Part 2: Provides customers with information about investments, makes suitable recommendations, transfers assets and maintains appropriate records

unit 9: mutual funds vs. variable annuities

- both pooled investment vehicles - neither offer guaranteed rate of return - annuities have higher surrender charges - in order to sell variable annuities, individual must have both an insurance and securities license - variable annuities have a separate account, whereas investments are made directly into shares of the mutual fund

unit 15: Records relating to terminated representatives must be retained for how many years?

3 years

unit 13: Which of the following may be affected when a company buys machinery for cash? I. Shareholders' equity II. Current assets III. Total liabilities IV. Working capital A) II and IV B) II and III C) I and III D) I and IV

A) II and IV Explanation The purchase of machinery for cash will reduce current assets and working capital.

unit 6: Which of the following would have the least impact in marketing a municipal bond issue? A) The dated date of the issue B) The maturity of the issue C) The rating of the issue D) The size of the block offered

A) The dated date of the issue Explanation The dated date of a bond issue is merely the date on which the issue begins to accrue interest. As such, it would have less to do with the marketing efforts related to a new issue than would items such as the size of the block offered, the rating of the issue (how financially strong it is), and the maturity.

unit 8: anti-reciprocal rule (MSRB Rule G-31)

An investment company must select a dealer to execute its portfolio transactions based on services provided. It is a violation of the _______-____________ rule (Municipal Securities Rulemaking Board Rule G-31) for an investment company to choose a firm to trade its portfolio based solely on sales of units or shares of the fund

unit 10: An investor owns $100,000 of convertible bonds with a conversion price of $50. By depositing these bonds into her account, how many covered calls could she write? A) 50 B) 20 C) 2,000 D) None

B) 20 explanation: A covered call means that the seller of the options has 100 shares of stock to cover each call. These bonds are convertible into 20 shares for each $1,000, making a total of 2,000 shares. At 100 shares per contract, that's enough stock to cover 20 calls.

unit 10: Which of the following actions could affect the holding period on a long position in IBS stock? A) Sale of 1 IBS out-of-the-money call B) Sale of 1 IBS out-of-the-money put C) Purchase of 1 IBS put D) Purchase of 1 IBS call

C) Purchase of 1 IBS put Explanation The purchase of a put affects a stock's holding period when the stock has been held short term. The holding period begins anew once the put position is closed. **because you are long stock and by buying a put, you are buying the right to sell the underlying stock which affects the holding period on a long position

unit 10: If a customer buys 1 OXY Oct 50 call at 3, and the holder exercises the option when the stock is trading at 60, what is the cost basis of the 100 shares? A) $5,000 B) $6,000 C) $6,300 D) $5,300

D) $5,300 Explanation: The cost basis of acquiring the shares is 100 multiplied by the strike price of 50, which equals $5,000, plus the cost of the call, which is $300. Total cost or cost basis is $5,300.

unit 13: A client purchases 1,000 shares of the XYZ Value Fund when the NAV is $18.75 and the POP is $19.74. Five years later, the client makes a gift to her daughter when NAV is $24.50 and POP is $25.79. The daughter elects to receive all distributions in cash. Two years after the gift, she sells all shares when the NAV is $34.25 and POP is $36.05. What are the tax consequences of this sale?

Long-term capital gain of $14,510 In the case of a gift of securities, the donee acquires the donor's cost basis—$19.74 per share. Sale (redemption) takes place at the NAV ($34.25) for a profit of $14.51 per share (times 1,000 shares = $14,510.00).

unit 8: with a mutual fund, reinvesting distributions allows those purchases of additional shares to be made at the _________ rather than at the offering price

NAV

unit 11: ______________ ___________ ________ are the noncapital costs of putting in a well. They are currently deductible expenses such as fuel, wages, and rent. An intangible drilling cost is one that, after expenditure, has no salvage value.

intangible drilling costs

unit 14: ____________ _______ risk is if interest rates rise, bond prices fall.

interest rate risk

unit 8: _____________ __________ are closed-end investment companies that permit shareholders to sell their shares back to the company at net asset value. The frequency varies by fund and can range from monthly to annually.

interval funds

unit 13: ___________________ is considered a current asset, not a fixed asset, because the company expects to convert it's inventory into cash within a short time

inventory

unit 8: A _________ ____________________ ________ issues shares that represent units of a particular portfolio; management has no authority—or only limited authority—to change the portfolio. The portfolio is _________, not traded.

a UNIT INVESTMENT TRUST issues shares that represent units of a particular portfolio. Management has NO authority, or only limited authority, to change the portfolio; the portfolio is FIXED, not traded

unit 10: a call spread consists of:

a long call and a short call

unit 10: a price spread, or vertical spread, has different ____________ ______, but the same _______________ _______

a price spread, or vertical spread, has different strike prices, but the same expiration dates

unit 10: a time spread, or calendar / horizontal spread, has different ______________ ______, but the same ___________ ____

a time spread, or calendar / horizontal spread has different expiration dates, but the same strike prices

unit 14: ____________________ risk occurs when there is a change in the law that negatively affects the value of a security

legislative risk

unit 5: with convertible securities, it is always true on the exam that the income return is ___________ than non-convertible issues.

lower

unit 13: Stocks with a beta greater than 1 are ___________ volatile than the market, and stocks with a beta less than 1 are ___________ volatile than the market.

more; less

unit 10: When a municipality appoints an underwriter, the bond issue is a _______________ underwriting.

negotiated

unit 15: Because the bond issue is selling at a _____________, the yield to call is less than the yield to maturity. The bonds must be quoted as yield to call at the earliest maturity.

premium

unit 14: call risk if the greatest when purchasing a bond at a ______________. If the bond is called much earlier than its maturity date, the amount of loss realized is significantly more than the amount of the bond's adjusted cost basis

premium;

unit 11: _________________ repayments on recourse debt are not deductible for tax purposes, whereas the ______________ payments are deductible.

principal repayments; interest

unit 9: variable annuities may only be sold by ____________________ ____________________

registered representatives

unit 13: when a corporation retains net income instead of distributing a dividend, the funds are called:

retained earnings

unit 13: total assets - total liabilities =

shareholder's equity

unit 10: short straddle vs. long straddle

short straddle = when markets are stable long straddle = when markets are volatile

unit 8: A __________________ fund would concentrate in either a specific geographic area or industry and is not going to be recommended as the only fund for the investor's portfolio.

specialized fund

unit 8: __________ ______ funds have different portfolios for each targeted date and will include both equity and fixed income securities.

target date funds

unit 10: if a customer buys 100 shares of stock and writes one out-of-the money call against her long position, the B/E is:

the cost of stock purchased - the premium

unit 9: with a non-qualified variable annuity, the client has paid for it with after-tax dollars and has a basis equal to the original investment amount. Consequently, the client pays taxes only on:

the growth portion of the withdrawal

unit 9: A _________________ ___________ is both an insurance and a securities product. An annuitant assumes the investment risk of a variable annuity and is not protected by the insurance company from capital losses.

variable annuity

unit 13: Short-term notes are not part of the ___________ ________, which measures the dollar amount of new issues scheduled over the coming month.

visible supply

unit 13: beta measures _______________, alpha measures _______________

volatility; performance

unit 13: A _________ ____ __________ __________ allows the premiums on an insurance contract to be waived for a person who has become disabled or otherwise unable to work.

waiver of premium option

unit 13: The term paid-in surplus is frequently found on a corporation's financial statements. Paid-in surplus refers to:

when a corporation issues new stock at a price in excess of the stock's par value *paid-in surplus is also called capital surplus

unit 13: fixed assets that cannot be converted into cash / liquidated easily:

- real estate - furniture - equipment

unit 5: a convertible bond's current market price depends on:

- the rating of the bond - the value of the underlying stock into which the bond can be converted - current interest rates

unit 9: qualified vs nonqualified variable annuity tax liability

-qualified variable annuity: entire withdrawal is taxed -nonqualified variable annuity: taxed using LIFO (during accumulation phase) and pro-rata (during annuitization phase-earnings are taxed, contributions are tax-free)

unit 9: 1. in a variable annuity with a 10-year period certain, a contact holder receives: 2. if the contract holder dies before the period expires:

1. a minimum of 10 years of variable payments , followed by additional variable payments for life 2. the remaining payments go to the beneficiary and then stop of the # of years period certain

unit 3: Aenical Corporation issued $100 million of $100 par value preferred stock a number of years ago. The stock pays semiannual dividends of $1.25. Recent issues of comparable preferred stock carry a dividend yield of 10%. One could expect the market price of the Aenical preferred stock to be closest to A) $25. B) $75. C) $100. D) $50.

A) $25. Explanation As with other fixed-income securities, as market yields change, the price of previously issued securities increase or decrease to offer a comparable return. The logic is that investors will purchase fixed-income securities only if they can receive a return comparable to the current market rate. This stock is paying an annual dividend of $2.50 ($1.25 every six months). If not stated, dividends are always paid quarterly. This question specifically states the dividends are SEMIANNUAL; do not get tripped up with something like this on the exam. Investors will be most interested in this stock if their return will be approximately 10%, the current rate being paid in the market. The math here must first answer "$2.50 is 10% of what number?" Divide $2.50 by 10% and the answer is $25. At $25 per share, Aenical stock paying a $2.50 annual dividend is offering a 10% return on investment.

unit 10: Without any position in the stock, an investor wrote an ABC Jul 60 put for 6. On the expiration date, ABC is selling for 66, and the investor closes the position at the intrinsic value. For tax purposes, the investor has A) realized a short-term capital gain of $600. B) realized ordinary income of $600. C) realized a short-term capital loss of $600. D) broken even.

A) realized a short-term capital gain of $600. Explanation With the stock at 66, the put is 6 points out of the money (put-down rule). That means the option will expire unexercised, and the writer gets to keep the premium. That 6 point premium is a short-term capital gain. Aren't short-term capital gains taxed at ordinary income tax rates? Yes they are, but for IRS and test purposes, they are legally characterized as short-term capital gain. All short positions will result in short-term treatment, even when the options are LEAPS.

unit 16: Your client has a combined margin account. The market value of the long stock position has increased by $5,000, and the market value of the short stock position has dropped by $2,000. What is the net change to the equity in the account? A) $7,000 increase B) $3,000 decrease C) $7,000 decrease D) $3,000 increase

A) $7,000 increase

unit 8: Which of the following investments would be the least appropriate for a customer's IRA? A) An inverse ETF B) A closed-end fund C) A unit investment trust D) A mutual fund

A) An inverse ETF explanation: IRAs are long-term investments while inverse ETFs are suitable for those with a short time horizon.

unit 10: A customer buys 100 shares of ABC at 56.50 and writes 1 ABC Aug 60 call at 2. If the call is exercised, the consequences are I. a cost basis of $56.50 per share. II. a cost basis of $58.50 per share. III. sales proceeds of $60 per share. IV. sales proceeds of $62 per share. A) I and IV B) I and III C) II and III D) II and IV

A) I and IV The premium of the option affects the basis of the stock (bought or sold) as a result of exercise, adding the premium per share ($2) to the price per share ($60), for total sales proceeds of $62. The original cost basis is not affected by the exercise, so it remains $56.50.

unit 10: A customer, long 100 shares of QRS at 62.50, writes 1 QRS Sep 65 call at 1.50. If the call is exercised, which two statements are true? I. The gain is $250. II. The gain is $400. III. For tax purposes, cost basis per share is $62.50. IV. For tax purposes, cost basis per share is $61. A) II and III B) II and IV C) I and III D) I and IV

A) II and III Explanation The customer has paid $62.50 for the stock and has received 1.50 for the call. If the Sep 65 call is exercised, the customer will receive 65 for the sale of the stock. After exercise, the total received is $66.50 ($1.50 + $65). $66.50 received minus $62.50 paid equals four points profit ($400). If a covered call writer is exercised, the cost basis for tax purposes is the purchase price of the stock. Sales proceeds for tax purposes are 66.50 per share (strike price plus premium).

unit 13: Financial footnotes found in which of the following would be of the greatest importance to your broker-dealer's retail customers? I. The broker-dealer's principal-approved advertising II. Balance sheets of stocks you've recommended to them III. Income statements of stocks you've recommended to them IV. Your broker-dealer's website page showing the history of the firm A) II and III B) I and IV C) I and III D) II and IV

A) II and III Explanation While footnotes found anywhere are of importance, those found in financial statements, such as balance sheets and income statements, would be the most important to your broker-dealer's customers when evaluating investment recommendations.

unit 10: Your customer has purchased 100 shares of Synovial Lubrication Products (SLP) at $95 per share. The date of the purchase was April 22, 2021. Three months later, the customer purchased one SLP Dec 90 put for 3. At the expiration date of the option, SLP's market price is $101 and the option expires unexercised. The customer sells the 100 shares of SLP stock on June 1, 2022 at $104 per share. This sale results in A) a short-term capital gain of $900. B) a short-term capital gain of $600. C) a long-term capital gain of $600. D) a long-term capital gain of $900.

A) a short-term capital gain of $900. Explanation Purchasing a put option on an existing long position is a protective put. It does not offer the same tax benefits as a married put (the option and long security position are purchased on the same day). That is, if the long position is not more than 12 months old when the put is purchased, the holding period is erased and does not begin again until disposition of the put. In addition, if the option expires or is sold, the transaction is a loss or a gain and does not affect the cost basis of the long position. This is why the cost basis of the SLP stock is the original $95 per share. Furthermore, the option expired in December 2021. That means the loss is taken that year. Selling the stock at $104 creates a capital gain of $900. As described above, the purchase of the put option severed the holding period and restarted it at the put's expiration date. From December to June is not longer than 12 months, so the gain is short term.

unit 11: Limited partners have the right to do all of the following except A) choose the assets for the partnership. B) sue the general partners for damages if he acts outside of his authority. C) inspect and copy partnership records. D) vote to remove the general partners.

A) choose the assets for the partnership. Explanation All of these are rights of the limited partner except choosing the assets to be purchased for the partnership, which is a function of the general partner.

unit 8: A registered representative notices that a fund he has been recommending to a recalcitrant customer has just declared a $1 per share dividend. Recognizing this as a great opportunity, he calls the client and explains that if a purchase is made within the next week, at the end of the month, the investor will receive a cash dividend of $1 for each share purchased. With a current public offering price of approximately $20 per share, that is a return on investment of 5% in a matter of a couple of weeks. This registered representative is A) guilty of violating the practice of selling dividends. B) guilty of guaranteeing a dividend. C) offering the client a wonderful opportunity. D) properly showing the return as a percentage of the offering price.

A) guilty of violating the practice of selling dividends. Explanation: What the registered representative has not explained is that, upon payment of the dividend, the net asset value of each share will drop by $1.00. That is why the practice of selling dividends is prohibited. There is no problem with stating the dividend of $1 will be paid; that is not guaranteeing anything because the dividend has already been declared. Rate of return on a mutual fund should always be shown as a percentage of the offering price, but that "good deed" does not count when performing a misleading activity.

UNIT 8: All of the following are risks associated with most mutual funds except A) liquidity risk. B) expense risk. C) market risk. D) tenure risk.

A) liquidity risk. Explanation Under federal law, mutual funds must redeem shares within seven days of receipt of the investor's request. There is never a need to find a buyer for the shares. Therefore, mutual funds have little to no liquidity risk. As with any investment, there is market risk for most mutual funds (little to none with money market funds, but they would have to be specified in the question). Expense risk is the uncertainty as to future expenses incurred by the fund. The higher the expense ratio, the lower the performance. Management fees, transaction costs, and regulatory filing fees can change. Another risk is that the management team that has brought the fund great success in the past might leave or be terminated. That is what tenure risk is all about.

unit 11: All of the following would flow through as a loss to limited partners except: A) principal repayment on recourse debt. B) interest payments on recourse debt. C) accelerated depreciation. D) depletion.

A) principal repayment on recourse debt. Explanation: Principal repayments are not deductible for tax purposes. The interest payments are deductible.

unit 5: The market price of a convertible bond depends on all of the following except A) the rating of the bond. B) the value of the underlying stock into which the bond can be converted. C) the conversion prices of bonds from similar companies. D) current interest rates.

A) the rating of the bond. explanation: Conversion prices are not set in competition; therefore, the conversion prices of similar bonds would be of no concern regarding price.

unit 12: Planned amortization class (PAC) collateralized mortgage obligation were designed to provide which of the following benefits, compared to plain vanilla tranches? A) Increase prepayments to tranche holders B) Reduce prepayment risk for tranche holders C) Match the prepayment risk of plain vanilla tranches D) Eliminate prepayment risk for tranche holders

B) Reduce prepayment risk for tranche holders Explanation PACs reduce, but cannot eliminate, prepayment risk for tranche holders. The companion tranches will have higher prepayment risk than the PAC, as they were designed to absorb the bulk of the prepayment risk.

unit 11: All of the following documentation is necessary for a publicly subscribed limited partnership except A) a partnership agreement. B) a cash flow analysis. C) a subscription agreement. D) a certificate of limited partnership.

B) a cash flow analysis. Explanation The certificate gives public information about the partnership and is filed in the home state. The partnership agreement spells out the roles of the general and limited partners. The subscription agreement is the instrument by which the limited partners invest.

unit 6: One of the most common cases of overlapping municipal debt is when a city's portion of the debt is shared with A) the state. B) the county. C) the revenue authority. D) the federal government.

B) the county. Explanation Overlapping debt is the issuer's proportionate share of the debt of other local governmental units that either overlap it (the issuer is located either wholly or partly within the geographic limits of the other units) or underlie it (the other units are located within the geographic limits of the issuer). The debt is generally apportioned based upon relative assessed values. The state is never a party to overlapping debt and, because overlapping debt applies only to general obligation (GO) bonds, there is no revenue authority.

unit 15: An outstanding municipal bond issue has the following characteristics: 7.50% coupon, maturity in 20 years, puttable in five years at 100, callable at 102 in 10 years, declining in a straight line to maturity, and yield to maturity is 6.50%. The issue should now be quoted A) yield-to-put. B) yield to call at 102. C) yield to maturity. D) yield to call at par.

B) yield to call at 102. Explanation Because the bond issue is selling at a premium, the yield to call is less than the yield to maturity. The bonds must be quoted as yield to call at the earliest maturity, which would be the 10-year call at 102. If the bonds were selling at a discount, yield to maturity would be the proper quote. Yield-to-put is not required to be quoted.

unit 13: One of your customers notices that the short interest on the NYSE is high. When she asks you for an interpretation, you should tell her that this signals A) a period of volatility in the market. B) a bullish market. C) a bearish market. D) a period of stability in the market.

B) a bullish market. explanation: short interest represents the number of shares sold short, and when this number is high, it is a bullish indicator because each share that has been sold short must be replaces (covered) at some point. to replace the stock shorted, an investor must go into the market to buy that stock. when all of those short sellers have to buy back stock they shorted, it puts upward pressure on the prices of those stocks

unit 8: If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as A) a closed-end company. B) a unit investment trust. C) a utilities fund. D) a growth fund.

B) a unit investment trust. Explanation A unit investment trust issues shares that represent units of a particular portfolio; management has no authority—or only limited authority—to change the portfolio. The portfolio is fixed, not traded.

unit 9: All of the following statements regarding variable annuities are true except A) variable annuities are classified as insurance products. B) variable annuities offer the investor protection against capital loss. C) variable annuities may only be sold by registered representatives. D) insurance companies keep variable annuity funds in separate accounts from other insurance products.

B) variable annuities offer the investor protection against capital loss.

unit 3: A registered representative has a customer looking to invest in stock for income. The customer is looking for the highest fixed rate of return available based on her risk profile. Which of the following would be least suitable? A) Straight preferred B) Callable preferred C) Convertible preferred D) Cumulative preferred Explanation Convertible preferred stock is convertible into the issuer's common stock. This conversion feature has value if the market price of the underlying stock should increase. Because of that feature, issuers are able to attract investor interest with a lower dividend on this preferred stock compared with preferred stock that has no conversion feature. Therefore, it would be the least suitable investment for this client.

C) Convertible preferred

unit 9: An investor begins a periodic payment deferred variable annuity purchase program. One respect in which this differs from purchasing a mutual fund is that A) the mutual fund will generally have a surrender charge for early withdrawal and variable annuities only charge for surrender when annuitizing. B) the variable annuity contract will generally have lower expenses than the mutual fund. C) the investor in the variable annuity contract reports no taxable consequences during the accumulation period. D) there is a minimum guaranteed return with the variable annuity, while there are no guarantees with the mutual fund.

C) the investor in the variable annuity contract reports no taxable consequences during the accumulation period. Explanation: One of the features of annuities is the tax deferral of all earnings until the money is withdrawn. Mutual fund distributions are taxable when received. On the other hand, when the annuity accumulation is withdrawn, everything above the cost basis is taxed as ordinary income (10% penalty if younger than 59½)—there is never any capital gains treatment with annuities. Variable annuities invariably have higher expense ratios than mutual funds with similar portfolios. Surrender charges are found with annuities. Do not confuse those with the conditional deferred sales charge (CDSC) applied to certain mutual fund share classes.

unit 10: If a customer does not anticipate that a stock's price will change, and she wants to take an option position, she would most likely A) buy a straddle. B) buy a call. C) write a straddle. D) buy a put.

C) write a straddle. Explanation: The customer earns combined premiums when selling a straddle (sale of a call and put with same terms). She hopes the market price will not move, both positions will expire unexercised, and she will keep the premiums. This position has unlimited loss potential, should the underlying stock rise (because of the short call).

UNIT 13: A fundamental analyst is reviewing GEMCO's financial statements. The company has a current ratio of 4:1, a price-to-earnings (P/E) ratio of 12:1, $10 million in 5% debentures, and net income after preferred dividends of $4 million. If the current market price of GEMCO stock is $60 and the company pays dividends at a rate of $0.75 quarterly, the dividend payout ratio is A) 40%. B) 20%. C) 5%. D) 60%. Explanation As with many computational problems, there is some unnecessary information given. The current ratio is irrelevant, and so is the information on the debentures. What is needed is the amount available to pay the common so that we can compare that to the amount actually paid. We see that $0.75 in quarterly dividends are paid. That is equal to $3 per year. The next key is determining the earnings. With a market price of $60 per share and a price-to-earnings ratio of 12:1, the earnings per share must be $5. The dividend payout ratio should be thought of as "dividends paid out of earnings made." The dividends paid are $3; the earnings made are $5. That is a 3 to 5 ratio, or, as usually expressed in percentage form, 60%.

D) 60%. Explanation As with many computational problems, there is some unnecessary information given. The current ratio is irrelevant, and so is the information on the debentures. What is needed is the amount available to pay the common so that we can compare that to the amount actually paid. We see that $0.75 in quarterly dividends are paid. That is equal to $3 per year. The next key is determining the earnings. With a market price of $60 per share and a price-to-earnings ratio of 12:1, the earnings per share must be $5. The dividend payout ratio should be thought of as "dividends paid out of earnings made." The dividends paid are $3; the earnings made are $5. That is a 3 to 5 ratio, or, as usually expressed in percentage form, 60%

unit 4: In a scenario of falling interest rates and a positive yield curve, assuming all to be of equal face value, which of the following bonds will appreciate the most? A) 20-year bond selling at a premium B) 1-year bond selling at a discount C) 1-year bond selling at a premium D) 20-year bond selling at a discount

D) 20-year bond selling at a discount Explanation This is all about duration. The longer the duration, the greater the price volatility of the bond. That is why prices of long-term bonds are more volatile than prices of short-term bonds. We know from the inverse relationship between bond prices and interest rates that falling interest rates lead to higher bond prices. Therefore, the 20-year bonds will appreciate more than the 1-year bonds when interest rates fall. Also, prices of bonds with low coupon rates tend to be more volatile than prices of bonds with high coupon rates because they have a longer duration. A bond sells at a discount when its coupon is lower than prevailing interest rates. Because of its lower coupon, the 20-year discount bond tends to appreciate more than the 20-year premium bond.

unit 7: Interest income from all of the following are exempt from state and local taxation except A) Treasury bonds. B) Treasury bills. C) Series EE savings bonds. D) FNMA mortgage-backed issues. Explanation As a general rule, the interest income from U.S. government and agency securities is subject to federal taxation only; it is generally exempt from state and local taxation. However, the interest income from mortgage-backed securities is fully taxable. LO 7.e

D) FNMA mortgage-backed securities Explanation As a general rule, the interest income from U.S. government and agency securities is subject to federal taxation only; it is generally exempt from state and local taxation. However, the interest income from mortgage-backed securities is fully taxable.

unit 3: Which of the following actions of XYZ Corporation would raise additional capital? I. Issue callable preferred stock II. Declare a stock dividend III. Make a rights offering IV. Encourage convertible bondholders to convert to common stock A) I and II B) II and III C) II and IV D) I and III

D) I and III Explanation Issuing new stock either through an underwriting or a rights offering allows a corporation to raise capital. Stock dividends represent more shares given to existing shareholders, but no money is raised. Conversion results in the exchange of one security for another, and no money is raised.

unit 10: which of the following terms are synonymous? A) Price spread and debit spread B) Vertical spread and time spread C) Price spread and horizontal spread D) Price spread and vertical spread

D) Price spread and vertical spread

unit 10: Your customer is opening a new options account. Which of the following need NOT occur to open the account? A) The background and financial information provided by the client must be verified by the client and returned within 15 days of the time the account was approved. B) The client must agree that any material change in financial status requires the broker-dealer be notified and the options agreement be amended. C) The registered representative must document that the client has received a current OCC disclosure document. D) The OCC must verify the financial information supplied by the client to ultimately approve the account.

D) The OCC must verify the financial information supplied by the client to ultimately approve the account. Explanation The client must have a current Options Clearing Corporation (OCC) disclosure document. This is verified by the client's signature on the options agreement form, which must be signed and returned within 15 days of account approval. The client must agree to notify the firm of any changes in financial status as soon as possible, and the options agreement must be amended, if necessary. OCC approval for an options account is not required, nor do they verify any information given by the client.

unit 13: The visible supply includes all of the following except A) revenue bonds. B) industrial development bonds. C) general obligation bonds. D) municipal notes.

D) municipal notes.

unit 10: A client with an options account contacts the registered representative handling the account with instructions to open the following spread: Buy 1 ABC 100 call and Sell 1 ABC 105 call at a 5-point debit. Under FINRA rules, this order A) is for a bull call spread. B) will be executed at the next available trade meeting the 5-point limit. C) should be turned in immediately. D) should be refused.

D) should be refused. explanation: The order should be refused because it is impossible for it to be profitable. This is a bull call spread (but that is not the correct answer here because it has nothing to do with FINRA rules) and will become profitable when the spread widens. With strike prices of 100 and 105, it can never widen more than 5 points. If the client paid 5 points for the spread, once commissions are factored in, the client must lose money and certainly cannot profit. FINRA looks at this as an uneconomic position, and the firm should refuse to take the order.

Dividend payout ratio

Dividends per share / Earnings per share The dividend payout ratio should be thought of as "dividends paid out of earnings made.

unit 9: for life insurance, the method used for tax consequences is:

FIFO

unit 10: If a covered call writer is exercised, the cost basis for tax purposes is the: Sales proceeds for tax purposes are:

If a covered call writer is exercised, the cost basis for tax purposes is the purchase price of the stock Sales proceeds for tax purposes are the XP + premium

unit 15: A summary statement of all interest and dividends credited to a customer's account must be sent to the primary accountholder each year in _____________________.

January

unit 15: Member firms must provide an IRS Form 1099 to the primary account holder of all the interest and dividends credited to the account in _______________. This form is used in the customer's tax return preparation.

January

unit 9: for annuities, there are 2 methods that are used to determine tax consequences:

LIFO and pro rata (partly taxable, partly tax free) - LIFO is used during the accumulation period for random withdrawals - pro rata is used during the annuitization period when receiving periodic payments (earnings portion is taxed while the contributions are tax free) *this assumes that the annuity is non-qualified

non-qualified =

after-tax dollars

unit 10: an options contract is _____ ___________ when the premium is equal to the intrinsic value.

at parity

unit 10: an options contract is _____ ______ __________ when the strike price and the market price are the same

at-the-money

unit 10: a put option is _____ ________ _______________ when the strike price is greater than the market price

in the money

unit 10: call option is ____ _______ __________ when the market price is greater than the strike price

in the money

unit 8: mutual fund objective to have a single source investment would best describe a ________________ fund because this type of fund combines equities with different market characteristics

blend/core fund

unit 10: If an investor buys 300 shares of FLB, and one month, later buys 1 FLB Jul 50 put, how does this affect the holding period on his stock? A) It has no impact on the holding period for any of the shares owned by the investor. B) It ends the holding period on the put. C) It erases the holding period on 100 shares. D) It erases the holding period on 300 shares.

c) it erases the holding period on 100 shares Explanation Because the stock has not been held more than 12 months, the put purchase erases the holding period for any shares the put subsequently allows the holder to sell. Because the holder owns one put, this erases the holding period on 100 shares owned. The other 200 shares are unaffected.

unit 3: which type of preferred stock would pay the highest stated dividend rate?

callable preferred stock explanation: when stocks are called, there are no more dividend payments. therefore, to compensate for that possibility, the issuer pays a higher dividend with callable preferred rather than straight preferred. Cumulative and convertible preferred have positive characteristics that would justify a lower fixed dividend than straight.

unit 11: The ________________ of limited partnership gives public information about the partnership and is filed in the home state. The _________________ _________________ spells out the roles of the general and limited partners. The ______________________ agreement is the instrument by which the limited partners invest.

certificate of limited partnership; partnership agreement; subscription agreement

unit 13: when gifting securities, the donee acquires the donor's:

cost basis (POP originally paid for the shares) and the sale (redemption) takes place at the NAV for a profit per share

unit 10: _______________ _____ writing is frequently used by persons who own the underlying stock to increase their rate of return. if the options expire unexercised, the writer keeps the premium, which provides additional portfolio income

covered call writing

unit 13: the bond buyer 20 index

includes only GO bonds is computed weekly explanation: The Bond Buyer 20 bond index measures secondary market yields of GO bonds. It consists of 20 GO bonds, A-rated or better, and each with approximately 20 years to maturity. The index is updated each week.

unit 8: receiving cash distributions from a mutual fund aside from reinvesting may cause the customer's proportional interest in the fund to:

decline

unit 15: bonds were sold at a ___________, yield to maturity would be the proper quote

discount

unit 4: A bond sells at a ______________ when its coupon is lower than prevailing interest rates.

discount

unit 8: capital gains distributed by a mutual fund to shareholders are taxed once in the year they are

earned (accrued)

unit 14: issuers are most likely to call in bonds when interest rates ________. This means that the issuer can borrow in the current market at a _________ rate than the outstanding debt instrument.

fall; lower

unit 4: We know from the inverse relationship between bond prices and interest rates that ______________ interest rates lead to higher bond prices.

falling interest rates lead to higher bond prices

unit 10: On exercise of the option, the holder of a put will realize a profit if the price of the underlying stock:

falls below the XP - the premium paid

unit 11: Taxable income for a partnership (DPP) is determined as follows: Gross revenue: $3 million less operating expense: $1.2 million equals net revenue: $1.8 million less interest: $200,000 less depreciation: $3 million equals taxable loss: $1.4 million

gross revenue - operating expense (includes mgmt fees) = net revenue net revenue - interest expense - deprecation = taxable loss/gain

unit 8: The portfolio of a _________/_________ would have much overlap with that of a blend/core fund, but more emphasis is placed on including stocks for their dividend payout.

growth/income fund