Practice Exam Questions (Incorrect & Marked for Review)
A long straddle in options would produce a profit for a customer under which two of the following circumstances? I. The market value of the underlying security moves above the combined premiums added to the strike price. II. The market value of the underlying security moves below the combined premiums subtracted from the strike price. III. The market value of the underlying security is equal to the combined premiums subtracted from the strike price. IV. The market value of the underlying security is equal to the combined premiums added to the strike price.
I or II A long straddle is a long call plus a long put on the same underlying security, with the same strike price and exercise month. The market value of the underlying security would have to move either above the combined premiums added to the strike price on the call, or below the combined premiums subtracted from the strike price on the put before either position would be profitable. III and IV describe the break-even prices.
Which of the following are true regarding Federal Farm Credit System securities: I. They issue notes and bonds in book entry form. II. They settle next business day in Federal Funds. III. They are exempt from federal tax and are guaranteed by the federal government. IV. The bonds are more actively traded in the secondary market than are the notes.
I, II, IV All choices are true except III, since Federal Farm Credit System securities are subject to federal tax.
Redeemable shares are issued by which of the following types of investment companies? I. open-end investment companies II. closed-end investment companies III. unit investment trusts IV. no load mutual funds
I, III and IV All choices issue redeemable shares except for the closed-end investment companies. Closed-end company shares trade in the open market on supply and demand.
Which of the following is a defensive stock? [A] Aerospace company [B] Food company debenture. [C] Blue chip [D] Public utility
[D] Public utility Defensive stocks (not defense) are stocks that remain stable during good and bad times. A Debenture is a type of bond, and is not a stock.
Registration of municipal securities dealer with the SEC indicates the SEC has: [A] Received from the dealer certain background organizational information. [B] Approved the business conduct of the registrant. [C] Approved the financial standing of the registrant. [D] Determined that all persons associated with the registrant are duly qualified under securities laws.
[A] Received from the dealer certain background organizational information. Registration with the SEC does not mean approval. It means that the SEC received from the dealer certain background organizational information.
Which of the following are true of warrants? [A] The market price of the stock is below the exercise price when they are issued. [B] All are perpetual. [C] They pay dividends. [D] The market price of the stock is considerably above the exercise price when they are issued.
[A] The market price of the stock is below the exercise price when they are issued. Because warrants are used as an incentive or "sweetener," the exercise price of the warrant will be more than the offering price of the new issue. As time passes and the market price of the new issue rises, the warrant will become valuable.
Which of the following would probably provide the greatest protection of purchasing power? [A] Variable annuity [B] Fixed annuity [C] Series HH bonds [D] Face amount certificates
[A] Variable annuity A Variable Annuity provides the greatest protection of purchasing power when compared to: Fixed Annuity, Series HH and Face Amount Certificates since these investments will only return a fixed amount.
All of the following are reasons to write call options except: [A] buy the underlying stock at a price which is below the current market price [B] increase the rate of return on invested capital [C] hedging [D] expecting the price of the stock to remain neutral
[A] buy the underlying stock at a price which is below the current market price The BUYER of a call would buy the underlying stock if the option were exercised. This question is about the WRITER of a call. Therefore the answer of "a" would not be applicable but "b", "c" and "d" are true.
A customer opens an account with an NYSE member firm and requests a copy of financial condition. The firm must: [A] make the statement available to the customer. [B] send a copy of the firm's income statement instead of the statement of financial condition. [C] send both the statement of financial condition and the income statement. [D] None of the above.
[A] make the statement available to the customer. If a customer requests a copy of the financial condition of an NYSE member firm, the firm must make the statement available.
Mortgage Real Estate Investment Trusts generally invest in which of the following? [A] properties handled by developer or builders [B] income producing properties [C] residential mortgage loans [D] oil and gas properties
[A] properties handled by developer or builders The BUYER of a call would buy the underlying stock if the option were exercised. This question is about the WRITER of a call. Therefore the answer of "a" would not be applicable but "b", "c" and "d" are true. Mortgage Real Estate Investment Trusts lend money to builders and developers and then pass the income on to shareholders.
An investor on a normal interest payment date owning a 7 1/2% U.S. Treasury bond, due 2010 trading at 102, would receive: [A] $36.75 [B] $37.50 [C] $73.52 [D] $75.00
[B] $37.50 Although the bond is trading at a premium that has no effect on the semi-annual interest payment, thus: Par $1000 x 71/2% = $75 annual interest $75 Annual Interest 2 Semi Payment = $37.50 paid semi-annually
The Intra Corporation earned $3 million plus received $200,000 in preferred dividends. The Corporation is in the 30% tax bracket. Taxes on its entire amount of taxable income would be: [A] $900,000 [B] $918,000 [C] $930,000 [D] $960,000
[B] $918,000 $200,000 dividend income x .30 taxable portion (70% exempt) $ 60,000 taxable portion of Div income $3,060,000 taxable x .30 tax rate $918,000 tax liability
Unless an extension of time is granted, a customer must be "bought in" if he does not deliver securities which he sold long for his account within how many business days after the settlement date? [A] 7 [B] 10 [C] 30 [D] 90
[B] 10 The customer is allowed 10 business days after settlement date to deliver securities before he will be bought in.
The wash sale rule may apply when an investor sells: [A] 100 shares of ABC at a loss and simultaneously buys 100 shares of ABC non-convertible preferred. [B] 100 shares of DEF at a loss and 30 days later buys a call option with DEF as the underlying security. [C] 100 shares of PDQ at a profit and four days later writes a deep in-the-money put option with PDQ as the underlying security. [D] 100 shares of AFL at a profit and less than thirty days later buys 100 AFL shares.
[B] 100 shares of DEF at a loss and 30 days later buys a call option with DEF as the underlying security. Wash sale rules apply when the investor sells a position at a loss and then purchases the same position or a relative equivalent within 30 days. This includes the purchase of call options and convertible securities. The purchase of any security which can get you back to owning what you sold would disallow the loss.
In the event a project financed by a municipal revenue bond is condemned (faulted), which of the following covenants would apply? [A] Refunding Covenant [B] Catastrophic Call Covenant [C] Refinancing Covenant [D] Defeasance
[B] Catastrophic Call Covenant In the event a project financed by a municipal revenue bond is condemned the Catastrophic Call Covenant would be utilized.
Mr. Jones is long 100 shares of XYZ stock. Which option transactions would give him the MOST downside protection? [A] He should sell one XYZ call and sell one XYZ put. [B] He should sell one XYZ call and buy one XYZ put. [C] He should buy one XYZ call and sell one XYZ put. [D] He should buy one XYZ call and buy one XYZ put.
[B] He should sell one XYZ call and buy one XYZ put. If an investor is long the stock, they would be looking for downside protection, which would be to buy a put or sell a call. The best hedge here is the long put. The sold call is covered by the long stock position and the premium provides a minimal amount of cushion in relation to protection from minor fluctuations downward in the market price.
A transfer agent for a security I. cancels old certificates. II. issues new certificates. III. maintains records of stockholders.
[B] I and II I and II are correct III is incorrect because the stock record book is kept by the Registrar.
Types of Asset Allocation include which of the following? I. Tactical II. Dynamic III. Policy Specific
[B] I and II only Tactical and Dynamic are types of asset allocation, but Policy Specific is not a method of asset allocation.
Which of the following features are offered to both the investors of corporations and the investors of limited partnerships? I.Limitation of liability II. High level of liquidity III. Management by professionals IV. The flow-through status of profits and losses
[B] I and III In a limited partnership, the limited partner's investment is the extent of their liability in the company. This is also the case with a corporation, where a shareholder's investment is their only liability. In both a limited partnership and a corporation, investors can expect professional management by both types of companies (LPs have general partners and corporations typically will have a board of directors).
Redeemable shares are issued by which of the following types of investment companies? I. open-end investment companies II. closed-end investment companies III. unit investment trusts IV. no load mutual funds
[B] I, III and IV All choices issue redeemable shares except for the closed-end investment companies. Closed-end company shares trade in the open market on supply and demand.
To be a good delivery, a bond with mutilated (vandalized) coupons must be authenticated by I. the broker/dealer delivering the certificate. II. the broker/dealer receiving the certificate. III. the issuer. IV. the transfer agent.
[B] III and IV Broker/dealers cannot authenticate or validate certificates, that is done by the issuer or transfer agent.
Which of the following statement concerning Real Estate Investment Trusts are correct? I.They are considered investment companies under Federal Securities Laws II.They redeem securities at net asset value III.They must be registered with the SEC before a public sale IV.They are not considered tax shelter investments because operating losses do not pass through to the owners of the REIT
[B] III and IV REITs (Real Estate Investment Trusts) trade like a stock trade and are not considered to be an investment company. They also are not classified as a tax shelter investment.
Super DOT (now called Universal Trading Platform) is the electronic order system used by which of the following markets for trading common stocks? [A] OTC Market [B] New York Stock Exchange [C] Chicago Board Options Exchange [D] Boston Stock Exchange
[B] New York Stock Exchange New York Stock Exchange Super DOT, now called Universal Trading Platform, is the electronic order system used for trading common stocks.
Which of the following regulates credit extension on securities loans by banks when the proceeds are used for the purpose of buying or carrying margin stocks? [A] Regulation T [B] Regulation U [C] Regulation G [D] Regulation X
[B] Regulation U Regulation U regulates credit extension on securities by banks.
In trading municipal securities, the terms "all or none" and "multiples of" most commonly refer to: [A] Principal transactions only [B] Seller's offering terms [C] Agency transactions [D] Discount bonds
[B] Seller's offering terms "All or None" or "multiples of" are terms used by dealers offering bonds for sale.
Which of the following would NOT be a reason for a municipality to issue revenue bonds versus general obligation bonds? [A] Current legislation at the state level requires the self-sufficiency of projects of this nature. [B] Statutory debt limitations are usually enforced on revenue bonds. [C] User fees are expected to support the project once completed. [D] Only certain members of the community will use the project.
[B] Statutory debt limitations are usually enforced on revenue bonds Revenue bonds are NOT subject to statutory debt limits. All other choices are correct with regard to Revenue bonds.
Which of the following would NOT be related to equity securities that a corporation would distribute? [A] Preferred stock [B] Subordinated debentures [C] Pre-emptive rights [D] Subscription warrants
[B] Subordinated debentures Preferred stock is an equity security. Pre-emptive rights and subscription warrants are both derivatives of equities which would allow a holder to purchase equity securities. Debentures are debt instruments and would NOT be related to equity securities.
Which of the following statements are TRUE of U.S. Government agency securities? [A] They are equity securities [B] The interest paid is subject to federal income taxation [C] They are direct obligations of the U.S. Treasury [D] They must be registered with the SEC
[B] The interest paid is subject to federal income taxation U.S. Government agency securities are debt investments that are not direct obligations of the U.S. Treasury and do not have to be registered with the SEC. Interest paid is subject to federal income taxation.
Your municipal securities firm has an "out firm" quote from another dealer on a block of municipal bonds. This means that: [A] Your firm must confirm the final price before finalizing the transaction. [B] Your firm can sell these bonds before buying them. [C] The bonds have not yet been issued. [D] The bonds have not yet been priced.
[B] Your firm can sell these bonds before buying them. Your firm has been given a firm price on a block of municipal bonds. Because you know the bonds are available at a specific price, you can sell them to your clients before you buy them from the other dealer.
A decrease of 10 basis points for a $1,000 bond would represent which of the following decreases in the price of the bond? [A] $100.00 [B] $10.00 [C] $1.00 [D] $.10
[C] $1.00 Let's first discuss the difference between a basis point and a bond point. A basis point is the measure of the change in yield. It is a small number, so a basis point measures that small change. A basis point is equal to 1/100th of 1% of a bond or $.10. So on a $1,000 bond, one basis point is equal to $.10. So, ten basis points would be equal to $1.00. (10 X $.10 = $1.00) A bond point deals with the price of a bond. A bond point is equal to 10 dollars.
In 2015, an attorney who is not an active participant in a retirement plan earns $150,000 annually and the attorney's spouse is unemployed. The maximum tax deduction allowed under IRA Federal Tax rules is? [A] $5,500 [B] $2,000 [C] $11,000 [D] $3,000
[C] $11,000 An IRA for an eligible unemployed spouse: The maximum deductible contribution is $11,000.00 ($5,500.00 per person).
A customer buys $30,000 of ABC in a margin account. He pays for the securities in full and there is no debit balance in the account. Regulation T is 50%. What is the SMA in the account? [A] $-0- [B] $10,000 [C] $15,000 [D] $30,000
[C] $15,000 Excess Equity (SMA) EUQALS Current Equity - (CMV x Reg T%) Reg T EQUALS 50% $ 30,000 CMV $ 0 DB $ 30,000 Current Equity $ 30,000 CMV x .50 $ 15,000 Excess Equity or SMA
A municipal syndicate is offering an 8 3/4% bond issue to the public at 100. The syndicate manager is allowing a 3/4 point concession and a 1 point additional takedown. A member of the syndicate sells $1,000,000 of the bonds. The profit accruing to the syndicate member is: [A] $7,500 [B] $10,000 [C] $17,500 [D] $100,000
[C] $17,500 Let's look at this question as an example: Any syndicate member who sells bonds will receive the full 1 3/4 points. This is the take-down plus the concession. One bond point is equal to 10 dollars. Now, let's look at this question step by step 1. 3/4 point concession = .75 X $10 = 7.5 2. 1 additional takedown = 1 X $ 10 = 10 So, 10 + 7.5 = 17.5 dollars per bond sold. If we have 1000 bonds, we take 17.5 X 1000 = 17,500. So, for this question we need to be aware of who sells the bonds.
A customer executes various transactions during the year and realizes a $10,000 net capital loss. What amount can be written off against ordinary income? [A] $-0- [B] $1,500 [C] $3,000 [D] $10,000
[C] $3,000 Only $3,000 in net capital loss can be written off against ordinary income in any given tax year.
Under NYSE regulations, what is the minimum maintenance requirement for selling short a $20 marginable security? [A] $2.50 per share [B] $5.00 per share [C] 30% of the market value [D] 100% of the market value
[C] 30% of the market value The NYSE/FINRA minimum maintenance requirement for short margin accounts is 30% of the market value.
All the following are commonly used designations for short-term tax exempt notes EXCEPT: [A] BAN [B] RAN [C] AON [D] TAN
[C] AON AON stands for an All or None type of order.
All of the following are methods of Depreciation EXCEPT: [A] Double Declining Balance [B] Straight Line [C] Amortization [D] Modified Accelerated Cost Recovery System (MACRS)
[C] Amortization Amortization reduces the cost basis of bonds purchased at a premium and is not considered to be "depreciated"
When a municipal bond is insured, the bondholder is protected against default of the issuer in the payment of which of the following? [A] Only the interest [B] Only the principal [C] Both the interest and the principal [D] Call premiums
[C] Both the interest and the principal Municipal bond insurance (e.g.. MBIA and AMBAC) insure municipal bonds against default, which means failure to make timely payments of interest and principal as they become due.
A corporation that has agreed to accept payments in Euro Currency would hedge by which of the following option positions? [A] Buying puts on the American dollar [B] Buying calls on the American dollar [C] Buying puts on the Euro Currency [D] Buying calls on the Euro Currency
[C] Buying puts on the Euro Currency Since the corporation will be paid in Euro Currency they would want to be protected from a decline in the value of the Euro and would therefore either sell calls or buy puts on the Euro.
All of the following kinds of mutual funds will ordinarily provide a high dividend yield EXCEPT: [A] Large Cap Common Stock Fund [B] Income Fund [C] Gold Fund [D] Balanced Fund
[C] Gold Fund Gold Funds generally pay little or no dividends to its shareholders.
A rate covenant in a municipal revenue bond pledges to charge rates that are sufficient to cover: I. Debt service of bonds II. The operations of and maintenance of the facility III. Funds to cover the call of bonds.
[C] I and II only
Stock index options are used for which of the following purposes? I. To hedge a stock portfolio from market risk II. To be sure that the stock portfolio will not decline in value III. To profit in a rising market IV. To profit in a declining market
[C] I, III, and IV All choices are correct except II. II is incorrect because you can hedge a decline in the portfolio value but you cannot "be sure" the value will not decline.
When determining whether position limit rules have been violated, which option positions on the same underlying security are combined under Option Clearing Corporation Rules? I. Long puts and long calls. II. Short puts and long calls. III. Long puts and short calls. IV. Short puts and short calls.
[C] II and III Position limit rules regulate option positions on the same side of the market. Short puts and long calls are both bullish positions, while long puts and short calls are both bearish positions, on the same side of the market.
Under the Securities Exchange Act of 1934, the Municipal Securities rulemaking Board is allowed to make rules concerning which of the following? I. Issuer reporting requirements. II. Fair profits. III. Books and records.
[C] III only The MSRB was established to regulate all firms transacting a business in municipal securities. This includes broker/dealers and registered representatives. The MSRB does not regulate issuer reporting requirements or fair profits.
When is the seller of a listed put option entitled to receive a cash dividend? [A] If the exercise notice is filed with the OCC on or after the ex-date. [B] If the exercise notice is filed with the OCC on or after the record date. [C] If the exercise notice is filed with the OCC just prior to the ex-date. [D] If the exercise notice is filed with the OCC just prior to the record date.
[C] If the exercise notice is filed with the OCC just prior to the ex-date. Whoever ends up owning a security the day before the ex-date would receive a dividend. "C" would cause the put writer to be the owner of the stock just before ex.
A U.S. Balance of Payments deficit would tend to increase due to which of the following? [A] Commodity exports [B] Spending by foreign tourists in the U.S. [C] Increase in U.S. investment abroad [D] Interest and dividends earned by U.S. citizens on foreign investments abroad
[C] Increase in U.S. investment abroad The deficit would increase when money is leaving the U.S.[C] III only
CMO tranches that pay a variable rate of interest which is usually measured against the: [A] T-bill rate [B] Federal funds rate [C] LIBOR (London Interbank Offered Rate) [D] Prime rate
[C] LIBOR (London Interbank Offered Rate) Returns on variable CMO's are compared to the LIBOR (London Interbank Offered Rate).
Which of the following best describes the 'Third Market"? [A] OTC securities traded by market makers [B] OTC securities traded on an exchange [C] Listed securities traded OTC by market makers [D] Listed securities traded on the floor of a stock exchange
[C] Listed securities traded OTC by market makers When listed securities are traded in the OTC market by market makers, it is known as the Third Market.
Yield-based or Interest Rate Options settle in which of the following? [A] Only the underlying treasury security [B] Treasury Bonds only [C] Only cash [D] The specific underlying security or a treasury security of equal or better value
[C] Only cash Yield Based or Interest Rate options value is measured by looking at the value of Treasury securities but when they are traded they always settle in cash.
State governments receive the least amount of revenues from which of the following? [A] Excise taxes. [B] Sales taxes. [C] Property taxes. [D] Gasoline taxes.
[C] Property taxes. Property taxes, also called ad valorem taxes, are collected at the local government level (counties, cities, etc.).
Securities issued by the Federal Intermediate Credit Banks (FICBs): [A] Are direct obligations of the U.S. government [B] Pay interest that is exempt from federal income tax [C] Provide funds for loans for farm expenses [D] Provide funds for residential mortgages
[C] Provide funds for loans for farm expenses Securities issued by the FICBs provide funds for loans for farm expenses.
The rules for regulating insider activity are established by the: [A] Rules of Fair Practice [B] Securities Act of 1933 [C] Securities Exchange Act of 1934 [D] Securities Investor Protection Corporation
[C] Securities Exchange Act of 1934 Insiders are regulated under the Securities Act of 1934. [33 > New Issues > Full & Fair Disclosure.; 34 > Exchange > People Act > Secondary Market]
An investor purchases $10,000 worth of XYZ common stock over a two-year period. He subsequently sells $5,000 of the stock and does not identify or specify which shares he sold. Which of the following statements is true with regard to this situation? [A] His gain is $5,000. [B] The IRS requires that LIFO be used to identify the shares sold. [C] The IRS requires that FIFO be used to identify the shares sold. [D] The investor is allowed to specify which shares are being sold when he files his tax return.
[C] The IRS requires that FIFO be used to identify the shares sold. Because the investor did not specifically identify the shares to be sold at the time of the sale, the IRS uses FIFO, first in, first out.
Which of the following municipal bonds would probably be refunded? [A] 5% coupon due 1/1/2010, callable 1/1/98 @ 102, 6% yield [B] 6% coupon due 1/1/2005, callable 1/1/95 @ 100, 6% yield [C] 7% coupon due 2/1/2000, non-callable, 6% yield [D] 8% coupon due 2/1/2015, callable 2/1/88 @ 100, 6% yield
[D] 8% coupon due 2/1/2015, callable 2/1/88 @ 100, 6% yield The callable bond with the highest coupon rate is most likely to be refunded. This would save the issuer the most money over the long term.
Which of the following are true about a listed option? I. It may be exercised immediately upon purchase. II. It is a wasting asset. III. If it is out-of-the-money, it has no intrinsic value. IV. It belongs to one of two classes of options (Calls or Puts).
[D] All All are true about listed options.
Which of the following items must be approved by a Registered Options Principal or his designee before issuance? I. Seminar transcripts II. Prospecting letters III. Advertising
[D] All All items of advertising and sales literature must be approved by the ROP - Registered Option Principal.
In analyzing its general obligation bond issue, which of the following characteristics of an issuer may be considered? I. Population trends. II. Budgetary practices. III. Unfunded liabilities. IV. Tax base.
[D] All All of these characteristics should be considered, to get an idea of the community's ability to pay the debt obligation.
Revenue bonds financed by user charges normally contain a flow of funds provision requiring the issuer to set rates sufficiently high to meet the requirements for which of the following: I.Sinking fund payments for retirement of bonds prior to the maturity. II.Expenses incurred for operation and maintenance of the facility. III.Debt service requirements. IV.Renewal and replacement fund payments.
[D] All of the above All choices are correct with regard to the Flow of Funds provision of a Revenue Bond.
An escrow receipt which is used in option trading is issued by: [A] The customer [B] The Chicago Board Options Exchange [C] The New York Stock Exchange [D] An OCC approved bank
[D] An OCC approved bank Escrow receipts are issued by OCC-approved banks and state that the customer holds the security with them.
The NYSE Composite Index is affected by the price changes of all listed [A] Common and preferred stocks [B] Common stocks, preferred stocks, and bonds [C] Preferred stocks [D] Common stocks
[D] Common stocks The NYSE Composite Index is affected by price changes of all listed common stocks only.
Which of the following can be used to meet a margin call of $5,000 in a customer's account? I.$ 5,000 cash II.$ 5,000 marginable securities III.$ 10,000 marginable securities
[D] I and III Because securities are only marginable at 50%, the investor would need to deposit $10,000 worth of the securities, but only $5,000 in cash.
When investing in a DPP, proceeds may be used to meet which expenses? I. Selling costs II. Offering costs III. Organization costs IV. Acquisition costs
[D] I, II, III, and IV In regards to DPP's proceeds may be used for the following expenses: Selling Cost Offering Cost Organization Cost Acquisition Cost
If convertible bonds are converted into common stock, which of the following items on the issuing company's balance sheet would change? I. Total Assets II. Total Liabilities III. Working Capital IV. Shareholders' Equity
[D] II and IV Total Liabilities would be reduced due to the conversion and shareholder's equity would be increased due to the additional common shares.
Which two of the following are correct regarding Eurodollar bonds? I.Interest and principal payments are made in the foreign currency. II.Interest and principal payments are made in Eurodollars. III.The bonds are registered with the SEC. IV.The bonds are not registered with the SEC.
[D] II, IV Eurodollar bonds pay interest and principal in U.S. Dollars (Eurodollars) and are issued in Europe, therefore, would not be required to be registered with the SEC.
When a corporation is investing funds, which of the following types of securities provides the best tax incentives for the corporation? [A] Investments in convertible fixed income debt securities [B] Investments in Treasury Securities [C] Investments in corporate debt securities [D] Investments in corporate preferred stock
[D] Investments in corporate preferred stock When a corporation invests in the equity securities of other corporations, the dividends from those securities are 70% excluded from taxable income. Therefore, only 30% is subject to income tax. This provides the greatest level of income and appreciation, along with tax benefits.
A customer that redeems a Variable Annuity prior to the scheduled annuity date would be taxed in which of the following ways? [A] Taxable gains and losses are deferred until retirement. [B] There would be no tax consequence. [C] The conduit theory applies to gains and losses. [D] Losses are disallowed, and gains are taxed as ordinary income.
[D] Losses are disallowed, and gains are taxed as ordinary income. When a variable annuity contract is surrendered or redeemed, gains are taxed as ordinary income, but losses are disallowed. The conduit theory means that the gains and losses on most securities transactions would be passed through to the investor and the investor would claim them on their individual tax return but this theory does not apply to Variable Annuities. .
All of the following companies are examples of non-cyclical or defensive stocks except: [A] Public utilities such as water and gas [B] Companies selling pharmaceuticals [C] Energy providers [D] Manufacturers of appliances
[D] Manufacturers of appliances Cyclical stock tends to rise quickly when the economy turns up and to fall quickly when the economy turns down. Housing and appliances manufacturers are examples of cyclical stocks.
Assume a broker enters buy and sell orders creating activity in the shares of ABC. The broker's sole purpose is to give appearance of heavy trading in ABC's stock. This practice is a violation of Federal Securities Laws referred to as: [A] Backing away [B] Pegging [C] Churning [D] Painting the tape and is a form of price manipulation
[D] Painting the tape and is a form of price manipulation Creating false activity by buying and selling repeatedly is referred to as "Painting the Tape" and is done in an attempt to push the market price of a stock higher.
Full employment and robust consumer spending usually results in: [A] Inflation [B] Deflation [C] Stagflation [D] Falling interest rates
[A] Inflation Full employment and high consumer spending usually results in rising prices i.e. "inflation".
How would the exercise price on a foreign currency option be displayed? [A] The price of the foreign currency per U.S. Dollar [B] The price of the Eurodollar per foreign currency unit [C] The spot price of the U.S. Dollar per foreign currency unit. [D] The price of the U.S. Dollar per foreign currency unit
D] The price of the U.S. Dollar per foreign currency unit Foreign currency option exercise prices are displayed showing the U.S. Dollar pricing per foreign currency unit. The spot price would not be valid as an exercise price, because the spot price changes daily. A US Dollar price would be listed as the exercise price, while the spot price would be the "market price" of the dollar in that particular currency pair.
Concerning public communications about investment companies all of the following statements are true EXCEPT: [A] Performance comparisons are prohibited. [B] Performance comparisons should cover the same period of time. [C] Performance comparisons should be for similar investment objectives. [D] The purpose of a performance comparison should be stated when comparing an investment company and a market index.
[A] Performance comparisons are prohibited. Performance comparisons are permitted as long as they are fair and not misleading.
When XYZ stock is at 72 1/2, an investor buys 10 XYZ June 60 calls @ 23 1/2 and sells 10 XYZ June 90 calls @10. What is the investor's maximum profit potential? [A] $1,650 [B] $1,350 [C] $13,350 [D] $16,500
[D] $16,500 The maximum profit on a debit spread is the difference between the strike prices adjusted by the premiums.
Under the Securities Investor Protection Act of 1970, customer claims for cash and securities in the event of the liquidation of a SIPC member are insured up to [A] $250,000 per "separate customer." [B] $250,000 per account. [C] $500,000 per account. [D] $500,000 per "separate customer."
[D] $500,000 per "separate customer." SIPC will provide protection for customers of up to $500,000 per separate customer, of which the maximum coverage of cash is $250,000.
If a bond is selling at a premium, I. It has a coupon rate lower than the current yield. II. The face value is lower than the market price. III. It is of higher quality than another bond selling at a discount.
[A] II A bond selling at a premium would have a coupon rate higher than the current yield so (I) is incorrect. Bonds sometimes trade at premiums simply because of changes in interest rates, and it has nothing to do with the quality of the bond, so (III) is incorrect. The face value is lower than the market price, is true because the price of a bond selling at a premium will be more than the face value of $1,000, so (II) is correct.
In an established margin account, a customer sells short 100 shares of ABC at $40 per share and writes 1 ABC July 40 put at 4. What is the customer's cash deposit requirement? [A] $1,600 [B] $2,000 [C] $2,400 [D] $4,400
[A] $1,600 With Reg T 50%, the customer would be required to deposit $2,000 to cover the short sale (50% of $4,000). The proceeds from the sale of the option can be used to reduce the $2,000 deposit, thus the $400 received for the sale of the option reduces the deposit to $1,600.
A person in the 28% tax bracket incurs a long term capital gain of $8,000 and a capital loss of $3,000. What is his tax liability? [A] $750 [B] $1,200 [C] $1,400 [D] $2,240
[A] $750 $8,000 gain - $3,000 loss $5,000 taxable .15 tax rate $ 750 tax liability
Assume a customer's margin account appears as follows: Long 10 ABC calls Long 100 shares of ABC @ 100 Debit Balance $7,500 SMA $2,500 How much cash can the customer withdraw? [A] -0- [B] $2,500 [C] $3,750 [D] $5,000
[A] -0- The client could not remove any money without incurring a maintenance call. Therefore, A is the correct answer. $10,000 CMV - $7,500 DB $ 2,500 EQ Remember that a customer can always use their SMA UNLESS by using it a maintenance call will be generated. In this case the minimum maintenance requirement is $2,500 ($10,000 X .25) therefore by using any SMA a maintenance call would be generated therefore the client would NOT be allowed to use SMA.
When comparing a Mutual Fund to an Exchange Traded Fund which of the following is true? [A] Both are subject to market risk [B] Both are traded during the trading day [C] Both can be bought on Margin [D] Both have actively traded portfolios
[A] Both are subject to market risk Both Mutual Funds and Exchange Traded Funds are subject to Market Risk but Mutual Funds are not traded during the trading day, they are only priced at the end of the trading day. ETF's can be bought on Margin but Mutual Funds cannot be bought on Margin. Since the portfolio of ETF's mirrors a specific index, they do not have actively traded portfolios.
Retail broker/dealer ABC wants to sell a certain variable annuity contract to a customer. Principal underwriter broker/dealer DEF is the distributor of the contracts for the insurance company. What are the FINRA requirements for ABC to be able to buy the contract from DEF at a discount from the public offering price and sell the contract to its customer at the public offering price? [A] Both firms must be members of FINRA and there must be a written sales agreement between them. [B] There must be a written sales agreement between them that provides for a give up of all sales compensation if a variable annuity purchaser redeems the contract within 10 days of purchase. [C] There must be a written sales agreement that is disclosed in the prospectus [D] Both firms must be members of FINRA and an oral sales agreement is sufficient.
[A] Both firms must be members of FINRA and there must be a written sales agreement between them.
Assume that for the past week, the number and dollar value of shares purchased by odd-lotters have been approximately 25% less than the number and dollar value of shares sold by odd-lotters. If this trend continues according to the odd lot theory, it would be: [A] Bullish [B] Bearish [C] Meaningless [D] An indication that total trading volume has increased
[A] Bullish The Odd Lot Theory believes that odd lot investors are always wrong; therefore, you should buy when odd lot investors are selling and sell when odd lot investors are buying. Using this philosophy the past weeks trend would be considered bullish.
A customer buys securities and cannot pay for the purchase within the five business days allowed under Regulation T. The broker would be allowed to take which of the following actions? I. Sell other securities in the customer's account to cover the call. II. Request an extension of time for payment. III. Borrow funds from another broker/dealer to cover the call. IV. Allow the customer to sell other stock short against the box to cover.
[A] I and II I and II are correct III Broker/dealers cannot borrow from other brokers to cover customer debts IV Selling stock short would cause the customer to owe the broker/dealer more money, not less.
Municipal security issuers and market participants are subject to which of the following? I.Anti-Fraud Provisions of the Securities and Exchange Act of 1934. II.Prospectus delivery requirements to purchasers of new issues (Securities Act of 1933). III.Issuer reporting requirements to the SEC under the Securities and Exchange Act of 1934.
[A] I only All securities are subject to the anti-fraud provisions of the 34 Act, but while municipals do not provide a prospectus, they do provide an Official Statement and municipals are exempt from the SEC reporting requirements.
An investor goes to their registered representative with specific objectives. The investor wants investments that are considered very safe and would also like to see income from these investments that is exempt from taxation. What is the BEST recommendation for this client, assuming the client wants the MOST safety possible? [A] The RR should suggest general obligation bonds issued by a medium-sized county. [B] The RR should suggest revenue bonds issued by the State. [C] The RR should suggest bonds issued by a municipality which are backed by U.S. Treasuries held in escrow. [D] The RR should suggest discount notes issued by an agency of the federal government.
[C] The RR should suggest bonds issued by a municipality which are backed by U.S. Treasuries held in escrow. The investor is seeking safe, tax-free income. The tax-free side will come from the municipal bonds. When it is specified that the investor wants the safest investment possible, the municipal securities backed by the U.S. Treasuries (escrowed in Treasuries) provide the safety and the tax-free status. Each of the other selections only fulfills one aspect of the client's objectives.
A client is currently filling out the paperwork for a new margin account with your firm. The client calls you and asks you about the purpose of the Loan Consent Agreement. What is the MOST appropriate description of this document? [A] The agreement provides the RR with the authority to make trades in the account which fall in line with the account's investment objectives without first consulting the client. [B] The agreement provides the firm with the authority to sell a customer out of a position and liquidate the necessary amount of securities needed to meet margin and maintenance calls when the customer fails to meet such calls. [C] The agreement provides the firm with the authority to lend margined securities from the customer's account to other firms and customers for purposes such as short sales. [D] The agreement provides the RR with the authority to put the margined securities in the customer's account up as collateral for loans from banks.
[C] The agreement provides the firm with the authority to lend margined securities from the customer's account to other firms and customers for purposes such as short sales. A Loan Consent Agreement provides the firm with the authority to lend the customer's margined securities to other firms and customers for purposes such as short selling. The other options include discretionary authority, new account forms related to margin and maintenance calls, and hypothecation agreements.
One of your customers calls and is seeking a fund that has a high level of capital appreciation. Of the following, which BEST fits this customer's objectives? [A] The best choice would be a fund made up of municipal bonds. [B] The best choice would be a fund made up of a balance of equity and fixed income securities. [C] The best choice would be a fund made up of small cap stocks. [D] The best choice would be a fund balanced between growth and income investments.
[C] The best choice would be a fund made up of small cap stocks. The customer is seeking high levels of capital appreciation. Of the choices listed, the best would be the small cap fund. Small cap securities generally appreciate more than the other options listed.
Which of the following is an arbitrage situation on a convertible bond? [A] Interest rates are going down. [B] The convertible bond and the underlying stock are selling at parity. [C] The bond is selling at par and the underlying stock is selling at a premium to parity. [D] The convertible bond is selling on a yield basis because the market price of the underlying stock has declined sufficiently
[C] The bond is selling at par and the underlying stock is selling at a premium to parity. Arbitrage is done to take advantage of a price disparity, which would be the situation in "c". The investor could attain a profit by purchasing the bonds and simultaneously selling the common short, therefore locking in a profit because the common is at a premium to parity.
Technical analysis would be concerned with all of the following EXCEPT: [A] Advances and declines [B] Daily purchases and sales by odd lotters [C] The price earnings ratio of DJI during the past year [D] Moving averages of 200 days and 30 weeks during the past year
[C] The price earnings ratio of DJI during the past year Technical Analysis would be concerned with the following factors: Trading volume Moving averages Advances and declines Odd lot purchases and sales Timing of purchases and sales Support and resistance levels but not with financial analysis (Fundamental).
An uncle is buying stock in his cash account which will be given to his nephew who is a minor. The gift is considered to be completed when: [A] The securities have been paid for. [B] Settlement date arrives. [C] The securities are registered. [D] The order is executed.
[C] The securities are registered. The registration of the securities completes the gift to a minor.
Each of the following are reasons for buying a listed put option on an exchange as opposed to selling short the underlying stock, EXCEPT [A] buying a put would require a smaller capital commitment than that required for a short sale. [B] an investor will not be subject to unlimited loss potential when buying a Put. [C] any time-value in the put gradually dissipates as it approaches expiration. [D] buying a put has lower dollar loss potential than selling short the stock.
[C] any time-value in the put gradually dissipates as it approaches expiration. Although "C" is a true statement it is not a reason for buying a put rather than selling stock short.
A single 28 year old professional has income of $350,000 per year and a net worth that exceeds $1,000,000. Her investment objective is capital appreciation. Which of the following would be the least attractive investment choice for this investor? [A] growth funds [B] small cap equity stocks [C] high yield preferred stocks [D] equities in emerging markets
[C] high yield preferred stocks Since this investors objective is capital appreciation the least attractive choice of those given would be preferred stocks since compared to the other choices preferred stock would be expected to remain the most stable.
The Securities Act of 1933 regulates the distribution of new issues and requires a prospectus which must include all of the following except? [A] A statement that the SEC does not approve or disapprove of the securities issued [B] Stabilization clause [C] opinions of counsel and underwriting contracts [D] The date of the prospectus
[C] opinions of counsel and underwriting contracts Copies of underwriting contracts and opinions of counsel are included in the registration statement but are NOT needed in the prospectus.
All of the following responses by a market maker reflect a firm quote, except [A] "It is 5 - 5 1/4." [B] "We'll do it 5 - 5 1/4." [C] "5 - 5 1/4 firm." [D] "It is quoted 5 - 5 1/2."
[D] "It is quoted 5 - 5 1/2." "It is quoted" would represent a subject quote.
A registered rep is explaining a Section 529 College Savings Plan to clients who are the parents of a college-bound child. The parents are interested in setting aside funds for their child's college education. The registered rep should disclose all of the following characteristics of such plans EXCEPT: [A] Although contributions to these plans are not tax deductible for federal income tax purposes, any annual earnings and qualified withdrawals are tax-free. [B] Although these plans are not mutual funds, many offer mutual funds as investment options. [C] These plans typically charge enrollment fees, annual maintenance fees, asset management fees, and sales charges for broker-sold plans. [D] The contribution is exempt from federal gift taxes and the maximum contribution limit can be set at more than $200,000 depending on the state.
[D] The contribution is exempt from federal gift taxes and the maximum contribution limit can be set at more than $200,000 depending on the state. All of the answers provided are true except for the contributions being exempt from federal gift taxes and contributions being set at more than $200,000. Contributions by parents to a child's college education plan are subject to Federal Gift Taxes. Exemptions to the gift tax include $14,000 annually for a single contributor or $28,000 annually for married couples. Up to 5 years of gifts can be aggregated when gifting to a 529 Plan, allowing individuals to contribute up to $70,000 and married couples to contribute up to $140,000 for the tax years of 2016-2017.
All of the following must be included on an option confirmation EXCEPT: [A] The name of the underlying security. [B] The price of the option. [C] The type and strike price. [D] The name of the contra-broker.
[D] The name of the contra-broker. The name of the contra-broker (the broker on the other side of the transaction) is never required on the confirmation.
The fundamental balance sheet comparison (or equation) is: [A] Assets (minus) Total Liabilities (equals) Net Worth [B] Total Assets (equals) Total Long-term Liabilities (plus) Net Worth [C] Total Liabilities (minus) Net Worth (equals) Total Assets [D] Total Assets (equals) Total Liabilities (plus) Net Worth
[D] Total Assets (equals) Total Liabilities (plus) Net Worth Total Assets (equals) Total Liabilities (plus) Net Worth is the fundamental balance sheet comparison or equation. [ALN - Alphabetical Order]
Which of the following options strategies would be best for an investor interested in maintaining his long position in the market while getting maximum downside protection? [A] selling covered call [B] selling covered puts [C] buying calls [D] buying puts
[D] buying puts Best downside protection with options is buying a put because you are protected down to 0.
Which of the following bond offerings would be required to have a trust indenture under the Trust Indenture Act of 1939? [A] U.S. Treasury Bond [B] airport authority revenue bond [C] general obligation bond [D] mortgage bond
[D] mortgage bond Since the Trust Indenture Act of 1939 is applicable only to corporate bonds, the mortgage bonds would be the only bonds required to have a trust indenture.
An annuity unit in a variable annuity is most like a: [A] pension payment [B] insurance unit [C] IRA contribution [D] mutual fund shares or units
[D] mutual fund shares or units An annuity unit in a variable annuity is most like mutual fund shares or units. Their value is based on the net asset value of the portfolio.
Treasury Bill rates have declined to an all time low. This indicates that [A] the FRB has tightened credit. [B] interest rates have increased. [C] the dollar cost of bills has decreased. [D] the dollar cost of bills has increased.
[D] the dollar cost of bills has increased. If T-Bill rates, (which is their yield) have declined, that would mean that prices would have increased, since the yield on a T-Bill is the amount of discount. Less of a discount = higher price.
Which of the following best describes the nominal yield on a bond? [A] annual interest divided by the market price of the bond [B] annual interest divided by the original issue price of the bond [C] the compound rate of return equating the present value of the bond to the future payments of interest and principal [D] the interest stated on the face of the bond
[D] the interest stated on the face of the bond The interest rate or coupon rate of a bond is defined as the bond's Nominal Yield.
