If the assets grow at an interest rate that is higher than the AIR, then the annuity payment will increase. Conversely, if the assets grow at an interest rate that is lower than the AIR, then the annuity payment will decrease.

The "death benefit" associated with a variable annuity contract means that if the contract holder dies: Aprior to annuitization, the amount invested in the contract is returned to a beneficiary Bafter annuitization, the amount invested in the contract is returned to a beneficiary Cprior to annuitization, the insurance company will make a lump sum payment to complete the terms of the contract Dafter annuitization, the insurance company will pay for the insured's burial expenses

The best answer is A. The "death benefit" of a variable annuity contract is not really much of one. If the contract holder dies prior to annuitization, the insurance company pays the greater of current NAV or the amount invested to a beneficiary. If the contract holder dies after annuitization, there is no more "death benefit."

Under MSRB rules, which of the following call provisions can affect the yield that is shown on a customer's municipal bond confirmation? I In-whole call II Sinking fund call III Extraordinary mandatory call AI only BIII only CII and III DI, II, III

The best answer is A. The MSRB requires that dollar prices of bonds quoted on a yield basis be computed to the lowest dollar amount of Yield to Maturity or Yield to Call. The only calls that must be considered are those where there is reasonable certainty that specified bonds will be called. Under an "in whole" call, the issuer establishes dates when the entire issue can be called. This meets the reasonable certainty test. Sinking fund calls are handled by random choice. It is not known which bonds will be called - only that a preset dollar amount of bonds will be called at the call dates. This does not meet the reasonable certainty test. Extraordinary calls, such as a calamity call, also do not meet the reasonable certainty test.

The Securities Exchange Act of 1934 regulates trading of all of the following EXCEPT: ACommodities Futures BOptions CCorporate Bonds DCorporate Stock

The best answer is A. The Securities Exchange Act of 1934 does not regulate the trading of commodities, since these are not securities, and are not regulated under the Securities Acts. Rather, futures (commodities) are regulated by the CFTC - the Commodities Futures Trading Commission. The Securities Exchange Act of 1934 does regulate trading of all non-exempt securities, including common stocks, preferred stocks, corporate bonds, options on securities, etc.

Which contract will likely have the highest premium when ABC closes at $38? AABC Jan 35 Call BABC Jan 35 Put CABC Jan 40 Call DABC Jan 30 Put

The best answer is A. The contract with the highest premium is likely to be the one that is the most "in the money." With the market price at 38, the 35 call is "in the money" by 3 points. The 35 put is "out the money" by 3 points. The 40 call is "out the money" by 2 points. The 30 put is "out the money" by 8 points.

"Alpha" is a measure of: Asystematic risk Bnon-systematic risk Ccredit risk Dliquidity risk

The best answer is B. "Alpha" measures non-systematic risk - that is, stock specific risk.

Which of the following would NOT be considered when evaluating the credit risk of a municipal revenue bond? ACoverage ratios BLegislative actions CCompeting facilities DManagement experience

The best answer is B. Credit risk is the risk that a bond will default. To evaluate this risk for a revenue bond issue, one would examine coverage ratios; the effect of competing facilities; and the management of the facility. Legislative actions have no bearing on credit risk. Potential effects of adverse legislative actions would be evaluated as legislative risk.

A customer owns 1,000 shares of XYZZ stock, purchased at $40 per share. The stock is now at $45, and the customer has become neutral on the stock, but believes that the stock still has good long term growth potential. The client asks her representative for a "conservative recommendation" that will give her a positive portfolio return. The client should be told to: A sell 10 XYZZ 45 Call Contracts B sell 10 XYZZ 45 Put Contracts C sell 1,000 shares of XYZZ and sell 10 XYZZ 45 Call Contracts D sell 1,000 shares of XYZZ and sell 10 XYZZ 45 Put Contracts

The best answer is A. The customer purchased the stock at $40 and it is now trading at $45. The customer is now neutral on the stock, but thinks it is a good long term investment. So the stock should not be sold (eliminating Choices C and D). If the customer sells calls against the stock position (covered call writer), the customer will generate extra premium income in the portfolio. This is a conservative income strategy. The risk here is that if the stock rises immediately, the stock will be called away and the customer will not enjoy the upside gain. If the stock falls, the customer loses on the stock (same as before), reduced by the collected premiums. The sale of puts will also produce premium income. If the stock rises, the puts expire and the customer still owns the stock, but if the stock drops, the short puts will be exercised, obligating the customer to buy the stock (in addition to the shares already owned). Thus, in a falling market, the customer will lose twice as fast! This is not a "conservative" strategy.

The designated Registered Options Principal (designated ROP) is responsible for the approval of options: I advertising II correspondence III sales literature IV accounts AI and III BI and IV CII and III DII and IV

The best answer is A. The designated Registered Options Principal (ROP) is responsible for ensuring the firm's overall compliance with options regulations and for approving all options advertising and options sales literature prior to use. Basically, the designated ROP is a main office compliance ROP. The BOM is the options branch manager who approves new options accounts and orders in options accounts. The BOM also approves registered representative correspondence with customers.

A customer buys $100,000 of a new issue 20 year corporate bond at 95. At maturity, the customer will have: Ano capital gain or loss Ba $500 capital gain Ca $5,000 capital gain Da $5,000 capital loss

The best answer is A. The discount on all original issue discount bonds (corporate, government and municipal) must be accreted over the life of the bond. If the bond is held to maturity, the entire discount has been accreted and the adjusted cost basis is par. Since the bonds are redeemed at par, there is no capital gain or loss at maturity.

A customer is long 400 shares of ABC stock at $50 per share in a margin account. The customer wishes to sell 4 ABC Jan 50 Calls @ $5. The customer must deposit: A0 B$500 C$2,000 D$20,000

The best answer is A. The existing long stock position covers the sale of the calls. The customer does not deposit anything to sell the calls; as a matter of fact, he or she can take the $500 received per contract x 4 contracts = $2,000 total premium received for selling the calls from the account. Please note, however, that the long stock position must be properly margined.

ABC 8% $100 par preferred is trading at $120 in the market. The current yield is: A 6.7% B8.6% C10.6% D60.6%

The best answer is A. The formula for current yield is: Annual Income/Market Price= Current Yield $8/$120 = 6.7%

What are the initial margins for stock positions in long and short margin accounts? A50 / 50 B50 / 25 C50 / 30 D25 / 30

The best answer is A. The initial margin requirement for stock positions is set by Regulation T at 50% for both long and short stock positions.

Which of the following statements are TRUE regarding a life annuity? I The shorter the expected annuity period, the larger the monthly payment II The longer the expected annuity period, the larger the monthly payment III A life annuity usually pays the largest amount of all of the annuity payment options IV A life annuity usually pays the smallest amount of all of the annuity payment options AI and III BI and IV CII and III DII and IV

The best answer is A. The shorter the time period to "expected death" when the separate account is annuitized, the larger the monthly payment will be; conversely the longer the time period to "expected death" when the separate account is annuitized, the smaller the monthly payment will be. Regarding annuity payment options, this must be looked at from the standpoint of the insurance company, that has a large pool of annuitants to cover. The insurance company can afford to pay a larger payment to those persons who it expects will be paid for the shortest time period; it will make smaller monthly payments when it expects to pay for a longer time period. A life annuity lasts only for that person's life - this is the shortest expected period of the annuity payment options. A life annuity with period certain continues to pay for a fixed time period if the person dies early; a joint and last survivor annuity pays a spouse when one person dies; a unit refund annuity pays a lump sum if a person dies early

Under the "wash sale rule," a loss on the sale of a security is disallowed, if between 30 days prior to the sale until 30 days after the sale, the customer: I buys a security convertible into that which was sold II buys a call option on the security which was sold III sells a call option on the security which was sold IV sells a put option on the security which was sold AI and II BIII and IV CII and III DI and IV

The best answer is A. The wash sale rule states that if a security is sold at a loss, and from 30 days prior to the sale date until 30 days after the sale date, the same security is purchased; or an equivalent security such as a convertible is purchased; or a call option, warrants or rights are purchased; then the loss deduction is disallowed. All of these "equivalents" effectively restore long the position, "washing out" the sale.

Distribution of a preliminary prospectus during the 20-day cooling off period for a new issue that is in registration with the SEC is: Aprohibited under the Securities Act of 1933 Bused to determine the level of investor interest in the issue Cused to solicit customers to buy the issue Dused to recommend the purchase of the issue to customers

The best answer is B. A "red herring" preliminary prospectus may be sent to any prospective purchaser of that new issue once the issue has entered into the "20-day cooling off" period that commences upon filing of the registration statement with the SEC. The use of the "preliminary prospectus" does not constitute an offer, solicitation, or recommendation under the '33 Act, and the red ink statement on the cover of the preliminary prospectus states this (hence the name "red herring"). The red herring is used to obtain non-binding indications of interest in the issue, and may be sent to anyone during the cooling off period, whether or not that person has previously expressed any interest in the issue.

Yield curve analysis is useful for an investor in debt securities for all of the following reasons EXCEPT: Athe yield curve is used to compare the marketability risk of one issue to that of another Binvestors can compare rates of return relative to changing maturities Cthe yield of a specific security can be compared to the market expectation for similar securities Dthe curve shows market expectations for interest rates

The best answer is A. The yield curve is not used to compare the marketability risk of different issuers. This is the risk that the security will be difficult to sell. The yield curve shows market expectations for interest rates - depending on the shape of the curve. An ascending curve indicates that interest rates are likely to rise in the future; a descending curve indicates that interest rates are likely to fall in the future. Because the yield curve shows all the market interest rates for all maturities, investors can compare rates against differing maturities. The yield curve is an average for securities of a given risk class. An investor can compare the yield on a specific security to the curve for the risk class to evaluate the attractiveness of that investment. If there is a great demand for a specific maturity, the price will be pushed up and the yield lowered. One can pick this out in a yield curve since the curve would drop for that specific maturity.

Mutual Funds NAV Buy Chg ALPO Fund 9.51 10.39 +.02 AUDI Fund 6.82 7.45 +.04 The funds listed are: A open end management companies B closed end management companies C fixed unit investment trusts D participating unit investment trusts

The best answer is A. These funds are open-end management companies, commonly called mutual funds. Closed-end management companies are not sold with a sales charge. They trade on an exchange and are bought at the prevailing market price plus a commission.

What is the "time premium" amount of the following contract? 1 ABC Jan 55 Put @ $2 ABC Market Price = $61 A$2 B$4 C$6 D$8

The best answer is A. This contract is "out the money," so there is no intrinsic value currently. The total premium paid of $2 represents the "time premium" for this contract.

Which of the following participate in the Eurodollar bond market? I Domestic investment banks II Foreign commercial banks III Domestic commercial banks IV Domestic thrift institutions AI, II, III BII, III, IV CI, III, IV DI, II, III, IV

The best answer is A. Thrift institutions do not operate in the foreign markets. They only conduct business in the State in which they are organized, with their primary purpose being to give mortgages on local real estate, funded by deposits raised locally. All the others participate in the Eurodollar bond market.

The "valuation date" for securities in a SIPC liquidation is the date the: Acourt appoints a trustee in bankruptcy Bsecurity was acquired by the claimant Csecurity is distributed to the claimant Dclaim is received from the harmed customer

The best answer is A. To determine the amount of SIPC coverage given to each customer name, the securities owned by each customer are valued as of the date the court is petitioned to appoint a trustee in bankruptcy. It may take the trustee years to clean up the mess and distribute any assets found to these customers. If the securities subsequently go up in value, the customer wins (if they went down in value, the customer loses).

A registered representative has written discretionary authorization from a customer. Specific customer approval is needed for the registered representative to effect which of the following transactions in the customer's account? I Sell naked calls II Sell covered calls III Purchase a municipal bond where the broker-dealer has a control relationship with the issuer AIII only BI and II CII and III DI, II, III

The best answer is A. Under MSRB rules, if a control relationship exists between a brokerage firm and the security being recommended, this security cannot be purchased in discretionary accounts unless the specific authorization of the customer is obtained first. The issue here is that there can be an inherent conflict of interest when such a relationship exists. For example, a municipal control relationship might exist if the president of the broker-dealer is also a political official of the town whose bonds are being recommended. Such a broker-dealer, if it were unscrupulous, would have an incentive to "support" the price of the issue in the aftermarket, making it more likely that the municipality would use that firm for future underwritings. It could do this by making purchases of that issue in its discretionary accounts. No specific authorization is required to sell naked or covered calls in discretionary accounts. The only requirement is that discretionary trades executed be consistent with the customer's investment objective; must not be too frequent; and must not be excessively large in size.

Under a gross revenue pledge, bondholders have a first lien on: Agross revenues Bgross revenues minus operations and maintenance Cgross revenues minus debt service reserve fund Dgross revenues minus deposits to the sinking fund

The best answer is A. Under a gross revenue pledge, bondholders have claim to the gross revenues of the facility. After the debt service is paid, then operation and maintenance is paid. Contrast this with a "net revenue pledge." Under this pledge, bondholders only have claim to net revenues after operation and maintenance is paid. In this case, the first use of funds is to pay operation and maintenance.

A municipality is at its debt limit and wishes to sell additional bonds. Voter approval is required for the municipality to sell: I General obligation bonds II Revenue bonds III Industrial revenue bonds AI only BI and II only CII and III only DI, II, III

The best answer is A. Voter approval is needed for a municipality to sell general obligation bonds (non-self supporting debt) in an amount that exceeds the municipality's constitutional limit. Revenue bonds and industrial revenue bonds are not subject to debt limits because they are self-supporting and pay their own way from collected revenues. They are not paid from tax collections.

Accretion of a bond discount will: I increase the bond's cost basis II decrease the bond's cost basis III increase annual reported interest income IV decrease annual reported interest income AI and III BII and IV CII only DII and III

The best answer is A. When a bond discount is accreted, annually, the bond's cost basis is increased by the pro-rata amount of the discount and the accretion amount is shown as an increase of interest income received for tax purposes. Over the life of the bond, the entire discount will be accreted, increasing the cost basis to par at maturity. Thus, there will be no capital gain or loss at maturity; and the entire discount will have been taxed as interest income over the bond's life.

A "consolidating market" is one where trading: Avolumes are stable Bprices are stable Cvolumes are volatile Dprices are volatile

The best answer is B. The market is said to be "consolidating" when prices are flat - not moving in any direction for a long period after a previous price rise or fall.

Which of the following bond issues would most likely have a mandatory sinking fund? I U.S. Government bond II General Obligation bond III Hospital Revenue bond IV Airport Revenue bond AI and II only BIII and IV only CII, III, IV DI, II, III, IV

The best answer is B. A bond issue is likely to have a mandatory sinking fund provision if it is perceived to be somewhat risky causing potential purchasers to demand this additional safeguard. Treasury Bonds are backed by the full faith and credit of the U.S. Government, so these issues have no credit risk. State General Obligation bonds are backed by the unlimited taxing power of the State, and also are perceived to be of low risk. Hospital Revenue bonds and Airport Revenue bonds are backed solely by the facility's revenues and are considered to be somewhat risky. (If there is hospital overbuilding or patient stays are shortened, revenues can fall; if another airport is built nearby that takes away passengers, revenues can fall; etc.)

The options positions listed in each of the following choices are in the same "class" EXCEPT: AABC Jan Calls and ABC Mar Calls BABC Jan Calls and ABC Jan Puts CXYZ Feb Calls and XYZ Jul Calls DXYZ Mar Puts and XYZ Apr Puts

The best answer is B. A class of options is determined by the underlying security and the type of option (Call or Put). Expiration and strike price are not considered. For example, all ABC Calls are a "class;" all ABC Puts are a "class;" all XYZ Calls are a "class;" all XYZ Puts are a "class."

Which of the following options positions has the greatest risk? Along straddle Bshort straddle Clong spread Dshort spread

The best answer is B. A long straddle is the purchase of a call and put on the same stock with the same strike price and expiration. The maximum loss is the premiums paid. A short straddle is the sale of a call and put on the same stock with the same strike price and expiration. The maximum loss is unlimited on the short call if the market rises; if the market drops, the customer loses all the way to zero on the short put. Spreads are risk limiting and gain limiting positions. The maximum loss on a long (debit) spread is the debit. The maximum loss on a short (credit) spread is the difference in the strike prices net of the credit received.

A research report on an issuer CANNOT be published by the underwriter of that issuer's securities for the time period encompassing: I 10 days following the effective date for an initial public offering II 25 days following the effective date for an initial public offering III 10 days following the effective date for a secondary offering IV 3 days following the effective date for a secondary offering AI and III BI and IV CII and III DII and IV

The best answer is B. A research report on an issuer cannot be published by the underwriter of that issuer's securities for the time period of 10 days following the effective date for an initial public offering; and 3 days following the effective date for a secondary offering.

A $10,000 municipal bond with 10 years to maturity is purchased in the primary market at 105. The bond is sold after 4 years at 105. The taxable gain or loss is a: A1 point capital gain B2 point capital gain C2 point capital loss D4 point capital loss

The best answer is B. All municipal premium bonds, whether original issue premium or trading market premium bonds, are subject to straight line amortization. The 5 point premium must be amortized over 10 years, so 1/2 point per year is amortized (with no tax deduction allowed for the annual amortization amount). After 4 years, the bond has an adjusted cost basis of 103 (105 purchase - 2 point total amortization). Since the bond is being sold at 105, there is a 2 point capital gain.

If sales of a municipal new issue by each syndicate member are used to extinguish liability of the group as a whole, then this indicates the account is a(n): I Undivided account II Divided account III Western account IV Eastern account AI and III BI and IV CII and III DII and IV

The best answer is B. An Eastern account is undivided as to selling responsibility and undivided as to liability. Since sales of bonds by each syndicate member are used to extinguish liability of the group as a whole, the account is an undivided, or Eastern account.

Which statement is TRUE about IO tranches? AWhen interest rates rise, the price of the tranche falls BWhen interest rates rise, the price of the tranche rises CWhen interest rates rise, the interest rate on the tranche falls DWhen interest rates rise, the interest rate on the tranche rises

The best answer is B. An IO is an Interest Only tranche. This is a tranche that only receives the interest payments from an underlying mortgage, and it is created with a corresponding PO (Principal Only) tranche that only receives the principal payments from that mortgage. The interest portion of a fixed rate mortgage makes larger payments in the early years, and smaller payments in the later years. These are issued at a discount to face and each interest payment made brings the "notional principal" of the bond closer to par. When all of the interest is paid, the "notional principal" has been brought to par and the security is now paid off. The price movements of IOs are counterintuitive! Unlike regular bonds, where when interest rates rise, prices fall, with an IO, when interest rates rise, prices rise! This occurs because when market interest rates rise, the rate of prepayments falls (extension risk) and the maturity lengthens. Because interest will now be paid for a longer than expected period, the price rises. Conversely, when interest rates fall (prepayment risk) the principal is being paid back at an earlier than expected date, so less interest is being received and the price falls (if interest rates fall drastically, the holder might get less interest back than what was originally invested).

An "accumulation unit" of a variable annuity contract is a(n): Ashare of common stock representing an interest in the underlying portfolio Baccounting measure of the owner's interest in the separate account Caccounting measure of the annuity amount to be received by the owner Dshare of beneficial interest in a fixed portfolio

The best answer is B. An accumulation unit is an accounting measure used for valuing a variable annuity holder's interest in the separate account.

A technical analyst who monitors stock advances against declines subscribes to the: AOdd Lot Theory BBreadth of Market Theory CDow Theory DEfficient Market Theory

The best answer is B. An analyst who charts advances relative to declines is measuring the "breadth" of the market movement as an indicator of future market direction.

Common carrier issues are: I exempt from the Securities Act of 1933 II subject to the Securities Act of 1933 III required to be sold with a prospectus IV not required to be sold with a prospectus AI and III BI and IV CII and III DII and IV

The best answer is B. Common carrier issues such as railway issues are exempt under the Securities Act of 1933 because they were regulated by the Interstate Commerce Commission (I.C.C.) before the Act was written; and Congress did not want to subject them to "double" regulation.

All of the following investors are likely to trade foreign currency options EXCEPT: Aforeign corporations with multinational operations Bindividuals with large U.S. dollar holdings Cindividuals with large foreign currency holdings DU.S. corporations with multinational operations

The best answer is B. Any multinational corporation will trade foreign currencies, either to acquire currency for payment in a particular country or to hedge transactions against fluctuations in currency values. Similarly, individuals with large foreign currency holdings are likely to use the foreign currency markets to hedge their positions. Individuals with U.S. dollar holdings have no need for the foreign currency markets - since they are not exposed to currency exchange risk.

A married couple, where both individuals work, earns in excess of $124,000 in year 2020. Both individuals are covered by qualified retirement plans. Which statement is TRUE regarding contributions to Individual Retirement Accounts for these persons? A A tax deductible contribution of $12,000 ($6,000 each) is permitted B A non-tax deductible contribution of $12,000 ($6,000 each) is permitted C A non-tax deductible contribution of $9,000 (with a maximum of $6,000 in one account) is permitted D No contribution is permitted

The best answer is B. Anyone can contribute to an IRA, whether covered by a pension plan or not. If a couple is not covered by a qualified plan, the contribution is tax deductible and the maximum that can be contributed in 2020 is $6,000 each ($12,000 total). However, the contribution is not tax deductible for couples, where both are covered by qualified plans, who earn over $124,000 in year 2020 (the deduction phases out between $104,000 - $124,000 of income).

As long as the firm has written policies and procedures covering borrowing from customers, a registered representative can borrow money without getting the firm's prior approval from a customer who is (a): Aaccredited Brelative Croommate Dneighbor

The best answer is B. As a general rule, registered representatives can neither lend money to, nor borrow money from, customers. However, as long as the firm has written policies and procedures covering this, a representative can borrow money from, or lend money to, an immediate family member who is a customer without having to give prior notice to the firm and get the firm's prior approval. For purposes of this rule, "immediate family" means parents, grandparents, mother-in-law or father-in-law, husband or wife, brother or sister, brother-in-law or sister-in-law, son-in law or daughter-in-law, children, grandchildren, cousin, aunt or uncle, or niece or nephew, and any other person whom the registered person supports, directly or indirectly, to a material extent.

A 529 plan is set up for a child in state A. The child attends a college in state B. Which statement is TRUE? A The funds in the 529 Plan are not portable and can't be used to pay for college in state B B The funds in the 529 Plan are portable and can be used to pay for college in state B C The funds must be transferred into a 529 Plan in state B if they are going to be used to pay for college in state B D The child must renounce his or her residency in state A and become a resident of state B in order to use the funds in the 529 Plan for college in state B

The best answer is B. As long as the funds are used to pay for college, 529 Plans are completely portable - the money can be used to pay for college in any state.

Auction Rate Securities: I have the interest rate reset weekly via Dutch auction II have a fixed interest rate for the life of the issue set by competitive bid auction III have an embedded put option IV do not have an embedded put option AI and III BI and IV CII and III DII and IV

The best answer is B. Auction Rate Securities are long-term debt issues where the interest rate is reset weekly (or monthly) via Dutch auction. This gives the issuer the advantage of paying a short-term market interest rate on a long-term security. However, unlike a variable rate demand note (VRDO), they have no embedded put option - meaning that the issuer is not obligated to buy them back at the reset date. The failure of the weekly auctions in 2008 created a situation where holders could not sell these securities to get out of them.

A bank wishes to make an investment in municipal bonds. The most advantageous security for this investor is a: Atax and revenue anticipation note Bbank qualified G.O. bond Cdouble barreled revenue bond Dmoral obligation bond

The best answer is B. Bank qualified municipal bonds are small dollar issues (less than $10,000,000) of General Obligation bonds. If a bank invests in these bonds, it is given a substantial tax break - 80% of the interest cost of carrying bank deposits that funded the purchase of those bonds is tax deductible to the bank, yet the interest income received from the bonds is free of Federal income tax. This benefit is only available on bank qualified issues.

In the same year, a customer has $14,000 of long-term capital losses on stock positions and $4,000 of short-term capital gains on options positions. Which statement is TRUE? A The capital losses can be netted against the capital gains and a $10,000 net capital loss is reported, all of which is deductible B The capital losses can be netted against the capital gains and a $10,000 net capital loss is reported, $3,000 of which is deductible C The $14,000 of capital losses on the stock positions must be reported separately from the $4,000 of capital gains on the options positions, with all $14,000 of capital losses being deductible and all $4,000 of capital gains being taxable D The $14,000 of capital losses on the stock positions must be reported separately from the $4,000 of capital gains on the options positions, with only $3,000 of capital losses being deductible and all $4,000 of capital gains being taxable

The best answer is B. Capital gains and capital losses on all assets are "netted" against each other. There is no segregation by type of asset. This customer had $14,000 of long term capital losses on stocks and $4,000 of short term capital gains on options. The customer has a net $10,000 long-term capital loss, of which only $3,000 is deductible in 1 year. The remaining $7,000 of unused net capital losses is carried forward to the next year.

All of the following are coincident economic indicators EXCEPT: APersonal Income BEmployment Duration CEmployment Levels DIndustrial Production

The best answer is B. Coincident indicators include personal income levels, employment levels and the index of industrial production. These all show how the economy is performing at the current time. Employment duration is a lagging indicator - it shows how long someone was employed before losing their job - so it shows past history.

Which of the following ratings is applicable to commercial paper? AMIG-1 BP-1 CBBB DAAA

The best answer is B. Commercial paper is rated on a P-1,2,3, and NP ("Not Prime") scale by Moody's or an A-1,2,3 scale by Standard & Poor's. MIG ratings are assigned by Moody's to short-term municipal notes. "ABC" ratings are used by both Moody's and Standard and Poor's for long-term corporates and municipals.

A customer that earns $300,000 per year wishes to set aside funds for his 12 year old daughter's future college expenses. Which statements are TRUE? I The customer can open a UTMA account for the daughter to deposit the funds II The customer cannot open a UTMA account for the daughter to deposit the funds III The customer can open a Coverdell ESA account for the daughter to deposit the funds IV The customer cannot open a Coverdell ESA account for the daughter to deposit the funds AI and III BI and IV CII and III DII and IV

The best answer is B. Custodial accounts opened under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) can be opened by any adult for any minor, with no limitation on the income of the donor in determining whether the account can be opened. On the other hand, high earning individuals are prohibited from opening either a Roth IRA or a Coverdell Education Savings Account.

Under MSRB rules, a registered representative that has been given discretionary authority by a customer, needs specific customer authorization to purchase: Anon-investment grade municipal bonds Bbonds where a control relationship exists between the municipal broker-dealer and the issuer whose bonds are purchased Cmunicipal bond unit investment trusts Dmunicipal bond option contracts

The best answer is B. Discretionary authority given by a customer allows the registered representative to buy or sell any securities that the representative considers to be suitable for that customer. It makes no difference if the securities selected are not investment grade; nor if the securities are "packaged products" like mutual funds and unit trusts; or "derivatives" like options. However, the MSRB does require that if a control relationship exists between a broker-dealer and the issuer whose bonds are to be purchased, this can only be done in a discretionary account with specific customer authorization. For example, if the Mayor of a municipality is an Officer of the municipal broker-dealer, a control relationship exists. To buy the municipality's bonds into discretionary accounts, specific customer authorization is required.

Customer Name: Jack and Jill Customer Ages: 62 and 57 Marital Status: Married - 39 years Dependents: None Occupations: Jack - Manufacturing Manager - Dyno-Mite Corp. Jill - Marketing Consultant - Self Employed Household Income: $140,000 Joint Income ($100,000 for Jack and $40,000 for Jill) Net Worth: $1,100,000 (excluding residence) Own Home: Yes $420,000 Value, No Mortgage Investment Objectives: Income / Tax Advantaged Risk Tolerance: Moderate Investment Time Horizon: 25 years Investment Experience: 30 years Tax Bracket: 30% Current Portfolio Composition: Cash in Bank: $30,000 Growth Fund: $50,000 Variable Annuity: $50,000 Growth Stocks: $150,000 Retirement Accounts: Jack's IRA: $100,000 invested in growth stocks Jack's 401(k): $600,000 invested in Dyno-Mite Corp. stock Jack's 529 Plan for Grandchild: $20,000 in growth mutual fund To meet the customer's investment objective of tax advantaged income, the BEST recommendation is for the customer to: A immediately liquidate the entire Dyno-Mite position and invest the proceeds in high yield bonds B set a minimum and maximum threshold price to liquidate as much of the Dyno-Mite stock as the customer will permit, and invest the proceeds in high yielding common and preferred stocks C liquidate the IRA without penalty since Jack is past age 59 1/2, and use the proceeds to buy corporate income bonds D consider early retirement, since Jack is old enough to receive Social Security as a means of supplementing income

The best answer is B. Dividend income is currently taxed at the preferential rate of 15%, so investments in high yielding common and preferred stocks will meet the customer's objective of tax advantaged income. High yield bonds come with a high potential risk of default, and this customer has a "moderate" risk tolerance level. If Jack liquidates his IRA, he will have to pay regular income tax on the liquidation amount at his 30% bracket; and income bonds do not give current income (they only pay if the company has enough earnings), so Choice C is particularly bad. If Jack retires now, his income will be cut substantially since he will not have his employment income anymore - and the small annual amount that Social Security pays will not offset this loss - making Choice D really bad as well!

What can an officer of a company say in a speech given at a road show during the 20-day cooling off period for an Initial Public Offering? A Our issue is selling out fast, so you should place your orders now" B "Our company has grown its earnings by an average of 20% yearly over the past 5 years" C "Our planned new product introductions are expected to increase earnings by at least 20% a year over the next 5 years' D "Our underwriters have advised us that they intend to make the offering price very attractive, so investors can have a nice profit when the issue goes public"

The best answer is B. During the quiet period for an IPO, the issuer very often runs a "road show" in major cities to invite interested institutional investors to learn about the company, its officers and business, and the securities being offered. The officers of the company who make presentations must make sure that the keep the road show informational and not promotional - because the issue cannot be "promoted" during the quiet period. Choice A is inducing the placement of a purchase order and is prohibited. Choice B is a statement of fact, so it is permitted. Choice C is speculation, and is prohibited. Choice D is promising a profit - again, prohibited.

All of the following statements are true regarding equipment trust certificates ("ETCs") EXCEPT: AEquipment trust certificates are secured by specified corporate assets BDefault of ETCs is common during recessionary periods CEquipment trust certificates are commonly issued by transportation companies DEquipment trust certificates are issued in serial maturities

The best answer is B. ETCs are issued by transportation companies (railroads, airlines, truckers, etc.). The collateral for the certificates is specified "rolling stock" of the issuer. For example, United Airlines might finance the purchase of a new 787 jetliner by selling an ETC issue. That jetliner is the collateral for the certificates. The serial number of that jetliner will be printed on the ETCs to show that it is pledged as collateral to the certificate holders. ETCs are issued in serial maturities, so that a portion of the debt is repaid each year. This is the typical structure for ETC issues, since the plane is a depreciating asset. Thus, as the plane depreciates each year, part of the issue is being retired. Therefore, the outstanding debt never exceeds the collateral value. Default on ETCs has been rare. Even if there is a default, certificate holders have collateral (in this case, the plane), that they may sell to obtain the funds to repay the outstanding debt balance.

Registered representatives are required to attend a compliance meeting at their firm: ASemi-annually BAnnually CEvery 2 years DEvery 3 years

The best answer is B. Every member firm must hold an annual compliance meeting with each registered employee, covering compliance issues that have arisen over the past year, and the procedures and policies that have been put in place to address those issues.

In 2020, a self-employed person earning $300,000 wishes to open a Keogh Plan. The maximum yearly contribution is: A$6,000 B$57,000 C$60,000 D$75,000

The best answer is B. The maximum contribution to a Keogh is effectively 20% of income (prior to taking the Keogh "deduction") or $57,000 in 2020, whichever is less. 20% of $300,000 = $60,000. However, only the $57,000 maximum can be contributed in 2020. (Note that this amount is adjusted each year for inflation.)

Which of the following is defined as sales literature? AE-mail distributed to 15 existing retail customers BSeminar text for a speech that will be delivered to 30 prospective retail clients CE-mail sent to 10 prospective retail clients DProspecting letter sent to 5 sales leads

The best answer is B. FINRA defines communications with the public as either: Correspondence: A communication made available to 25 or fewer existing or prospective retail clients Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites

Which of the following statements are TRUE about the Federal National Mortgage Association (FNMA)? I FNMA is a publicly traded corporation II FNMA is owned by the U.S. Government III FNMA pass through certificates are guaranteed by the U.S. Government IV FNMA pass through certificates are not guaranteed by the U.S. Government A I and III B I and IV C II and III D II and IV

The best answer is B. Fannie Mae performs the same functions as Ginnie Mae except that its pass through certificates are not guaranteed by the U.S. Government; and it has been "sold off" as a public company. Its stock was listed for trading on the NYSE, but Fannie went "bust" in 2008 after purchasing too many "sub prime" mortgages and was placed into government conservatorship. Its shares were delisted from the NYSE and now trade OTC in the Pink OTC Markets.

Which of the following statements are TRUE about the taxation of interest on securities issued by the Federal Farm Credit Banks Funding Corporation? I Interest is exempt from state and local taxes II Interest is subject to state and local taxes III Interest is exempt from Federal tax IV Interest is subject to Federal tax AI and III BI and IV CII and III DII and IV

The best answer is B. Federal Farm Credit Banks Funding Corporation does not issue pass-through certificates. Interest received gets the same tax treatment as Treasury issues. Interest on Federal Farm Credit issues is subject to federal income tax but exempt from state and local tax

All of the following statements are true regarding GNMA "Pass Through" Certificates EXCEPT: Athe certificates are quoted on a percentage of par basis in 32nds Bthe certificates are available in $1,000 minimum denominations Ccertificates trade "and interest" Daccrued interest on the certificates is computed on a 30 day month/360 day year basis

The best answer is B. GNMA certificates are quoted on a percentage of par basis in 32nds, with the minimum denomination of a certificate being $25,000. Unlike Governments on which interest accrues on an actual day month / actual day year basis, accrued interest on "agency" securities is computed on a 30 day month / 360 day year basis. All debt instruments that make periodic interest payments trade "and interest," meaning they trade with accrued interest.

Growth companies typically have which of the following? I Low dividend payout ratios II High dividend payout ratios III Low Price / Earnings ratios IV High Price / Earnings ratios AI and III BI and IV CII and III DII and IV

The best answer is B. Growth companies are characterized by high price-earnings ratios and low dividend payout ratios. Mature companies are characterized by low price-earnings ratios and high dividend payout ratios.

REITs receive preferential tax treatment based upon: Aportfolio of real estate investments Bdistribution of income to shareholders Cregistration with the Securities and Exchange Commission Dlisting on the New York Stock Exchange

The best answer is B. If a Real Estate Investment Trust distributes at least 90% of its net investment income to shareholders, then it is regulated under Subchapter M of the Internal Revenue Code. The REIT pays no tax on the distributed income - the shareholder who receives the net income pays tax once. In addition, REITs must derive at least 75% of their income from real estate related activities to be "regulated" - however Choice A is not the best answer because these activities include investments in mortgages, as well as investments in real estate.

A $10,000 par corporate bond is purchased in the secondary market with a .30 mark-down. If the bond is held to maturity, the tax consequence is: A$30 capital gain B$30 taxable interest income C$300 capital gain D$300 taxable interest income

The best answer is B. If a corporate bond is purchased in the secondary market for less than par, the market discount is treated as "taxable interest income." The holder has the choice of accreting the market discount annually and paying tax each year, or waiting until maturity or sale to pay the tax (the better option). This bond is purchased at $10,000 less a .30 mark-down, which is a mark-down of .30% of $10,000 = $30. The bond is purchased for $9,970. If the bond is held to maturity, the $30 gain is taxable interest income.

A customer buys a municipal bond in the primary market at a discount. Which of the following statements are TRUE regarding the discount and the tax consequence? I The discount must be accreted II The discount may be accreted at the option of the bondholder III The discount is taxable IV The discount is not taxable AI and III BI and IV CII and III DII and IV

The best answer is B. If a customer buys a new issue municipal bond at a discount, the discount must be accreted. Every year, a portion of the discount is "earned" and is taxed as interest income. In this case, since municipal issues are exempt from Federal income tax, no tax is due. As the bond is accreted, its basis is increased yearly by the accretion amount. At maturity, the bond's cost basis has been accreted to par. Since it is redeemed at par, there is no capital gain or loss at maturity.

A customer buys 100 shares of ABC stock at $50 and sells 2 ABC Jan 50 Calls @ $5. This is a: Ashort straddle Bratio call write Ccovered call write Dratio call spread

The best answer is B. If a customer who is long stock sells call contracts against the stock position, then as long as the contract amount does not exceed the long stock position, the call writer is "covered." This means that if the short call is exercised, the customer already has the stock for delivery. Hence the customer is covered against the risk of having to go to the market to buy the stock at a sky high price to make delivery. If a customer sells more call contracts than the stock position owned, this is a "ratio" call write. In this example, the customer is selling calls against the stock position at a 2:1 ratio.

A facility built with a revenue bond issue has been condemned. Which of the protective covenants found in the trust indenture would be activated? Adefeasance covenant Bcatastrophe call covenant Cmaintenance covenant Dsinking fund covenant

The best answer is B. If a facility is condemned, it can no longer generate revenues. Though the question is not clear as to why it was condemned, the best choice is that a catastrophe call provision would be activated. This requires the issuer to call in the bonds, repaying the bondholders if a disaster occurs. Of the other choices, sinking fund covenants and defeasance covenants have no bearing. A maintenance covenant requires the issuer to maintain the facility in good repair. This covenant is not "activated" by a condemnation, as is a catastrophe call covenant.

Callable preferred stock is likely to be redeemed by the issuer if: Ainterest rates rise Binterest rates fall Cthe common stock price rises Dthe common stock price falls

The best answer is B. If interest rates fall, issuers can "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. Thus, calls take place when interest rates have fallen.

A customer buys 1 ABC Jul 50 Call @ $4. The customer lets the contract expire. Which statement is TRUE? AThe holder has a $400 capital loss as of the date the contract was purchased BThe holder has a $400 capital loss as of the date the contract expires CThe holder has a $5,400 capital gain as of the date the contract was purchased DThe holder has a $5,400 capital loss as of the date the contract expired

The best answer is B. If the holder of an option contract allows the option to expire, he or she has a capital loss equal to the premium paid as of the expiration date.

A customer has a $1,000,000 portfolio that is invested in the following: $250,000 Large Cap Growth Stocks $250,000 Large Cap Defensive Stocks $250,000 U.S. Government Bonds $250,000 Investment Grade Corporate Bonds During a period of economic expansion, the securities which will enjoy the greatest price appreciation are likely to be the: I Large Cap Growth Stocks II Large Cap Defensive Stocks III U.S. Government Bonds IV Investment Grade Corporate Bonds A I and III B I and IV C II and III D II and IV

The best answer is B. In a period of economic expansion, growth companies do well, so their stock prices increase. Defensive companies are those that are unaffected by the general economy (such as drug companies), so an economic expansion does not give their business an added boost, and their stock prices do not benefit as much from the improved economic conditions. In a period of economic growth, investors that hold bonds tend to sell their government bond holdings and buy more corporate bonds that give a higher yield. This gives a price boost to corporate bonds during a period of economic expansion.

A customer directs his broker to "Sell 100 shares of ABCD stock and use the proceeds to buy 100 shares of XPDQ stock." This is a: Ariskless transaction Bproceeds transaction Cagency cross transaction Dprohibited transaction

The best answer is B. In a proceeds transaction, a customer directs that the firm sell a position owned by the customer, and use the "proceeds" to buy another position. In effect, the firm is performing 2 trades for the customer. A riskless principal transaction is where a firm receives a buy order from a customer and then purchases the stock into inventory and resells it to the customer. The dealer wasn't holding the security when the order was received, so there is no "risk" to the dealer of falling prices giving the dealer an inventory loss. An agency cross transaction is where at the same time, a broker-dealer receives an order to buy a stock from one customer; and receives another order to sell the same amount of that stock from another customer. The firm is permitted to "cross" those orders at the current market price.

A simultaneous trade is performed on the OTC market. Under FINRA rules, the transaction is: Aprohibited Ballowed and must conform to the 5% Policy Callowed if a commission or mark-up is only charged on one side of the transaction Dallowed if the combined mark-up does not exceed 8 1/2%

The best answer is B. In a riskless or simultaneous trade, a dealer gets an order from a customer to buy a security, and then the dealer buys the stock into his inventory to sell to the customer. The dealer has no risk and in this case the mark-up must be disclosed to the customer. Of course, the amount of the mark-up must conform with the 5% Policy.

In a negotiated municipal underwriting, which of the following statements are TRUE? I The spread is disclosed II The spread is not disclosed III Each underwriter's participation must be disclosed IV There is no requirement to disclose each underwriter's participation AI and III BI and IV CII and III DII and IV

The best answer is B. In negotiated municipal underwritings, the spread and offering price of each maturity must be disclosed. There is no requirement to disclose the names of the underwriters, nor their participation amounts.

Royalties received from an oil and gas program are: Apartnership income Bpassive income Cearned income Dportfolio income

The best answer is B. Income received from partnership investments is characterized under the tax code as passive income. Passive losses can only be offset against other passive income - they cannot be offset against earned income or portfolio income.

A registered representative takes an order from a customer to buy 100 shares of SPQR stock at $40 and writes the order ticket for processing. The registered representative fails to note the execution price on the ticket. Which statement is TRUE? AThe order will be processed as a market order by default BThe order will be returned to the representative for entry of the execution price CThe order will be canceled without any further action taken DThe order will be referred to the member firm's compliance department for resolution

The best answer is B. Incomplete order information on an order ticket will result in the ticket not being processed. It will be returned to the representative for entry of all of the required information.

Issuers of securities are prohibited from: Abuying calls on their own stock Bselling calls on their own stock Cbuying puts on their own stock Dselling puts on their own stock

The best answer is B. Issuers are prohibited from selling call options against their underlying stock. If they were exercised, they could simply issue more shares to deliver on the exercise notice, diluting each existing stockholder's equity. Furthermore, the issuance of the new shares would require a registration with the SEC. Thus, issuers are prohibited from selling calls against their own stock.

In 2020, a self-employed person earning $200,000 also has $100,000 of investment income. This person wishes to open a Keogh Plan. Their maximum permitted contribution is: A$20,000 B$40,000 C$57,000 D$67,000

The best answer is B. Keogh (HR10) contributions are based only on personal service income - not investment income. $200,000 of personal service income x 20% effective contribution rate = $40,000. Note that this is less than the maximum contribution allowed of $57,000 in 2020.

For an investor who has a Keogh Plan, which of the following statements are TRUE? I The plan is a tax qualified II The plan is non-tax qualified III Once distributions commence at age 59 1/2 or later, only the tax deferred build-up is taxed IV Once distributions commence at age 59 1/2 or later, both the original investment and the build-up are taxed AI and III BI and IV CII and III DII and IV

The best answer is B. Keoghs are tax qualified retirement plans for self employed individuals. The investment in a Keogh plan is tax deductible; and the earnings in the plan "build-up" tax deferred. Since none of the dollars were ever taxed, 100% of all distributions from Keoghs are taxable.

The figures presented for GDP, Currency Value and Trade Balance show the change from 1 year ago. During the past year, foreign investment in the United States has been increasing. The likely cause for this is: Athe United States has been running a trade surplus, demonstrating the strength of the economy Binterest rates in the United States are higher than those available overseas Cthe U.S. economy has been undergoing a broad expansion during the past year Dthe dollar has been strengthening, producing gains for investors in dollars over the past year

The best answer is B. Long term interest rates in the U.S. are at 8.5%, while those in Japan are at 6%, reading from the chart. Since U.S. interest rates are higher, this attracts investment from overseas. During this past year, the U.S. ran a trade deficit of $100 billion, which is not a good sign for the economy; GDP declined, another bad sign; and the dollar weakened by 10%, another bad sign.

Which of the following statements are TRUE about money market funds? I All distributions are fully taxable as investment income II Money market funds usually have high beta coefficients III The objective of such funds is long term capital growth IV Money market funds usually have no sales charge AI and II BI and IV CII and III DI, III, IV

The best answer is B. Money market funds invest in very short term (usually 30 day maximum maturity) money market instruments with an investment objective of high current income. All distributions are fully taxable as investment income. The beta coefficient (volatility of a security relative to the market) of these funds is very low - the securities are not volatile because the maturities are so short. Money market funds typically do not have sales charges.

Mutual funds must send their financial statements to shareholders: Aonce a year Btwo times per year Cthree times per year Dfour times per year

The best answer is B. Mutual funds must send their financial statements to shareholders semi-annually (twice a year)

New issues of short term municipal notes and bonds are available in which form? ABearer BBook Entry CRegistered to Principal only DRegistered to Principal and Interest

The best answer is B. New issues of municipal notes are available only in "book entry" form.

Which of the following positions would receive the greatest benefit of reduced margin requirements from portfolio margining? AShort naked call BLong stock/Long put CShort stock/Short put DLong call/Long put

The best answer is B. Portfolio margin is based on the risk of a portfolio, rather than applying a fixed margin percentage to each security position. When a stock position is hedged by an option, as is the case with a long stock/long put position, then the maximum loss on the stock position is reduced to approximately the premium paid for the put (net of any difference between the stock cost and the put strike price). Thus, portfolio margin results in a much lower margin requirement for stock positions that are hedged by options.

Regulation AC requires that research analysts at member firms MUST give a: I written certification on each published research report II written certification on each week's published research reports III must give a blanket certification to all appearances made each month IV must give a blanket certification to all appearances made each quarter AI and III BI and IV CII and III DII and IV

The best answer is B. Regulation AC (Analyst Certification) requires research analysts to certify each published research report; and to make a quarterly certification covering all public appearances made during that quarter. The certification basically states that the analyst gave his or her honest view at that time; and that the analyst's compensation was not tied to the recommendation or views expressed. If an analyst fails to make the required certification, FINRA must be notified; and for the next 120 days, any research reports authored by that analyst must include the disclosure that the analyst did not provide the required certification.

A 50-year old customer is in a very low tax bracket. She lives in a state that has one of the highest income tax rates. The customer is seeking income and preservation of capital. She has a 10 year investment time horizon. The best recommendation would be a 10 year maturity: ATreasury Bond Binvestment grade corporate bond Cinvestment grade municipal bond DTreasury STRIPS

The best answer is B. Remember that interest rates are highest for corporate bonds because the interest income is taxable at both the federal and state level. Because this customer is in a low tax bracket, most of this return will be kept after tax - the customer will have the highest after-tax return with the corporate bond investment. Interest rates for Treasury securities are lower than for investment grade corporate securities, because the interest income is exempt from state and local tax. Because this customer is in a low tax bracket, this does not benefit her. Interest rates for municipal securities are the lowest of all, because the interest income is exempt from both federal income tax and state and local income tax (when purchased by a resident of that state). Again, because the customer is in a low tax bracket, this does not benefit her. As a general rule, customers in low tax brackets should invest in fully taxable bonds (corporates); while customers in very high tax bracket should invest in tax-free municipal bonds.

A customer buys 200 shares of ABC stock at 60 and sells short 100 shares of XYZ stock at 100 on the same day in a margin account. The minimum maintenance margin requirement is: A$5,500 B$6,000 C$6,600 D$11,000

The best answer is B. The minimum maintenance margin for a long stock position is 25%. 25% of $12,000 = $3,000. The minimum maintenance margin for a short stock position is 30%. 30% of $10,000 = $3,000. The total minimum maintenance margin requirement is $6,000.

SEC Rule 10b-5-1: A is the "catch all" fraud rule that makes any deceptive or manipulative practice in connection with the sale of a security potentially fraudulent under the Securities Exchange Act of 1934 B gives officers of publicly held companies a safe harbor from being charged with an insider trading violation if they establish a pre-arranged trading plan for that issuer's securities C prohibits the purchase or sale of an issuer's securities based on material nonpublic information in breach of duty of trust owed to the issuer or shareholders of that security D prohibits any person, in connection with a tender offer for securities, to bid for or purchase the security which is subject of the tender offer through any means other than via the offer

The best answer is B. SEC Rule 10b-5-1 allows officers of publicly held companies (statutory insiders) to establish "pre-arranged trading plans" that set future transaction dates and amounts of that issuer's securities; or that specify algorithms that establish the transaction dates and amounts. As long as the officer does not deviate from the plan, the officer is given a "safe harbor" from being accused of insider trading based on those trades.

When opening a custodial account, the social security number to be used on the account is that of: Athe custodian Bthe minor Cthe parent Deither the parent or the minor

The best answer is B. Since custodial account property is considered to be "owned" by the minor, the social security number of the minor (not the custodian) is used on the account. The custodian does not have to be the father or mother of the minor!

Municipal bonds are offered out "firm" by one dealer to another. All of the following are true regarding this EXCEPT the: Abuying dealer has control over the bonds for a specified time period Bbuying dealer is able to renegotiate the price Cbuying dealer can sell the bonds before actually purchasing them Dselling dealer will not change the price for a specified time period

The best answer is B. Since the quote is "firm," the price will not be changed for the time period specified. During this time period, the buying dealer has control over the bonds (since he has a firm price that will be honored) and can actually "sell" the bonds before buying them.

ABC Corporation has declared a rights offering to stockholders of record on Friday, December 10th. Under the offer, shareholders need 10 rights to subscribe to 1 new share at a price of $19. Fractional shares can be rounded up to purchase 1 full share. As of Wednesday, December 1st, the stock is trading at $30. The value of the right is: A$.90 B$1.00 C$1.10 D$1.25

The best answer is B. Since the record date is Friday, December 10th, a customer buying on Wednesday, December 1st would settle on Friday, December 3rd (2 business days later) and would be on the record books for the distribution. Therefore, the stock is trading cum rights. The value of a right "cum rights" is: (Market Price - Subscription Price) / (N+1) = Value "Cum Rights" $30 - $19 ---------- 10 + 1 = $11 ---------- 11 = $1 Value "Cum Rights"

Which of the following is an exempt security under the Securities Act of 1933? AUnit Investment Trust BSmall Business Investment Company COpen-End Investment Company DClosed-End Investment Company

The best answer is B. Small business investment companies are an exempt security under the Securities Act of 1933. Other investment companies - whether they be open-end or closed-end management companies; or unit investment trusts; are non-exempt and must be registered with the SEC.

A customer asks his broker the following "Who are all those people that I see trading on the NYSE floor on television?" As a broker, you could tell him that: I the individual stationed at each trading post is a market maker in the stock known as the Specialist (DMM) II the individual stationed at each trading post is a trader known as a floor broker III individuals that come to the trading post at any moment to execute orders received from customers are Specialists/DMMs IV individuals that come to the trading post at any moment to execute orders received from customers are Floor Brokers AI and III BI and IV CII and III DII and IV

The best answer is B. Specialists (now renamed the Designated Market Maker or DMM) are the assigned market makers in NYSE listed issues. These are the individuals that are standing at the round trading posts on the NYSE floor, ready to trade with all market participants. Floor brokers represent the retail member firms, executing orders for customers at the trading posts, either with the Specialist/DMM or with other Floor Brokers that are at the trading post at that moment.

Supply Side Theory states that: Aincreased government spending will stimulate the economy Btax rate reductions and lower government spending will stimulate the economy Cthe actions of the Federal Reserve are the driving force behind the economy Dtax rate increases will stimulate the economy

The best answer is B. Supply Side Theory states that economic growth is controlled by individual initiative. If individuals are given the incentive to produce, they will, and the economy will grow. To give this incentive, the theory holds that government spending, and the tax collections necessary to support that government spending, should be reduced. This leaves the individual with an economic incentive to produce, since less of his or her income is being taxed.

If a municipal securities firm is subject to a 2-year ban under MSRB Rule G-37, it would be permitted to: Aact as a financial advisor to that municipality during the period of the ban Bplace a bid for a competitive offer of general obligation bonds being sold at auction by that issuer Cnegotiate with the issuer to be the underwriter on a revenue bond offering Ddo none of the above

The best answer is B. The 2-year ban applies to engaging in municipal securities business with that issuer. Municipal securities business includes acting as a financial advisor to that issuer or performing negotiated underwritings for that issuer. It does not include competitive bid underwritings because "favoritism" does not decide the outcome of the auction. Rather, the lowest interest rate bidder wins.

Information about the municipal primary market can be obtained from all of the following EXCEPT: AMunifacts BCRD CEMMA DThe Bond Buyer

The best answer is B. The Bond Buyer is the "new issue" municipal newspaper. Municipal issuers place announcements of new issues in this publication. Munifacts is the newswire service of the Bond Buyer, that mainly announces new issue offerings by syndicates, and also includes some general news items that can affect the secondary market. EMMA (Electronic Municipal Market Access) is the MSRB's website which includes copies of municipal new issue Official Statements. CRD is the Central Registration Depository, run by FINRA, which keeps the records of every registered individual in the U.S.

A Specialist (DMM) on the NYSE shows the following orders for ABC stock on his book: $50.05 - $50.07 30 x 60 The Specialist/DMM in ABC stock receives a market order to buy 1,000 shares. The Specialist/DMM can take which of the following actions? I The Specialist/DMM can fill the order from his own account at $50.06 II The Specialist/DMM can fill the order from his own account at $50.07 III The Specialist/DMM can fill the order against the book at $50.06 IV The Specialist/DMM can fill the order against the book at $50.07 AI and III BI and IV CII and III DII and IV

The best answer is B. The Specialist (now called the DMM - Designated Market Maker) is quoting the stock at $50.05 Bid with a size of 30 (good for 30 x 100 = 3,000 shares); and $50.07 Ask with a size of 60 (good for 60 x 100 = 6,000 shares). These are the next orders to be filled on the Specialist's/DMM's book. If the Specialist/DMM receives a market order to buy for 1,000 shares, the Specialist/DMM can either fill that order at the current ask price of $50.07 against the book; or, if the Specialist/DMM wishes, the Specialist/DMM can "improve" the price of the order by selling to the customer out of its inventory price at a price that is better (lower) than $50.07, such as at $50.06.

A customer bought a $1,000 par convertible subordinated debenture at par, convertible into common at $31.25 per share. If the bond's market price increases by 20%, the conversion ratio will be: A 31.25:1 B 32.00:1 C 37.50:1 D 38.40:1

The best answer is B. The conversion price (and hence the conversion ratio) is fixed when the convertible security is issued and does not change. In this case, the bond is issued with a conversion price of $31.25, based upon converting each bond at par. $1,000 par / $31.25 conversion price = 32:1 conversion ratio. Thus, for every bond that is converted, the holder receives 32 shares.

A customer sells 1 ABC Jan 70 Call @ $4 and sells 1 ABC Jan 70 Put @ $1 on the same day when the market price of ABC stock is $72. Assume that the market price falls to $66 and the call premium falls to $.50, while the put premium rises to $5.50. The customer closes the positions. The gain or loss is: A$100 gain B$100 loss C$500 gain D$500 loss

The best answer is B. The customer established two positions with a credit of $5 x 1 contract = $500 credit. When the market is at $66, the customer closes the call at $.50 and closes the put at $5.50. Thus, the positions are closed at: Buy 1 ABC Jan 70 Call @ $ .50 Buy 1 ABC Jan 70 Put @ $5.50 $6.00 debit = $600 debit The customer closed for a debit of $600. Since the initial credit was $500, the customer has a $100 loss.

On the same day, in a margin account, a customer buys 1 ABC Jan 40 Call @ $9 and sells 1 ABC Jan 55 Call @ $3. The maximum potential loss is: A$300 B$600 C$900 Dunlimited

The best answer is B. The customer has purchased a long call spread. The positions are: Buy 1 ABC Jan 40 Call @ $9 Sell 1 ABC Jan 55 Call @ $3 $6 Debit If the market drops below $40, both calls expire unexercised. The customer loses the net debit of 6 points or $600.

A company has 1,000,000 shares outstanding. It plans to issue 2,000,000 additional common shares to raise funds to build a new manufacturing facility. Your client owns 50,000 shares of this company. How many rights will the customer receive? A25,000 B50,000 C75,000 D100,000

The best answer is B. The customer receives 1 right per shares, so he or she receives 50,000 rights. Because there are 1,000,000 shares outstanding, the company will issue a total of 1,000,000 rights covering the sale of 2,000,000 additional shares. Therefore, the terms of the offering will be 1,000,000 rights/2,000,000 shares = .5 right per additional shares. Because this customer gets 50,000 rights, the customer will be able to subscribe to 50,000 rights/.5 right per share = 100,000 additional shares. Another way of looking at this is that the customer owns 5% of the company (50,000 shares owned /1,000,000 shares outstanding). Because the company is issuing 2,000,000 additional shares, the customer can subscribe to 5% of these, or 100,000 shares.

A customer sells short 100 shares of MNO at $48 and purchases 1 MNO Jan 45 Call @ $2.50. MNO drops to $41.25 and the customer closes the option contract at $1.40 and buys the stock at the current market price. The customer has a(n): A$112 loss B$565 gain C$587 gain Dunlimited loss

The best answer is B. The customer shorts the stock at $48 and bought a call, which protects the stock position if the market were to go up. Without the call, as the market rises, the customer would have the potential for infinite loss. As the market drops, the customer's call loses value, but the short stock position increases in value. The call contract that was originally bought for $2.50; is closed (sold) for $1.40; for a loss of -$1.10. The stock that was originally sold for $48; is purchased for $41.25; for a gain of +$6.75. The net profit is: +$6.75 - $1.10 = +$5.65 = $565 for 100 shares

A customer invests $50,000 in a non-qualified variable annuity. Over the years, it has grown in value to $110,000. The customer's cost basis in the annuity contract is: A0 B$50,000 C$60,000 D$110,000

The best answer is B. The customer's cost basis in a non-qualified annuity is the amount contributed - these are dollars that are after-tax (no tax deduction is allowed for these). The build-up over the cost basis represents the dollars that were never taxed. When distributions commence, only the portion attributable to the build-up is taxable.

Which statements are TRUE? I The name of the beneficiary on a Coverdell ESA can be changed to another beneficiary II The name of the beneficiary on a Coverdell ESA cannot be changed to another beneficiary III The name of a beneficiary (minor) on a UTMA account can be changed to another beneficiary IV The name of a beneficiary (minor) on a UTMA account cannot be changed to another beneficiary AI and III BI and IV CII and III DII and IV

The best answer is B. The donor controls the funds in a Coverdell ESA and the funds can be transferred from one beneficiary to another beneficiary (e.g., transfer of the funds from a daughter to an account for a son). In comparison, custodial accounts opened under UGMA or UTMA cannot be transferred to another minor - gifts into custodian accounts are irrevocable and cannot be transferred.

Which statement is TRUE about changing the beneficiary on a Coverdell Education Savings Account? AThe beneficiary cannot be changed on a Coverdell ESA BThe beneficiary can be changed to any relative of the same or later generation CThe beneficiary can be changed to any relative DThe beneficiary can be changed to another individual attending school

The best answer is B. The donor controls the funds in a Coverdell ESA and the funds can be transferred from one beneficiary to another beneficiary (e.g., transfer of the funds from a daughter to an account for a son). Note that the money cannot be transferred to a relative that is in an older generation, however.

The minimum maintenance margin requirement for short stock positions is: A25% B30% C50% D100%

The best answer is B. The minimum maintenance margin requirement is set by the exchanges at 30% of the short market value. If the account falls below this level, then a "maintenance call" is sent to bring the account back up to the 30% minimum. Note that Regulation T sets initial margin at 50%. Thus, if the account loses value after the Reg. T amount is deposited, nothing happens unless the account falls below the 30% minimum.

A customer buys 100 shares of XYZ at 87 and buys 1 XYZ Jan 90 Put @ $8. Just prior to expiration, the stock is trading at $87. The customer closes the option position at a premium of $3. One week later, the stock moves to $93 and the customer sells the stock position in the market. The net gain or loss on all transactions is: A$100 loss B$100 gain C$600 loss D$600 gain

The best answer is B. The put contract was purchased at $8 and closed (sold) at $3 for a net loss of $5. The stock was purchased at $87 and sold at $93 for a net gain of $6. The net of all transactions is a 1 point or $100 gain.

An investor who wishes to vote at a company's annual meeting: A must physically attend the meeting Bcan vote by proxy Ccan vote by assignment Dcan vote by appointment

The best answer is B. The way that an investor votes at the company's annual meeting is to appoint someone (usually the management of the company as his or her proxy (meaning "stand in") to vote those shares. There is no requirement for the investor to physically attend the meeting.

A registered representative has mailed promotional material and response cards to potential clients in near-by affluent neighborhoods. The registered representative receives a returned signed response card from one of the prospects, and when calling the phone number provided, finds that it is on the National Do-Not-Call List. Which statement is TRUE? A This prospect cannot be called by the registered representative B This prospect can be called by the registered representative C This prospect can only be called by the registered representative between the hours of 8:00 AM and 9:00 PM D This prospect can only be called by the registered representative with written approval of the #24 General Principal

The best answer is B. There are 3 exceptions provided for cold calls to individuals that are on the National Do-Not-Call list. These are the: Established Business Relationship ("EBR") Exception; Prior Express Written Consent Exception; and Personal Relationship With The Associated Person Exception. Because this prospect signed and returned the response card, this qualifies for the "Prior Written Consent" exception. Furthermore, if the prospect has given such consent, the prohibition on making solicitations before 8:00 AM and after 9:00 PM does not apply.

A 60-year old man is looking to create a portfolio that will provide current income and preservation of capital. Which of the following portfolios would be the BEST recommendation to the client? A Long term corporate bonds rated AA or better, high yield corporate bonds and blue chip stocks B Treasury bills, a money market mutual fund and bank certificates of deposit C Treasury STRIPS, corporate income bonds and PO tranches D Growth stocks, defensive stocks and foreign stocks

The best answer is B. This customer wants current income and preservation of capital. Choice A provides current income, but does not provide preservation of capital. Long term bonds are subject to loss of value if interest rates rise; high yield corporate bonds have this risk as well as higher default risk; and blue chip stocks also can lose substantial value in a bear market. Choice B meets both objectives. Treasury bills, money market funds and bank certificates of deposit all provide income (but not high levels of income) and safety of principal. Choice C consists of long term securities that do not provide income, and that also have high levels of interest rate risk. Treasury STRIPS are zero coupon Treasury obligations - they have high levels of interest rate risk and do not provide current income. Corporate income bonds only pay interest if the corporation has enough earnings. PO tranches are CMO tranches that pay "Principal Only." Because mortgage payments in the early years are mostly interest and in the later years are mostly principal, they pay very little in the early years and make most of their payments in their later years. Thus, they are most similar to a long-term zero coupon bond with high levels of interest rate risk. Choice D consists only of common stocks, which do not provide for preservation of capital.

A customer has an existing margin account that shows: $10,000 LMV $9,000 Debit The customer will receive a call for minimum maintenance margin of: A$1,000 B$1,500 C$4,500 D$5,000

The best answer is B. This is an existing account, so the $2,000 initial equity minimum to open an account does not apply. The account has $10,000 of securities x 25% minimum maintenance margin = $2,500 minimum equity requirement. Since the account has only $1,000 of equity, a maintenance call for $1,500 will be generated.

An 85-year old risk averse investor is not happy about the minimal return she is earning on her current investments. She is stressed about having enough income because her cost of living has been increasing by more than 10% annually. Her current portfolio composition consists of: 40% Money Market Fund 50% Bonds 10% Equities What changes should you suggest to her portfolio? A Reduce the Money Market Fund allocation by 10% (to 30%) and put the released funds in commodities such as gold B Reduce the Money Market Fund allocation by 30% (to 10%) and put the released funds in AAA-rated corporate bonds C Liquidate the entire Money Market Fund allocation and put the released funds in Equities, bringing that allocation up to 50% D Liquidate the entire Money Market Fund allocation and put the released funds in U.S. Treasury securities

The best answer is B. This woman is looking for income. Commodities do not generate income, and equities do not generate as much income as bonds. So we are left with either increasing the allocation given to corporate bonds or to U.S. Government bonds. AAA-rated corporate bonds will yield more than Treasury bonds, and are safe (they are AAA), so this recommendation better meets the customer's needs.

A fund which invests in companies in bankruptcy or takeover situations is known as a: Aspeculative fund Bhigh yield fund Cspecial situations fund Dspecialty fund

The best answer is C. A Special Situations Fund invests in companies in "special situations" such as bankruptcies or takeovers, to reap capital gains if the company recovers. Do not confuse a special situations fund with a specialty fund. A specialty fund is one that invests in one industry or geographic area.

A customer sells short 100 shares of PDQ at $49 and sells 1 PDQ Sep 50 Put @ $6. The breakeven point is: A$43 B$44 C$55 D$56

The best answer is C. The customer sold the stock at $49 and received $6 in premiums for selling the put, collecting $55 in total. To breakeven, the stock must be bought at this price. To summarize, the formula for breakeven for a short stock / short put position is: Short Stock/Short Put Breakeven= Short Sale Price + Premium

Which statements are TRUE regarding Treasury Inflation Protection securities? I In periods of deflation, the amount of each interest payment will decline II In periods of deflation, the amount of each interest payment is unchanged III In periods of deflation, the principal amount received at maturity will decline below par IV In periods of deflation, the principal amount received at maturity is unchanged at par AI and III BI and IV CII and III DII and IV

The best answer is B. Treasury "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. When the bond matures, the holder receives the higher principal amount. In periods of deflation, the principal amount is adjusted downwards. Even though the interest rate is fixed, the holder receives a lower interest payment, due to the decreased principal amount. In this case, when the bond matures, the holder receives par - not the decreased principal amount.

The term for the annual reduction of cost basis of a premium municipal bond performed according to IRS rules is: Acompound amortization Bstraight line amortization Ceconomic accrual accretion Dstraight line accretion

The best answer is B. Under IRS rules, the premium on municipal bonds must be amortized on a straight line basis over the life of the bond.

Which statements are TRUE about the time value and intrinsic value of rights and warrants when issued? I Warrants have time value but not intrinsic value II Warrants have intrinsic value but not time value III Rights have time value but not intrinsic value IV Rights have intrinsic value but not time value A I and III B I and IV C II and III D II and IV

The best answer is B. Warrants are long term options (usually 5 years) that allow the holder to buy the stock at a substantial premium to the current market price. Therefore, the stock's price must rise substantially over time for the warrant to have any real monetary value. They have no intrinsic value at issuance; but they have 5 years of "time value." Rights are very short term options (30-60 days) granted to existing shareholders that allow them to buy the stock at a discount to the current market price. The discount is the "intrinsic value" of the right. However, because they are so short term, they have virtually no "time value.

Preferred stock is issued with an "anti-dilutive" covenant. If the corporation declares a 5% stock dividend, which statements are TRUE? I The conversion ratio is increased II The conversion price is increased III The conversion ratio is decreased IV The conversion price is decreased AI and II BI and IV CII and III DIII and IV

The best answer is B. When a senior convertible security is issued with an "anti-dilutive" covenant, should the company issue additional common shares, the terms of conversion are adjusted. When additional common shares are issued, there are more common shares outstanding, with each share being worth proportionately less. To adjust the terms of conversion, the conversion price is reduced, and the number of common shares into which the security is convertible (the conversion ratio) is increased.

CAPM" is an abbreviation for: ACorporate Allocation Portfolio Mechanism BComputer Algorithm Pricing Module CCapital Asset Pricing Model DComputer Assisted Portfolio Management

The best answer is C. "CAPM" stands for Capital Asset Pricing Model. This is a methodology for finding the most efficient investments - those that give the greatest return for the amount of risk assumed.

Which statements are TRUE regarding the conduct of Treasury Bill auctions? I 4 week, 8 week, 13 week and 26 week T-Bills are auctioned weekly II 1 year T-Bills are auctioned monthly III Non-competitive bids take priority over competitive bids IV Bids are awarded based on the lowest discount yield except for 26 week bills which are sold at par AI and III only BI, II, IV CI, II, III DII, III, IV

The best answer is C. 4 week, 8 week, 13 week and 26 week Treasury Bills are auctioned weekly; 1 year T-Bills are auctioned monthly. Because the amount of securities represented by non-competitive bids are withheld from auction and are always filled at the average winning yield, these bids have priority. Competitive bids will not be filled if the yield specified is too high. The bids are always awarded on the basis of lowest discount yield.

A municipality would issue a GAN in anticipation of receiving: Aproperty tax collections Bproceeds from a long term bond sale Cfederal transit funding Dfederal highway funding

The best answer is C. A "GAN" is a municipal "Grant Anticipation Note." A GAN would be issued by a municipality to get immediate access to federal grant monies that are expected to be received months into the future. These grant monies typically are used to support mass transit programs, like buses and subways for cities. Note, in contrast, that a "RAN" - Revenue Anticipation Note - is paid from expected revenues to be received in the future, and that this source of funding is usually federal highway funds.

A securities firm buys stock from a customer and charges a mark-down. In what capacity did the firm act? AAgent BBroker CPrincipal DMiddleman

The best answer is C. A FINRA member firm can do securities transactions in one of two ways. It can act as a broker, routing the order to the best market, charging a commission for this service. This is called an agency trade, and the firm is acting as a middleman in the transaction. The other way to do the trade is to act as a dealer. Here, the firm maintains an inventory of the security, and acts as a principal, buying the security into inventory from the customer; or selling to the customer out of inventory. When acting as a principal, the firm earns a mark-up when selling to the customer out of inventory; or a mark-down when buying into inventory. Also note that the firm can only act in one capacity in a given transaction - either as a broker or as a dealer. Thus, it could not charge both a commission and a mark-up in the same transaction.

A self-employed individual makes $200,000 per year. To which type of retirement plan can the maximum contribution be made? ATraditional IRA BRoth IRA CSEP IRA DSIMPLE IRA

The best answer is C. A SEP (Simplified Employee Pension) IRA is usually set up by small business because it simplifies all of the recordkeeping associated with retirement plans (though there actually no limit of the size of the company to open up a SEP IRA). Contribution amounts made by the employer cannot exceed 25% (statutory rate; effective rate is 20%) of the employee's income, up to a maximum of $57,000 in 2020. SIMPLE IRAs also are relatively "simple" for a business to set up, but they only allow a maximum contribution of $13,500 (in 2020). So the SEP IRA is better. In contrast, the maximum contribution to either a Traditional or Roth IRA in 2020 is $6,000 (plus an extra $1,000 catch-up contribution for individuals age 50 or older). Also note that because this individual is a high-earner, he or she cannot open a Roth IRA.

Which statement is FALSE about a fixed UIT? AEach trust unit represents a piece of a diversified portfolio of underlying securities BAn investor can reduce concentration risk with a relatively small dollar investment CA professional manager can change the portfolio composition in response to a changing outlook for the underlying investments DOngoing expenses are low, making this an efficient investment

The best answer is C. A fixed UIT is an investment company structure where the sponsor assembles a fixed portfolio of securities that is transferred into trust, and then $1,000 units of the trust are sold to investors. For a relatively small investment amount, the buyer gets a piece of a diversified portfolio. This diversification reduces the concentration risk of investing in one, or a few, stocks or bonds. Once the portfolio is assembled, it does not change. There is no ongoing management and no management fees - which is the largest expense of running any investment company type. If the portfolio consists of bonds (a very popular type of fixed UIT), then the portfolio self-liquidates as the bonds mature. If the portfolio consists of stocks (such as an Energy Trust consisting of various oil and gas stocks), then there is a fixed life set on the trust (say 10 years) at which point the stocks in the portfolio are sold and the proceeds distributed to the unit holders.

No load funds do not impose any of the following fees EXCEPT: AFront end sales charge BRedemption fee CManagement fee DContingent deferred sales charge

The best answer is C. A pure "no-load" fund does not impose sales charges of any kind to buy into the fund; nor to redeem shares. However, all mutual funds charge an annual management fee, which is an annual expense against the fund's investment income.

An issuer is required to make an 8K filing with the SEC for which of the following events? I Election of new members of the Board of Directors II Declaration of bankruptcy III Declaration of a cash dividend IV Proposal of a merger with another corporation AII and III only BI and IV only CI, II, and IV DI, II, III, IV

The best answer is C. An 8K filing with the SEC is required by a corporation if a "major event" happens at the company. These include if there is a change in the composition of the Board of Directors; if the company declares bankruptcy; if there is a major acquisition or divestiture of assets; if the company proposes a merger; or if any other major corporate event occurs. The notice must be filed no later than 4 business days after the event.

The short leg of a bull call spread: Aincreases risk Breduces risk Climits potential gain Dlimits potential loss

The best answer is C. An example of a bull call spread is: Buy 1 ABC Jan 50 Call Sell 1 ABC Jan 60 Call The long 50 call allows the customer to buy the stock at $50 per share in a rising market. Thus, if the market rises above $50, this position gives increasing gain. However, if the market rises above $60, the short 60 call will be exercised, obligating the customer to sell the stock at $60. Thus, the short position limits potential gain. The maximum gain is limited to 10 points (Buy at $50; Sell at $60).

In 2020, a self-employed individual earns $180,000 for the year, and contributes the maximum amount to an HR10 plan. If this individual wished to make a contribution to a self-directed Individual Retirement Account for this year, which statement is TRUE? A A contribution is prohibited because this person is already covered under a qualified retirement plan B A maximum contribution of $6,000 is permitted, which is an adjustment to that year's taxable income C A maximum contribution of $6,000 is permitted, but no adjustment is allowed to that year's taxable income for that amount D A contribution is permitted only if the HR10 contribution is reduced by the same amount

The best answer is C. Any individual, whether or not he is covered by another retirement plan, can make an annual contribution to an Individual Retirement Account. However, if that person's income is high (above $75,000 in 2020 for an individual) and that person is covered by another qualified retirement plan, the contribution is not tax deductible. This person makes $180,000 per year and contributes to a Keogh plan, so the IRA contribution is not tax deductible.

XYZ Corporation announces a 10% stock dividend, followed by a 5% "spin off" of a subsidiary business. A customer who owns 200 shares of XYZ will receive: A20 shares of XYZ and 10 shares of the spin-off B10 shares of XYZ and 10 shares of the spin-off C20 shares of XYZ and 11 shares of the spin-off D20 shares of XYZ and cash equal to 5% of the value of the spin-off

The best answer is C. Because the customer owns 200 shares of XYZ stock, the 10% stock dividend will give the customer 20 additional XYZ shares for a total of 220 XYZ shares. The 5% spin off of the subsidiary that follows means that 5% of the 220 share holding = 11 shares will be spun-off to the shareholders as a separate company.

A customer wishes to place an order to short 50,000 shares of ABC stock. The average daily trading volume (ADTV) in ABC stock is 40,000 shares. The representative: Ashould place the order Bcannot accept the order because the order size exceeds the ADTV Cshould inform the client that the firm may not be able to borrow the stock Dshould inform the client that the order can only be executed on an up-bid

The best answer is C. Because the customer wants to short 50,000 shares of the stock and the average daily trading volume is only 40,000 shares per day, this means that there is not much trading activity in the stock relative to the amount of stock this customer wants to short. Regulation SHO requires than when a stock is sold short, the broker-dealer must locate the shares to be borrowed; must determine that the shares can be delivered by settlement; and must document this. In this case, finding the shares to be borrowed will be more difficult, and if the firm is unable to locate the shares to be borrowed, the customer will not be able to short the stock.

Which of the following statements are TRUE when comparing bonds and preferred stock? I Payments to bondholders are subject to approval of the Board of Directors II Payments to preferred stockholders are subject to approval of the Board of Directors III Bonds are considered senior securities over common stock in a corporate dissolution IV Preferred stock is considered to be a senior security over common stock in a corporate dissolution AI and III only BII and IV only CII, III, IV DI, II, III, IV

The best answer is C. Both bonds and preferred stock are "Senior" securities over common. Payments to bondholders are a legal obligation of the issuer. They are not a discretionary decision on the part of the Board of Directors, as is the decision to pay a dividend to preferred and common shareholders.

Which of the following investment portfolios is MOST liquid? AAn aggressive growth fund BA U.S. Government bond fund CA money market fund DAn income fund

The best answer is C. By definition, a money market instrument is liquid. They are readily traded at a discount equal to the market rate of interest because any purchaser knows that he or she will be paid when it matures in the near future. Long term governments are not as liquid - there is not nearly as much long term government debt outstanding as there are T-Bills (the biggest of the money market instruments), making these somewhat less liquid. Income funds are composed mainly of high yielding preferred stocks and corporate bonds. These are not as liquid as U.S. Government issues. Finally, aggressive growth stocks are the least liquid of the choices offered, since they are not traded on the NYSE, but rather OTC - which is a less liquid marketplace.

Contributions to Individual Retirement Accounts must be made by: ADecember 31st of the calendar year in which the contribution may be claimed on that person's tax return BDecember 31st of the calendar year after which the contribution may be claimed on that person's tax return CApril 15th tax filing date of the calendar year after which the contribution may be claimed on that person's tax return DAugust 15th tax filing date permitted under an automatic extension of the calendar year after which the contribution may be claimed on that person's tax return

The best answer is C. Contributions to Individual Retirement Accounts must be made by April 15th (tax filing date) of the year after the tax filing year. For example, a contribution for tax year 2020 must be made by April 15th, 2021. No extensions are permitted.

What entity was created to provide clearing and settlement efficiencies by immobilizing securities and to make "book entry" changes to ownership of securities? AFRB BOCC CDTC DPSA

The best answer is C. Depository Trust and Clearing Corporation (DTCC, sometimes just called DTC), is owned by U.S. banks and brokerage firms. It is the central clearing house for stock and bond transactions, and also maintains custody of both physical certificated securities and electronic book-entry securities. The OCC (Options Clearing Corporation) performs a similar function for the options markets. PSA stands for Prepayment Speed Assumption - which is used to determine the average life of a mortgage backed security.

ERISA requirements regarding the investments that are suitable for a retirement account stress: Aincome potential Bcapital gain potential Csafety of principal Dlegal list securities

The best answer is C. ERISA rules regarding retirement plans stress that investments should be "safe."

Which of the following are terms that describe economic indicators? I Leading II Lagging III Coincident IV Concomitant AI and II only BIII and IV only CI, II, III DI, II, III, IV

The best answer is C. Economic indicators either lag the economy; lead the economy; or are coincident with the economy. There is no such terminology as a concomitant indicator.

Which statements are TRUE about asset classes and investment time horizons? I Equity investments are the better choice for short term time horizons II Interest bearing investments are the better choice for short term time horizons III Equity investments are the better choice for long term time horizons IV Interest bearing investments are the better choice for long term time horizons AI and III BI and IV CII and III DII and IV

The best answer is C. Equity investments typically produce a higher rate of return with higher volatility - thus a long time horizon is needed to achieve consistent results with equity investments. Interest bearing investments produce a lower rate of return with lower volatility - thus they are suitable for portfolios with short time horizons.

Which of the following statements are TRUE about Eurodollar bonds? I Interest received from the bonds is subject to U.S. taxation II Interest received from the bonds is not subject to U.S. taxation III The bonds are purchased only by foreigners IV The bonds are purchased only by U.S. citizens AI and III BI and IV CII and III DII and IV

The best answer is C. Eurodollar bonds are only issued outside the U.S. and are purchased by foreigners. The bonds are not registered for sale in the U.S. The bonds are not subject to withholding taxes and are issued in bearer form.

Eurodollars are: I European currency deposits II U.S. dollar deposits III held in foreign branches of U.S. banks IV held in U.S. branches of foreign banks AI and III BI and IV CII and III DII and IV

The best answer is C. Eurodollars are U.S. dollar deposits held in foreign branches of U.S. banks or foreign banks. Eurodollar deposits are used to finance international trade.

Under SEC rules, filing of the Form 144, required when selling restricted stock, is the responsibility of the: Aissuer Bbroker-dealer Cseller Dtransfer agent

The best answer is C. Filing of the Form 144 to sell restricted stock is the responsibility of the seller.

Under Rule 144, no filing is required if the sale amount every 90 days does not exceed: I 500 shares II 5,000 shares III $50,000 IV $500,000 AI and III BI and IV CII and III DII and IV

The best answer is C. Form 144 does not have to be filed to sell restricted or control stock if 5,000 shares or less, worth $50,000 or less, is sold during each 90 day period.

A customer has a fully paid options position and is long marginable stock. Subsequently he receives a margin call on his long stock position. Which of the following statements are TRUE? I The customer can borrow against long options contracts to satisfy a portion of the margin call II The customer cannot borrow against the long options contracts to satisfy the margin call III Long option contracts have a loan value of 0% IV Long option contracts have a loan value of 50% AI and III BI and IV CII and III DII and IV

The best answer is C. Fully paid long option contracts have a loan value of "0" - they cannot be borrowed against because they will expire in the near future. If a customer has a fully paid options position, he or she cannot borrow against it to satisfy a margin call.

Which TWO of the following positions would receive the greatest benefit of reduced margin requirements from portfolio margining? I Long stock/Short call II Long stock/Long put III Short stock/Long call IV Short stock/Short put AI and III BI and IV CII and III DII and IV

The best answer is C. Portfolio margin is based on the risk of a portfolio, rather than applying a fixed margin percentage to each security position. When a stock position is hedged by an option, as is the case with a long stock/long put position or a short stock/long call position, then the maximum loss on the stock position is reduced to approximately the premium paid for the protective long put or long call. Thus, portfolio margin results in a much lower margin requirement for stock positions that are hedged by options.

A customer calls her registered representative and says the following: "I'm looking for a safe investment for $100,000 that I have, that will give me a moderate level of income. I have 2 children, ages 12 and 13, and I will need to use these monies to pay for their college education, starting in 5 years." All of the following recommendations would be suitable EXCEPT: A Treasury bond mutual fund B Treasury bonds with 5, 6, 7, 8, and 9 year maturities C GNMA pass-through certificates with 5, 6, 7, 8, and 9 year maturities D FNMA debentures with 5, 6, 7, 8, and 9 year maturities

The best answer is C. GNMA pass-through certificates represent an ownership interest in a pool of underlying mortgages. Each month, the mortgage payments made into the pool are "passed through" to the certificate holders. If interest rates drop, then the homeowners in the pool will refinance their mortgages and prepay their old higher rate mortgages. These prepayments are passed through to the certificate holders, who are paid off much earlier than expected. If these payments are reinvested, since interest rates have fallen, the overall rate of return falls, and the anticipated monies needed to fund the college education will not be available. Prepayment risk does not exist with conventional debt securities.

A customer has purchased 10,000 shares of Hot Tamale stock, a Mexican enchilada company. The stock is not traded in the United States. Hot Tamale declares and pays a dividend of 20,000 Mexican Pesos, which when converted to dollars, equals $150. Mexico imposes a 10% withholding tax on dividends repatriated outside its borders. How is the dividend reported on this investor's U.S. tax return? A No dividends are reported, since the investment is made outside the United States B $150 of dividends are reported, with no tax credit available C $150 of dividends are reported, along with a $15 tax credit for monies withheld in Mexico D $165 of dividends are reported, along with a $15 tax credit for monies withheld in Mexico

The best answer is C. If a direct investment is made in a foreign security, that foreign country often withholds tax on dividends repatriated out of that country. If this occurs, the tax withheld is applied as a tax credit on that person's U.S. tax return. Thus, this person who received $150 of dividends, but who has $15 of taxes withheld on those dividends in Mexico, would report the entire $150 of dividends received, along with a $15 tax credit for the tax withheld in Mexico.

Which statements are TRUE regarding SMA in a margin account that is at 50% margin? I For every $.50 increase in market value in a long account, SMA goes up by $1.00 II For every $1.00 increase in market value in a long account, SMA goes up by $.50 III For every $1.00 decrease in market value in a short account, SMA goes up by $1.50 IV For every $1.50 decrease in market value in a short account, SMA goes up by $1.00 AI and III BI and IV CII and III DII and IV

The best answer is C. If a long account increases in value above 50%, SMA will increase by $.50 for every dollar increase. For example, assume an account shows: Long Market Value -Debit= Equity % SMA $20,000 $10,000 $10,000 50% 0 If the market value increases to $30,000, the account will now show: Long Market Value -Debit=Equity % SMA $30,000 $10,000 $20,000 66% $5,000 With $30,000 of stock, 50%, or a total of $15,000 can be borrowed. Since this customer has only borrowed $10,000, another $5,000 can be lent to the customer - this is the SMA. Thus, for an account that increased $10,000 in market value (and the equity increased by $10,000), SMA increased by $5,000 (or 50%). If a short margin account decreases in value, SMA will increase by $1.50 for every dollar decline. For example, assume an account shows: Credits - Short Market Value = Equity % SMA $60,000 $40,000 $20,000 50% 0 If the market value decreases to $30,000, the account will now show: Credits - Short Market Value = Equity % SMA $60,000 $30,000 $30,000 100% $15,000 With $30,000 of stock, 50% or $15,000 is the required equity to support the position. Since there is $30,000 of equity in the account, there is $15,000 of excess equity. This is the SMA amount that can be borrowed. Thus, for a short account that decreased $10,000 in market value (and the equity increased by $10,000), SMA increased by $15,000 (or 150%).

A customer owns an ABC Call option. ABC declares a dividend for shareholders on record July 5th. The last day to exercise the option and get the dividend is: AJune 30th BJuly 1st CJuly 2nd DJuly 3rd

The best answer is C. If an option is exercised, a regular way stock trade results (2 business day settlement). To be an owner of record, the call must be exercised 2 business days prior to July 5th, which is July 2nd (don't forget to exclude July 4th, since it is a legal holiday!) Notice that to get the dividend, the call must be exercised just prior to the ex date, (which is the business day before the record date, so in the case the ex date is July 3rd).

A customer sells 2 ABC Jan 60 Puts @ $4 when the market price of ABC is $59. The maximum potential loss for the customer is: A$400 B$800 C$11,200 D$12,000

The best answer is C. If the market goes to zero, the put writer will experience the maximum potential loss. The writer of the puts will be exercised, forcing him to buy worthless stock at the $60 strike price. However, the customer has received $4 per share in premiums. The net loss is $56 per share x 200 shares = $11,200.

A customer is short 100 shares of DEF stock at $35 per share. The stock goes up to $50 and the customer covers the position. If, 30 days later, the customer decides to re-establish this short position when the market for DEF is $48, which statement is TRUE? AThe cost basis is $33 per share BThe cost basis is $48 per share CThe sale proceeds are $33 per share DThe sale proceeds are $63 per share

The best answer is C. In this transaction, the customer is attempting to take a loss and then reestablish the position. Under the "wash sale" rule, the loss deduction is disallowed if the position is reestablished within 30 days of the date the loss was generated. In this case the customer originally sold short the stock at $35. The stock was repurchased at $50, for a $15 loss per share ($1,500 loss on 100 shares). Then, the customer sold short another 100 shares 30 days later at $48 - exactly the 30 day limit set by the "wash sale" rule. Thus, the $1,500 loss is disallowed. (If the customer had waited for 31 days until reestablishing the short position, the rule would not apply!) The $15 per share loss will be deducted from the sale proceeds of $48, for a new sale proceeds of $33. In essence, this defers the taking of the loss until this short position is covered.

REITs can invest in all of the following EXCEPT: Amortgages Breal estate Climited partnerships Dother REITs

The best answer is C. REITs do not invest in limited partnerships, which are tax shelter vehicles. This makes sense because REITs cannot pass losses to their shareholders. They invest primarily in real estate and mortgages (under the tax code, at least 75% of the REIT's assets must be invested in real estate or mortgages). Any excess funds can be invested in securities, such as U.S. Governments and can also be invested in the shares of other REITs, though this rarely happens.

Customer Z is a single 26-year-old man who earns $125,000 annually. He informs you that he is getting married and that his new wife's income of $75,000 per year will put them into the highest federal tax bracket. The couple will have investable income of $25,000 per year. The couple wishes to buy a house in 5 years that will be substantially more expensive than the condominium in which they currently reside. To meet the customer's needs for the large cash down payment in 5 years and to reduce taxable income, the BEST recommendation is to: A open a margin account and invest in income bonds B open an Individual Retirement Account and invest in tax-deferred variable annuities C open a cash account and invest in mutual funds holding high yielding common and preferred stocks D open a trust account and invest in Treasury STRIPs

The best answer is C. Income bonds are not a reliable source of income or principal repayment (since payment depends on earnings of the issuer), and the interest is 100% taxable. Tax-advantaged investments like variable annuities should never be purchased in tax-deferred accounts. The annual accretion on Treasury STRIPS is taxable, unless the bonds are held in a tax-deferred account. Only Choice C makes sense - since cash dividends are taxed at a maximum rate of 15% (reducing taxable income), and the mutual fund shares can be easily liquidated in 5 years to make the house down payment.

A customer buys 1 ABC Jan 50 Call @ $4 and buys 1 ABC Jan 50 Put @ $3 when the market price of ABC = $51. The breakeven points are: A$46 and $53 B$47 and $54 C$43 and $57 D$45 and $55

The best answer is C. Long straddles are profitable if the market either moves up or down. To breakeven, the total premium paid must be recovered by the market moving either up or down. To breakeven, the $7 Debit paid for the straddle must be recovered. This happens at 50 + 7 = $57 on the call side of the straddle and 50 - 7 = $43 on the put side of the straddle. To summarize, the breakeven formulas for a long straddle are: Upside Breakeven = Call Strike Price + Combined Premium Downside Breakeven = Put Strike Price - Combined Premium

Which of the following statements are TRUE? I Systematic risk can be diversified away II Systematic risk cannot be diversified away III Non-systematic risk can be diversified away IV Non-systematic risk cannot be diversified away AI and III BI and IV CII and III DII and IV

The best answer is C. Market risk is the same as systematic risk. It is the risk of the market moving adversely, and one's securities positions moving with the market. This risk cannot be diversified away; but it can be hedged against. Non-systematic risk is the portion of risk in a portfolio that is "stock specific." Also known as selection risk, this can be diversified away by adding more and more stocks to the portfolio, until the portfolio becomes reflective of the "market" as a whole.

Municipal bond traders execute transactions: I on the floor of recognized exchanges II with bank dealers in the over-the-counter market III with brokerage wire houses in the over-the-counter market IV with municipal broker's brokers AI only BIV only CII, III, IV DI, II, III, IV

The best answer is C. Municipal bonds are traded in the over-the-counter market. They are not traded on national stock exchanges. Remember, there is no national trading market in municipals - a requirement for listing - so municipal markets are generally confined to the state of issuance. Bonds can be traded in the OTC market with bank dealers, other brokers, as well as with municipal broker's brokers. These are wholesale firms (of which only 12 exist in the U.S.) that only trade with retail municipal brokers. These firms do not take inventory positions. They act as an agent, usually helping the retail firm with large institutional trades.

A municipality will solicit bids from interested persons for a new bond issue by publishing a(n): AOfficial Statement BProspectus COfficial Notice of Sale DTombstone

The best answer is C. Municipalities publish an "Official Notice of Sale" that gives the details of a new bond issue that the municipality will put up for auction in the near future. This is published in the Bond Buyer, and often in local newspapers as well. Any interested potential bidders can contact the municipality for more detailed information by requesting a copy of the "Preliminary Official Statement" - the disclosure document for municipal new issues. There is no prospectus requirement for municipal issues because these are exempt securities (exempt from the provisions of the Securities Acts). Hence, the tombstone advertisement rules under the '33 Act do not apply to municipals, as well.

A customer buys 2,500 shares of DEFF stock at $10 per share. After holding the position for 12 years, the customer dies. The customer's will specifies that the position goes to this adult daughter. The market value of DEFF at the date of death is $22 per share. The market value when the securities are actually transferred is $25 per share. Which statement is TRUE? AThe daughter assumes the cost basis of "0" BThe daughter assumes a stepped up cost basis of $10 per share CThe daughter assumes a stepped up cost basis of $22 per share DThe daughter assumes a stepped up cost basis of $25 per share

The best answer is C. One of the benefits included in the tax code is that when assets are inherited, the inheritor gets a stepped-up cost basis if the assets have appreciated - so the gain on the position is not subject to capital gains tax. The valuation date is the date of death - so the securities receive a stepped-up cost basis of $22 when transferred to the daughter.

Passive portfolio management is: Abuying and holding the investments chosen by the Registered Representative Bdetermining the securities to be bought or sold based on investment research performed by the Registered Representative Cmanaging a portfolio to meet the performance of a benchmark portfolio Dmanaging a portfolio to exceed the performance of a benchmark portfolio

The best answer is C. Passive portfolio management is the management of a portfolio to meet the performance of a benchmark, such as a designated index. Active portfolio management attempts to beat the performance of the benchmark portfolio through better security selection and better investment timing.

Which of the following would NOT purchase STRIPS? I Pension fund II Money market fund III Individual seeking current income IV Individual wishing to avoid reinvestment risk AI and III BI and IV CII and III DII and IV

The best answer is C. Pension funds and retirement accounts are the large purchasers of STRIPS. These zero-coupon bonds are purchased at a deep discount and are held to maturity to fund future retirement liabilities. There is little credit risk, because the U.S. Treasury is a top credit. There is no current income because they don't pay until maturity. They have a huge amount of purchasing power risk as a long-term zero coupon obligation, but this is not an issue if they are held to maturity. Retirement plan managers like STRIPS because they don't have to worry about reinvestment risk - there are no semi-annual interest payments to reinvest! It is an investment that can be "tucked away" for 20 or 30 years, with no further work or worry on the part of the retirement fund manager.

Which of the following statements are TRUE about REITs? I 90% of Net Investment Income must be distributed to shareholders to be "regulated" under Subchapter M II 75% of assets must be invested in real estate related activities to be "regulated" under Subchapter M III Gains may be passed through to shareholders under "conduit" tax treatment IV Losses may be passed through to shareholders under "conduit" treatment A I and IV only B II and III only C I, II, III D I, III, IV

The best answer is C. Real Estate Investment Trusts must distribute at least 90% of their Net Investment Income to shareholders; and invest at least 75% of their assets in real estate activities; to be regulated under Subchapter M. Gains may be passed through to shareholders, but losses cannot be passed through under "conduit" tax treatment.

Which of the following statements about margin requirements are TRUE? I Payment is required promptly, but no later than 4 business days after trade date, in either a long and short account II $2,000 equity minimum is the same for both long and short accounts III Maintenance margin percentages are 30% for long accounts and 25% for the short accounts IV Initial margin percentages are the same for both long and short accounts AI and II only BIII and IV only CI, II, IV DI, II, III, IV

The best answer is C. Regulation T requires payment promptly for both purchases and short sales, but no later than 4 business days (2 business day regular way settlement + 2 "grace days"). Minimum dollar equity set by FINRA in both a long and short account is $2,000, ignoring special situations. Minimum maintenance margins set by the exchanges are 25% and 30% respectively for long and short positions (not vice versa). Initial margin for both long and short positions is 50% under Regulation T.

Which of the following economic events would have a negative long term impact on common stock prices? I Rising interest rates II Rising capital gains tax rates III Rising employment rates IV Rising inflation rates AI and II only BIII and IV only CI, II, IV DI, II, III, IV

The best answer is C. Rising interest rates are bad for stock prices. More investors will switch from investments in stocks to bond investments. A rising capital gains tax rate also makes stocks less attractive to investors (why would an investor want to invest in stocks if the capital gains tax is so high?) Rising employment indicates that the economy is expanding. This is bullish (not bearish) for corporate profits and hence, stock prices. Rising inflation means that interest rates are likely to rise. This makes long term debt unattractive due to their greater price volatility in response to market interest rate changes and also makes stocks unattractive since corporations are not able to increase prices in line with rising costs, hurting profits. In inflationary times, investors switch from stocks and long term bonds to money market instruments which are paying current high rates of interest; and "hard" assets such as gold and real estate that tend to keep up with inflation.

Under the provisions of Rule 606 of Regulation NMS, which of the following must be disclosed to customers by member firms upon request? I Which market received the customer order II Whether the order was directed or non-directed III The time of execution of the order IV The best market for the security at the time of execution AI and III BI and IV CI, II, III DI, II, III, IV

The best answer is C. Rule 606 of Regulation NMS covers reports that broker-dealers must prepare on their order-routing procedures. Upon customer request, a member firm must disclose: The markets to which the customer's orders were routed to during the past 6 months; Whether the orders were directed (that is, the customer specified the market where the order was to be filled) or non-directed (the member firm chose the market where the order was to be filled); and The time of execution of the orders. There is no requirement to disclose the best market available for that security at the time, since SEC rules require that execution must occur at the "best market."

Which of the following must be sent to customers of broker-dealers semi-annually? I Broker-dealer securities inventory amounts II Broker-dealer balance sheet III Broker-dealer subordinated loan amounts IV Broker-dealer net capital computation AII only BIII and IV only CII, III, IV DI, II, III, IV

The best answer is C. Semi-annually, customers receive a balance sheet (which includes a listing of subordinated loans - these are loans to broker-dealers where the lender subordinates his claim to all other creditors and are included as part of the firm's capital base) and a net capital computation from the broker-dealer. There is no requirement for a broker-dealer to disclose his inventory positions to customers.

A new issue has a Public Offering Price of $21 per share. Which of the following are likely stabilizing bids? I $22.00 II $21.00 III $20.88 IV $20.00 AI and II BIII and IV CII and III DI, II, III, IV

The best answer is C. Stabilizing bids are permitted at, or below the Public Offering Price - never above. When placing the bid, the manager will not drop the price by much below the Public Offering Price, so the likely stabilizing bids are $21 and $20.88. A bid of $22 is prohibited because it is higher than the $21 Public Offering Price; a bid of $20 is too far below the $21 Public Offering Price.

Strategic portfolio management is the selection of the: Asecurities in which to invest Basset classes in which to invest Ctarget asset allocation for each asset class selected for investment Dvariation permitted in target asset allocation for each asset class selected for investment

The best answer is C. Strategic asset allocation is the determination of the target percentage to be allocated to each asset class (e.g., 25% Treasuries; 25% Corp. Debt; 50% Equities). Tactical asset allocation is the permitted variation around each of the chosen percentages - for example, even though Equities are targeted at 50%, this might be allowed to be dropped to as low as 40%, or as high as 60%, depending on market conditions.

A customer buys 2 ABC Jan 60 Puts @ $4 when the market price of ABC is $59. ABC stock falls to $40 and the customer buys the stock in the market and exercises the puts. The gain is: A$800 B$1,600 C$3,200 D$4,000

The best answer is C. The customer buys the stock for $40, and exercises the put to sell at $60 for a 20 point profit. Since 4 points were paid in premiums, the net profit per contract is 16 points or $1,600. The profit on 2 contracts is $3,200.

A customer buys 1 ABC Jan 35 Call @ $3.50 and 1 ABC Jan 35 Put @ $.50 when the market price of ABC is at $36.75. The customer must deposit: A$200 B$300 C$400 D$2,000

The best answer is C. The customer has bought a call and a put on the same stock with the same strike price and expiration, so this is a long straddle that must be paid for in full. $350 for the call, plus $50 for the put, is a $400 deposit.

Which bond portfolio with a 20-year life would be expected to give the highest long-term return? A Portfolio #1 with an expected rate of return of 6% and a default risk of 5% over the portfolio life B Portfolio #2 with an expected rate of return of 8% and a default risk of 10% over the portfolio life C Portfolio #3 with an expected rate of return of 10% and a default risk of 20% over the portfolio life D Portfolio #4 with an expected rate of return of 12% and a default risk of 40% over the portfolio life

The best answer is C. The "default risk" represents the loss of return that is likely due to making higher risk investments. If Portfolio #1 has an expected annual rate of return of 6% over 20 years; but there is the probability that 5% of those bonds will default, so the net return will be 95% of 6% = 5.7%. If Portfolio #2 has an expected annual rate of return of 8% over 20 years; but there is the probability that 10% of those bonds will default, so the net return will be 90% of 8% = 7.2%. If Portfolio #3 has an expected annual rate of return of 10% over 20 years; but there is the probability that 20% of those bonds will default, so the net return will be 80% of 10% = 8.0%. If Portfolio #4 has an expected annual rate of return of 12% over 20 years; but there is the probability that 40% of those bonds will default, so the net return will be 60% of 12% = 7.2%.

All of the following issue agency securities EXCEPT: A FNMA B FHLMC C FRB D FHLB

The best answer is C. The Federal Reserve Bank does not issue bonds. Fannie Mae (FNMA) and Freddie Mac (FHLMC) issue mortgage-backed pass through certificates. The Federal Home Loan Banks (FHLB) issues short term and long term bonds.

The Federal Telephone Consumer Protection Act permits: I solicited calls to be made only after 8 AM or before 9 PM in the time zone of the recipient II unsolicited calls to be made only after 8 AM or before 9 PM in the time zone of the recipient III solicited calls to be made anytime IV unsolicited calls to be made anytime AI and III BI and IV CII and III DII and IV

The best answer is C. The Federal Telephone Consumer Protection Act of 1991 requires that unsolicited calls cannot be made before 8:00 AM nor after 9:00 PM, in the time zone of the recipient. Thus, unsolicited calls are only permitted after 8:00 AM until 9:00 PM in the time zone of the recipient. Solicited calls can be made anytime (as an example of a solicited call, a customer tells you to call at 7:00 AM, before he or she leaves for work).

A non-MFP (non-Municipal Finance Professional) contributes $500 to an elected official's campaign in which he is entitled to vote. Which statement is TRUE about this? A This action will result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the amount exceeded $250 B This action will result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the individual was not entitled to vote C This action will not result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the MSRB rule only applies to MFPs D This action will not result in a 2-year ban on the municipal broker-dealer conducting municipal securities business with that issuer because the amount involved is under the "de minimis" exemption

The best answer is C. The MSRB political contribution rule only applies to contributions made to elected officials' campaigns by "MFPs" - Municipal Finance Professionals. MFPs are registered individuals in municipal finance departments and their supervisors. If a non-MFP, such as a typical registered representative, gives a political contribution of any amount to an elected official's campaign in which he or she is, or is not, entitled to vote, this will not trigger a ban! Non-MFPs are not in a position to use campaign contributions as "payment" to an issuer official in return for getting future underwritings or financial advisory work from that municipality - so the rule does not apply.

What would be disclosed in the Offering Memorandum prepared for an Equipment Leasing Limited Partnership that has a life of 7 years? AThe method used by the partnership to acquire assets that will be leased BThe partnership's performance over the preceding 7 years CThe partnership's projected returns over the upcoming 7 years DThe name and percentage participation of each limited partner

The best answer is C. The Offering Memorandum is the disclosure document that is given to potential investors. It describes the business of the partnership, the management of the partnership, the assets to be purchased by the partnership, the minimum investment amount, fees paid to the underwriter, etc. It also includes an important section that gives a projection of the revenues and expenses, along with the annual cash flow, that the partnership expects to generate. This is evaluated to find the "cross-over" point in the partnership - the point where the partnership "crosses over" from generating losses to actually generating income. Note that there is no past performance shown because each partnership is a newly formed entity. Also, the names and percentage participation of the limited partners is not known until the deal is sold out.

PHLX traded option contracts are available for which of the following currencies? I Euro II U.S. Dollar III Japanese Yen IV Canadian Dollar AII only BI and II CI, III, IV DI, II, III, IV

The best answer is C. The PHLX World Currency options are available on the 6 major foreign currencies - Euro, British Pound, Swiss Franc, Japanese Yen, Australian Dollar, and Canadian Dollar. Note that there is no trading of U.S. Dollar options in the U.S. markets because U.S. law prohibits speculation in its own currency.

The Securities and Exchange Commission is empowered to administrate which of the following Acts? I Securities Act of 1933 II Securities Exchange Act of 1934 III Trust Indenture Act of 1939 IV Uniform Securities Act AI and II only BIII and IV only CI, II, III DI, II, III, IV

The best answer is C. The SEC administrates the Securities Act of 1933; the Securities Exchange Act of 1934; the Trust Indenture Act of 1939; and the Investment Company Act of 1940. The Uniform Securities Act is more commonly known as the "Blue Sky" state law, and is adopted "state by state." The SEC, a Federal agency, has no jurisdiction over activities within each state and does not administrate this Act.

The provisions of the Securities Exchange Act of 1934 apply to all of the following activities EXCEPT: Atrading of corporate bonds Btrading of municipal bonds Cissuance of municipal bonds Dissuance of corporate financial statements

The best answer is C. The Securities Exchange Act of 1934 relates to the secondary (trading) market; it does not cover the issuance of securities. Trading of both corporate and municipal bonds is covered under the "anti-fraud" provisions of the Act. Corporate financial reporting standards and public disclosure of financial reports is another part of the '34 Act.

Which of the following are functions of the transfer agent? I Mailing dividend payments to shareholders II Canceling old shares and issuing new shares III Preparing and mailing proxies IV Setting the Declaration Date AI and II BIII and IV CI, II, III DI, II, III, IV

The best answer is C. The declaration date is set by the Board of Directors of the company. The transfer agent cancels old shares and issues new shares; and mails voting materials (proxies), annual reports, and dividend payments to the shareholders.

The designated Registered Options Principal is responsible for which of the following functions? I Writing of procedures for supervision of options accounts II Review of procedures for supervision of options accounts III Approval of options advertising IV Approval of options accounts A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is C. The designated Registered Options Principal resides in the main office of the firm and is responsible for creating and enforcing procedures for compliance with the rules of the O.C.C. and options exchanges. This person is also responsible for approving all options advertising and sales literature. Each branch must have a BOM - Branch Office Manager. This person is responsible for approving options accounts, options orders, options correspondence sent to 25 or fewer existing or prospective clients and for resolving options complaints.

The target allocation for a specific asset class has been set at 20% of total assets under an asset allocation scheme. The manager is permitted to reduce this percentage to 15%; and can increase it to 25%; as he or she sees fit. If this action is taken by the manager, this is termed: Aportfolio rebalancing Bstrategic asset management Ctactical asset management Dactive asset management

The best answer is C. The selection of the percentage of total assets to be allocated to a given asset class is called "strategic asset management" - that is, setting the investment strategy. The permitted variation from this percentage that is given to the asset manager, so that the manager can take advantage of market opportunities, is called "tactical asset management".

Which annuity payout option usually results in the largest periodic payment? AUnit Refund Annuity BJoint and Last Survivor Annuity CLife Annuity DLife Annuity-Period Certain

The best answer is C. The shorter the expected annuity period, the larger the payment. A life annuity lasts only for that person's life - this is the shortest expected period of those given. A life annuity with period certain continues to pay for a fixed time period if the person dies early; a joint and last survivor annuity pays a spouse when one person dies; a unit refund annuity pays a lump sum if a person dies early.

Which of the following securities can be traded using the NASDAQ Market Center Execution System (Single Book)? ANASDAQ Global Market issues BNASDAQ Capital Market issues CAll NASDAQ issues DAll securities trading in the secondary market

The best answer is C. The system for automated trading and order maintenance of NASDAQ issues (Global Market and Capital Market stocks) is the NASDAQ Market Center Execution System, or simply, the "System." The predecessor name was Single Book. OTCBB and Pink Sheet issues, which do not have listing standards, cannot be traded through the System.

A customer purchases $100,000 of corporate bonds at 40% in a margin account. The customer must deposit: A$2,000 B$7,000 C$8,000 D$20,000

The best answer is C. There is no Regulation T. requirement for corporate bonds because the Federal Reserve is not "worried" about these. The only margins are the minimums set by the exchanges. The minimum maintenance requirement set by FINRA is the greater of 7% of face amount or 20% of market value. The bonds are purchased at 40% of $100,000 par = $40,000. 20% of $40,000 = $8,000. 7% of $100,000 face = $7,000. The greater amount is $8,000.

Which statement is TRUE about the use of index option strategies by managers of pension plans subject to ERISA requirements? A Index option trades are permitted without restriction B Index option trades are permitted only if the options are broad based and exchange traded C Index option trades are permitted only if such transactions conform with the objectives stated in the plan document D Index option trades are prohibited under ERISA legislation

The best answer is C. There is no prohibition on the trading of options by retirement plans subject to ERISA (Employee Retirement Income Security Act) regulation. However, before a plan may engage in options trades, it must adopt a policy, in the plan document, of permitting options transactions. It is common for large pension plans to use index options contracts to hedge positions (by buying index puts) and to generate extra income by selling index call contracts.

Customer Name: John Doe Age: 41 Marital Status: Married Dependents: 1 Child, Age 13 Occupation: Engineer Household Income: $140,000 Net Worth: $240,000 (excluding residence) Own Home: Yes Investment Objectives: Total Return / Tax Advantaged Investment Experience: 12 years Current Portfolio Composition: 8% Common Stocks 62% Corporate Bonds 30% Money Market Fund This client has just been informed that he has been promoted and will be earning $190,000 per year instead of $140,000 per year. The customer intends to use this extra income to fund his 13-year old child's college education. Based on the customer's existing asset mix, the best recommendation would be for the customer to invest the extra $50,000 per year into a(n): A money market fund B income fund C growth fund D inflation protected fund

The best answer is C. This customer's portfolio is 92% invested in cash and bonds with only 8% in equities. Since he has 6 years to fund the child's education, growth stocks would help balance the portfolio and enhance the overall return.

On the same day in a margin account, a customer sells 1 ABC Jan 60 Put @ $2 and buys 1 ABC Jan 70 Put @ $6 when the market price of ABC is $67. The point where the customer breaks even is: A$62 B$64 C$66 D$68

The best answer is C. To breakeven, the customer must recover the $400 (4 points) paid in premiums. Any gain comes from the long put position (remember this is a long put spread), therefore the breakeven point is $70 - $4 = $66. To summarize, the breakeven formula for a long put spread is: Long Put Spread Breakeven= Long Strike Price - Debit

Which of the following would create a bear price spread? I Short 1 ABC Jan 70 Call; Long 1 ABC Jan 60 Call II Long 1 ABC Jan 70 Call; Short 1 ABC Jan 60 Call III Short 1 ABC Jan 70 Put; Long 1 ABC Jan 60 Put IV Long 1 ABC Jan 70 Put; Short 1 ABC Jan 60 Put AI and III BI and IV CII and III DII and IV

The best answer is D. A "Bear Spread" is the purchase and sale of either 2 calls or 2 puts with different strike prices and/or different expirations. Since it is a bear spread, it must be profitable in a falling market. Long Put Spreads (buy the higher strike price, sell the lower strike price, resulting in a net debit) and Short Call Spreads (sell the lower strike price, buy the higher strike price, resulting in a net credit) are profitable in a falling market.

The ex date for a cash dividend is Wednesday, November 6th and the Record Date is Thursday, November 7th. Which statement is TRUE? AA buyer of the stock in a regular way trade on November 6th will receive the dividend BA buyer of the stock in a regular way trade on November 7th will receive the dividend CA seller of the stock in a regular way trade on November 6th will receive the dividend DA seller of the stock in a regular way trade on November 7th will not receive the dividend

The best answer is C. To buy stock in a regular way trade in time to get a cash dividend, it must be bought before the ex date, making Choices A and B false. A purchase on November 5th will settle on November 8th while a purchase on November 7th will settle on November 11th (it goes over the weekend) and the purchaser will not be an owner of record as of November 7th. To sell stock in a regular way trade and still retain the dividend, the stock cannot be sold until the ex-date or after. Thus, Choice C is true - if the stock is sold on November 6th, the trade will settle on November 8th and the seller will show as an owner of record on November 7th and will receive the dividend. If the stock is sold on November 7th, the trade will settle on November 11th (it goes over the weekend) and the seller will be an owner of record as of November 7th and will receive the dividend - making Choice D false.

Customer Jane Jennings' suitability information is presented below: Age: 39 Marital Status: Single Dependents: 1 Child - Age 10 Annual Income: $80,000 Tax Bracket: 28% Net Worth: $510,000 excluding home Home: $350,000 fully paid Investment Portfolio: $422,000 (60% equities; 20% long bonds; 20% money market) The customer wants to start a college fund for her child. The anticipated tuition, starting 8 years from now, is $50,000 per year ($200,000 total tuition). Which of the following recommendations is most appropriate for this customer? A liquidate $200,000 of common stock in the client's portfolio and invest the entire proceeds in 8-year Treasury Notes B take out a second mortgage on the customer's residence in the amount of $200,000 and invest the proceeds in a tax-deferred annuity funded by an income separate account C liquidate $160,000 of the common stock and invest the proceeds in laddered Treasury Notes and Bonds of $40,000 amounts maturing 8, 9, 10 and 11 years from now D liquidate $100,000 of the bonds in the customer's portfolio and $100,000 of common stock in the customer's portfolio and invest the entire proceeds in 8-year Adjustment Bonds

The best answer is C. To fund this child's college education, payments of $50,000 per year are needed over a period of 4 years, starting 8 years from now. There is no reason to fund the entire $200,000 right now, since this amount will grow over the next 8 years - making Choices A, B and D incorrect. Also, please note that this customer is only 39 years old - a fairly young age. She should keep as much of her portfolio in growth stocks as possible.

The Bank of England is concerned that the British Pound is weakening against the U.S. Dollar. The appropriate action for the British central bank is to: I buy British Pounds II buy U.S. Dollars III sell British Pounds IV sell U.S. Dollars AI and II BIII and IV CI and IV DII and III

The best answer is C. To protect the British Pound from falling, the Bank of Britain would buy British Pounds in the interbank market (raising the value of the Pound) and would sell U.S. Dollars (depressing the value of the dollar). Thus, two currency values would be driven closer to the desired level.

During a tender offer, which of the following activities are prohibited? I Purchase the stock in a cash account and tender 2 business days after trade date II Purchase a call option in a cash account and tender 2 business days after trade date III Tender shares held in an arbitrage account where the position is "short against the box" IV Exercise a call option held in a cash account and issue irrevocable instructions to deliver the acquired shares AI and III BI and IV CII and III DII and IV

The best answer is C. Under the short tender rule, a customer can only hand in shares on a tender offer to the extent of his "net long" position. A customer who has bought the stock (Choice I) is "long" and can tender. A customer who has bought a call option is not "long" until the option is exercised, so he cannot tender. A customer who is "short against the box" has a net "zero" position and cannot tender. A customer who has exercised a call option is "long" since the stock is being delivered to him. Therefore, he can tender.

To avoid the application of the "wash sale rule" securities sold at a loss on October 31st, can first be bought back on: ANovember 29th BNovember 30th CDecember 1st DDecember 2nd

The best answer is C. Under the wash sale rule, if a security is sold at a loss, and the same or similar security is purchased within 30 days, the loss deduction is disallowed. To avoid the wash sale rule, the securities can be repurchased 31 or more days after the sale date. Since the securities were sold at a loss on October 31st, 31 days later is December 1st.

Which statement is TRUE when a short sale is effected for a client? AThe broker-dealer can require the short seller to provide the stock to the lender within 3 business days BThe broker-dealer can require the short seller to provide the stock to the lender within 5 business days CThe broker-dealer can require the short seller to provide the stock to the lender at any time DThe broker-dealer can require the short seller to provide the stock to the lender only when the client has a loss

The best answer is C. When a customer shorts stock, the shares to be sold are borrowed by the brokerage firm, usually from another client at the same firm who has signed a loan consent agreement. The short seller agrees that the broker has the right to demand, at anytime, that the short seller "close out" the position by purchasing the shares in the market and returning them to the lender of the shares. As an example of why this could occur, maybe the customer (lender of the stock) who is long those shares now wants the stock transferred and shipped. In the real world, this rarely happens - if the original lender of the shares wants them returned, the broker will "move over" the IOU to another customer who is long the stock at the same firm and who has signed a loan consent agreement, returning that stock to the original lender of the shares.

A customer who has a fully paid long position in ABC stock goes "short against the box" for a credit to his account of $50,000. ABC is an NYSE listed stock. The customer can withdraw: A$25,000 B$45,000 C$47,500 D$50,000

The best answer is C. When the customer goes "short against the box," the net position is "0" (e.g., 1,000 shares long / 1,000 shares short). There is no risk at this point, so Reg. T. does not set an initial margin. However, FINRA sets a minimum maintenance margin of 5% of the long side. 5% of $50,000 of stock is $2,500 minimum margin. Therefore, the customer can withdraw $50,000 credit - $2,500 minimum margin = $47,500 withdrawal amount.

Which of the following statements are TRUE about Fill or Kill orders? I The order can be executed in part or in full II The order must be executed in its entirety III If the order cannot be filled, later execution attempts are permitted IV If the order cannot be filled, later execution attempts are not permitted AI and III BI and IV CII and III DII and IV

The best answer is D. A "fill or kill" order is to be executed in full or the order is canceled - only one attempt is made to fill the order. An "all or none" order is to be executed in full, but if the trader can't fill the order, he is free to attempt execution at a later time. These orders cannot be executed in part.

Which statements are TRUE about the use of a "red herring" preliminary prospectus? I A preliminary prospectus may be sent to a prospective customer before the issue has entered into the 20 day cooling off period II A preliminary prospectus may be sent to a prospective customer once the issue has entered into the 20 day cooling off period III The use of the preliminary prospectus constitutes an offer to sell under the Securities Act of 1933 IV The use of the preliminary prospectus does not constitute an offer to sell under the Securities Act of 1933 AI and III BI and IV CII and III DII and IV

The best answer is D. A "red herring"/preliminary prospectus may be sent to any prospective purchaser of that new issue once the issue has entered into the "20 day cooling off" period that commences upon filing of the registration statement with the SEC. Prior to the "20 day cooling off period," the filing had not been made, so nothing can be done that involves contacting the public about that issue. The use of the "preliminary prospectus" does not constitute an "offer" under the 1933 Act, and the red ink statement on the cover of the preliminary prospectus states this (hence the name "red herring").

All of the following statements are true regarding a mutual fund "Letter of Intent" EXCEPT: Athe letter can cover a period of 13 months Bthe letter can be backdated 90 days Cthe extra shares purchased under the breakpoint are held in escrow until the letter is completed Dduring the period covered by the letter, the customer cannot redeem his shares

The best answer is D. A letter of intent can cover a period of 13 months, inclusive of a 90 day "backdate." The extra shares purchased at the lower sales charge are held in escrow until the letter is completed. If the letter is not completed, the purchase price is recalculated to the higher sales charge and the customer does not get the extra shares. The customer can always redeem his shares.

A customer sells 1 ABC Jul 65 Call @ $7 and sells 1 ABC Jul 65 Put @ $5 when the market price of ABC is $66. The breakeven points are: A$60 and $72 B$58 and $70 C$63 and $67 D$53 and $77

The best answer is D. A short straddle is the sale of a call and a put on the same stock, with the same strike price and expiration. To breakeven, the writer must lose the 12 point credit received for the straddle. If the market rises, the call side will be exercised and as the market goes to $65 + $12 = $77, the customer breaks even here on the call. If the market falls, the put side will be exercised and customer breaks even at $65 - $12 = $53. To summarize, the breakeven formulas for a short straddle are: Upside Breakeven = Call Strike Price + Combined Premium Downside Breakeven = Put Strike Price - Combined Premium

A technical analyst would be LEAST concerned with the: AShort interest BStandard and Poor's 500 Index CAdvance / Decline Line DBook Value per share

The best answer is D. A technical analyst makes buy and sell decisions on "technical" market factors such as trading volumes, breadth of market movement (advance / decline line), and the movement of market averages, and short interest figures. The "short interest" is the aggregate outstanding short position in a security. Technical analysts are not concerned with fundamentals such as earnings per share, balance sheet ratios etc.

Which statement is FALSE when comparing Agency CMOs to Private Label CMOs? A Agency CMOs carry the direct or implied guarantee of the U.S. Government while Private Label CMOs do not have such a guarantee B Agency CMOs are backed by underlying mortgage backed pass-through certificates issued by that agency, while Private Label CMOs are backed by mortgage backed securities issued by private lenders and agencies C Agency CMOs take on the credit rating of the underlying agency securities while Private Label CMOs are assigned credit ratings by independent credit ratings agencies D Agency CMOs are traded in the public markets while Private Label CMOs can only be sold in private placements and cannot be traded

The best answer is D. Agency CMOs are created by Ginnie Mae, Fannie Mae, or Freddie Mac, using their own mortgage backed securities (MBSs) as the underlying collateral. Because the MBSs are AAA rated, the CMOs created from them are AAA rated as well. If it is an agency CMO created by Ginnie Mae, the securities have the direct backing of the U.S. Government; if the agency CMO is created by Fannie Mae or Freddie Mac, it has the implied backing of the U.S. Government. In contrast, "Private Label" CMOs are created by brokerage firms, who can use the MBSs of Ginnie, Fannie and Freddie as underlying collateral, but they also use MBSs created by the broker-dealer itself that have underlying collateral consisting of non-conforming jumbo mortgages that Ginnie, Fannie and Freddie won't buy because they are too large; and mortgage loans that the agencies won't buy because they do not meet the agency's underwriting standards (meaning they are risky). The credit rating of a "Private Label" CMO is established by a credit ratings agency such as Moody's based on the quality of the underlying collateral and is not automatically AAA.

Regarding secondary market corporate bonds, which statements are TRUE? I Corporate market discount bonds must be accreted II Corporate market discount bonds may be accreted III Corporate market premium bonds must be amortized IV Corporate market premium bonds may be amortized AI and III BI and IV CII and III DII and IV

The best answer is D. Corporate bonds bought in the secondary market at a discount are termed "market discount bonds." There is an option of accreting the discount and paying tax annually on the accretion amount at full tax rates; or of waiting until the bond is redeemed or sold to pay the tax on the earned market discount at full tax rates. If the holder accretes the bond and holds it until maturity, there is no capital gain or loss, since the entire discount has been accreted and taxed over the bond's life. If the holder opts not to accrete the bond, the bond will be redeemed at par and the entire market discount is taxed as interest income received at maturity (not as capital gains). If a corporate or Government bond is purchased at a premium in the secondary market, the holder has the option of amortizing the premium over the bond's life. The bondholder doesn't have to amortize the premium, but it is in his best interest to do so because amortizing the premium reduces reported taxable interest income each year.

Which of the following statements are TRUE regarding a municipal bond issue that is advance refunded? I The security that backs the advance refunded bonds will change after the issue is refinanced II The bondholder's lien on pledged revenues will be defeased in accordance with the terms of the bond contract III The marketability of the advance refunded bonds will increase IV The funds to pay the debt service requirements on the advance refunded bonds are set aside in escrow AII only BIII and IV only CI, II, IV DI, II, III, IV

The best answer is D. All of the statements are true regarding advance refunding of a municipal bond issue. In an advance refunding, the issuer floats a new bond issue and uses the proceeds to "retire" outstanding bonds that have not yet matured. These funds are deposited to an escrow account and are used to buy U.S. Government securities. The escrowed Government securities become the pledged revenue source backing the refunded bonds. These bonds no longer have claim to the original revenue source. Since there is a new source of backing for the bonds (and an extremely safe one!), the credit rating on the advance-refunded bonds increases, as does their marketability. The advance-refunded bonds no longer have any claim to the original pledged revenues - and thus have been "defeased" - that is, removed as a liability of the issuer. (Also note that the tax law changes that took effect at the beginning of 2018 banned municipalities from doing any more advance refundings or pre-refundings. However, all the bonds that have been advance refunded remain outstanding until they reach their maturity date, while those that have been pre-refunded remain outstanding until their first call date.)

American Depositary Receipts pay dividends in: ALIBOR Units BEuropean currency Units CForeign Currency DU.S. Dollars

The best answer is D. American Depositary Receipts pay dividends in U.S. Dollars only. The dividends are declared and paid in the foreign currency by the issuer. The bank that issues the ADR exchanges the dividend into U.S. Dollars and pays this to the U.S. ADR holders.

All of the following statements are true if the SEC sends a deficiency letter to the issuer regarding an issue in registration EXCEPT: Adisclosure in the registration documents is not complete Bthe issuer must file an amendment with the SEC to cure the deficiency Cthe 20-day cooling off period starts again once the amendment is filed Dthe effective date of the issue is unaffected by the deficiency notice

The best answer is D. An SEC "deficiency letter" indicates that there is not adequate disclosure in the registration documents to allow investors to make an informed decision. The deficiency must be cured before the SEC will allow the registration to be effective. Once the amendment is filed, the 20-day cooling off period starts counting again from the beginning. If the SEC finds that there is not adequate disclosure after the amendment is filed, it can issue subsequent deficiency letters. Thus, the registration for the issue may never "go effective."

An equity REIT would most likely invest in all of the following EXCEPT: Aapartments Boffice buildings Cshopping malls Dindustrial parks

The best answer is D. An equity REIT invests in income producing real estate. These include apartment buildings, shopping centers, and office buildings. The key here is that these have a large, diverse tenant pool. If any one tenant moves out, that will not have a great impact on the income stream. Industrial parks usually have only a few large tenants, not a lot of smaller tenants.

Which of the following statements are TRUE regarding indications of interest received during the "cooling off" period for a registered initial public offering? I The indication is binding on the customer II The indication is not binding on the customer III The indication is binding on the underwriter IV The indication is not binding on the underwriter AI and III BI and IV CII and III DII and IV

The best answer is D. An indication of interest is taken during the 20 day cooling off period before a new issue's registration is effective. The issue may never "go effective" and the indication can be canceled by the underwriter. Thus, the underwriter can cancel or change the indication. Similarly, the customer can also cancel or change his indication. These are not binding because the issue cannot be legally "offered or sold" until the effective date.

Which statement is TRUE about limited partners and general partners ALimited partners have no liability and general partners have limited liability BBoth general and limited partners have limits on their liability CBoth general and limited partners have no limits on their liability DGeneral partners have unlimited liability while limited partners have limited liability

The best answer is D. Any limited partnership must have at least 1 general partner and 1 limited partner. There can be multiples of each. The general partner is the manager of the venture, receives management fees, and assumes unlimited liability. The limited partner is the passive investor, similar to a stockholder. The limited partner cannot have a management role and can only lose the amount invested. If the limited partner financed part of the investment with a "recourse loan" (where the lender has recourse to the partner personally to repay the debt if the partnership cannot), then the limited partner is potentially liable for this as well.

Which statements are TRUE regarding bids placed at the Treasury Auction? I Competitive bids are always filled II Non-competitive bids are always filled III Competitive bids are not always filled IV Non-competitive bids are not always filled AI and II only BIII and IV only CI and IV only DII and III only

The best answer is D. At the weekly Treasury auction, non-competitive bids are always filled at the average winning yields of the competitive bids. Only the lowest interest rate competitive bids are filled; the higher rate competitive bids that exceed the amount of securities up for auction that week are rejected.

Block trades for sales of NYSE listed issues that are too large for Super Display Book are: Agiven directly to the Specialist/DMM for execution Bgiven to Floor Brokers, who may only execute them as "Fill or Kill" orders Conly executable during normal trading hours Drouted to Third Market Makers who effect the transaction on a principal basis

The best answer is D. Block trades to sell that are too large for Super Display Book (e.g., trades of over 3,000,000 shares for limit orders) are not accepted in the Display Book. Competition from the Third Market has made it much more attractive for institutions to buy or sell large blocks of NYSE listed issues OTC (because the Third Market Makers do these transactions as "price leaders" to attract further institutional business). Also note that orders that are too large for the Display Book can be routed to floor brokers on the NYSE floor for execution, but they are not required to be "Fill or Kill" orders. If anything, they would be routed to a floor broker as a "market-not held" order, which gives the floor broker discretion over price and time of execution.

All of the following transactions are permitted in a custodial account EXCEPT the: Apurchase of mutual fund shares Bpurchase of warrants Csale of pre-emptive rights Dshort sale of common stock

The best answer is D. Custodial accounts cannot be margin accounts - so short sales are prohibited. If securities are purchased, they must be paid in full. If securities are sold, they must be long sales with the proceeds being used for other investments or expenses that benefit the minor.

Which of the following information is disclosed on an options confirmation? I Commission II Trade date III Settlement date IV Expiration AI and II only BIII and IV only CI, II, IV DI, II, III, IV

The best answer is D. Disclosed on an options confirmation are the type of option; the expiration; the strike price; the execution price and any commission; and the trade date and settlement date.

Comparing the first and second markets, which statement is FALSE? AThe First Market is an auction market BThe Second Market is a negotiated market CThe First Market has listing standards DThe Second Market has listing standards

The best answer is D. Each exchange with a trading floor is an auction market (First Market). The over-the-counter market (Second Market) is a negotiated market. OTC equities are quoted in either the OTCBB or the Pink OTC Market. These "quotations vendors" have no listing standards. In contrast, each exchange has its own listing standards.

A no-load mutual fund: Acannot charge a management fee and cannot charge a 12b-1 fee Bcannot charge a management fee, but can charge an annual 12b-1 fee limited to .25% Ccan charge a management fee, but cannot charge a 12b-1 fee Dcan charge a management fee and can charge an annual 12b-1 fee limited to .25%

The best answer is D. FINRA allows a mutual fund to call itself "no load" (as in no sales charge) as long as the maximum annual 12b-1 fee does not exceed .25%. Otherwise, the fund is subject to a FINRA maximum annual 12b-1 fee limitation of .75%. Note, in contrast, that if a fund wishes to advertise itself as a "pure no-load fund" then it cannot charge any 12b-1 fees. Finally, generally all mutual funds charge management fees.

Unless specific authorization is given, all of the following accounts cannot be opened as margin accounts EXCEPT a: ATrust Account BCustodial Account CGuardian Account DJoint Tenants Account

The best answer is D. Fiduciary accounts cannot be opened as margin accounts unless the account documentation specifically authorizes the opening of such an account. For example, if a Trust document does not authorize the opening of the Trust account as a margin account, then it must be opened as a cash account. Fiduciary accounts include Trust accounts, Custodial accounts, and Guardian accounts - in each of these there is a Third Party managing the assets in the account for the beneficiary. A Joint Tenants account is not a fiduciary account - each tenant is a direct account owner and can manage the account (place orders) directly.

A married couple opens a joint margin account. The brokerage firm will send the Internal Revenue Service Form 1099 (Report of Interest and Dividends Earned) to the: Ahusband only Bwife only Chusband on one report; and the wife on another report Dperson whose social security number was given on the account form

The best answer is D. Form 1099s (Reports of Interest and Dividends Earned) are sent to the customer whose social security number appears on the account. If it is a joint account, then the parties to the account must decide which 1 person's social security number will be used. The Form 1099 is sent to that 1 party in the account. It is up to the joint owners to allocate the proper share of income as shown on that report onto their personal tax returns.

All of the following statements are true regarding municipal bonds that have been called EXCEPT: Ainterest ceases to accrue on the bonds Bthe call price sets a ceiling on the market price of the bonds Cthe holder may redeem the bonds at anytime Dthe bonds will continue to trade "and interest"

The best answer is D. If a bond issue is called, interest ceases to accrue as of the date specified in the call. Thus, the bond will now trade "flat" - that is, without accrued interest. The call price will set a ceiling on the market price of the bond. Meaning, the market price of the bond will never go above the call price; if it did and the bonds were called, investors would suffer a loss. The bond can be tendered anytime thereafter, at which point the bondholder will be paid par value plus any specified call premium. The call price would not set the floor on the market price of the bonds as the market could go below the call price (which could occur if market interest rates started to rise).v

If a firm effects trades solely on an agency basis, the firm: I carries inventory II does not carry inventory III is a market maker IV is not a market maker AI and III BI and IV CII and III DII and IV

The best answer is D. If a firm effects trades solely on an agency basis, it carries no inventory and is not a market maker.

If the U.S. dollar appreciates against foreign currencies, which statements are TRUE? I U.S. exports should increase II U.S. exports should decrease III Any trade deficit should narrow IV Any trade deficit should widen AI and III BI and IV CII and III DII and IV

The best answer is D. If the U.S. dollar appreciates against foreign currencies, then U.S. goods become more expensive to foreigners, while foreign goods become cheaper in the U.S. This should cause exports to decrease, and imports to increase. If the U.S. is running a trade deficit, the increase in net imports will widen the deficit.

If the writer of a call contract is assigned, the call writer must: Apay the strike price for the security in next business day Bpay the strike price for the security in 2 business days Cdeliver the security the next business day Ddeliver the security in 2 business days

The best answer is D. If the writer of a call is "assigned," this means that the OCC has assigned an exercise notice to that call writer. The call writer is then obligated to deliver the stock to the call holder in a regular way trade, with the transaction price being the strike price. Regular way settlement of stock trades occurs 2 business days after trade (exercise) date.

A customer sells 1 XYZ July 45 Call @ $2 after having purchased 100 shares of XYZ @ $42 per share. If the customer is exercised, the tax consequences are: I cost basis of $40 per share II cost basis of $42 per share III sale proceeds of $44 per share IV sale proceeds of $47 per share AI and III BI and IV CII and III DII and IV

The best answer is D. The customer purchased the stock at $42 for a cost basis of $42 for tax purposes. When the call is exercised, the customer must sell the stock at the strike price of $45. Since the customer also received $2 in premiums from the sale of the call, this is included in the sale proceeds for tax purposes. The sale proceeds are thus $45 + $2 = $47 per share. The net taxable gain is: Cost Basis of $42 - Sale Proceeds of $47 = Taxable Gain of $5 per share.

As the initial transaction in a new margin account, a customer buys 1,000 shares of XYZ stock at $30. The market value increases to $50. Which statements are TRUE? I Equity increases by $10,000 II Equity increases by $20,000 III SMA increases by $5,000 IV SMA increases by $10,000 AI and III BI and IV CII and III DII and IV

The best answer is D. In a long margin account for every $1 rise in market value, equity will increase by $1. Since initial margin is set at 50%, for every $1 rise in market value, SMA increases by $.50 (that is, 50% of the market value increase can be borrowed). This account's equity went up $20,000; so the SMA would go up by 1/2 that amount, or by $10,000. Initially, the account sets up as: Long Market Value - Debit = Equity % SMA $30,000 $15,000 $15,000 50% 0 After the increase in market value, the stock is worth $50,000. The account now shows: Long Market Value - Debit = Equity % SMA $50,000 $15,000 $35,000 70% $10,000 The SMA can be computed in either of 2 ways. The additional amount that can be borrowed is 1/2 of the market value increase. 1/2 of $20,000 = $10,000. Or, 1/2 of the current market value can be borrowed in total. 1/2 of $50,000 = $25,000. Since the existing debit is $15,000, an additional $10,000 can be borrowed.

A customer, age 51, has a 20 year investment time horizon, a moderate risk tolerance, and is looking for investments that provide both income and growth. The best recommendation would be: Amoney market instruments Bmutual funds Cbonds Dlarge capitalization growth stocks

The best answer is D. Money market instruments are very safe, but provide little income and no growth. These would be recommended to a customer seeking preservation of capital - not to a customer seeking income and growth. Choice B, mutual funds, is too generic to be a valid choice. There are all kinds of mutual funds out there, for all types of investment objectives. Choice C, bonds, is also too generic to be a valid choice. Also, while bonds provide income, they do not provide growth. Choice D, large capitalization growth stocks, is the best one offered. Large capitalization stocks pay dividends for income, and also offer long term growth potential, meeting both of the customer's objectives.

The DMM (Specialist) on the NYSE, just prior to market opening, has orders to sell 100,000,000 shares of ABC stock at the open, but only has orders to buy 5,000,000 shares. Because of the extreme order imbalance, the DMM, at the open, displays "ABC - OPD" on the Network A Tape. Which statement about this is FALSE? AThe NYSE has delayed the opening of the stock BOther markets are permitted to trade the stock CThis is a non-regulatory trading halt DAny other market that wishes to trade the stock during the halt must get prior FINRA approval

The best answer is D. OPD stands for "Opening Delayed." This is a non-regulatory halt, which is quite different from a "halt" imposed by a regulator, such as the SEC or FINRA. For example, in the "good old days," the NYSE would routinely delay the opening of trading in a stock if there was a large opening order imbalance (many more opening sell orders than buy orders). During the halt, the Specialist/DMM would attempt to round up matching buy orders, so that there could be an orderly opening. The NYSE learned that this was not such a great idea, because institutions that could not trade the stock on the NYSE simply went to regional exchanges, Third Market Makers and ECNs to do their trades instead. So each time the NYSE did this, they lost market share! Needless to say, they don't do this anymore - except in test questions of course!

REITs can invest in all of the following EXCEPT: Amortgages Breal estate Cgovernment securities Ddirect participation programs

The best answer is D. REITs do not invest in direct participation programs (limited partnerships), which are tax shelter vehicles. This makes sense because REITs cannot pass losses to their shareholders. They invest primarily in real estate and mortgages; excess funds can be invested in securities (however, under the tax code, at least 75% of the REIT's assets must be invested in real estate or mortgages). Therefore, a REIT may put up to 25% of its assets in "cash assets" (such as Treasury Bills) to earn interest income during periods when the trust is not fully invested in real estate.

All of the following are actively traded in the secondary market EXCEPT: AReal estate investment trusts BClosed end funds CCorporate stock DMutual funds

The best answer is D. REITs, closed end funds, and corporate stock are listed on exchanges or OTC and are traded like all other stocks. Mutual funds (open-end funds) are redeemable with the sponsor - they do not trade.

Which statement is TRUE regarding rights? A Rights give the holder the long term option to buy stock BRights typically give the holder a 6-9 month option to buy stock CThe exercise price of a right is set at a premium to the stock's current market price DThe exercise price of a right is set at a discount to the stock's current market price

The best answer is D. Rights are very short term options (about 1 or 2 months) that give existing shareholders the right to subscribe to new shares at a discount to the stock's current market price. Warrants give the holder the long term option to buy stock - they usually have a life of 5 years or so.They are attached by the issuer to preferred stock or bond offerings to make the deal more attractive to investors. At issuance, the exercise price of a warrant is set at a premium to the stock's current market price. Thus, for a warrant to have real value, the price of the common stock must subsequently rise in the market.

Which statements are TRUE? I Rule 144A issues trade on the NYSE, AMEX and NASDAQ II Rule 144A issues trade on PORTAL III The general public can trade Rule 144A issues IV Only QIBs can trade Rule 144A issues AI and III BI and IV CII and III DII and IV

The best answer is D. Rule 144A issues are private placement securities sold in minimum $500,000 blocks only to QIBs - Qualified Institutional Buyers (institutions with at least $100MM of assets available for investment). Whereas normal private placements cannot be traded, these can be traded from QIB to QIB. The market for this is PORTAL, but trading activity is thin in this market, especially as compared to the market for publicly traded securities.

All of the following statements about Securities Investor Protection Corporation (SIPC) are true EXCEPT: ASIPC is a government sponsored non-profit corporation BSIPC is an insurance fund protecting customer accounts against broker-dealer insolvency Cevery broker-dealer registered under the Securities Exchange Act of 1934 must be a member of SIPC DSIPC protects the full balance in each customer account

The best answer is D. Securities Investor Protection Corporation is a non-profit membership corporation, composed of all broker-dealers registered under the Securities Exchange Act of 1934. SIPC is government sponsored, but is not an agency of the U.S. Government. SIPC insures customer accounts at broker-dealers for up to $500,000, inclusive of maximum cash coverage of $250,000.

What securities offering must be registered with the SEC? A Rule 144 B Rule 144A C Rule 506 D Rule 415

The best answer is D. Shelf offerings under Rule 415 allow seasoned issuers to file a blanket registration statement that goes on the SEC's "shelf," good for 3 years. The issuer simply gives 2 day notice to the SEC and can sell. This is a simplified registration process. Regulation D is the private placement exemption from registration. It basically states that private placements that are not offered to the general public are exempt from registration. Rule 506 (the major rule under Regulation D) states that if an offering is made to a maximum of 35 non-accredited investors and to an unlimited number of accredited (wealthy) investors, then it is exempt from SEC registration. Rule 144 allows holders of restricted private placement stock to sell the shares in the market, as long as the company has gone public. If the provisions of the rule are followed, the SEC allows the transfer agent to register the shares, and they become freely tradable in the market. No registration statement is required to do this. Rule 144A states that issuers can sell "private placements" in large block sizes (typically $500,000 or more per unit) to QIBs - Qualified Institutional Buyers - without having to register them with the SEC. A QIB is an institution with at least $100 million available for investment. Rule 144A solves a problem with private placements for QIBs - the fact that they are illiquid. Rule 144A issues can be traded from QIB to QIB in the "PORTAL" market. This opens up the market for these securities to large institutional investors, who would not buy unless they knew they could sell the holding at will.

A 12%, $1,000 par corporate bond is trading at $900. What is the current yield? A9% B10% C12% D13.3%

The best answer is D. Since the bond is trading at a discount, its current yield must be greater than its coupon. The formula to find the current yield is: Annual Interest/Market Price= Current Yield $120 _______ $900 = 13.3%

Stockholders' Equity (Net Worth) is affected by all of the following EXCEPT: Adeclaration of a cash dividend Bthe purchase of Treasury stock Cthe issuance of new stock Ddeclaration of a stock dividend

The best answer is D. Stockholders' Equity consists of: Common at Par + Capital in Excess of Par + Retained Earnings. When a cash dividend is declared, it is deducted (debited) from Retained Earnings and credited to Dividends Payable - a current liability. Thus, Stockholders' Equity drops. When Treasury Stock is purchased, Common at Par and Capital in Excess of Par are reduced by the purchase amount and cash (a current asset) is reduced (to reflect the payment made to buy the Treasury stock). Thus, Stockholders' Equity decreases. When new stock is issued, Common at Par and Capital in Excess of Par are increased by the sale amount and cash (a current asset) is increased (to reflect the cash received from selling the new stock). Thus, Stockholders' Equity increases. When a stock dividend is "paid," it is debited to Retained Earnings (a reduction) and credited to Common at Par and Capital in Excess of Par. Since these are all accounts within Stockholders' Equity, there is no net change to the total Stockholders' Equity amount.

A registered representative wishes to appear in a television commercial about options strategies. Which statement is TRUE? ANo approval is required BThe commercial must be approved in advance by the Branch Manager CThe commercial must be approved in advance by the General Principal DThe commercial must be approved in advance by the designated Registered Options Principal

The best answer is D. Television commercials are defined as advertisements. All options communications must be approved in writing prior to use, by a designated Registered Options Principal (ROP). This is the main office compliance ROP. In addition, any communication that is not accompanied or preceded by the ODD (Options Disclosure Document) must be filed with the Exchange at least 10 days in advance of use. Branch managers supervising options are responsible for supervising customer options accounts, approving the opening of options accounts and transactions in options accounts

Which of the following will decrease the tax basis of a limited partnership interest? I Cash contribution II Cash distribution III Distributive share of partnership income IV Distributive share of partnership loss AI and III BI and IV CII and III DII and IV

The best answer is D. The "basis" is the theoretical value of the investment in the partnership. The "basis" amount establishes the limit of tax deductions that may be taken by the partner - so the larger the basis, the better it is for the partner. Cash contributions and assumption of debt will increase the basis (more money going into the partnership investment). In addition, each partner's "distributive" share of income increases the basis (this is income that is retained in the partnership that has not physically been sent to the partner). Cash distributions and pay down of debt by the partnership reduce the basis (this is cash being paid out of the partnership). In addition, each partner's "distributive" share of losses decreases the basis (these are losses that are retained in the partnership that have not physically been sent to the partner).

If a Municipal Finance Professional gives more than $250 to an elected official's campaign in which the MFP is entitled to vote, then the: AMFP is banned for 1 year from being associated with a municipal securities dealer Bmunicipal securities firm employing the MFP is banned for 1 year from engaging in municipal securities business with that issuer CMFP is banned for 2 years from being associated with a municipal securities dealer Dmunicipal securities firm employing the MFP is banned for 2 years from engaging in municipal securities business with that issuer

The best answer is D. The MSRB political contribution rule is intended to stop so-called "pay to play" practices, where a person associated with a municipal firm would give large dollar contributions to the campaign of an elected official, and in return, the elected official would steer that issuer's upcoming underwritings to that municipal firm. The maximum amount that can be given by an MFP to an elected official's campaign in which the MFP is entitled to vote is $250 without any problems. If more than $250 is contributed, then that firm is banned from engaging in municipal securities business with that issuer for the next 2 years.

All of the following statements are true about "odd lot" transactions EXCEPT: Aorders for odd lot amounts have no standing on the NYSE trading floor Ban odd lot is an order for less than the normal trading unit of 100 shares Codd lot transactions are handled by the Specialist (DMM) Dodd lot commissions are set by the NYSE

The best answer is D. The NYSE does not set commission rates - these are set by brokers and dealers themselves. Odd lots are transactions for less than the normal trading unit of 100 shares. Odd lot orders are handled by the Specialist (now renamed the DMM - Designated Market Maker), by buying the odd lot into the Specialist's (DMM's) inventory account; or selling the odd lot out of the Specialist's (DMM's) inventory account. Orders for odd lots have no priority on the NYSE trading floor - trading is in round lot units only.

A customer sells short 100 shares of ABC stock at $63 per share. The stock falls to $47, at which point the customer writes 1 ABC Sept 45 Put at $2. The stock falls to $36 and the put is exercised. The customer's gain per share is: A$16 B$17 C$18 D$20

The best answer is D. The customer sold the stock short at $63 per share (sale proceeds). Later, the customer sold a Sept 45 Put @ $2 on this stock. If the short put is exercised, the customer is obligated to buy the stock at $45 per share. Since the customer received $2 in premiums when the put was sold, the net cost to the customer is $43 per share for the stock (this is the cost basis in the stock for tax purposes). The stock that has been purchased is delivered to cover the short sale, closing the transaction. The customer's gain is: $63 sale proceeds - $43 cost basis = 20 point gain.

All of the following should be considered when determining the suitability of a municipal bond recommendation EXCEPT the customer's: Astate of permanent residence Btax bracket Cfinancial background Dformal education level

The best answer is D. The customer's education level is of no relevance in making a securities recommendation (people can be educated smart, and people can be street smart as well!) State of residence is important for a municipal bond recommendation, since if the purchaser is a resident of the issuing state, then the state exempts that issue from state and local tax (in addition to the Federal tax exemption). Tax bracket is important because municipal yields are lower than those of taxable investments; and the customer's tax bracket must be high enough to justify this type of investment. Financial background information such as income, net worth, and other investments, is needed to recommend the right type of municipal bond to the customer.

A municipal bond "tax swap" is described by which of the following? I The purchase and sale of identical bonds II The purchase and sale of similar, but not identical bonds III The "swap" is employed to incur a capital gain for that year IV The "swap" is employed to incur a capital loss for that year AI and III BI and IV CII and III DII and IV

The best answer is D. The definition of a municipal bond tax swap is the purchase and sale of similar, but not identical bonds, to incur a tax deductible capital loss for that year. The bonds cannot be identical, otherwise the wash sale rule comes into play.

DEF Corporation Income Statement Net Sales $30,000,000 Cost of Goods Sold 15,000,000 Gross Margin 15,000,000 Operating Expenses 5,000,000 Operating Income 10,000,000 Bond Interest 2,000,000 Net Income Before Tax 8,000,000 Tax at 50% 4,000,000 Net Income After Tax $4,000,000 What is DEF's bond interest coverage ratio? A 2:1 B 3:1 C 4:1 D 5:1

The best answer is D. The formula for the Interest Coverage Ratio is: Total Income Before Bond Interest Expense/Annual Bond Interest Expense= Interest Coverage Ratio $10,000,000 _________________ $2,000,000 = 5 x

The sponsor of a mutual fund is also known as the: ABank BManager CCustodian DUnderwriter

The best answer is D. The fund underwriter is also known as the fund sponsor. The sponsor is responsible for establishing the fund in compliance with the requirements of the Investment Company Act of 1940.

The investment adviser of a mutual fund determines all of the following EXCEPT: Apurchases of securities into the portfolio Bsales of the securities from the portfolio Cpercentage of cash or equivalents held in the portfolio Dinvestment objective of the fund

The best answer is D. The investment objective for a mutual fund is initially set by the sponsor; and can only be changed by majority vote of the fund's outstanding shares. The investment adviser decides which securities to buy and sell in the portfolio; and decides the timing of these transactions.

If it is now December, regular options contracts could be traded with all of the following expirations EXCEPT: AJanuary BApril CJuly DNovember

The best answer is D. The maximum life of a regular stock option contract is 8 months (this may be tested as 9 months, though). Longer term stock options, known as LEAPs (Long Term Equity AnticiPation options) have a maximum life of 28 months.

Portfolio margining: I is suitable for unsophisticated investors II is suitable for sophisticated investors III requires a minimum account equity of $2,000 IV requires a minimum account equity of $100,000 AI and III BI and IV CII and III DII and IV

The best answer is D. The minimum equity to open a portfolio margin account for an individual customer is $100,000. This compares to the minimum equity requirement of $2,000 for a regular margin account. Portfolio margin can only be used by institutional or wealthy sophisticated individual customers. To open a portfolio margin account, the account must be qualified for naked options writing, which requires a more-detailed suitability determination showing that the customer is sophisticated and able to bear loss. Such an account requires not only branch manager approval, but also separate approval of a designated Registered Options Principal.

The penalty tax applied for not taking required minimum distribution from a qualified retirement plan in a given year is: A6% of the shortfall B10% of the shortfall C15% of the shortfall D50% of the shortfall

The best answer is D. The penalty applied for not taking required minimum distributions from a qualified plan starting at age 72 is 50% of the under-distribution. There is an incentive to take the money out and pay tax on it, which is what the Treasury is really looking for!

In May, a customer buys 100 shares of ABC stock at $50 and buys 1 OEX Aug 500 Put @ $5. In August, the OEX is at 470, while the stock is at $45. The put is exercised and the stock position is sold at the current market price. The customer has a: A$500 loss B$1,000 loss C$1,500 profit D$2,000 profit

The best answer is D. The stock is bought at $50 and sold for $45, for a 5 point ($500) loss. The index put option is purchased at a premium of 5 and then exercised when the contract is 30 points in the money (500 strike price versus 470 index value = 30 points "in the money"). Since index options settle in cash when exercised, the holder will receive 30 points or $3,000. The gain on option is 30 - 5 initial premium = $2,500. The net gain on both positions is: -$500 on the stock and +$2,500 on the option = +$2,000.

Under Regulation M, which statement is TRUE regarding stabilizing bids entered by market makers? AStabilizing bids can only be maintained for 5 consecutive business days BStabilizing bids can only be maintained for 30 calendar days CStabilizing bids can only be maintained for 45 calendar days DThere is no time limitation on the period that a stabilizing bid can be maintained

The best answer is D. There is no time limitation on the period that a stabilizing bid can be maintained under Regulation M. However, stabilization must cease when the syndicate is broken by the manager.

A customer opens a short margin account by selling short 600 shares of XYZ stock at $80 per share and deposits the required margin. If the stock increases in value by 25%, the customer's equity in the account will: Aremain unchanged Bdecrease by 12.5% Cdecrease by 25% Ddecrease by 50%

The best answer is D. This customer account sets up as: Credit Balance-Short Market Value=Equity% Sale $48,000 $48,000 $0 Margin $24,000 $24,000 $72,000 $48,000 $24,000 50% If the market value increases by 25%, the new market value will be 125% of $48,000 = $60,000. The account will now show: Credit Balance-Short Market Value=Equity % $72,000 $60,000 $12,000 20 The equity has decreased from $24,000 to $12,000 - a 50% decrease.

A customer opens a margin account by purchasing 300 shares of XYZ stock at $80 per share and deposits the required margin. If the stock declines in value by 25%, the customer's equity in the account will: Aremain unchanged Bdecline by 12.5% Cdecline by 25% Ddecline by 50%

The best answer is D. This customer account sets up as: Long Market Value - Debit = Equity % $24,000 $12,000 $12,000 50% If the market value declines by 25%, the new market value will be 75% of $24,000 = $18,000. The account will now show: Long Market Value - Debit = Equity % $18,000 $12,000 $6,000 33% The equity has dropped from $12,000 to $6,000 - a 50% decline.

A customer is long 100 shares of ABC stock purchased at $30. The stock is now trading at $42. The customer believes that the stock has the potential to move up to $55 a share, but no further. The customer would like to generate extra income and also enjoy the limited upside gain potential in the stock. To do this, the customer should: Abuy 1 ABC Jan 40 Call Bsell 1 ABC Jan 40 Call Cbuy 1 ABC Jan 55 Call Dsell 1 ABC Jan 55 Call

The best answer is D. This customer bought the stock at $30, and it is now worth $42. The customer believes that the stock will rise to $55, so he does not want to sell a 40 call on that stock (since it will be called away if the price stays above $40). If the customer sells a 55 call, the customer will collect a smaller premium, but he or she will collect something - so this meets the requirement to generate income. As long as the stock price does not rise above $55, the customer will enjoy the price rise in the stock and the stock will not be called away.

A wealthy, sophisticated investor with a high risk tolerance has just turned extremely bearish on the market. To profit from this, the BEST recommendation to the client would be to: Abuy index calls Bbuy index puts Cbuy inverse floaters Dbuy leveraged inverse ETFs

The best answer is D. This customer has just turned "extremely bearish" on the market, meaning he thinks that equities are going to fall rapidly in price. The customer is wealthy, sophisticated, and has a high risk tolerance. The most aggressive choice offered is the leveraged inverse ETF. Assume it is a 300% leveraged inverse ETF based on the S&P 500 Index. If the index falls by 15%, this ETF should rise by 3 x 15% = 45%. (Of course, if the customer is wrong and the index rises, then the customer loses big time!) Also note that an inverse floater is a type of bond where when market interest rates rise, its interest rate "floats" and is adjusted downwards by the increase in interest rates. Thus, when interest rates rise, its interest rate will "float" down (and remember that lower coupon bonds lose value more rapidly in a rising interest rate environment). For the exam, just know that an "inverse floater" is a wrong answer.

Which statements are TRUE about meeting a Regulation T call for initial margin? I 50% of the call amount must be deposited in cash II 100% of the call amount must be deposited in cash III 100% of the call amount must be deposited in fully paid securities IV 200% of the call amount must be deposited in fully paid securities AI and III BI and IV CII and III DII and IV

The best answer is D. To meet a Regulation T call, either the entire call amount must be deposited in cash; or twice the call amount must be deposited in fully paid securities (which have a loan value of 50% of the market value that is used to meet the call).

A customer shorts 1,000 shares of ABC stock @ $5 per share in a margin account. The customer must deposit: A$2,000 B$2,500 C$4,000 D$5,000

The best answer is D. To short a stock priced from $10 down to $5, the minimum is $5 per share. Thus, to short 1,000 shares at $5, $5,000 must be deposited. Note that this minimum set by FINRA is greater than the Regulation T requirement of 50%. Also note that to short a stock under $5, the minimum rule changes to the greater of 100% or $2.50 per share.

All of the following trade securities on the New York Stock Exchange EXCEPT: ATwo dollar broker BFloor broker CSpecialist (DMM) DOrder Book Official (OBO)

The best answer is D. Two dollar brokers, Specialists, and Floor brokers execute transactions on the NYSE. The Specialist (now renamed the DMM - Designated Market Maker) is the assigned market maker in a security on the NYSE floor. The Floor Broker handles orders as agent for retail member firms. The Two Dollar Broker executes orders for retail member firms, usually when its Floor Brokers are too busy. The name comes from the fact that they used to charge $2 per trade. Order Book Officials, who solely handle the book of public orders, are only used on the Chicago Board Options Exchange.

Under FINRA rules, an alteration to an order ticket for an order submitted to the NYSE trading floor is prohibited: Aunder all circumstances Bunless the alteration is approved in writing by a Floor Governor of the exchange Cunless the alteration is approved in writing by the Specialist (DMM) on the floor of the exchange Dunless the alteration is approved in writing by Branch Office Manager

The best answer is D. Under FINRA rules, alterations to order tickets are prohibited, unless the alteration is approved in writing by a "designated person" such as a branch manager. This person must understand all of the facts surrounding the alteration before approving of the change, and is responsible for the change.

A customer wishes to purchase $100,000 face amount of municipal bonds that the broker-dealer does not have in inventory. Under MSRB rules, the firm should: Asell short the security to the customer Brefer the customer to a municipal firm that has the bonds in inventory Ccontact at least 5 dealers and obtain quotes for the customer Dcontact enough dealers so that a reasonable market quote is obtained

The best answer is D. Under MSRB rules, when a municipal dealer acts in an agency capacity, the price charged must be representative of the market for that type of security. There is no requirement to obtain a pre-set number of quotes (as a contrast, FINRA requires that a minimum of 3 quotes be obtained for non-NASDAQ OTC issues, meaning OTCBB or Pink Sheet issues), nor is there a requirement to direct the customer to a dealer that physically has those bonds. The dealer would not sell short the bonds to the customer, since short covering is very difficult in the thinly traded municipal market.

Under NYSE rules, a company moving its listing from another market must meet which requirements? I 100,000 publicly held shares II 1,100,000 publicly held shares III $10,000,000 aggregate market value of publicly held shares IV $100,000,000 aggregate market value of publicly held shares AI and III BI and IV CII and III DII and IV

The best answer is D. Under NYSE rules, the numerical standards for a company wishing to move its listing from another market include 2,200 or more shareholders, with an average monthly trading volume of 100,000 shares for the past 6 months. There must be 1,100,000 publicly held shares with an aggregate market value of $100,000,000.

Pitter Patter Water Authority "Flow of Funds" Statement 20XX Water Charges: $6,000,000 Interest on Reserve Funds: $2,000,000 Gross revenues: $8,000,000 Operation and Maint: $4,000,000 Net Revenues: $4,000,000 Debt Service: $2,000,000 Addition to Reserves: $2,000,000 If the bonds were issued under a gross lien revenue pledge, how much in funds were available to pay the bondholders for this year? A$2,000,000 B$4,000,000 C$6,000,000 D$8,000,000

The best answer is D. Under a gross revenue pledge, all revenues from all sources (including investment income) are pledged to pay the bondholders prior to the payment of operation and maintenance. This water authority collected $8,000,000 in gross revenues - which would be the amount available to pay the bondholders under a gross revenue pledge.

What is a characteristic of a Unit Investment Trust? AHigh portfolio turnover BDisclosure of the identity of the investment adviser CBoard of directors overseeing investments DSecurities that are redeemable with the sponsor

The best answer is D. Unit Investment Trusts (UITs) create a fixed portfolio, transfer it into a trust, and then sell units of the trust (typically $1,000 amounts) that are sold to investors. For that $1,000 investment, the client gets a piece of a diversified portfolio. Once the trust is created, the portfolio does not change. There is no investment adviser and no management fees. There is no Board of Directors (as is the case with a mutual fund) - rather there is a Board of Trustees. The true statement is that the securities are redeemable. There is no trading. The sponsor will buy back trust units from clients that wish to sell. These "slightly used" units are then resold to other investors by the sponsor.

If a limited partnership is dissolved, the priority of claim to partnership income and assets is: Ageneral creditor, general partner, secured creditor, limited partner Bgeneral creditor, secured creditor, general partner, limited partner Csecured creditor, general creditor, general partner, limited partner Dsecured creditor, general creditor, limited partner, general partner

The best answer is D. When a limited partnership is liquidated, secured lenders have first claim, followed by general creditors, followed by limited partners, followed by the general partner.

A customer buys 100 shares of XYZ stock at $36 and buys 1 XYZ Jan 35 Put @ $6 on the same day. For tax purposes, what is the cost basis of the stock? A$30 B$36 C$41 D$42

The best answer is D. When a put is purchased on a stock on the same day that the stock is bought, the put is said to be "married" to the stock position. The only reason the option was purchased was to protect the customer against loss if the market for the stock fell. It was not purchased to speculate in the market. The IRS treats a "married" put as part of the cost basis of the stock. Notice that, therefore, the put premium cannot be deducted as a capital loss if the put expires worthless; instead, it has increased the stock's cost basis and will reduce any potential capital gain, when, and if, the stock is sold. As one would expect, this is the tax treatment that is most beneficial to the IRS and least beneficial to the investor. The cost of the stock is $36 + $6 premium = $42 per share. When the stock is sold the customer reports a capital gain or loss based on the sale price of the stock.

When the investment performance of each asset class varies from the anticipated rate of return, the: A selection of the type and number of asset classes used for the portfolio must be changed B target allocation percentages assigned to each asset class must be changed C tactical limits on target allocation percentages for each asset class must be changed D portfolio must be rebalanced by liquidating portions of overperforming classes and investing the proceeds in underperforming classes

The best answer is D. When investment performance varies over time from one asset class to another, the target percentage allocations will shift from their optimal setting. To bring the portfolio back to these targets, it must be rebalanced - that is, a portion of the overperforming class(es) must be sold off and the proceeds reinvested in the underperforming class(es).

A customer buys a 10% G.O. bond at par. The issue is callable in 5 years at par and matures in 10 years. Which statement is TRUE? AThe yield to call is higher than the yield to maturity BThe yield to call is lower than the yield to maturity CThe yield to call is the same as the yield to maturity DThe nominal yield is higher than either the yield to call or yield to maturity

he best answer is C. Since the bond is purchased at par, there is no premium to be amortized over the life of the bond nor is there a discount to be accreted over the life of the bond. Thus, the nominal yield and the yield to maturity are the same. If the bond is called early at par, again since there is no discount or premium, the nominal yield and the yield to call are the same. The yield to call will be higher than the yield to maturity if there is a substantial call premium or if the bond was purchased at a discount. The yield to call will be lower than the yield to maturity if the bond was purchased at a premium (which will be lost faster if the bond is called early).