Missed Series 7 Questions

Which of the following choices is NOT considered a short-term municipal note? A A RAN B A TAN C A BAN D An AON

All of the choices given are the acronyms for short-term municipal notes except an AON, which are the letters for an all-or-none order. RAN is the acronym for a revenue anticipation note, BAN for a bond anticipation note, and TAN for a tax anticipation note. An AON

A dealer will NOT consider which of the following factors when determining the markup on a transaction? A The dollar amount involved in the transaction B The availability of the securities C Expenses incurred in doing the trade D The 5% markup policy if the transaction involves a municipal bond

All of the choices listed need to be considered except the 5% markup policy. This is due to the fact that municipal bond transactions are exempt from the 5% policy. MSRB rules require a broker-dealer to obtain a price that's fair and reasonable based on prevailing market conditions. The 5% markup policy if the transaction involves a municipal bond

Which of the following increases would NOT indicate a deteriorating credit situation for a municipality? A An increase in municipal assessed valuations B An increase in per-capita debt C An increase in tax delinquencies D An increase in personal bankruptcies

All of the items listed would be indications of a deteriorating credit situation except an increase in municipal assessed valuations. This indicates that property values have increased, thereby generating a higher tax base. An increase in municipal assessed valuations

Which of the following investors would be LEAST suitable for an oil and gas direct participation program (DPP)? A An investor in the highest federal tax bracket B A retired investor who is in the highest federal tax bracket C An investor who is concerned about the alternative minimum tax D An investor who recently inherited $5,000,000

An investment in an oil and gas limited partnership may have excess depletion and depreciation as well as excess intangible drilling costs. These are tax preference items and may result in an investor being subject to the alternative minimum tax (AMT). The other investors may or may not be suitable for an oil and gas DPP. It would depend on many other factors. However, an investor concerned about the AMT would not want to invest in a security that normally has tax preference items. (73594) An investor who is concerned about the alternative minimum tax

A bond that's owned by an ETF has recently matured. What happens with the proceeds that result from the bond's maturity? A They will be re-distributed to the ETF's shareholders. B They will be held in the ETF's trust until the ETF matures. C The ETF manager will reinvest them into another bond. D They must be held in a custodian bank and invested in T-bills.

Exchange-traded funds (ETFs) are managed just like mutual funds. Cash in the fund, including the proceeds from maturing bonds, will be reinvested into other bonds for the portfolio. ETF managers will often distribute investment income, but typically not the par value on a maturing bond. The ETF manager will reinvest them into another bond.

An exercise limit is the maximum number of options contracts that a customer may exercise in a five-consecutive-business-day period for each: A Account that she maintains at each brokerage firm B Underlying stock on each side of the market C Series of options in an underlying stock D Underlying stock on the long side of the market only

Exercise limits relate to the maximum number of contracts that an individual may exercise during a five-business-day period for each underlying stock on each side of the market. Exercise and position limits apply cumulatively to all accounts that a customer maintains at all brokerage firms, not for each account at each firm. Underlying stock on each side of the market

A registered representative recently purchased a new vacation home and is in the process of renovating it. The RR is disputing an overage expense of $14,000 with her contractor, but the contractor responds by filing a lien against the RR. What's the BEST course of action for the RR to take? A Contact the contractor and attempt to settle the matter using arbitration. B File an updated Form U4. C Take no action until the lien is satisfied. D Take no action since the amount of the lien doesn't exceed $15,000.

Form U4 must be updated for any unsatisfied judgments or liens. Once the lien is settled, the RR is required to update her Form U4. The $15,000 threshold is only for investment-related arbitration, civil litigation, or complaints. File an updated Form U4.

From last to first, list the order of payments if a limited partnership declares bankruptcy. A Secured creditors, general partners, limited partners, general creditors B General creditors, limited partners, general partners, secured creditors C General partners, limited partners, general creditors, secured creditors D Secured creditors, general creditors, limited partners, general partners

If a limited partnership declares bankruptcy, state law provides a priority for settling accounts. The order for settling accounts is secured creditors, general or unsecured creditors, limited partners, and finally general partners. It's important to note that this question is asking for the reverse order (i.e., last to first). (25051) General partners, limited partners, general creditors, secured creditors

If a company declares a cash dividend, which of the following is TRUE? A Shareholders' equity increases B Shareholders' equity decreases C Current assets decrease D Current assets increase

It is important to note that this question refers to the declaration of a cash dividend, not the payment of a cash dividend. If a company declares a cash dividend, dividends payable (a current liability) will increase by the amount of the announced dividend and the retained earnings (part of shareholders' equity) will be reduced. The announcement has no impact on the assets of the company; however, assets will be reduced once the company actually pays the cash dividend. Regardless of the specific corporate transaction, the balance sheet must remain balanced. Shareholders' equity decreases

Which of the following statements concerning the characteristics of preferred stock is TRUE? A The securities have a fixed maturity date. B The price will fluctuate primarily because of changes in interest rates. C The price of these securities is more volatile than common stock. D The dividend will be paid annually.

Most preferred stock does not have a maturity date and there's no fixed date on which investors will receive their principal back. Preferred stocks are less volatile than common stock for the same company. As with bonds, the prices of preferred stocks are inversely related to the movement of interest rates. The dividend is typically paid quarterly, not annually. (25064) The price will fluctuate primarily because of changes in interest rates.

A customer is in her late 40s and is currently in the 15% tax bracket, but she's recently inherited $7 million. While visiting a broker-dealer, she informs a registered representative that she's a conservative investor and is seeking advice about how to invest the inheritance. Which of the following choices is the BEST method for investing the funds? A 20% in equities, 30% in Treasury bonds, and 50% in tax anticipation notes B 30% in equities, 20% in-state municipal bonds, 20% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in revenue anticipation notes, and 5% in tax-exempt money-market funds C 80% in equities, a 10% mixture of in-state and out-of-state municipal bonds, 10% in corporate bonds D 20% in-state municipal bonds, 20% in out-of-state municipal bonds, 20% in corporate bonds, 20% in Treasury bonds, 10% in revenue anticipation notes, and 10% in tax-exempt money- market funds

30% in equities, 20% in-state municipal bonds, 20% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in revenue anticipation notes, and 5% in tax-exempt money-market funds

An investor with an investment objective of tax-exempt income will need access to the funds in four months. An RR should NOT recommend which of the following municipal securities? A A variable-rate demand obligation (VRDO) B An auction-rate security (ARS) C A tax-anticipation note (TAN) D A bond anticipation note (BAN)

A VRDO and an ARS are both long-term securities with short-term trading features. A VRDO has a put feature that permits the holder to sell the securities back to the issuer or third party. An auction rate security (ARS) does not have this feature and, if the auction fails, the investor may not have immediate access to his funds. TANs and BANs are short-term municipal notes and, if their maturities extend four months, these securities can easily be sold in the secondary market. (73681) An auction-rate security (ARS)

According to FINRA rules, a breakpoint sale is: A A sale of mutual fund shares at a dollar level above the point at which a sales charge reduction is available and is acceptable B A sale of mutual fund shares at a dollar level that's below the point at which a sales charge reduction is available and is a violation CThe sale of investment company shares in anticipation of a distribution soon to be paid D Payment to a registered representative after retirement and is acceptable if a contract is established prior to retirement

A breakpoint sale is the prohibited act of selling mutual fund shares in dollar amounts just below the point at which the sales charge is reduced on quantity purchases. This practice is done to assess higher sales charges on transactions and is a violation of the FINRA rules. A sale of mutual fund shares at a dollar level that's below the point at which a sales charge reduction is available and is a violation

A security that pays a fixed amount twice a year, and also allows the holder to profit if the common stock rises, is known as a: A Warrant B Right C Convertible preferred stock D Convertible bond

A convertible bond pays interest on a semiannual basis (twice a year). Preferred stock pays a dividend to shareholders on a quarterly basis. A convertible security (bond or preferred stock) would allow an investor to convert the security into shares of the company's common stock, at a predetermined ratio. If a security is convertible into common stock, the price of the security will tend to move with the price of the stock. Convertible bond

A corporation wishes to open a cash account. Which of the following documents is required? A A corporate resolution B A copy of the corporate charter C A hypothecation agreement D A risk disclosure document

A corporate resolution authorizing a person to trade for the account is necessary to open a corporate cash account. A risk disclosure document may be required but only if options or penny stocks are going to be traded in the account. A hypothecation agreement and corporate charter are required to open a margin account. A corporate resolution

A corporation is about to go public. Its shares will be quoted on the OTCBB. A broker-dealer selling the securities in the aftermarket is required to deliver a prospectus to purchasers for how many days following the effective date of registration? A 25 B 40 C 90 D 120

A dealer selling securities in the secondary market must provide prospectuses to customers if new securities of that class were recently sold by the issuer under a registration statement. Prospectuses must be delivered for 40 days after the effective date in the case of issuers with publicly traded securities already outstanding, or 90 days for IPOs. There are two exceptions. If an issuer was subject to the reporting requirements of the Securities Exchange Act of 1934 prior to the filing of the registration statement, there is no aftermarket prospectus delivery requirement for dealers. If the issuer was not a reporting company prior to filing, but will be listed on an exchange including Nasdaq as of the effective date, the requirement applies for 25 days. The main purpose of this rule is to provide investors with information concerning an issue of securities. If the issuer was already a reporting company, information is readily available to the public through the SEC's EDGAR system. 90 Days

A broker-dealer that is an MSRB member firm sells bonds to one of its customers. If the broker-dealer is a member of the syndicate, the firm is entitled to the: A Takedown less the concession B Additional takedown plus the management fee C Total takedown less the management fee D Total takedown

A member of the syndicate is entitled to the additional takedown plus the concession, which is also known as the total takedown. Only the syndicate manager is entitled to the management fee. A broker-dealer that is not a member of the syndicate selling part of a new issue of municipal bonds is entitled to the concession. Total Takedown

Which of the following is NOT acceptable under a soft-dollar relationship? AProviding in-house research BProviding subscriptions to industry trade publications CProviding third-party research D Providing software for accounting services

A soft-dollar arrangement is a practice in which an investment adviser pays for research or other services from a broker-dealer with commission dollars rather than buying these services separately. Providing software for accounting services would not assist the client in making an investment decision. Providing software for accounting services

A 65-year-old individual has retired and started receiving money from a qualified variable annuity. Which of the following statements is NOT TRUE concerning the distributions from the annuity? A They're treated as capital gains for tax purposes. B They're treated as ordinary income for tax purposes. C They're fully taxable at the investor's tax bracket. D There's no early withdrawal penalty.

A tax-qualified variable annuity is one that's used as part of a qualified retirement plan. The funds contributed are a tax deduction (pre-tax monies), they grow tax-deferred, and are taxed as ordinary income when they're withdrawn. There is no exclusion allowance since the distribution has never been taxed. Also, since the individual is 65 years old at the time of the distributions, there's no early withdrawal penalty. An early withdrawal penalty is assessed if distributions are taken prior to the age of 59 1/2. (25069) They're treated as capital gains for tax purposes.

The advance-decline theory states that: A A bull market exists if the Dow industrials and transportations averages make new highs B A bear market exists if more put options have been purchased by investors than call options C It is bullish if more stocks go up than go down during the day D A large number of shares sold short is bullish

A technical indicator that measures the strength of the market by comparing the number of stocks that increase and decrease is called the advance-decline theory. It shows the general direction and breadth of a market movement on a given day. It is bullish if more stocks go up than go down during the day

Which of the following statements is NOT TRUE regarding a variable annuity accumulation unit? A It's an accounting measure used to determine an owner's interest during the pay-in phase. B It's an accounting measure used to determine an owner's interest during the payout phase. C The value of the units will fluctuate. D The value is tied to performance of the separate account.

Accumulation units are an accounting measure used to determine an owner's interest in the separate account during the accumulation or pay-in phase of a variable annuity. When an annuity has been annuitized, accumulation units are converted into annuity units, which are used to determine the annuitant's payments. The value of both accumulation and annuity units will vary based on the performance of the separate account. (25075) It's an accounting measure used to determine an owner's interest during the payout phase.

The breadth of the market is indicated best by the: A Put-call ratio B Advance-decline figures C Dow Jones Industrial Average D Short interest ratio

Advance-decline information indicates the number of stocks that increased versus the number of stocks that decreased during a particular trading day. When used in conjunction with stock averages or indexes, the advance-decline figures will show whether a market movement has breadth (i.e., whether it is broad-based or just limited to the stocks in the index or average). Advance-decline figures

When limited partnership interests are sold to a customer, which of the following must be certified by a registered representative? A That the customer has been advised by an accountant B That the customer is a qualified institutional buyer (QIB) C That the customer has a sufficient net worth to lose the entire investment D That the customer has received and read the prospectus

After obtaining information about the customer's investment objectives, financial and tax status, and future financial needs, the RR must have reasonable grounds to believe the customer has sufficient net worth and income to lose his entire investment and has other liquid assets. There's no requirement to certify that the customer has been advised by an accountant or an attorney. Limited partnerships are not required to be sold exclusively to QIBs and most partnerships are sold through private placements which don't require the delivery of a prospectus. (25071) That the customer has a sufficient net worth to lose the entire investment

A bond is selling at a premium and yields have remained constant. As the bond gets closer to its maturity, what happens to its price? A It increases B It decreases C It remains the same D It will experience significant price changes

Although fixed income securities are subject to some degree of interest rate risk, that risk is of less concern if the security is being held to maturity. Assuming there is no default by the issuer, the price of a bond selling at a premium will decrease (move towards par value) as it gets closer to its maturity. It decreases

When buying listed put options compared to selling the underlying stock short, which of the following choices is NOT an advantage? A Buying a put requires a smaller capital commitment B Buying a put has a smaller dollar loss potential than selling the stock short C The put has a time value beyond any intrinsic value that gradually dissipates D Buying a put is not subject to Regulation SHO

Although puts do have time value which dissipates as it gets closer to maturity, this is not an advantage for the buyer of a put; instead, it's a disadvantage. An options premium may consist of intrinsic value and/or time value. The portion of the premium that's represented as time value declines over time. For example, when XYZ is trading at $47, if an investor buys an XYZ July 50 put for $5, the intrinsic value (in-the-money value) is $3 and the time value is $2. As the put nears expiration, the time value gradually dissipates, which is a disadvantage to the buyer. All of the other statements are advantages of buying a put compared to selling the stock short. The premium of a put is substantially less than the Regulation T margin requirement for a short sale. In a put purchase, the potential loss is limited to the premium, while the potential loss on a short sale of stock is unlimited. The purchase of puts is not subject to the borrowing requirements of Regulation SHO. The put has a time value beyond any intrinsic value that gradually dissipates

Unless registration is delayed, the effective date of a registration statement is generally on the: A 10th day after the registration statement is filed B 10th business day after registration statement is filed C 20th day after the registration statement is filed D 20th business day after the registration statement is filed

Although there are exceptions, unless registration is delayed, the registration statement is effective on the 20th day after filing. 20th day after the registration statement is filed

All of the following statements are TRUE regarding ADRs, EXCEPT: A The securities are priced in dollars B The instrument's price reflects the value of the underlying stock and currency fluctuations of the underlying issuer's host country C The increased trading volume and enhanced liquidity in the U.S. markets lead to prices that are virtually identical to those of the underlying stock in the issuer's host country D The securities may be listed on an exchange, and may be sponsored by the company

American Depositary Receipts (ADRs) are priced in dollars and are sensitive to the value of the stock and the fluctuations of the currency in the underlying issuer's host country. ADRs may be listed on an exchange and may be sponsored by the company (issuer). The trading volume of ADRs varies considerably among issues. Securities that are not heavily traded may have significant disparities between the price of the ADR and the underlying stock. The increased trading volume and enhanced liquidity in the U.S. markets lead to prices that are virtually identical to those of the underlying stock in the issuer's host country

A registered representative has recommended the purchase of a variable annuity to a customer who subsequently completes the application. Which of the following statements is TRUE concerning the application? A The contract must be forwarded directly to the insurance company. B The contract is forwarded to the representative's nearest FINRA office. C A principal is not required to approve the transaction. D A principal must approve the transaction within seven business days

Annuity suitability rules require that contracts which are sold through FINRA member firms be forwarded to the representative's OSJ and be approved by a principal within seven business days of receipt before being sent to the insurance company. (25061) A principal must approve the transaction within seven business days

A publicly-traded company issued $30 warrants for a price of $5. At the time the warrants were issued, the stock's price was $25; however, one year later, the stock is trading at $40. What's the current intrinsic value of the warrant? A$10 B$5 C$15 D$0

As is true with equity options, a warrant's intrinsic value is the difference between the market price and the strike price. Since the warrants have a strike price of $30 and the stock is trading at $40, the warrant's intrinsic value (in-the-money amount) is $10 ($40 stock price - $30 strike price). $10

A corporation has announced in a tombstone ad that it will issue $500,000,000 of 6 1/2% convertible subordinated debenture bonds that are convertible into common stock at $10.00. The bonds will mature in November 2040 and are being issued at par value ($1,000). If the bonds were subsequently trading in the market at $1,020, at what market price must the common stock be trading to be at parity with the bond? A$156.92 $10.00 $10.20 D$20.40

Before calculating the parity price, the conversion ration must first be determined (i.e., the number of common shares received if the bond is converted). To find the conversion ratio, the formula is par value divided by the conversion price. In this question, $1,000 ÷ $10 results in a conversion ratio of 100-to-1. If converted, the investor will receive 100 shares of the common stock for every one bond converted. To find the parity for the stock, simply divide the market price of the bond by the conversion ratio. In this case, $1,020 ÷ 100 shares results in a parity price of $10.20. $10.20

Buy-stop orders or sell-stop orders can provide all the following features, EXCEPT: A Provide price protection for a short position B Provide price protection for a long position C Give a broker discretion when the order is activated D Possibly cause a fluctuation in the market price of a stock

Buy-stop or sell-stop orders do not give a broker discretion when the order is activated. When activated, the order becomes a market order and should be executed immediately. All of the other choices are correct. Give a broker discretion when the order is activated

Which of the following is NOT one of the "doing business" requirements that are established under Rule 147 or Rule 147A? A At least 80% of the net proceeds from the offering are intended to be used by the issuer, and are in fact used in connection with the operation of a business or of real property, the purchase of real property located in, or the rendering of services within the state or territory B At least 80% of the issuer's assets are located within the state or territory at the end of its most recent semiannual fiscal period prior to the first offer of securities under the exemption C At least 80% of the issuer's employees are based in one state D At least 80% of the issuer's gross revenues are derived from the operation of a business or of real property that is located in the state or territory or from the rendering of services within the state

Companies that are selling new securities are typically required to register their securities with the SEC. However, under Rule 147 and Rule 147A, if a company is conducting an offering and only selling its securities to its state residents, the offering is exempt from registration. A condition of this exemption is that the issuer must meet at least one of the four doing business requirements that are listed below. At least 80% of its consolidated gross revenues are derived from the operation of a business or of real property that is located in the state or territory or from the rendering of services within the state or territory; At least 80% of its consolidated assets are located within the state or territory at the end of its most recent semiannual fiscal period prior to the first offer of securities under the exemption; At least 80% of the net proceeds from the offering are intended to be used by the issuer, and are in fact used in connection with the operation of a business or of real property, the purchase of real property located in, or the rendering of services within the state or territory; or A majority of the issuer's employees are based in the state or territory (this fourth requirement was not included in the original Rule 147) The choice "At least 80% of the issuer's employees are based in one state" is not a requirement since the threshold is for a majority of the issuer's employees to be based in the state, not at least 80% of them. At least 80% of the issuer's employees are based in one state

During periods of deflation, which of the following investments tends to perform the best? A Common stock B Treasury inflation-protected securities C Long-term debt D Short-term debt

During deflationary periods, interest rates and the price of goods will be declining, which generally has a negative impact on the stock market. The consumer price index (CPI), to which the principal on TIPS is linked, declines in value during periods of deflation resulting in decreasing principal on TIPS. The fixed interest on TIPS would also decline. Bonds perform better when interest rates decrease, with long-term debt appreciating more than short-term debt. Long-term zeros would tend to perform best during deflationary periods. Long-term Debt

May a brokerage firm place a temporary hold on a securities transaction? A Yes, for the account of any investor. B No, temporary holds may only be placed on disbursements or transfers of funds and securities. C Yes, for the account of a specified adult. D Yes, if the customer has a margin account.

FINRA rules permit a brokerage firm to put a temporary hold on the disbursements or transfers of funds and securities, as well as the execution of securities transactions. The temporary hold only applies to the account of a specified adult. A specified adult is a person who's age 65 or older or a person who's age 18 or older and who the firm reasonably believes has a mental or physical impairment that renders her unable to protect her own interests. Yes, for the account of a specified adult.

When is it appropriate for a registered representative (RR) to recommend the purchase of a non-qualified variable annuity in an IRA? A If an investor has not yet maximized his contributions in his employer-sponsored retirement plan B Only after the client turns age 72 C If the client's income makes him ineligible to contribute to a Roth IRA D If the client is worried about outliving his retirement savings and providing a death benefit for his beneficiaries

Generally, non-qualified annuities are not suitable investments in an IRA since the IRA already provides tax-deferral. In most cases, investors should only consider annuities after they have maximized their contributions in employer-sponsored plans. If an investor is interested in lifetime payments or a minimum death benefit, then buying an annuity in an IRA may be suitable. However, registered representatives should ensure that investors are aware of the higher costs associated with variable annuities. If the client is worried about outliving his retirement savings and providing a death benefit for his beneficiaries

When doing a municipal bond swap, which of the following items is NOT a factor when trying to avoid the wash sale rule? A The issuer B Maturity date C The rating D The coupon

If a security is sold at a loss, and within 30 days (prior to and after the sale), substantially the same security is purchased, the IRS, considers it a wash sale and will disallow the loss. To avoid purchasing a security that the IRS will consider substantially the same as the security sold, you should purchase bonds either by a different issuer or with a different coupon or maturity. The rating of the bonds would not be a factor. The Rating

A customer opens a margin account and signs the basic customer margin agreement, which consists of a credit agreement, loan consent agreement, and hypothecation agreement. If the customer's initial transaction in the account is to buy 100 shares of XYZ stock at a price of $36, the customer: A May personally take delivery of all of the shares that are purchased B Will pledge the stock to her broker-dealer in order to secure the loan he is receiving C Will be obligated to pay interest on a debit balance of $1,800 D Will allow the brokerage firm to lend some of the stock, but only to other customers on a case-by-case basis

In a margin account, customer securities are always held in street name so that the broker-dealer is able to liquidate shares if necessary. By completing the hypothecation agreement, the customer agrees to pledge the securities to the broker-dealer as collateral for the loan. As for the other parts of the margin agreement, the loan consent agreement permits the firm to lend the securities to other customers or other broker-dealers. The credit agreement establishes the customer's responsibility to pay interest on the debit balance. For a new account, the minimum initial margin requirement is $2,000 or 100% of the purchase, whichever is less. Since the initial trade was for $3,600, the customer is required to deposit $2,000 which means that he can borrow $1,600. Will pledge the stock to her broker-dealer in order to secure the loan he is receiving

A limited partner would be in jeopardy of losing her limited liability if the partner: A Received a portion of the project's income and deductions B Assisted in the decision of which properties to acquire C Insisted on examining the partnership's financial records D Made a loan to the partnership

Limited partners have the right to receive their portion of income and losses, examine books and records, and make loans to the partnership. If they get involved in the management of the program, such as deciding which properties to acquire, they could be considered general partners and lose their limited liability. Assisted in the decision of which properties to acquire

Level I of Nasdaq indicates the: A Cumulative trading volume of the security listed B Inside market for the security listed C Price of transactions as they occur D Market makers for the security listed

Nasdaq Level I provides subscribers with the highest bid and the lowest offer (i.e., the inside market) for a security that has at least two market makers; however, the actual market makers are not listed. Level I does not display the cumulative trading volume or the prices of the transactions as they occur. Although non-members firms can also subscribe to Nasdaq Level I, it is typically used by the branch offices of member firms. (88220) Inside market for the security listed

If a customer intends to engage in intraday trading and has an investment objective of capital growth, she may purchase: A An index fund B An index option C An exchange-traded fund (ETF) D A balanced fund

Of the choices given, only an ETF offers an investor the ability to engage in short-term trading and meet the objective of capital growth. Both index and balanced funds offer capital growth, but not short-term trading; on the other hand, index options offer short-term trading, but not capital growth. (33337) ETF

An investor has a $5 million position in long-term Treasury bonds. Which of the following types of risk is the investor's greatest concern? A Liquidity risk B Inflationary risk C Credit risk D Prepayment risk

Of the choices listed, the greatest concern would be inflationary risk, which is the risk that inflation would erode the investor's purchasing power. When invested in a fixed-income security, an increase in inflation may be detrimental. Note: If it was Treasury Inflation-Protected Securities (TIPS), they would be adjusted for the inflation rate. The Treasury market is generally a liquid market (being able to sell quickly). Treasury bonds are backed by the U.S. government (they have no credit risk) and may not be prepaid prior to maturity (they have no prepayment risk). Another risk the investor would have is interest-rate risk, the risk that an increase in interest rates could cause the bond price to fall, which is not one of the choices. Inflationary risk

An individual who's considering moving to the payout phase of a variable annuity should understand that the payments will: A Never be less than the cost basis in the separate account B Be based on the performance of the subaccount products in the separate account compared to the AIR C Be based on the performance of the subaccount products in the separate account plus the AIR D Be based on the performance of the subaccount products in the separate account minus the AIR

Once a variable annuity is annuitized, each payment will represent the same number of annuity units, but the payment amounts are based on the performance of the subaccount products in the separate account compared to the assumed interest rate (AIR). If the performance of the separate account exceeds the AIR, the payment will increase. If the performance of the separate account is below the AIR, the payment will decrease. If the performance of the separate account equals the AIR, the payment will remain the same as the previous payment. Be based on the performance of the subaccount products in the separate account compared to the AIR

An individual who's considering moving to the payout phase of a variable annuity should understand that the payments will: ANever be less than the cost basis in the separate account B Be based on the performance of the subaccount products in the separate account compared to the AIR C Be based on the performance of the subaccount products in the separate account plus the AIR D Be based on the performance of the subaccount products in the separate account minus the AIR

Once a variable annuity is annuitized, each payment will represent the same number of annuity units, but the payment amounts are based on the performance of the subaccount products in the separate account compared to the assumed interest rate (AIR). If the performance of the separate account exceeds the AIR, the payment will increase. If the performance of the separate account is below the AIR, the payment will decrease. If the performance of the separate account equals the AIR, the payment will remain the same as the previous payment. Be based on the performance of the subaccount products in the separate account compared to the AIR

If an investor is anticipating that a company will have very high earnings in the current year, which of the following types of preferred stock is the most suitable? A Non-cumulative B Cumulative C Participating D Convertible

Participating preferred stock allows the owners to share in the extraordinary earnings of a company. Essentially, participating preferred has a stated dividend, but these stockholders may receive more than the stated amount based on the profits of the issuing company. In contrast, the benefit of cumulative preferred stock is that, if the issuer intends to pay its common stockholders a cash dividend after having not paid dividends, it allows the owner to add up all of the unpaid dividends to a future payment. Cumulative preferred stock may be beneficial during a period in which the company is unable to pay the full dividend since the owner is able to accrue the missing payments. Convertible preferred can be converted into a fixed number of common shares of the same issuer and tends to perform better when the market price of the common stock is appreciating. Lastly, non-cumulative preferred stock is limited to simply paying its stated dividend. Participating

Before accepting a delivery versus payment (DVP) order from a customer, a broker-dealer must: A Notify FINRA B Obtain the name of the customer's agent from the customer C Receive approval of the trade from the contrabroker D Notify the appropriate banking regulator

Prior to accepting a DVP (Delivery versus Payment) or RVP (Receipt versus Payment) order from a customer, a broker-dealer must receive the name of the customer's agent and the customer's account number. The order ticket must be marked DVP or RVP. Obtain the name of the customer's agent from the customer

Before a broker-dealer may offer a portfolio margin program to its clients, the firm must obtain approval from: A The options exchange B FINRA C The SEC D The OCC

Prior to establishing a portfolio margin program for its clients, a broker-dealer is required to obtain approval from FINRA. With a portfolio margin program, a broker-dealer is able to offer larger loans to its clients; however, this will also create greater risk of the firm going bankrupt. The reason for requiring approval is that FINRA wants the opportunity to analyze whether the broker-dealer is capable of handling the potential risks that portfolio margin accounts create. FINRA

Which of the following conditions apply and would permit the sale of securities outside the U.S. without registration with the SEC? A Any offer or sale is permitted to be made only to qualified institutional buyers (QIBs) B Any offer or sale must be made to accredited investors and no more than 35 non-accredited investors C No direct selling effort may occur in the U.S. D The issuer must be a publicly traded company that's headquartered outside the U.S.

Regulation S is an exemption from SEC registration for companies that are headquartered in the U.S. and selling securities outside the United States. There are two general conditions that must be met in order for this safe harbor to apply. Any offer, sale, or resale is made in an offshore transaction. No direct selling effort may be made in the U.S. in connection with the transaction. QIBs are relevant to Rule 144A offerings, while accredited investors are a part of Regulation D. (25047) No direct selling effort may occur in the U.S.

Which of the following securities would be LEAST suitable for an investor interested in preservation of capital? A Long-term CDs B Reverse convertible bonds C A corporate bond fund D A floating rate bond maturing in five years

Reverse convertible securities would not be suitable for an investor interested in preservation of capital. Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the "knock-in level". If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal (the most beneficial option). If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal. (73550) Reverse convertible bonds

A U.S. Treasury bill is sold in the secondary market on Thursday, March 14. It has a regular-way settlement of: A Monday, March 18 B Friday, March 15 C Wednesday, March 20 D Thursday, March 14

Secondary market trades in U.S. Government bonds, notes, and bills settle one business day after the trade date. Friday, March 15

An investor is in the third year of accumulating an interest in a variable annuity that assesses a deferred sales charge. The investor's registered representative recommends for her to switch to a newly created variable annuity that offers a larger number of subaccount choices which are also offered with a deferred sales charge. Which of the following statements may be considered TRUE of this switch? A Since both annuities have a deferred sales charge, the recommendation is suitable. B The switch will not be taxable if it qualifies as a 1035 exchange. C The switch will be taxable if it qualifies as a 1035 exchange. D Since the new annuity has a larger number of subaccount options, the deferred sales charge does not matter.

Selling one annuity and using the proceeds to buy another annuity is exempt from taxes if the transaction meets the requirements under IRS Section 1035. If the customer accepts the switch recommendation, she will be required to pay the deferred sales charge on the old annuity. Additionally, by switching to another variable annuity, the investor's holding period will restart with the new annuity. Since the question doesn't mention whether the new subaccounts meet the client's objectives, the switch recommendation is likely unsuitable. (25058) The switch will not be taxable if it qualifies as a 1035 exchange.

An investor wrote a 115 index option call. The option was exercised and assigned to the customer when the index closed at 125. The writer will: A Deliver the index B Receive the index C Deliver cash D Receive cash

Settlement on an index option contract is made in cash. When assigned an exercise notice, the writer must pay the contract's in-the-money amount times $100. Deliver Cash

What term is used when a company sells stock to the public above par value? A Earned surplus B Capital surplus C Retained earnings D Shareholders' equity

Shares are often priced well above their par value in an offering. This excess is recorded on the balance sheet as Capital Surplus. For example, a company prices its IPO at $18 per share, but the par value is $10 per share. In this case, $8 is added to the Capital Surplus in the Stockholders' Equity section of the balance sheet. A more common term for this excess is Paid-in Capital. This is different from earned surplus (retained earnings), which is profits that have been retained by the company and have not been paid as dividends. (17321) Capital surplus

An individual purchases $100,000 face value of a 6% municipal bond at a dollar price of 101 1/2. The bond's maturity is 7-1-35, but the issue has been called for redemption on the first call date. The customer's confirmation should show the: A Yield-to-call B Yield-to-maturity C Taxable equivalent yield D After-tax yield

Since the bond has been called, the yield-to-the call must be shown because the maturity is no longer of importance. Taxable equivalent yield and after-tax yield are never shown since the investor's tax bracket and/or capital gains rate cannot be accurately predicted. Yield-to-call

A corporation's earnings per share on its common stock, after paying preferred dividends of $3.00 per share, is $5.00 per share. The corporation also paid a dividend of $2.00 per share on the common stock. The dividend payout ratio is: A 25% B 40% C 60% D 100%

Since the earnings per share on the common stock is given, the $3.00 preferred dividend can be disregarded. To find the dividend payout ratio, divide the yearly dividend on the common stock ($2.00) by the earnings per share on the common stock ($5.00). This equals a dividend payout ratio of 40%. 40%

On the NYSE, an investor enters an order to buy 400 shares of HRJ at $56 per share. Which of the following statements is TRUE regarding this order? A The order may be partially filled B The order must be executed in its entirety or not at all C The order must be executed immediately or cancelled D An order must be executed at $56 before this order can be executed

Since the order specifies a price, it's a limit order. A limit order may be executed at the limit price or better. In this question, the investor wants to buy HRJ at $56 or lower (i.e., the order is not required to be executed at exactly the limit price). Since the order doesn't indicate an all-or-none (AON) qualifier, a portion of the order may be filled. Also, since the order doesn't indicate an immediate-or-cancel (IOC) qualifier, it's not required to be executed immediately. As for the remaining choice (an order must be executed at $56 before this order can be executed), an order is not required to be executed at $56 for this order to receive execution. The order may be partially filled

ABC Corporation has net income of $6,000,000. It had $1,000,000 in interest expense and is in the 34% tax bracket. ABC has 500,000 shares of common stock and 10,000 shares of 10% preferred stock ($100 par value) outstanding. What are the earnings per share for ABC? A $6.40 B $7.72 C $10.91 D $11.80

Since the question gives ABC Corporation's net income, interest and taxes have already been deducted. Earnings per share is equal to net income minus the preferred dividend divided by the number of common shares outstanding. ($6,000,000 net income - $100,000 preferred dividend) divided by 500,000 shares outstanding = $11.80 earnings per share. $11.80

An investor buys an 8% municipal bond in the secondary market at a 10.00 basis. If the bond is held to maturity, the investor's after-tax return will be: A 8% B Between 8% and 10% C 10% D Greater than 10%

Since the yield (10%) is higher than the coupon (8%), the bond was purchased at a discount. Since the bond was purchased in the secondary market at a discount, the interest on the bond is exempt from federal taxation but the discount will represent ordinary income at maturity. Since the investor must pay federal income tax on the ordinary income, the after-tax return will be between 8% and 10%. Between 8 and 10%

When sent to a client, which of the following must be preceded or accompanied by a prospectus? A A brochure describing how mutual funds in general work B A tombstone ad for a new mutual fund being offered by the XYZ fund complex C An omitting prospectus advertisement for the Cerebral Growth Fund D Supplemental sales literature for the bond mutual funds in the Flyer Group family of funds

Supplemental sales literature may only be used in the post-effective period and must be preceded or accompanied by a prospectus. These requirements do not apply to generic advertising, tombstone ads, or omitting prospectus ads. The latter two types of ads are often published in newspapers. Supplemental sales literature for the bond mutual funds in the Flyer Group family of funds

What system allows investors to hold securities in book-entry form? A EMMA B DRS C TRF D RTRS

The Direct Registration System (DRS) allows investors to hold securities in book-entry form. The TRF is used to report equity trades, while the RTRS is used to report municipal trades. EMMA is the MSRB's database for municipal disclosures and is similar to the SEC's EDGAR database for corporate filings. DRS

Regarding the FHLMC, which of the following statements TRUE? A It's referred to as Fannie Mae. B Its securities are issued only in book entry form. C The interest paid on its securities is exempt from federal taxes. D Its securities are backed by the full faith and credit of the U.S. government.

The Federal Home Loan Mortgage Corporation (FHLMC) is typically referred to as Freddie Mac. Its securities are only issued in book entry form, but interest that's paid to investors is taxable. FHLMC is only government-sponsored and is not backed by the full faith and credit of the U.S. government. Its securities are issued only in book entry form.

Which of the following statements is TRUE regarding the Interbank market? A It is the market for fed funds between banks B It helps establish the spot prices for foreign currencies C It administers loans to foreign countries D It is the guarantor of foreign currency options

The Interbank market is the purchase and sale of foreign currencies among large banks. The market helps establish the cash (spot) prices for foreign currencies. Spot prices are often referred to as the spot rate. It helps establish the spot prices for foreign currencies

Which of the following systems is used to report information on the origination, transmittal, and execution of an equity security? A The Trade Reporting Facility (TRF) B The Trade Reporting and Compliance Engine (TRACE) C The Order Audit Trail System (OATS) D The National Securities Clearing System (NSCC)

The Order Audit Trail System (OATS) is a system that enables a regulator (FINRA) to review equity market activity. OATS records the life of an order from receipt, to routing, to modification if applicable, and to cancellation or execution. The TRF is a reporting system for equity securities. TRACE is used to report transactions in Corporate and Government debt. The NSCC is a clearing system used by broker-dealers. The Order Audit Trail System (OATS)

Which of the following is NOT a characteristic of preferred stock? A It has a fixed dividend B The board of directors must declare the dividends C It has a dividend that is not guaranteed D It carries voting rights

The board of directors must declare dividends for both common and preferred stock. Neither common nor preferred stockholders are guaranteed a dividend. Preferred stock normally has a fixed dividend. Preferred stock does not have voting rights, only common shares may vote. It carries voting rights

Which of the following bonds has the most interest-rate risk? A A three-month Treasury bill B A 30-year Treasury STRIP C A 6%-coupon, 30-year Treasury bond D A 3%-coupon, five-year Treasury note

The bond with the most interest-rate risk or price volatility is the bond with the longest maturity and the lowest coupon. This price sensitivity is based on the concept of duration. The first step is to identify the bond or bonds that have the longest maturity. In this question, there are two bonds with 30-year maturities, which eliminates the possibility of the three-month and five-year bonds as the answer. The second step is to find the long-term bond that offers the lowest coupon rate. Since a T-STRIP is a form of zero-coupon bond, it clearly has more interest-rate risk than another long-term bond that offers a 6% coupon. Remember, the greatest price sensitivity based on interest rate fluctuation is a long-term bond with a low coupon A 30-year Treasury STRIP

A registered representative receives a sell order from his customer. When he submits the order, he accidentally transposes two of the digits in the account number and the order is processed under the wrong account. This problem is rectified: A By the branch office manager B With a purchase of the security out of the wrong account C By placing the order in an error file D By the registered representative

The branch office manager will rectify this error by correcting the account number and crediting the sale in the proper account. The order is not placed in the error file since it was properly executed, but in the wrong account. The registered representative doesn't rectify these types of problems. The wrong account will not be responsible for anything related to the incorrect order. (15607) By the branch office manager

If a member firm brokers a customer's purchase of a security, the member firm must disclose: A The next ex-dividend date B The amount of the markup on the transaction D The amount of commission charged on the transaction DThe date on which the prospectus will be delivered

The broker-dealer must disclose the amount of commission it charged if it acted in an agency (i.e., broker) capacity. Markups are charged on principal, not agency, transactions. In addition, the broker-dealer must disclose, or offer to disclose, the time when the transaction occurred and the name of the other party to the transaction. Broker-dealers are not required to disclose ex-dividend dates and prospectuses are typically not delivered for trades in the secondary market. (25062) The amount of commission charged on the transaction

Your firm has completed an underwriting of Zylo Plastics subordinated debentures. The bond indenture contains a five-year call protection provision. This covenant would be most valuable to bond purchasers if, during the five years following issuance: A Interest rates decline B Interest rates increase C Interest rates remain stable D The yield curve slopes downward

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

An investor is considering the possibility of purchasing mutual fund shares. Which of the following considerations should NOT be of concern to the investor when choosing whether to purchase Class A, B, or C shares? A The holding period B The dollar amount being invested C The experience of the fund advisory staff D A qualification for waiver or reduction of sales charges

The experience of the fund advisory staff is not a concern when choosing the specific class of shares for investment since the same personnel manage Class A, B, and C shares. Also, the investments that are held in each of the three share classes are the same. The dollar amount being invested is significant since features such as breakpoints and rights of accumulation are only offered for Class A shares. The anticipated holding period is equally important since Class B shares have a declining sales charge that is based on how long the investor owns the shares prior to redemption. When compared to Class A shares, both Class B and Class C shares often have higher annual operating expenses. Therefore, Class A shares may be the cheapest to own over a long period. The experience of the fund advisory staff

When reading a research report on an automobile company, a registered representative's use of fundamental analysis determines that the stock is a good investment. When attempting to determine the best time to execute orders to buy the stock, the registered representative could refer to: A A chart showing the price-earnings ratio for all automobile stocks B A chart showing a recent history of the market price of the stock C The company's dividend payout ratio D The research report's past earning for the company

The fundamental analyst will use the balance sheets and income statements of companies to determine which security to purchase but may use technical analysis (i.e., reviewing the chart pattern of the stock's market price) to assist in determining when to make a purchase (timing). A chart showing a recent history of the market price of the stock

Which of the following statements about Treasury bills is NOT TRUE? A The interest received is exempt from state and local taxes. B The interest received is based on the difference between the purchase price and face value. C The interest received is taxed in the year in which the securities are purchased. D The difference between the purchase price and face value is considered taxable interest.

The interest received on a Treasury bill is based on the difference between the discounted purchase price and the face value that's received when the bill is redeemed at maturity. This interest is taxable as interest rather than as a capital gain. This amount is taxable in the year in which the bill matures, not when it's purchased. The interest received on Treasury bills is subject to federal income tax, but exempt from state and local income taxes. (25066) The interest received is taxed in the year in which the securities are purchased.

In August, an investor sells an uncovered listed option and receives a $1,100 premium. The following February, the customer makes a closing purchase transaction at 3. The result of the transactions is: A A short-term capital gain of $800 B A capital loss of $800 C Ordinary income of $800 D A non-taxable event

The investor made an $800 profit on the closing transaction (sale at $1,100 and purchase at $300). The profit is treated as a short-term capital gain in the year in which the transaction is closed out. Although short-term capital gains are taxed at the same rate as the investor's ordinary income, they're not considered ordinary income. Ordinary income typically includes a person's salary, wages, tips, bonuses, commission, or income earned from self-employment. A short-term capital gain of $800

A revenue bond is backed by a pledge of net revenues. This indicates that: A All revenues are pledged to pay debt service on the bonds B Net revenues are pledged to pay operating and maintenance expenses C The first use of net revenues is to pay the debt service on the bonds D The issuer guarantees that net revenues from the facility will be sufficient to pay debt service on the bonds

The issue requires that operation and maintenance expenses are paid first from gross revenues. Gross revenues minus operating and maintenance expenses leaves net revenues. Debt service (also called bond service) would then be the first item paid from net revenues. The first use of net revenues is to pay the debt service on the bonds

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

The key to this question is to recognize that if interest rates are stable, then most bond prices will experience little movement. However, to identify the bond that is still expected to fluctuate the most, find the answer that is the most unique. In this question, the convertible debenture may still experience a significant change in price based on the changing value of the underlying equity (i.e., the security into which the bond may be converted). For example, if the value of the underlying stock increases, the value of the bond will also increase to keep the bond's price in the vicinity of conversion parity. Parity is achieved when the value of the bond is equal to the value of the common stock which is able to be obtained at conversion. A 7 1/2%, 10-year convertible subordinated debenture

A margin disclosure document would NOT include which of the following statements? A You can lose more funds than you deposit in the margin account. B The firm can sell your securities without contacting you. C The firm can increase the house maintenance without advance written notice. D The firm can change the method of calculating interest charges without advance written notice.

The margin disclosure document describes the different types of risk associated with margin accounts and includes the following declarations. You can lose more funds than you deposit. The firm can force the sale of securities in your account. The firm can sell your securities without contacting you. You are not entitled to choose which securities are liquidated in order to meet a margin call. The firm's house maintenance margin requirements may change without providing you advance written notice. You are not entitled to an extension of time on a margin call. The firm definitely needs to provide advance written notice if the method of calculating interest charges is changed. The firm can change the method of calculating interest charges without advance written notice.

Which of the following statements is NOT TRUE regarding a bond's nominal yield? A It must be approved by the company's board of directors. B It indicates the amount per thousand that bondholders will receive as income. C It does not change. D It does not react to changes in market interest rates.

The nominal yield is set at the time of issuance and does not change. It indicates the dollar amount of income the bondholder will earn on each $1,000 of principal invested. For example, a 6% nominal yield indicates a return of $60 per year. Prices of bonds will rise or fall inversely to the falling or rising of interest rates; however, the nominal yield will remain the same. The interest rate on a bond is not required to be approved by the issuer's board of directors. (25060) It must be approved by the company's board of directors.

In which of the following documents are bid limitations for a new municipal bond issue found? A The official statement B The indenture C The notice of sale D The syndicate agreement

The notice of sale is published by the issuer. It announces the issuer's intention to sell an issue and invites securities firms to compete for the issue. All information pertaining to the bidding would be contained in the notice of sale. The Notice of Sale

The proceeds of the sale of a municipal bond issue are invested in U.S. government securities that are sufficient to cover interest, principal, and call premiums on an outstanding bond issue. The outstanding bonds are called: A Structured notes B Double-barreled bonds C Guaranteed bonds D Prerefunded bonds

The outstanding bonds are called prerefunded or advance-refunded bonds. The new issue is called a refunding issue. This is usually done when the issuer can borrow funds at lower rates, thereby reducing its interest costs. Prerefunded Bonds

A corporation has $7,000,000 in income after paying preferred dividends of $500,000. The company has 1,000,000 shares of common stock outstanding. The market price of the stock is $56. What is the price-earnings ratio? A 6.5 times B 7.5 times C 8 times D 8.6 times

The price-earnings ratio is the market price ($56) of the stock divided by the earnings per share ($7), which equals 8 times. The earnings per share of $7.00 is found by dividing the $7,000,000 of available income to the common stockholders by the 1,000,000 shares of common stock outstanding. 8 Times

Which of the following risks is considered unique to an investor holding a CMO? A Prepayment risk B Credit risk C Interest-rate risk D Reinvestment risk

The risk that an investor will receive her principal earlier than projected (prepayment risk) instead of at one time is the most important risk concerning mortgage-backed securities such as CMOs. Although all fixed-income securities will have interest-rate risk, prepayment risk is unique to CMOs. Historically, CMOs have been highly rated, due to the underlying mortgages backing these securities. This risk did increase significantly in 2008. Prepayment risk

An individual owns shares of a mutual fund and wants to switch to an ETF because of potential tax advantages provided by ETFs. Which of the following statements is TRUE regarding the taxation of ETFs? A There are no tax advantages to investing in ETFs. B Cash dividends from ETFs are always considered qualified. C Dividends received on stocks held by the ETF are automatically reinvested in the ETF. D Gains are only realized on ETFs when the shares are sold.

The tax advantage that ETFs have over mutual funds is the fact that the investor controls the timing of the sale of shares, thereby determining when a capital gain or loss may be realized. Since ETFs are typically linked to indexes, the managers seldom trade their portfolios and therefore don't generate capital gains that need to be distributed. On the other hand, mutual fund managers trade shares within their portfolios on a regular basis and any realized gains are taxable in the year in which they're received by the shareholders (regardless of whether the funds are reinvested). As with other stocks, ETF dividends may be considered qualified and taxed at the same rate as long-term capital gains if the ETF shares are held for more than 60 days. Gains are only realized on ETFs when the shares are sold.

When computing coverage for revenue bonds, the ratio used is: A Net revenue to debt service B Gross revenue to operating expenses C Gross revenue to annual interest payments D Net revenue to operating expenses

The term coverage (short for coverage ratio) is used when discussing revenue bonds. It is an indication of the number of times by which the earnings generated over a certain period will exceed the debt service requirement. The debt service is the required payments for interest and retirement of principal. The coverage is computed by comparing the ratio of net revenue (gross revenue minus operating and maintenance expense) to debt service. Net revenue to debt service

A municipal bond with a 6% coupon is priced at a 7.20 basis. If the bond's yield to maturity increases by 40 basis points, the yield to maturity is: A5.60% B6.40% C6.80% D 7.60%

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

A municipal bond pays interest on February 1 and August 1. A customer purchasing the bond on Monday, April 30 will need to pay the seller the purchase price plus accrued interest for: A 90 days B 91 days C 93 days D 96 days

The trade date is Monday, April 30. The bond pays interest on February 1 and August 1. Accrued interest is calculated from the last interest payment date, up to but not including the settlement date. The settlement date is Wednesday, May 2. The following calculation illustrates the answer. February30 daysMarch30 daysApril30 daysMay1 day91 days 91 Days

If a bond is selling at a premium and is callable at par, how is the yield calculated? A As a percentage of the par value B By dividing the annual income by the current price C To the final maturity date D To the call date

The yield for a bond that is selling at a premium and is callable at par is calculated to the call date. The yield to call measures the yield that would be earned if the bonds were called at the call price, rather than held to the maturity date. Industry rules require broker-dealers to quote the lower estimate of the yield to call or the yield to maturity. If the bond had been selling at a discount, it would have been quoted on a yield to maturity basis. If a bond is selling at a premium and callable at a premium, the yield may be to the final maturity or the call date, whichever is less. In each case, the investor would receive a quote based on the most conservative scenario. This is referred to as the yield to worst. To the call date

If a municipal bond is selling at a premium and is callable at par, how is the yield calculated? A As a percentage of the par value B By dividing the annual income by the current price CT o the final maturity date D To the call date

The yield for a municipal bond that is selling at a premium and is callable at par is calculated to the call date. The yield to call measures the yield that will be earned if the bonds are called at the call price and not held to the maturity date. MSRB rules require dealers to quote the lower of the yield to call or the yield to maturity. If the bond is selling at a discount, the bond is quoted on a yield to maturity basis. If the bond sells at a premium and is callable at a premium, the yield may be to the final maturity or the call date, whichever is lower. To the call date

An investor purchases an EPG Jan 40 put at 5 and writes an EPG Jan 50 put at 13. The investor would profit in all of the following situations, EXCEPT: A The spread narrows B Both options expire C The Jan 50 put is closed out at 10 and the Jan 40 put is closed out at 4 D The spread widens

This is an example of a credit spread (more premium received for the option sold than paid for the option purchased). In a credit spread, the investor will profit if the spread (difference in premium) narrows. The spread widens

A 75-year-old client is looking for a high level of income for his retirement fund. He wants to maintain a balance between income and safety of principal. Which of the following funds will MOST LIKELY meet this requirement? A A high-yield fund B An investment-grade fund CA balanced fund D A GNMA fund

This question is a bit tricky, since there are two potentially correct answers. So, let's determine the answer that's the MOST correct. When a client states that he wants both safety of principal and income, it can be assumed that a large portion of his money should be invested in bonds. This makes a balanced fund a poor choice because a balanced fund contains both stocks and bonds, which implies a higher principal risk. Another concern with a balanced fund is that it's not a very good investment for a person who wants income because stocks generally pay less than bonds in percentage terms. A high-yield fund invests in junk bonds. Since high yield equates to high risk, this is not a good choice either. Now, what remains are the investment-grade fund and the GNMA fund. The GNMA fund is a better choice; but why? For starters, the GNMA fund will consist of GNMA securities which are fully backed by the U.S. government. In contrast, the investment-grade bond fund will consist of bonds that are issued by corporations with ratings as high as AAA and as low as BBB. Overall, the backing of a corporation is not as secure as the backing of the U.S. government. It's important to note that neither fund is backed by the government; instead, it's the contents of the GNMA fund that's backed by the U.S. government. Although the investment-grade fund may pay a little more in income, another benefit of the GNMA fund is that it will pay more interest than Treasury securities because GNMA yields are based on mortgages. These two facts are what make the GNMA fund a better choice for this investor. A GNMA fund

An investor owns convertible preferred stock that was originally purchased at $106. The stock is convertible at $25 and has a current market price of $112. If the common stock is currently trading at $27.75 and the investor decides to convert the preferred stock into common stock, the cost basis per share for the newly acquired common stock is: A $27.75 B $27.50 C $26.50 D $28.00

To determine the cost basis of the common stock, the first step is to calculate the conversion ratio (i.e., the number of common shares to be received if the preferred stock is converted). The formula for calculating conversion ratio is the par value of the preferred stock ($100) divided by the conversion price ($25). As a result, four shares of common stock are received if the preferred stock is converted into common stock. The cost basis of the newly acquired common shares is found by dividing the original purchase price of the preferred stock ($106) by the number of shares received (4) ($106 ÷ 4 = $26.50). Any future gains or losses on the sale of the common stock will be calculated by using the basis of $26.50. $26.50

A convertible bond has a conversion price of $50 and is currently selling in the market at $1,100. The conversion ratio is: A 22 B 20 C 50 D 55

To find the conversion ratio of a convertible bond, the bond's par value ($1,000) is divided by the conversion price ($50). In this question, the conversion ratio is $20 ($1,000 ÷ $50). To calculate the conversion ratio, the market price of the bond is irrelevant. 20

TIPS were created to address which type of risk? A Liquidity risk B Interest rate risk C Credit risk D Inflation risk

Treasury Inflation Protected Securities (TIPS) are a type of U.S. government bond that adjusts for inflation. The interest rate on a TIPS will not change, but when the Consumer Price Index (CPI) rises, the principal on a TIPS will increase and investors will receive more in interest. TIPS are created to keep up with, but not beat, inflation. Inflation risk

An article in The Wall Street Journal states that yields on Treasury bills have declined in the past month to 4.58% from 4.61%. This indicates that: A Buyers of new bills paid more than buyers paid the previous month B Buyers of new bills paid less than buyers paid the previous month C Interest rates are increasing D Buyers of new bills purchased the bills above par

Treasury bills are purchased at a discount from the dollar amount on its face. The larger the discount, the higher the discounted yield to maturity. In this example, the discounted yield to maturity has gone down to 4.58% from 4.61% from the previous month. This indicates that buyers of new bills paid more for the Treasury bills (meaning the discount was less) than buyers paid the previous month. Buyers of new bills paid more than buyers paid the previous month

A customer is a resident of Utah, but has a vacation home in California. A friend of the customer who lives in California intends to raise capital for a new business in California using Rule 147. If the customer wants to invest less than 1% of her liquid assets in her friend's business, how should the RR advise the customer? A As long as the customer is an accredited investor, the investment is permitted. B If the customer signed a suitability statement, the investment is permitted. C The investment is permitted with no additional requirements. D The investment is not permitted since the customer is not a resident of California.

Under SEC Rule 147, an offering is exempt from SEC registration if all (100%) of the investors are residents of the state in which the offering is being conducted (i.e., California). Owning a vacation home in California doesn't make the customer a resident and she's therefore ineligible to purchase the securities. The investment is not permitted since the customer is not a resident of California.

Which of the following issuers is able to seek a registration exemption under Regulation A? A An issuer that's offering an aggregate of $16 million of common stock, which includes $7.5 million being sold on behalf of existing shareholders. B An issuer that's offering an aggregate of $19 million of common stock, which includes $6.75 million being sold on behalf of existing shareholders. C An issuer that's offering an aggregate of $75 million of common stock, which includes $25 million being sold on behalf of existing shareholders. D An issuer that's offering an aggregate of $45 million of common stock, which includes $12.5 million being sold on behalf of existing shareholders.

Under the Regulation A exemption, there are two tiers which represent the maximum amount of the offering. Under Tier 1, the maximum offering size is an aggregate of $20 million, of which no more than $6 million of the offering may be sold on behalf of existing shareholders (i.e., 30% of the offering). Under Tier 2, the maximum offering size is an aggregate of $75 million, of which no more than $22.5 million of the offering being sold on behalf of existing shareholders (i.e.,30% of the offering). The only issuer that's able to take advantage of the Regulation A exemption is the issuer conducting an aggregate offering of $45 million, of which only $12.5 million is on behalf of its selling shareholders. in this case, $12.5 million is approximately 28% of the offering size (i.e., not more than 30%). An issuer that's offering an aggregate of $45 million of common stock, which includes $12.5 million being sold on behalf of existing shareholders.

An investor has been making payments into a variable annuity for the last 20 years. The investor decides to annuitize and selects a straight-life payout. Which of the following statements is TRUE? A The investment risk is assumed by the insurance company. B The amount of each payment to the investor is guaranteed by the insurance company. C All of the assets are held in the general account of the insurance company. D The amount of each payment to the investor is not guaranteed by the insurance company.

Unlike a fixed annuity, the customer assumes the investment risk in a variable annuity and the amount of the payment depends on the performance of the separate account. The payment could increase, decrease, or remain the same since the amount is not guaranteed. (25063) The amount of each payment to the investor is not guaranteed by the insurance company.

An individual purchased a 10-year municipal bond at a cost of $1,050. If the individual sells the bond in five years at its amortized value, the tax consequence will be: A $25 capital gain B A $25 capital loss C A $50 capital loss D No capital gain or loss

When a municipal bond is purchased at a premium, the premium must be amortized over the life of the bond. When asked to amortize, the individual would use straight-line to calculate the amount. In this question, the $50 premium would be amortized equally over the 10 years at $5/year. After five years, $25 would be amortized and the adjusted cost basis would be $1,025. No Capital Gain or Loss

An investor writes an uncovered ABC March 45 put for a premium of 4. At expiration, ABC is at $36 per share and the put option is exercised. If the stock is immediately sold by the writer at the current market price, what is the writer's profit or loss? A $400 loss B $500 loss C $400 profit D $900 profit

When the stock is put to the writer, he must buy the stock for $4,500. His cost basis for tax purposes is $4,100 ($4,500 strike price - $400 premium received). Since he sold the stock for $3,600, he has a net $500 loss ($4,100 - $3,600). $500 Loss

On Tuesday, June 16, an investor purchases for regular-way settlement, $20,000 face value of 8% municipal bonds that mature on November 1, 2035. What is the dollar amount of accrued interest that the investor is required to pay? A $75.55 B $208.88 C $213.33 D $1008.88

With the maturity falling on November 1, the other interest payment date would be May 1. The trade on Tuesday, June 16, would settle on Thursday, June 18. Accrued interest on municipal bonds is calculated on a 30/360 day basis resulting in 30 days for the month of May and 17 days for June, (up to but not including settlement), for a total of 47 days. The amount of interest paid is calculated based on the following Accrued Interest formula. Accrued Interest = (Principal x Rate x Days of Interest) / 360 = ($20,000 x 8% x 47) / 360 = $208.88

Which of the following statements is TRUE regarding Class B shares of a mutual fund? A Contingent deferred sales charges are assessed, but typically decline to zero after six years B The shares convert to Class C shares after three years C The shares have lower annual operating expenses than Class A shares D A portion of the initial investment is applied as a sales charge and is not invested

Class B shares, also referred to as back-end sales charge shares, have a declining sales charge. After six years, the sales charge percentage is typically reduced to zero. There is no conversion to Class C shares; however, Class B shares usually convert to A shares after six years. Class B shares tend to have higher operating expenses than A shares, due to a higher percentage that is applied as 12b-1 fees. Since there is no front-end sales charge, the full investment in Class B shares is applied to the purchase of the shares. Contingent deferred sales charges are assessed, but typically decline to zero after six years

Which of the following statements concerning duration is TRUE? A A well-diversified index stock fund will have duration of approximately 1.0. B Due to their extended holding period, long-duration funds are right only for young investors with a suitable time horizon. C Duration is the measurement of the period in which a CDSC will be assessed on a Class B share. D Duration is a measurement of a given bond's sensitivity to interest-rate swings.

Duration is a measurement of a given bond's sensitivity to interest-rate swings. Factors affecting a given bond's duration include maturity and coupon. It is important to remember that a long-duration bond portfolio is much more price sensitive to interest-rate swings. Duration is a measurement of a given bond's sensitivity to interest-rate swings.

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

When the wash sale rule is activated, the investor must add the loss to the new cost of the stock regardless of whether the stock is repurchased at a price that is higher or lower than the original cost. In this example, the investor's cost basis for tax purposes is found by adding the 3-point loss to the new cost of $27. $30