Practice Exam Missed Questions

A municipality wants to issue industrial revenue bonds to benefit a local company who employs hundreds of the municipality's residents. Regarding these bonds, which of the following is true? A) The credit rating of the bonds is dependent on the credit rating of the company, not the municipality. B) Because these bonds are used for a nonpublic purpose, the interest income will not be subject to the alternative minimum tax. C) The issuance of these bonds would require voter approval. D) Interest is paid from revenues collected through property assessments and taxes.

A) The credit rating of the bonds is dependent on the credit rating of the company, not the municipality. The debt service for IDRs is derived from the lease payments made by the leasing corporation to the issuing municipality; it is not derived from local property taxes. Therefore, the credit rating of the bonds is dependent on the creditworthiness of the leasing corporation. Because they are revenue bonds, they do not require voter approval, and because they are for nonpublic purpose, they may be subject to the AMT for some investors.

A customer calls you and excitedly tells you that she just had her first child. She says her mother-in-law gifted $20,000 to them in honor of the birth. She wants to invest it to have funds available for the child's higher education in 18 years. She wants assurance that the principal will grow, regardless of market conditions. Which of the following would be the most appropriate recommendation? A) U.S. Treasury STRIPS maturing in 18 years B) Blue-chip stocks C) AAA rated municipal bonds maturing in 18 years D) U.S. Treasury bonds with 18 years to maturity date

A) U.S. Treasury STRIPS maturing in 18 years STRIPS are issued at a discount, and are backed by the U.S. Treasury. Purchasing these maturing in 18 years gives the client a guaranteed rate of growth and assurance that the funds will be there when needed. The Treasury bonds will certainly pay off at maturity, but there is no growth potential. The same problem plagues the municipal bonds. Common stock, no matter how respectable the company is today, offer no guarantees for the future.

In what is commonly known as a proceeds transaction, one of your clients is using the proceeds from the liquidation of one stock to purchase another stock. In compliance with the 5% markup policy for these transactions, the markup will be computed based on: A) a combination of both the buy side and the sell side compensation to the dealer. B) the compensation to the dealer for each side of the transaction separately. C) the markup or compensation to the dealer on the buy side of the transaction. D) the markdown or compensation to the dealer on the sale side of the transaction.

A) a combination of both the buy side and the sell side compensation to the dealer. This is known as a proceeds transaction, which is the sale of one position, and the purchase of another with the proceeds of the sale. The 5% markup policy is applicable to proceeds transactions. In compliance with the policy, the markup is computed by adding the compensation made by the dealer on the sell side to that made by the dealer on the buy side, and applying the total to the inside market on the buy side.

A toll road authority issues a revenue bond backed by the revenue stream from the tolls collected. In addition, the state has agreed to cover any shortfall. This bond is categorized as: A) a double-barreled bond. B) a moral obligation bond. C) an overlapping debt issue. D) an industrial revenue bond.

A) a double-barreled bond. A bond secured by both a defined source of revenue (other than property taxes) and the full faith and credit of an issuer that has taxing powers, such as the state, is known as a double-barreled bond.

One of your clients has the opportunity to participate in his employer's employee stock purchase plan (ESPP). Before enrolling, he should be aware that funds will come out of his paycheck on: A) an after-tax basis, and those contributions are not deductible on his tax return. B) a pretax basis, and those contributions are not deductible on his tax return. C) an after-tax basis, and those contributions will be deductible on his tax return. D) a pretax basis, and those contributions are deductible on his tax return.

A) an after-tax basis, and those contributions are not deductible on his tax return. Contributions to an ESPP are payroll deductions. Though the contribution percentage is calculated on one's pretax salary, they are taken after tax. Contributions to ESPPs are not deductible on one's tax return.

A U.S. investor owns an American depositary receipt (ADR). The net tax liability to the investor for any dividends received is: A) any U.S. income tax due, credited by any amount of foreign income tax withheld. B) any foreign income tax due, but not U.S. income tax. C) zero, because there is no tax liability to U.S. investors who purchase foreign government issues. D) the total of both foreign and U.S. income tax due.

A) any U.S. income tax due, credited by any amount of foreign income tax withheld. Any income to a U.S. investor is always subject to U.S. income tax. If foreign income tax is withheld in the country of origin, then that tax may be taken as a credit against the U.S. tax due.

A client, age 52, wants to know if there are any circumstances that will allow withdrawals from her IRA without having to pay the 10% penalty. One example you could give is: A) education expenses for one of her grandchildren. B) housing expenses while she is unemployed. C) up to $10,000 annually for the first-time purchase of a principal residence. D) premiums for medical insurance in excess of defined adjusted gross income (AGI) limits.

A) education expenses for one of her grandchildren. Distributions before age 59½ are subject to a 10% penalty, as well as regular income tax. The 10% penalty is not applied in the event of the following: death; disability; purchase of a principal residence by a first-time homebuyer (up to $10,000—lifetime); education expenses for the taxpayer, a spouse, a child, or a grandchild; medical premiums for unemployed individuals; medical expenses in excess of defined AGI limits; and Rule 72(t): substantially equal periodic payments.

If a municipal bond has a call provision, this will tend to: A) make the bond less attractive to investors because a call would terminate the interest payments. B) place a floor on how low the price will decline. C) make the bond more attractive to investors because most bonds are called at a premium. D) have no effect on the price.

A) make the bond less attractive to investors because a call would terminate the interest payments. The possibility of a call is unattractive to the investor. In most cases, bonds are called when their interest rate is above the current market rate. This means the investor must give up that higher yielding security. It is attractive to the issuer because with a call, the bonds are bought back at par or a small premium, and interest payments end.

While looking at a report of trades that had been executed for your customers in the secondary market, you would not see included: A) mutual fund shares. B) agency securities. C) American depositary receipts (ADRs). D) municipal bonds.

A) mutual fund shares. There is no secondary trading market for mutual funds. All purchases and redemptions are done through the issuer or underwriter. All shares sold are newly issued shares (primary market).

A customer opens a new margin account and immediately purchases 200 shares of XYZ stock, which is trading at $9 per share. The customer must deposit: A) $900. B) $1,800. C) $2,000. D) $450.

B) $1,800. If the first trade in a long margin account is less than $2,000, the customer must deposit 100% of the purchase price.

An investor's margin account has a short market value of $9,000 and a credit balance of $13,000. Assuming Regulation T is 50%, a maintenance call will be triggered if the short market value increases above: A) $11,000. B) $10,000. C) $13,000. D) $9,000.

B) $10,000. Minimum maintenance rules require a minimum maintenance of 30% for a short margin account. The maintenance level is determined by dividing the credit balance by 1.3 ($13,000 ÷ 1.3 = $10,000).

A customer has substantial passive income from a real estate investment. Which of the following limited partnership (LP) programs is most suitable for this customer if he wishes to offset this income? A) A government-assisted housing program B) An oil and gas exploratory program C) An oil and gas income program D) An equipment leasing program

B) An oil and gas exploratory program Passive income may be offset by passive losses. Of the programs listed, the one most likely to have significant losses, particularly in the early years, is an exploratory or wildcat drilling program.

Which of the following statements regarding the sale of restricted stock under Rule 144 is true? A) Affiliates are not subject to volume restrictions on stock held for more than six months. B) Nonaffiliates are not subject to volume restrictions on stock held for more than six months. C) Affiliates are never subject to holding periods or volume restrictions. D) Form 144 must be filed with the SEC within 10 days of the date of sale.

B) Nonaffiliates are not subject to volume restrictions on stock held for more than six months. Sellers of restricted stock who are not defined as affiliated persons may sell freely after meeting a six-month holding period. Affiliates may also sell after meeting the six-month holding period but are subject to volume restrictions as mandated in Rule 144. Form 144 must be filed no later than concurrent with the sale.

Your broker-dealer has received from the Automated Customer Account Transfer System (ACATS) a Transfer Initiation Form (TIF) instructing that one of your customers would like to have existing positions in her account transferred to her new broker-dealer. How long does your broker-dealer have to validate the positions listed on the form? A) Three business days B) One business day C) No later than the end of business on the Friday of the week the TIF was received D) Seven calendar days from the time the TIF is received

B) One business day When transferring a customer's positions to another broker-dealer via the TIF under the Uniform Practice Code, the carrying broker-dealer has one business day to validate positions and three business days to transfer the positions to the receiving broker-dealer after validation.

ABC stock is going ex-dividend today, and certain orders on the order book must be reduced prior to the opening. For a cash dividend of 0.12, which of the following orders would be reduced? A) Sell 100 ABC at 50. B) Sell 100 ABC at 45 stop. C) Buy 100 ABC at 50 stop. D) Buy 100 ABC at the market.

B) Sell 100 ABC at 45 stop. Orders that are entered below current market value would be reduced unless do not reduce (DNR) instructions are received. Those orders are buy limits, sell stops (BLiSS) orders. These orders are reduced by the amount of the dividend on the ex-dividend date for a cash dividend distribution.

Your customer wrote a September 918 index call at 4.15 five months ago. The option expired, and the customer received no assignment notice. For tax purposes, it should be taxed and reported as: A) a $41.50 short-term capital loss. B) a $415 short-term capital gain. C) ordinary income of $415. D) ordinary income of $9,180.

B) a $415 short-term capital gain. When options contracts expire, writers (sellers) report a capital gain equal to the premium amount received; in this case, the amount is $415. Because options only have a nine-month life cycle, all capital gains and losses are short term.

Your customer wants you to recommend an option strategy that will prove profitable in a highly volatile stock, regardless of which direction the stock price moves. To suit the client's objective, you should recommend: A) a short straddle. B) a long straddle. C) a credit call spread. D) a debit put spread.

B) a long straddle. A long straddle consists of a put and a call on the same security with the same strike price and the same expiration date. Should the stock increase, the call will increase in value. If the stock declines, the put will increase in value, making the position profitable if the stock moves in either direction.

Because of their unlimited potential loss, short positions: A) must be approved by a designated principal before execution. B) are marked to the market at the close of each day. C) can only be taken by those who are accredited investors. D) require a higher initial margin deposit.

B) are marked to the market at the close of each day. Although most securities positions are marked to the marked on a daily basis, it is more important that this be done with short positions because of how quickly they can reach the maintenance margin level. The initial margin is the same as long purchases, and the term accredited investors applies principally to private placements. Short sales, just as with any transaction, must approved by a principal, but not in advance.

Your client asks you to explain a not-held order. You could correctly explain that a not-held order: A) can be filled only on the last trade of the day. B) gives time or price discretion to the floor broker. C) can only be done in a discretionary account. D) must be executed immediately and in its entirety.

B) gives time or price discretion to the floor broker. With a not-held order, the customer gives the firm's time or price broker the discretion as to time or price. Remember, however, that time and price alone do not require the order to be done in a discretionary account.

For an oil and gas limited partnership (LP), allowances in the form of deductions are allowed by the IRS to be taken to compensate for a depleting resource. The allowance can be taken based on: A) the amount of the natural resource extracted. B) the amount of the natural resource sold. C) the cost of moving the natural resource to refiners and distributors. D) the condition or grade of the natural resource.

B) the amount of the natural resource sold. Depletion allowances may be taken only once the oil or gas is sold and is based on the amount sold (depleted).

With ABC stock trading at 33.10, a customer buys 2 ABC Jun 35 puts at 4.35. What is the time value of each contract? A) $1.90 B) $0 C) $2.45 D) $4.90

C) $2.45 Time value is the premium minus the intrinsic value ($4.35 − $1.90 = $2.45).

Your 66-year-old customer invested $35,000 in a nonqualified variable annuity. It now has a value of $55,000, and your customer wishes to make a random withdrawal of $30,000. What is the tax liability that results if the customer is in the 28% tax bracket? A) $8,400 B) $7,600 C) $5,600 D) $2,800

C) $5,600 Partial or random liquidations of a variable annuity are taxed on a last-in, first-out (LIFO) basis, which means that the last dollars into the account, the earnings, are withdrawn first. Of the $30,000 withdrawn, $20,000 represents deferred earnings or income that is now taxable at the 28% rate (0.28 × $20,000 = $5,600). No penalty applies because the investor is older than age 59½.

An investor contributes $200,000 in cash to an oil and gas partnership. The partnership has entered into a nonrecourse loan for $500,000. The customer's cost basis in the program is: A) $200,000. B) $700,000. C) $300,000. D) $500,000.

A) $200,000. Cost basis in all direct participation programs (DPPs), other than real estate, consists of actual investment plus any recourse financing. Because this note is nonrecourse, it is not included in the customer's cost basis.

An individual is covered under his employer's 401(k) plan. The plan provides for 100% employer matching of the first 3% of the employee's contribution. The employee decides to contribute 7% of his pay to the plan. Under ERISA, which of the following statements is correct? A) Only the 7% contributed by the employee is immediately vested. B) Only the 3% employee contribution being matched by the employer is immediately vested. C) Only the 3% employer contribution is immediately vested. D) Only the 4% employee contribution in excess of the employer's match is immediately vested.

A) Only the 7% contributed by the employee is immediately vested. Under ERISA rules, any contribution by an employee is immediately vested. It is only employer contributions that may subject to a vesting schedule.

A client interested in Treasury bills (T-bills) asks you to explain their features. Which of these is correct? A) They have a maximum maturity of 365 days. B) They are all auctioned on a monthly basis. C) They are quoted with a bid higher than the ask. D) They are generally callable after the first 6 months.

C) They are quoted with a bid higher than the ask. T-bills pay no interest; they are issued at a discount and are direct obligations of the U.S. government. They are not callable and have maximum maturities of 52 weeks (not 365 days) or less. Most T-bills are auctioned weekly.

A U.S. importer orders computer components from a Japanese manufacturer with payment to be made in yen upon delivery. To hedge against the dollar weakening against the yen before payment is due, the importer should: A) buy yen puts. B) sell yen calls. C) buy yen calls. D) sell yen puts.

C) buy yen calls. If the dollar was to weaken against the yen, then the yen would increase in value. If one wished to gain as the result of an asset's increased value, the appropriate option strategy is the purchase of a call. As a general rule, to hedge, importers buy calls on the foreign currency, whereas exporters buy puts.

Having been a customer of a broker-dealer for over 10 years, currently holding equity positions and cash in his account, Daryl Smith wants to purchase 1,000 shares of a penny stock. Smith is: A) required to receive both the suitability statement and the disclosure. B) exempt from both the requirement to receive a suitability statement and the disclosure requirement. C) exempt from the requirement to receive a suitability statement but subject to the disclosure requirement. D) exempt from the disclosure requirement but must receive a suitability statement.

C) exempt from the requirement to receive a suitability statement but subject to the disclosure requirement. Smith meets the criteria for an established customer under the penny stock rules. Established customers are exempt from the suitability statement requirement but not from the disclosure requirements.

Even in the best firms, there are times when a customer files a complaint. FINRA recordkeeping requirements for those complaints is: A) six years. B) three years. C) four years. D) two years.

C) four years. Although the general recordkeeping requirements are three years, with some of the corporate-type documents being six years, FINRA has selected four years as the retention period for customer complaints.

An associate of a broker-dealer engaged in municipal securities activities such as soliciting municipal bond business but is not involved in retail sales: A) is required to be an elected official of a municipality. B) is required to be employed by the MSRB. C) is known as a municipal finance professional (MFP). D) may sell municipal bonds to professional bond traders only.

C) is known as a municipal finance professional (MFP). An MFP is an associate of a broker-dealer engaged in municipal securities representative activities, other than retail sales. Those activities can include the solicitation of municipal bond business. Though someone employed by a broker-dealer is not prohibited from being an elected official of a municipality, there is no requirement that an MFP must be. Being employed by a broker-dealer dealing in municipal bonds and the MSRB simultaneously would be prohibited as a conflict of interest.

XYZ, Inc., has 5 million shares outstanding and will issue 1 million shares of new stock through an upcoming rights offering. Regarding the rights offering, a registered representative (RR) should know that: A) the value of the right will generally increase after the ex-date. B) a shareholder will generally have two to three weeks to exercise the rights. C) the exercise price is generally lower than the current market price at issuance. D) XYZ will issue 1 million rights.

C) the exercise price is generally lower than the current market price at issuance. The exercise price is generally below the current market price at issuance. None of the other choices are true because the value of the right drops on the ex-rights date. Each existing share receives 1 right, so in this case, XYZ will issue 5 million rights. An investor must exercise the rights within 30-45 days of issuance; otherwise, they will expire.

Section 28(e) of the Securities Exchange Act provides a safe harbor for certain soft dollar compensation extended from broker-dealers to investment advisers. Which of the following is most likely to be included in that safe harbor? A) Desks remaining after the broker-dealer redesigned its office B) Meal expenses to attend an investment seminar sponsored by the broker-dealer C) Use of vacant office space in the broker-dealer's facilities D) Customized software designed to give clients access to asset allocation programs

D) Customized software designed to give clients access to asset allocation programs Among the items generally in the safe harbor are those items designed to assist the firm's customers. Customized software that helps clients would be acceptable. Although seminar registration expenses are in the safe harbor, travel and transportation expenses (such as meals and lodging) are not. Rent and office furniture are specifically listed as out of the safe harbor.

Which of the following collateralized mortgage obligation (CMO) tranches tends to have low extension and reinvestment risk? A) Z-tranche B) Companion C) TACs D) PACs

D) PACs PACs have targeted maturity dates. They are retired first, and offer protection from prepayment risk and extension risk (the chance that principal payments will be slower than anticipated) because changes in prepayments are transferred to companion tranches, also called support tranches.

Your customer, age 46, has been investing money in a variable annuity for several years. He plans to stop the deposits to meet current financial obligations, but he does not intend to withdraw any of the funds already invested until retirement, which is still several years away. Until the withdrawals are made, the client will be holding: A) accumulation shares. B) annuity units. C) deferred units. D) accumulation units.

D) accumulation units. Until the customer withdraws funds or annuitizes, the annuity is still in the deferral stage, and the customer is holding accumulation units.

To achieve its goals, an inverse ETF uses: A) short selling. B) preemptive rights. C) arbitrage. D) derivatives and debt.

D) derivatives and debt. An inverse ETF will almost always use derivatives, such as options and, in the case of a leveraged ETF, will use debt, primarily in the form of margin. Inverse ETFs do not engage in short selling; they are an alternative to selling short a specific index without the unlimited risk potential of the short sale. Arbitrage is used, typically by institutional investors, to the advantage of temporary imbalances between the ETF's net asset value and market price.

The item that is not true when you read a bond quote of 6.5s of 29 at 99 is: A) the bond is trading at a 1-point discount. B) the bond matures in 2029. C) if traded at this price, the yield to maturity rather than the yield to call would be shown on the confirmation. D) if the price quote was changed to a basis quote, the yield would be less than 6.5%.

D) if the price quote was changed to a basis quote, the yield would be less than 6.5%. This bond is trading at a discount of 1 point ($10); therefore, a basis quote, which is the bond's yield to maturity, will be greater than the 6.5% coupon, not less than 6.5%. YTC is only shown when it produces the lowest yield. That would never be the case with a bond traded at a discount.

You believe XYZ stock will be rising and want to recommend a spread position to your client that would be profitable if it does. Of the positions listed, you would recommend that the client go: A) short 1 XYZ Jan 40 put and long 1 XYZ Jan 50 put. B) long 1 XYZ Jan 40 call and short 1 XYZ Jan 30 call. C) short 1 XYZ Jan 30 call and long 1 XYZ Jan 50 call. D) long 1 XYZ Jan 30 put and short 1 XYZ Jan 40 put.

D) long 1 XYZ Jan 30 put and short 1 XYZ Jan 40 put. Of the choices given, the correct answer is the credit put spread. Credit put spreads are bullish. Anytime the long option in a spread has a lower strike price than the short position, the spread is known as a bullish spread. We refer to that strategy as buy low, sell high (BLSH).

A 50-year-old investor purchases a single payment deferred variable annuity with a premium of $50,000. Five years later, the value of the account is $45,000, and the investor makes a $10,000 withdrawal. The tax consequences of this action would be: A) ordinary income on the $5,000 difference between the purchase price and the current value plus a penalty of 10% because the investor is only 55 years old. B) ordinary income on the $5,000 difference between the purchase price and the current value. C) ordinary income on the entire $10,000 withdrawn plus a penalty of 10% because the investor is only 55 years old. D) no tax is due.

D) no tax is due. Investors in variable annuities are only taxed on the earnings of the account. This account lost money—there were no earnings to be taxed.

A customer's confirmation of a municipal securities transaction must include: A) the highest potential yield the customer may receive and the amount of markup or markdown in a principal transaction. B) the highest potential yield the customer may receive and information regarding the catastrophic call provision. C) the lowest potential yield the customer may receive and information regarding the catastrophic call provision. D) the lowest potential yield the customer may receive and whether the bond is taxable or subject to the alternative minimum tax.

D) the lowest potential yield the customer may receive and whether the bond is taxable or subject to the alternative minimum tax. Customer confirmations always reflect a worst-case scenario (lowest) regarding yield. Any possible tax ramifications, such as the bond being designated as an AMT bond, must also be disclosed. Catastrophe call provisions need not be disclosed on a confirmation. Commissions and markups/markdowns are disclosed, but not the highest yield. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.