Practice Exam #1

If an investor opens a new margin account and buys 200 shares of DWQ at 50, with Regulation T at 50%, what is the investor's initial margin requirement?

- $5,000 *The initial margin requirement is calculated by multiplying the market value of $10,000 by the Regulation T requirement of 50%, which equals $5,000.

One of your clients who is interested in purchasing some investment company shares brings to your attention a fund with a net asset value per share (NAV) of $22.13 and an asking price of $21.02. The client asks for an explanation, and you would respond?

-"This is a closed-end investment company whose selling price is based on supply and demand, not NAV." *One of the characteristics of closed-end investment companies is that their selling price is frequently at a discount to the NAV. Because the shares are not continuously offered, as is the case with an open-end company, the shares are priced based on supply and demand. That means they can sell at, above, or below the net asset value per share. They trade in the secondary markets like any stock and one usually pays a commission, not a sales load when buying or selling.

In a margin account, which of the following would be affected by a stock dividend?

-# of Shares held in the account. *Stock dividends merely give an investor more shares of stock valued at less per share. The total value of the position does not change. Therefore, the balances in the account remain unchanged as well.

The Options Clearing Corporation (OCC) automatically exercises an open equity option contract if, at expiration, the contract is in the money by?

-$0.01 or more for a member firm. -$0.01 or more for a public customer.

If an investor has an established margin account with a current market value of $6,000 and a debit balance of $2,500, with Regulation T at 50%, how much buying power does the investor have?

-$1,000 *The Regulation T requirement is 50% of the current market value of $6,000 ($3,000). Equity is equal to the current market value of $6,000 minus the debit balance of $2,500 ($3,500). Excess equity is calculated by subtracting the Regulation T requirement of $3,000 from the current equity of $3,500 ($500). Buying power is calculated by multiplying the excess equity of $500 by 2 ($1,000).

A 38-year-old investor places $25,000 into a single premium deferred variable annuity. Twenty-two years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is?

-$11,750 *Only the deferred growth is taxable. In this case, it is the difference between the surrender value of $72,000 and the cost basis of $25,000. That $47,000 is taxed at the marginal rate of 25%. Because the investor is older than 59½ (38 + 22 = 60), there is no additional 10% penalty tax. Effectively, this is a 25% tax on $47,000.

An investor wishes to invest $5,000 into the KAPCO Balanced Fund, an open-end investment company. How many shares will the investor receive if the next computed NAV per share after receipt of the order is $41.30 and the fund has a sales charge of 4%?

-$116.225 *The investor will pay the POP (public offering price) of $43.02 per share. That price is computed by dividing the NAV of $41.30 by (100% ‒ 4%). Remember, the 4% sales charge is a percentage of the offering price, not the NAV. Dividing the $5,000 investment by the POP of $43.02 results in a purchase of 116.225 shares.

Jennifer bought 500 shares of Wolfe Industries common stock on October 1, 2019, at $50 per share. On October 24, 2019, she sold all the stock at $40 per share. On November 12, 2019, she buys 200 shares of Wolfe Industries common stock at $42. How much of a loss will Jennifer be able to claim for 2019?

-$3,000 *By repurchasing 200 shares of Wolfe Industries common stock less than 30 days after the sale at a loss, Jennifer has run afoul of the wash sale rule. Because she only purchased 200 rather than the full 500 she sold, those are the only shares affected by the rule. Therefore, of the $5,000 total loss (500 shares × $10 per share as the stock fell from $50 to $40), $2,000 (200 shares × $10) is "washed" but the other $3,000 is allowable.

A customer goes long an MMM Jan 40 put at 5 and writes an MMM Jan 50 put at 13. The customer will break even or profit when the market price is at all of the following except?

-$35 *This is a bull spread; the investor wants the stock to rise. Breakeven for put spreads is computed by subtracting the net premium (8) from the higher strike price (50). If it stays above the breakeven price of $42, they will profit.

An investor purchased 100 shares of ABC common stock valued at $6,000. What is the adjusted cost basis per share of this position after the company pays a 20% stock dividend?

-$50.00 *FINRA Rule 2273 requires that educational material be provided to customers about potential conflicts of interest, the transferability of assets, differences in products and services, and potential costs of the transfer. Customers do not need to have their identity revalidated by a receiving firm, because the carrying firm has already complied with anti-money-laundering requirements.

If a customer buys 1 XYZ Aug 50 put at 1 and sells 1 XYZ Aug 65 put at 10 when XYZ is at 58, the maximum potential gain is?

-$900 *The maximum gain on any credit spread is the net credit. In this case, $1,000 was received, and $100 was paid out, so the net credit is $900.

What is the size of one LEAPS contract?

-100 Shares

The Trade Reporting and Compliance Engine (TRACE) is a trade reporting system used to report certain bond trades to the public. Trade details must be reported to FINRA via TRACE no later than?

-15 minutes after the trade execution.

ALFA Enterprises pays a quarterly dividend of $0.15 and has earnings per share of $2.40. What is the dividend payout ratio?

-25% *Earnings per share are typically calculated for a year, so the annual dividend of $0.60 ($0.15 × 4) is divided by $2.40 to calculate what percentage of earnings is paid as a dividend—or rather, the dividend payout ratio (0.60 / 2.40 = 25%).

A May and November Treasury bond is traded the regular way on Wednesday, June 8. The number of days of accrued interest is?

-39 *Accrued interest on government bonds is based on actual days in a year. Settlement occurs on the next business day. This bond pays interest in May and November, with the most recent payment on May 1. Interest has accrued on this bond for 31 days in May and 8 days in June, for a total of 39 days. The settlement date is Thursday, June 9.

The investment adviser of the GEMCO Special Situations Fund would find which of the following companies least attractive for the fund's portfolio?

-ABC Corporation, whose shareholders have just reelected the current board of directors

Who signs the agreement among underwriters for a municipal bond issue?

-All members of the underwriting syndicate *All members of the syndicate, including the managing underwriter, sign the agreement among underwriters. It is not signed by the issuer, bond counsel, or trustee.

Which of the following statements regarding straddles are true?

-An investor who expects no change in a stock's price and wishes to generate income SELLS a straddle. -An investor who expects substantial fluctuations in a stock's price and is unsure as to direction buys a straddle.

Correspondence—one of the three categories of communication with the public—is defined as?

-Any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30-calendar-day period.

A client writes 1 Apr 30 call and buys 1 Apr 40 call. This is?

-BEAR SPREAD -CREDIT SPREAD *This is a call credit spread, and bears sell calls. The 30 call is worth more because it has a lower strike price. Long the lower is bullish; short the lower is bearish.

As a registered representative, you often have customers who are interested in learning about derivative products such as options and different derivative strategies. Of the following customer profiles, which would writing calls be considered least suitable for?

-Bernard and Judy Jones, both retired, covering monthly expenses with their Social Security and annual mandatory IRA withdrawals. Savings outside of retirement accounts total $25,000. Income is the investment objective listed on the account. *While these profiles offer some guidance, and any of them could be considered incomplete to some extent, the one for whom writing calls would be considered the least suitable is the retired joint account of Bernard and Judy Jones. Factors to note would be the nominal total savings and that both are in retirement, needing Social Security and mandatory IRA withdrawals to meet current living expenses. Consider that while writing calls brings income into an account, it is a strategy that is high in risk with an unlimited maximum loss potential—not suitable for a retired couple in their position.

If a Nasdaq market maker is selling stock to a customer from inventory and the firm has held the shares to be sold for several months, what price should the dealer use as a basis for a markup?

-Best offering price quoted in the interdealer market *FINRA rules require that a dealer's markup to a customer be based on the current market rather than the dealer's cost in an active, competitive market. The dealer's potential loss on inventory is considered to be a risk of making a market.

Who attests to the legality of a bond issue and issues a legal opinion on a proposed new municipal bond issue?

-Bound Council *The issuer hires a firm or an individual to act on its behalf as bond counsel.

A UK company exports sweaters to the U.S. and will be paid in U.S. dollars upon delivery. To hedge foreign-exchange risk using listed currency options, the UK company should?

-Buy British Calls *Normally, exporters buy puts on foreign currency to hedge. There are no listed currency options available on the U.S. dollar, so the British company should buy calls on its own currency.

Two registered representatives are discussing a collateralized debt obligation (CDO) backed by cash flow from credit card payments. Which of their statements during the discussion is not true?

-CDOs always represent pools of assets that individually are very liquid, and that is why the CDOs themselves are very liquid. *In most cases, the assets comprising the CDO portfolio are small and individually not very liquid. Generally, individual investors would not have an opportunity to purchase these assets separately. Repackaging the assets, however, facilitates them being sold to individual investors in the secondary markets.

An investor purchases a municipal bond at par to yield 5.5% to maturity. Two years later, if he sells the bonds at a price equivalent to a 5% yield to maturity, the investor incurs

-Capital Gain *Yields fall as bond prices rise. Because the yield to maturity has dropped, the bond is trading at a higher price than when it was purchased. The consequence of the sale is a capital gain because the investor sold the bond that was purchased for par at a premium.

Most business development companies (BDCs) are classified as?

-Closed-End Investment company. *Most BDCs register as closed-end investment companies (CEF) and trade in similar fashion in the secondary markets. Federal law places some restrictions on the investment flexibility of a BDC that are not required of regular CEFs. A major difference between BDCs and the other investment companies is the active role played in the management of the businesses in the portfolio. That is what business development is about helping smaller businesses develop into larger ones.

Which of the following features of preferred stock allows the holder to reduce the risk of inflation?

-Convertible *Fixed-dollar investments, such as bonds and preferred stock, are subject to inflation risk, which is the risk that the fixed interest or dividend payments will be worth less over time in terms of purchasing power. The ability to convert to common stock, which tends to keep pace with inflation, offsets this risk.

The over-the-counter (OTC) market could be characterized as what type of market?

-Dealer

Which of the following employer-sponsored plans is not required to meet the nondiscrimination provisions of ERISA?

-Deferred compensation plans *Deferred compensation plans, by design, are nonqualified and not subject to ERISA. Therefore, they may discriminate as to who may participate. In any question on the exam, a qualified plan sponsored by a business will most likely have to comply with ERISA.

Regulation BI contains four key component obligations. Which two of them apply to registered representatives?

-Disclosure & Care Obligation. *The obligation to disclose all material information and to exercise reasonable diligence, care, and skill in making any recommendation apply to both the member firm and the registered representative. The Conflict of Interest Obligation and the Compliance Obligation belong to the firm. That does not mean you do not have an obligation to disclose any conflicts of interest. That is part of the disclosure obligation. The specified Conflict of Interest Obligation includes the written supervisory procedures and training the firm must provide. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

Which of the following characteristics are applicable to real estate investment trusts (REITs)?

-Dividends from REITs are taxed as ordinary income. *While income flows through to REIT shareholders in the form of dividends, losses do not flow through. When a REIT pays a dividend, it will be taxed as ordinary income, but there are no guaranteed minimum dividend payouts. They trade both on exchanges and over the counter, and are therefore considered to be liquid investments.

A customer is interested in an exchange-traded fund (ETF). With regard to the trading of ETFs, the customer should be aware that?

-ETFs can be purchased throughout the trading day. -Real-time quotes are available for ETFs *ETFs can be traded throughout the trading day. Changing price quotes are available in real time as investors buy and sell. Although ETFs have a NAV that is calculated on the basis of the portfolio holdings, the trading price is determined by supply and demand in the open market, with customers paying commissions.

All of the following statements regarding a transfer on death (TOD) account are correct except?

-Estate Taxes are reduced *A TOD account avoids probate but not estate taxes. The owner of the account may change beneficiaries and their percentages as she wishes. The TOD account is an account at a specific broker-dealer and only relates to the assets in that account.

One of your customers would like to purchase a government agency security for the UTMA account of her daughter. The daughter worked in construction over the summer and would like to use $1,275 of her savings for the purchase. Securities issued by which of these agencies could be purchased for this account?

-FNMA, Fannie Mae, Federan National Mortgage Association. *Of this group, the only agency that would be able to sell $1,275 of securities is Fannie Mae. Their securities are available with a minimum denomination of $1,000 and then increments of $1. FHLMC also has the $1,000 initial minimum, but with $1,000 increments. The same numbers apply to the FCS, and Sallie Mae's minimum is $10,000. Another agency that would have met the investor's need is GNMA.

Which of the following order types is permitted in Nasdaq markets but not in NYSE equity markets?

-FOK "Fill-or-Kill" *FOK and all-or-none orders may no longer be entered in the NYSE equity market but are still accepted in both the bond market and Nasdaq.

Dale Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. Wells is looking for favorable tax treatment of earnings and losses. Wells also wants to limit the number of investors but is willing to share control of the enterprise with others to attract them. What business form would you advise?

-General Partnership *Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. Although an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.

If a state agency has issued a moral obligation bond that runs into difficulty and requires the secondary backing to be implemented, what is necessary?

-Legislative Approval *If a state agency that has issued a moral obligation bond requires that secondary backing, the agency must apply to the legislature for approval. If approved by the legislature, the funds will be made available. If not approved, the issue might go into default.

When a company issues additional preferred stock and bonds, which of the following will be the net result?

-Leveraged is increased *Leverage is the use of investors' money at a fixed cost to benefit the common shareholders. Both preferred stock and bonds are fixed-rate issues. Therefore, issuing more preferred stock or bonds increases the leverage of the common stockholders.

A mutual fund that charges 12b-1 fees may use the money to cover all of the following except

-Management Fees *12b-1 fees may not be used to pay for the portfolio manager's fees, only for sales promotions and fees and other activities relating to the distribution of the fund's shares.

Which of the following is a risk most often encountered when investing in common stock?

-Market Risk *Common stocks have market risk because they move with the overall stock market. Market risk is a systematic risk, probably the one most investors think of when buying stock. Interest rate risk is associated with fixed-income securities. Their prices move inversely with interest rates. Debt securities also have default or credit risk. Investors use the ratings services to fit that risk with their tolerance. Historically, stocks have been a good hedge against inflation while debt instruments have not.

An investor opens the following options position: Long 1 ABC Aug 50 call @ 5½; short 1 ABC Aug 55 call @ 3½. What is the investor's maximum gain, maximum loss, and breakeven point?

-Maximum gain is $300; maximum loss is $200; breakeven is $52.

An investor opens the following positions: Sell short 100 shares of FAB @72; buy 1 FAB Jun 70 call @5. What is the customer's maximum gain, maximum loss, and breakeven point?

-Maximum gain is $6,700; maximum loss is $300; breakeven point is $67.

Stocks that are listed on the NYSE can also be listed on?

-NASDAQ *NYSE-listed securities can be listed on and trade on other U.S. exchanges including the Nasdaq Stock Market. NYSE-listed stocks would never be listed on the OTCBB nor on options exchanges such as the CBOE and the BOX Exchange LLC.

You have a high net worth client who is interested in investing in a hedge fund. Details of the offering would be found in the fund's?

-Private Offering Memorandum *Hedge funds do not register with the SEC, so there is no registration statement. However, the management does prepare an offering document. It could be called the private placement memorandum, the offering circular, or even the prospectus on the exam. The statement of additional information (SAI) is limited to registered management investment companies (open- and closed-ends) and ETFs.

Which of the following statements regarding the Government National Mortgage Association (GNMA) is true?

-Private lending institutions approved by GNMA originate eligible loans and sell the mortgage-backed securities to investors. *GNMA is a government-owned corporation that approves private lending institutions, such as banks and mortgage companies, to originate eligible loans, pool them into securities, and sell the GNMA mortgage-backed securities to investors. GNMA does not originate loans, and it does not issue or sell securities.

For both U.S. Treasury notes and Ginnie Maes?

-Quotes are a percentage of par in 32s *Interest from U.S. T-notes is taxed at the federal level only, while interest on Ginnie Maes is taxed at all levels. GNMA bonds are treated like corporate bonds in many ways. T-notes settle next day, while Ginnie Maes normally settle T+2. Interest on T-notes is computed on an actual-day basis, and Ginnie Mae interest is computed on a 30-day month/360-day year basis. Both Ginnie Maes and T-notes are quoted in 32nds

Reasons why a corporation might engage in a stock buy-back program would include all of these except?

-Reducing annual interest expense. *There is no interest expense with stock. When a company buys back its stock, it becomes treasury stock. That stock is no longer outstanding. Buying back the stock should cause the earnings per share to increase (there are now fewer shares outstanding). Many times one company will acquire another one by paying for the purchase with its treasury stock rather than cash. Many companies offer employees ownership opportunities through employee stock options. This is a way to ensure that the company has enough stock to meet the needs.

Once individuals have passed the Series 7 exam and are now registered as general securities registered representatives, compliance with Regulation BI would allow including which of these on their business card following their name?

-Registered representative

Which of the following types of municipal bond issues is associated with a flow of funds?

-Revenue Bonds *The flow of funds only relates to municipal revenue bonds. It describes the priority of disbursing revenues from the project. TANs are backed by taxes to be collected, while GO bonds are backed by the issuer's taxing authority. School districts are funded by GO bonds.

A corporate offering of 200,000 additional shares to existing stockholders may be made through?

-Rights Offering *A rights offering is an offering of additional shares of stock to existing shareholders

New issues of municipal bonds are exempt from all of the following except?

-Securities exchange act of 1934 antifraud provisions. *Municipal securities are exempt from federal and state registration. However, no security is exempt from the antifraud provisions of federal securities law, including the Securities Exchange Act of 1934. The SFA is a UK regulator and has no application in the United States.

An agent taking which of the following actions would be committing a violation?

-Selling securities from a minor's custodial account without the custodian's consent but with the beneficial owner's consent

If an investor maintaining a short equity option is assigned an exercise notice, which of the following statements is true?

-Short investor must accept the exercise notice.

If a customer gives his broker-dealer an order to sell his stock if it falls to or below 69 and will not accept a price below 69, the order is

-Stop Limit Order *When an order is entered this way, the client has specified that it should not be triggered until the stock is at or below 69, a stop order. Because the client will not accept an execution below 69, it is a stop limit order.

Which of the following regarding taxation of collateralized mortgage obligation (CMO) interest is true?

-Subject to Federal, State & Local taxes. *Interest earned on all mortgage-backed securities is fully taxable.

A 60-year-old customer who wishes an investment that can provide for retirement needs while adjusting for changes as aging takes place would probably find which of the following investments most suitable?

-Target Date Fund *Common stocks have market risk because they move with the overall stock market. Market risk is a systematic risk, probably the one most investors think of when buying stock. Interest rate risk is associated with fixed-income securities. Their prices move inversely with interest rates. Debt securities also have default or credit risk. Investors use the ratings services to fit that risk with their tolerance. Historically, stocks have been a good hedge against inflation while debt instruments have not.

A pension plan might invest in each of the following except?

-Tax-free municipal bonds *It is inappropriate to place tax-free investments into a tax-deferred plan because there is no benefit to the deferral.

ABC Corporation has an outstanding 8% convertible bond that is callable at 102. Currently, the bond is trading at 101. The conversion price is $40, and the common stock is currently trading at $39.50. ABC announces a call at 102. To realize the greatest profit, a bondholder should?

-Tender the Bonds *The investor would realize the greatest sales proceeds by tendering the bond to the corporation for 102. Selling the bond at its current market value of 101 is not an attractive option. Converting the bond to common stock would result in 25 shares ($1,000 par converted at $40 = 25 shares) sold at $39.50 per share ($39.50 × 25 = $987.50).

The visible supply may be found in?

-The Bond Buyer

One of the terms used in the discussion of SEC Rule 144 is affiliate. Which of the following would be defined as an affiliate?

-The brother-in-law of the spouse of the issuer's CEO, who lives in the same home as the CEO *For purposes of Rule 144, an affiliate is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the issuer. In addition, any relative or spouse of such person, or any relative of such spouse, any one of whom has the same home as such person is considered an affiliate of the issuer. For test purposes, unless stated otherwise, spouses always live in the same home.

An investor owns a convertible debenture with a conversion price of $10. If a 10% stock dividend is paid on the company's common stock, which of the following is true?

-The conversion price will be adjusted to $9.09. *You can assume that any convertible security on the exam will have an anti-dilutive provision. That means that a stock dividend or stock split will not cause the investor's conversion privilege to be diminished. With a conversion price of $10, the investor was able to convert into 100 shares ($1,000 divided by $10). After the 10% stock dividend, the investor must be able to convert into 10% more shares (110 shares). To get 110 shares from a $1,000 principal, the price must be reduced. The computation is $1,000 divided by 110. That equals $9.09 per share.

A registered representative's customer is speaking of a variable life insurance contract she owns. She makes several statements regarding the contract. Which of the following is not an accurate statement concerning a variable life insurance contract?

-The death benefit can never be more than the guaranteed benefit. *The minimum guaranteed death benefit is provided by that portion of the payment invested in the insurance company's general account. The remainder of the premium is invested in the separate account. While there is no guarantee on how investments in the separate account will perform, depending on its investment performance, the separate account could provide for a larger death benefit than the minimum guaranteed amount.

If a customer buys a new issue municipal bond at a discount in the primary market, which of the following statements are true?

-The discount must be accreted. -At maturity, there is no capital gain. *If a new issue municipal bond is bought at a discount in the primary market, the discount must be accreted. The accretion is considered interest income, and, as an original issue discount bond, is not taxable.

Libby sees a tombstone advertisement for a new issue of Southwest Barge subordinated convertible debentures. The bonds will carry an 11¼% coupon, are convertible into common stock at $10.50, and are being issued to the public at 100. The proceeds of the issue will be used specifically for purchasing new Southwest barges. Libby's concerns about the issue could include which of the following?

-The issue may have a junior claim to another security issue. *The word subordinated is the key to the question. A subordinated bond has other debt holders ahead of it in the event of liquidation. The barges do not serve as collateral, as the bonds are identified as debentures, and having to convert to common stock is not a threat because she is the one that will, if she desires, exercise the conversion privilege.

An affiliate of an issuer that holds control stock for five months sells 1,000 shares for a $10,000 profit. How will this transaction be treated?

-These short-swing profits must be disgorged from the holder of the stock to the issuing corporation. *If control stock is sold before a six-month holding period, any profits are defined as short-swing profits, and the company receives the profits. The term disgorged refers to the profits being removed from the affiliate and given to the issuer.

Which of the following statements regarding stock index options are true?

-Trades are settled the next business day. (T+1) -Exercise settlement involves the delivery of cash.

Which of the following would not be found in a municipal revenue bond resolution?

-Underwriting Agreement *The bond resolution, which is also referred to as the bond contract, contains the requirement for the municipality to properly keep the facilities books, reporting requirements regarding revenues collected, conditions of the maintenance covenant, and terms of the rate covenant. The underwriting agreement is between the municipality and underwriters, and it spells out the terms agreed to for the underwriting of a new issue.

Other than the 52-week bills, the U.S. Treasury conducts auctions for Treasury bills?

-Weekly *With the exception of the 52-week bills, T-bills are auctioned by the U.S. Treasury weekly. The 52-week T-bills are auctioned every four weeks (which is not the same as monthly).

Which of the following investment activities are suitable for an individual retirement account?

-Writing covered calls -Buying puts on stock held long

You and your spouse like to invest in option contracts. You each have separate individual accounts with different brokers for executing your trades. The current level of contract position limits for ABC stock is 75,000 contracts. Which of the following would be a violation of the contract limit?

-You are long 37,650 ABC puts, and your spouse is short 37,560 ABC calls. *A violation would occur if you exceed the 75,000-contract position limit for ABC stock with combined positions that are on the same side of the market. A long put and a short call each represent a bearish position, and the combined positions in the correct answer exceed 75,000. Even though you each have individual accounts, it is deemed that you would each have control over the other's account for determination of contract position limit violations.

Two friends would like to open a joint account but have the tax filed under the name of the nonemployed individual. That could be done in?

-a JTWROS account with the Social Security number of the designated person used.

An investor purchased a REIT from her broker-dealer in an SEC-registered public offering. The following year, she asked her registered representative for a quote. When told there is no current quote available, you would gather that this is?

-an untraded REIT. *Untraded or unlisted REITs are those not traded in the secondary markets (exchanges or OTC). Therefore, there is limited to no liquidity. As described in the question, this security is registered with the SEC, so it is not a private placement. Hybrid REITs are those that take equity and debt positions. With this lack of liquidity, you can expect suitability standards to be higher, and the trades would be subject to increased regulatory review

All of the following will affect special memorandum account (SMA) in a short account except?

-appreciation of CMV. *In a short account, the customer benefits if the current market value (CMV) falls. If the CMV is falling, the equity is increasing, thus increasing SMA. If the CMV is rising, the equity is falling, with no effect on SMA.

In a bull call spread, an investor?

-buys the lower exercise price and sells the higher exercise price. -anticipates the spread will widen.

The price paid for a listed REIT is most similar to the pricing of?

-closed-end investment management company. *Pricing of a listed REIT (real estate investment trust) is based on supply and demand. In this respect, they trade similarly to a closed-end investment management company. Open-end investment management companies are mutual funds and their pricing is based on the net asset value as computed daily. On the exam, unless stated otherwise, all real estate limited partnership offerings are offered through private placements. This means that they are not publicly traded and have limited liquidity.

Buying municipal bonds would normally not be considered suitable for?

-defined benefit plan portfolio. *A defined benefit plan is a form of qualified tax-deferred corporate pension plan. Tax-free municipal bonds would never be considered suitable for a tax-deferred account on the exam. An individual investor, a mutual fund portfolio, and a corporate investment account could benefit from receiving tax-free municipal bond interest.

Tax preference items are used for the purpose of computing the alternative minimum tax. They include

-excess intangible drilling costs (wages, fuel, repairs). -accelerated depreciation. -percentage depletion in excess of basis. *All of these are tax preference items. Note that straight-line depreciation is not a tax preference item.

A market order to purchase 100 shares of XYZ common stock is?

-good for that day only.

A customer buys 300 LMN at $45 per share and writes 3 LMN Aug 45 calls at 4. The customer will profit under all of the following circumstances except?

-if LMN is below $41 at expiration.

The principal tax benefit of investing in an exploratory oil and gas drilling program is derived from

-intangible drilling costs (IDCs).

Alternative minimum tax (AMT)

-is assessed against high annual income earners and disallows some deductions and exemptions used to calculate adjusted gross income.

Probably the most significant difference between a business development company (BDC) and any other investment company registered under the Investment Company Act of 1940 is that a BDC

-makes available significant managerial assistance to the investments in their portfolio. *All other registered investment companies are passive investors. That is, they do not take an active role in the management of the companies held in their portfolios. The purpose behind BDCs is just that - help small companies with management issues. BDCs, like most other investment companies, qualify as regulated investment companies by distributing at least 90% of their net investment income. Doing so enables them to avoid tax on the distribution. Like closed-end funds and ETFs, shares of BDCs trade actively in the secondary markets. Many trade on the NYSE and the Nasdaq Stock Market, while others trade OTC. As do all registered investment companies, BDCs file annual reports with the SEC.

A wealthy client owns a large percentage of a thinly traded common stock. When this client wants to sell a major portion of her securities, she will immediately face?

-marketability risk.

An investor purchases a PQR convertible bond at 98 on June 18, 1994. The bond is convertible at $25, and on June 19, 1995, when the common stock is trading at $26 per share, the investor converts his bond into the stock. For tax purposes, these transactions will result in?

-neither gain nor loss. *The process of converting a convertible bond into common stock is not a taxable event. When the stock is sold, the taxable event occurs.

When discussing unit investment trusts with a prospect, it would be correct to state that these are?

-nonmanaged investment companies. *A primary characteristic of the UIT is that, unlike the open-end and closed-end companies, it has no portfolio managers. That is why it is never referred to as a management company. It may have the term "trust" in its name, but it is an investment company registered under the Investment Company Act of 1940. UITs cannot be sold without a prospectus. Only securities traded in the secondary market are listed on an exchange. UITs are redeemable securities through the issuer.

The placement ratio in The Bond Buyer indicates the relationship for a particular week between the number of bonds sold and the number of bonds

-offered for sale in the market that week.

A person wishing to grant a registered representative the right to make investment decisions for her account does so by

-providing a limited power of attorney giving discretionary powers.

The managing partner of a limited partnership has responsibility for all of the following except?

-providing unlimited capital for the partnership business.

All of the following may be included in an advertisement for a collateralized mortgage obligation (CMO) issue except?

-statement that the CMO is guaranteed by the U.S. government. *The U.S. government does not issue or back CMOs. It is also misleading to state or imply that a CMO's anticipated yield or average life is guaranteed. CMOs must include the coupon rate and the final maturity date, a generic description of the CMO tranche, and disclosure that payment assumptions may or may not be met.

A registered representative recently changed firms and is meeting with former customers to see if they will move their accounts to the representative's new firm. Under FINRA Rule 2273, the representative must disclose all of the following except

-that the customers must have their identity confirmed as part of the new firm's customer identification program. *FINRA Rule 2273 requires that educational material be provided to customers about potential conflicts of interest, the transferability of assets, differences in products and services, and potential costs of the transfer. Customers do not need to have their identity revalidated by a receiving firm, because the carrying firm has already complied with anti-money-laundering requirements.

A qualified legal opinion issued for a municipal bond underwriting means that?

-the legal opinion is qualified with restrictions and conditions.

A member firm must prefile its retail communications if?

-the member has not previously filed with FINRA. -it appertains to standardized options prior to the distribution of the ODD. -the advertising relates to single stock futures. -under an order from FINRA to prefile.

A municipal bond rating service would consider all of the following when evaluating a revenue bond except?

-the public's attitude toward debt. *Debt service coverage ratio, feasibility studies, and projected operating revenues are important to the analysis of a municipal revenue bond. The public's attitude toward debt is relevant in evaluating general obligation bonds, which are backed by the taxing authority of the issuer.

Regulation FD covers

-the selective disclosure of material nonpublic information by issuers. *Regulation FD was enacted to curb the selective disclosure of material nonpublic information by issuers to financial analysts and institutional investors. The rule helps ensure that all investors receive equal access to a company's material disclosures at the same time.

When a stock's trendline is moving primarily in a horizontal direction, a technical analyst would consider?

-the stock's price to be consolidating.

A FINRA member firm wishes to encourage its registered representatives to sell more limited partnership DPPs. As an incentive, the firm offers an all-expenses-paid trip to a popular vacation resort for those reaching certain sales targets. FINRA rules provide that?

-the target must be based on the total production of associated persons with respect to all direct participation programs offered by the member. *FINRA made a slight modification to its rules on noncash compensation because of the SEC's Regulation BI (best interest). Specifically, if there is to be any kind of sales contest or other method of incentivizing registered representatives, sales of the particular product type must give equal weighting to all of those investments sold by the firm. This applies largely, but not exclusively, to sales of investment companies, variable products of life insurance companies, and direct participation programs. Previously, firms could give higher weighting to sales of proprietary products, but that ended on June 30, 2020. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

In a municipal underwriting, the scale is?

-used by the syndicate to determine the bid on a new issue. -a list of the yield or prices at which the bonds will be offered to the public. *The scale, or reoffering scale, represents the prices and/or yields at which new issue securities are offered for sale to the public by the underwriter. The syndicate uses this scale to determine its bid on the issue.

A customer contacted her registered representative requesting that her account be updated with her new residential address. The member firm must send a copy of the updated account record to the customer within?

30 Days

The market attitude of a customer who establishes a debit put spread is?

Bearish