Practice Exam 3

Transactions in securities that are sold by a prospectus are not subject to the

5% markup policy. A mutual fund will disclose its cost to the client in the prospectus and is therefore not subject to the rule. Five percent is a guideline, and markups can exceed it.

Which of the following balance sheet entries may be affected when a company pays a cash dividend? Shareholders' equity Total assets Total liabilities Working capital A) II and III B) I and IV C) II and IV D) I and III

A) II and III

An investor purchased an interest in a limited partnership, paying $10,000 in cash and signing a recourse note to the partnership under a letter of credit for $40,000. Which of the following statements are true? The investor's tax basis will be $10,000. The investor's tax basis will be $50,000. The investor's maximum loss will be $10,000. The investor's maximum loss will be $50,000. A) II and IV B) I and III C) I and IV D) II and III

A) II and IV

Which of the following statements regarding nonqualified deferred compensation plans is not true? A) Plans must be nondiscriminatory and cannot favor employees serving in certain capacities. B) Board members are not eligible for these plans, as they are not considered employees. C) Employees have a limited claim to plan benefits if the business fails. D) Benefits payable to employees at retirement are taxable.

A) Plans must be nondiscriminatory and cannot favor employees serving in certain capacities.

The City of Podunk has an outstanding 25-year maturity issue that is callable in seven years. It has prerefunded the issue and established an escrow account containing the proper government securities with face amounts and maturities approximating the call provisions of the original issue. In quoting the original issue, which of the following must be used? A) Yield to call B) Yield to maturity C) The lower of the yield to call or the yield to maturity D) Current yield

A) Yield to call

The amount paid into a defined contribution plan is set by A) the trust agreement. B) the employee's age. C) the employer's profits. D) the ERISA-defined contribution requirements.

A) the trust agreement.

Scale in a municipal bond underwriting refers to A) yields by maturity. B) price by coupon. C) profit per bond. D) the order of the lowest net interest cost to the municipality.

A) yields by maturity.

If 1 OEX 375 call is purchased at 3.25 and exercised when the S&P 100 closes at 381, the writer delivers which of the following to the holder? A) $600 in stocks B) $600 cash C) $381 in securities D) $325 cash

B) $600 cash

Customer account information must be updated at least every A) 12 months. B) 36 months. C) 48 months. D) 24 months.

B) 36 months.

Why do hedge funds tend to limit the participation to a maximum of 100 investors? A) Keeping it to 100 or less avoids the need to give the investors voting rights. B) Keeping it to 100 or less avoids the need to register with the SEC. C) Having more than 100 investors makes the fund more difficult to control. D) The more investors in the fund, the greater the likelihood that some may want their money back before the end of the lockup period.

B) Keeping it to 100 or less avoids the need to register with the SEC.

Which of the following best describes an intangible drilling cost? A) Proven reserve of oil or gas B) Labor, fuel, or drilling rig rental C) Exploratory well drilling D) Tax liability

B) Labor, fuel, or drilling rig rental

A customer is short 10 ABC Dec 50 calls at 2.50 and short 10 ABC Dec 50 puts at 3.50. Before expiration, ABC declines to 40.50, and the customer is assigned on his put position while his short calls expire worthless. A month later, he liquidates his long position at 45 for A) a loss of $7,500. B) a gain of $1,000. C) a gain of $7,500. D) a loss of $1,500.

B) a gain of $1,000.

All of the following terms are associated with the holder of an option except A) owner. B) seller. C) buyer. D) long.

B) seller.

If a customer sells short 100 XYZ at 79 and simultaneously writes 1 XYZ Jan 80 put at 5, the maximum gain potential is A) $600. B) $500. C) $400. D) unlimited.

C) $400.

A married couple are both employed by firms that cover them under the company pension plans, and each earns approximately $300,000 annually. If they both open a traditional IRA and make the maximum contribution, how much of their contribution could they deduct? A) Neither is eligible to make a contribution in any amount (deductible or not). B) Only one spouse is eligible to deduct their entire contribution. C) They are ineligible to deduct any contribution made. D) Both may deduct the entire contribution.

C) They are ineligible to deduct any contribution made.

If a customer sells $5,000 worth of stock in a restricted margin account, the special memorandum account (SMA) will be A) credited by $5,000. B) debited by $2,500. C) credited by $2,500. D) debited by $5,000.

C) credited by $2,500. When securities are sold in a restricted account, 50% of the proceeds are credited to SMA. In other words, the customer is permitted to remove 50% of the proceeds from the account, but the balance must remain in the account to reduce the debit balance.

In the case of a real estate direct participation limited partnership program, nonrecourse financing will A) have no effect on a limited partner's original cost basis. B) decrease a limited partner's original cost basis. C) increase a limited partner's original cost basis. D) be added to a limited partner's sales proceeds at the time the partnership is dissolved.

C) increase a limited partner's original cost basis.

If a customer buys 500 shares of ABC at 48 and writes 5 ABC 50 calls at 2, what is the maximum loss? A) $1,000 B) Unlimited C) $4,600 D) $23,000

D) $23,000

Which of the following is not under governance of the Municipal Securities Rulemaking Board (MSRB)? Issuers of municipal fund securities Broker-dealers that sell municipal fund securities Issuers of municipal bonds Banks that sell municipal securities A) II and IV B) II and III C) I and II D) I and III

D) I and III

Which of the following transactions would not be subject to the 5% markup policy? A) A client enters an order to purchase one share of a stock to be put in the name of her grandchild. You charge the client the minimum commission for your firm ($45) even though the stock is currently trading at $26 per share. B) A client sells shares of an over-the-counter stock and uses the proceeds to purchase shares from your firm's inventory account. C) Your firm agrees to do an agency cross-transaction between two of your clients. Each client has been charged a commission. D) Your client enters trades to purchase two different mutual funds in the same fund family. The combined purchases do not qualify for any breakpoints. The client is charged a sales charge of 6.5%.

D) Your client enters trades to purchase two different mutual funds in the same fund family. The combined purchases do not qualify for any breakpoints. The client is charged a sales charge of 6.5%.

A customer purchased a full faith and credit bond. This bond would be known as A) a sinking or surplus fund bond. B) a revenue bond. C) a moral obligation bond. D) a general obligation bond.

D) a general obligation bond.

Index options settle in

Index options settle in cash. Physical delivery does not occur. The call buyer receives cash equal to the difference between the strike price and the index closing value on the day the option is exercised.

For real estate limited partnerships, nonrecourse loans are included in the limited partner's

cost basis. In this way, the loans increase the partner's original cost basis by the amount of the partner's debt liability for the loan.

Needing no IRS approval, nonqualified deferred compensation plans may be

discriminatory and offered only to certain employees such as key executives.

Issuers of municipal or municipal fund securities are exempt issuers and are not regulated or under the guidance of the MSRB or any other self-regulatory organization.

exempt issuers and are not regulated or under the guidance of the MSRB or any other self-regulatory organization.

A defined contribution plan's trust agreement contains a section explaining the

formula(s) used to determine the contributions to the retirement plan.

The seller of an option contract, put or call, is not the

holder of the option. The holder of an option is also known as the buyer

Intangible drilling costs 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.

When a bond issue is prerefunded, the issuer is going to

redeem the bond on the first call date. The yield must be quoted to call.

Under SEC rules, once the number of investors in a hedge fund exceeds 100, the fund will most likely have to

register with the SEC. That puts many restrictions on the fund manager's flexibility.

A recourse note means that the limited partner agrees to pay

the note no matter what happens.