Practice Final

A customer buys 1,000 shares of XYZ at $60 in a margin account, regular way settlement. Two days after the trade, XYZ has dropped to $40. The minimum maintenance margin requirement is: A. $10,000 B. $12,000 C. $15,000 D. $18,000

A. $10,000 The minimum maintenance margin requirement for long stock positions is 25% of the current market value = 25% of $40,000 = $10,000. Note that minimum margins are based on the closing market value each day.

A corporation has issued $100 par, 4% cumulative convertible preferredstock, callable at par. The preferred is convertible into 4 shares of common stock. Currently, the preferred stock is trading at $103 while the common stock is trading at $26. If a customer buys 100 preferred shares, converts, and then sells the common stock in the market, the profit or loss is (ignoring commissions): A. $100 gain B. $100 loss C. $7,400 gain D. $7,400 loss

A. $100 gain If the customer buys 100 shares of the preferred stock, he or she will pay 100 x $103 per share = $10,300. Since each share of preferred is convertible into 4 common shares, the 100 preferred shares will be converted into 4 x 100 = 400 common shares. The sale of 400 common shares at the current market price of $26 will yield $10,400. The net gain is: $10,400 - $10,300 = $100.

A customer buys 1 ABC Feb 45 Call @ $9 and sells 1 ABC Feb 55 Call @ $1. Later, the positions were closed - the ABC Feb 45 Call was closed at $12 and the ABC Feb 55 Call was closed at $3. The customer has a: A. $100 profit B. $100 loss C. $500 profit D. $500 loss

A. $100 profit The opening position is: Buy 1 ABC Feb 45 Call@ $9 Sell 1 ABC Feb 55 Call@ $1 $8Debit The closing position is: Sell 1 ABC Feb 45 Call@ $12 Buy 1 ABC Feb 55 Call@ $ 3 $9Credit The net gain is $100 since the spread between the premiums widened from 8 to 9. Debit spreads are only profitable if the spread between the premiums widens - in this case they did widen.

A company's capitalization consists of: Debentures 10% ($1000 par)$10,000,000 Preferred Stock 10% ($100 par)$ 1,000,000 Common at Par ($5)$ 1,000,000 Capital in Excess of Par$ 9,000,000 Retained Earnings$20,000,000 Stockholder's Equity$31,000,000 Its income statement for the year shows: Net Sales$10,000,000 Cost of Goods Sold$ 6,000,000 Gross Margin$ 4,000,000 Operating Expenses$ 1,000,000 Operating Margin$ 3,000,000 Interest Expense$ 1,000,000 Net Income Before Tax$ 2,000,000 The conversion ratio of these convertible debentures is set at issuance at 40:1. The trust indenture for the debentures includes an "anti-dilutive" covenant. The company wants to issue 50,000 additional common shares. The conversion price after the issuance of the additional common shares will be: A. $20.00 B. $25.00 C. $27.50 D. $31.25

A. $20.00 The conversion price of the convertible bonds set at issuance was $25 per share ($1,000 par / 40 conversion ratio). If the company issues more common shares, the market value of outstanding shares will fall. For example, assume that the common stock price is trading at $25. The bond and the common are at parity. If the company issues 25% more shares (as it does in this example - there is $1,000,000 of common at $5 par or 200,000 shares outstanding, and the company wishes to issue 50,000 additional shares, or 25% more), the adjusted conversion price of the stock after issuance will be $25 / 1.25 = $20 per share. If the conversion price were not adjusted, the convertible security, which was "at the money," goes "out the money." To protect convertible security holders, an anti-dilutive covenant is included in the trust indenture. The conversion price is adjusted for these dilutive effects. The new conversion price will be $25 original conversion price / 1.25 = $20.

A customer sells short 100 shares of ABC stock at $38 and buys 1 ABC Mar 40 Call @ $5. The maximum potential gain is: A. $3,300 B. $3,500 C. $4,200 D. unlimited

A. $3,300 If the stock falls, the customer gains on the short stock position. The customer sold the stock for $38. If it falls to "0," the customer can buy the shares for "nothing" to replace the borrowed shares sold and make 38 points. The customer lets the call expire "out the money" losing 5 points, so the maximum potential gain is 33 points = $3,300.

For the year 2019, the maximum annual contribution to an Individual Retirement Account for a single person is: A. 100% of income or $6,000 whichever is less B. 100% of income or $6,000, whichever is greater C. 100% of income or $12,000, whichever is less D. 100% of income or $12,000, whichever is greater

A. 100% of income or $6,000 whichever is less For the year 2019, the maximum permitted contribution to an IRA is 100% of income or $6,000, whichever is less. If a person earns $1,000 per year, then the maximum permitted contribution would be only $1,000. (Of course, it is highly doubtful that this person would make a contribution, since he or she would probably prefer to eat instead!) Contributions are based on earned income only - dividend or interest income cannot be used as the basis for making a contribution.

403(b) Plans are permitted to invest in all of the following EXCEPT: A. Common stocks B. Mutual Funds C. Fixed Annuities D. Variable Annuities

A. Common stocks 403(b) plans are tax deferred annuity contracts available to non-profit employees who are not covered by qualified retirement plans. The plans allow for investment in tax deferred annuity contracts, that can be funded by mutual fund purchases, as well as by traditional fixed annuities. Note that these are all "managed" products - where an investment adviser is managing the portfolio. Direct investments in common stocks selected by the plan participant are prohibited.

Equity securities of which issuer are the LEAST defensive? A. Defense manufacturer B. Pharmaceuticals C. Soft drink manufacturer D. Utilities

A. Defense manufacturer A defensive industry is one which is not greatly affected by economic downturns. Pharmaceuticals, soft drink makers, and utilities are all defensive. If the economy sours, people still buy drugs, cola, and use electricity. The defense industry is the least defensive of the choices offered. In periods of economic slowdowns, the government collects less taxes, and tends to reduce arms and expensive defense systems orders.

The MSRB online system that gives non-professional investors key information about municipal securities, including issuer financial disclosures, notices of material events, real-time prices, and market statistics is called: A. EMMA B. SHORT C. RTRS D. MSIL

A. EMMA "EMMA" - the Electronic Municipal Market Access system - is an MSRB-created website established specifically for retail customer use. It gives municipal investors access to municipal disclosure documents and municipal price reporting at no charge. The information that the investing public can find on EMMA is: New municipal issue offering documents (Official Statements) for most municipal bond issues, notes, and 529 plans; Details of bonds that have been pre-refunded; Ongoing disclosures by municipal issuers about their finances, including material event notices and annual financial information; Real-time prices and yields for municipal bond trades, as reported through RTRS (Real Time Reporting System) and SHORT (Short-Term Obligation Rate Transparency System).

In a corporate new issue offering, the underwriter's responsibilities include which of the following? I Managing the syndicate account II Selling the securities III Printing the certificates IV Registering the certificates A. I and II only B. III and IV only C. I and IV only D. II and III only

A. I and II only The manager runs the syndicate account and determines each member's participation in the underwriting's profit or loss. The manager is responsible for selling the issue to the public. In a new issue offering, the issuer is responsible for originally printing and delivering the shares. These shares go to the transfer agent, who transfers the shares into the names of the purchasers of the new issue. Corporate new issues must be registered with the SEC under the Securities Act of 1933, unless an exemption is available. These securities must also be registered in each state under that state's "Blue Sky Laws." Both registrations are the responsibility of the issuer.

Which of the following statements are TRUE regarding a life annuity? I The shorter the expected annuity period, the larger the monthly payment II The longer the expected annuity period, the larger the monthly payment III A life annuity usually pays the largest amount of all of the annuity payment options IV A life annuity usually pays the smallest amount of all of the annuity payment options A. I and III B. I and IV C. II and III D. II and IV

A. I and III The shorter the time period to "expected death" when the separate account is annuitized, the larger the monthly payment will be; conversely the longer the time period to "expected death" when the separate account is annuitized, the smaller the monthly payment will be. Regarding annuity payment options, this must be looked at from the standpoint of the insurance company, that has a large pool of annuitants to cover. The insurance company can afford to pay a larger payment to those persons who it expects will be paid for the shortest time period; it will make smaller monthly payments when it expects to pay for a longer time period. A life annuity lasts only for that person's life - this is the shortest expected period of the annuity payment options. A life annuity with period certain continues to pay for a fixed time period if the person dies early; a joint and last survivor annuity pays a spouse when one person dies; a unit refund annuity pays a lump sum if a person dies early.

In order to sell restricted stock under the provisions of Rule 144, the stock must be: I fully paid II either properly margined or fully paid III held for at least 6 months IV held for at least 1 year A. I and III B. I and IV C. II and III D. II and IV

A. I and III To sell restricted stock under the requirements of Rule 144, the stock must be held, fully paid, for at least 6 months

Which of the following funds MUST be a closed end fund? I Net Asset Value = $10 / Purchase Price = $9.50II Net Asset Value = $10 / Purchase Price = $10III Net Asset Value = $10 / Purchase Price = $10.50 A. I only B. I and II C. II and III D. I, II, III

A. I only A closed end fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed end fund share is purchased at the prevailing market price plus a commission. This contrasts to mutual fund (open end management company) shares that are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a "sales load." Thus, the minimum price for a mutual fund is Net Asset value; while the only type of fund that can trade for less than Net Asset Value is a closed end fund.

Prior to the filing of a registration statement, which of the following activities is (are) permitted? I A member firm signing a syndicate agreement to become part of the underwriting group for the issue II A member firm distributing preliminary prospectuses for the issue to customers III A member firm taking indications of interest for the issue from customers IV A member firm selling the issue to customers A. I only B. II and III only C. I, II, III D. I, II, III, IV

A. I only Prior to the filing of a registration statement, the issue cannot be promoted in any manner - so the use of a preliminary prospectus to take indications of interest is prohibited; as is selling the issue. Once the registration statement is filed, the issue enters the 20 day cooling off period. At this point, a preliminary prospectus can be used to take indications of interest, but the issue cannot be sold. Once the registration is effective, the issue can be sold with the prospectus. There is no prohibition on the underwriter joining the syndicate or selling group prior to the filing of the registration statement, since this does not involve offering the issue to the public.

A technical analyst has been charting the price movements of ABC stock. The stock has been fluctuating in price between $41 and $46 per share for the past 3 months. If the analyst expects a breakout through the support level, which order should be placed? A. Sell (Short) ABC @ $40 Stop GTC B. Sell (Short) ABC @ $41 Stop GTC C. Sell (Short) ABC @ $46 Stop GTC D. Sell (Short) ABC @ $47 Stop GTC

A. Sell (Short) ABC @ $40 Stop GTC If a stock moves through a support level, it is breaking out to the downside. In this example, the support level is at $41. If the stock moves through this price, it is expected that it will move sharply downward. To sell below the current market, a sell stop order must be used. Therefore, the order to sell (short) ABC @ $40 Stop GTC is appropriate. This would be a short sale (the sale of borrowed shares), so that these shares could be purchased at a lower price after the market drops and used to cover the short position at a profit. A sell limit order cannot be used, since these are orders to sell higher than the current market.

If a foreign government wishes to stabilize its currency because it has been falling against the U.S. Dollar, the government would: A. buy its own currency B. sell its own currency C. sell short its own currency D. buy U.S. dollars

A. buy its own currency To stabilize a currency that is falling against the dollar, the foreign government would buy its currency (driving its price up against the U.S. Dollar); and sell the U.S. Dollar (driving the U.S. dollar down against the foreign currency).

A promise by a municipality to call in a bond issue if the facility built with the proceeds of the offering is condemned, is a: A. calamity call covenant B. rate covenant C. maintenance covenant D. insurance covenant

A. calamity call covenant A calamity call covenant is a type of optional mandatory call provision that obligates an issuer to call in the bonds if the facility is destroyed by some catastrophic event. Since the facility would be insured, the insurance monies are used pay for the retirement of the bonds.

Chicago Board Option Strike ExpCalls - Last Puts - Last A E P 15 Nov r r 20.25 15Feb 5.50 r 20.25 15May r r 20.25 20Nov .25 .40 20.25 20Feb .65 r 20.25 20May .75 1.25 The AEP Feb 20 Call is: A. in the money by .25 point B. in the money by .65 points C. out the money by .25 point D. out the money by .65 points

A. in the money by .25 point The strike price on the AEP Feb 20 Call is 20 while the market price is $20.25. This call is "in the money" by .25 points. Calls go "in the money" when the market price rises above the strike price.

The VIX Index Option: A. is negatively correlated to the S&P 500 Index B. is positively correlated to the S&P 500 Index C. is delta neutral when compared to the S&P 500 Index D. has no correlation to the S&P 500 Index

A. is negatively correlated to the S&P 500 Index The VIX option measures volatility of the S&P 500 Index, and rising volatility is associated with bear markets. When the S&P 500 Index is falling, the VIX will be rising (meaning that volatility is increasing). "Delta neutral" is an advanced option strategy that is not covered on the Series 7 exam.

A municipal bond dealer buys 100M of 30 year non-callable 9% General Obligation bonds at par less 1 point. After holding the bonds in inventory for a week, the dealer reoffers the bonds on a 9.10 basis. The dealer's approximate profit or loss on this transaction is: A. loss of $100 B. loss of $1,000 C. gain of $300 D. gain of $3,000

A. loss of $100 The dealer purchases these bonds at par less 1 point, so the bonds were purchased at 99. Since these 9% coupon bonds were reoffered on a 9.10 basis, they must have been reoffered at a discount price. Since these are long term bonds (30 years), we can approximate the reoffering price by dividing 9% (nominal yield) by the 9.10 reoffering yield. 9/9.10 = .989. Thus, the bonds were reoffered at an approximate price of .989% of par (note, this only works for long term maturities - not short term maturities). The bonds were reoffered at a price that is .001% lower than the cost to the dealer (.99 cost versus .989 reoffer price)..001% x $100,000 face amount = $100 loss on the transaction. Note that "100M" of bonds is $100,000 face amount, where M = $1,000. (Final Note: From the choices given, this answer can be easily approximated.)

A "sinking fund call" is a(n): A. mandatory call B. extraordinary mandatory call C. optional call D. extraordinary optional call

A. mandatory call A sinking fund call obligates an issuer to place monies periodically into a sinking fund; and at dates established in the bond resolution, to retire a portion of the outstanding bonds by either calling some of the issue by random choice; or by purchasing bonds in the open market (if it is cheaper to do so). These calls are mandatory, since the specifics of how the monies are to be deposited to the sinking fund; and at what dates, and in what amounts, bonds are to be retired, are all spelled out in the bond resolution

A customer buys $100,000 of a new issue 30 year General Obligation bond at 80. At maturity, the customer will have: A. no capital gain or loss B. a $2,000 capital gain C. a $20,000 capital gain D. a $20,000 capital loss

A. no capital gain or loss The discount on all original issue discount bonds (corporate, government and municipal) must be accreted over the life of the bond. If the bond is held to maturity, the entire discount has been accreted and the adjusted cost basis is par. Since the bonds are redeemed at par, there is no capital gain or loss at maturity.

A customer owns 100 shares of ABC stock and owns 1 ABC Put option. The customer wishes to sell the stock by exercising the put, but wishes to retain a recently declared cash dividend. In order to receive the dividend, the customer must exercise the put: A. on the ex date B. on the record date C. before the ex date D. before the record date

A. on the ex date Because exercise settlement of listed stock options occurs 2 business days after trade date, in order to retain the cash dividend, the holder of the shares cannot sell them before the ex date (which is 1 business day prior to record date). If the put is exercised on the ex date or later, the trade will settle after the record date, and the customer will be on record to receive the cash dividend. On the other hand, if the long put were exercised before the ex date, the trade would settle on the record date or before, and the customer would be selling the stock, taking him- or herself off the record book on the record date or before, so that client would not receive the dividend.

Delivery of the privacy notice required under Regulation SP is required for: A. retail customers B. institutional customers C. retirement plan customers D. any of the above

A. retail customers Regulation SP ("Statement of Privacy") requires member firms to provide a privacy notice to retail customers only. Firms cannot divulge non-public information about customers to third parties unless the firm has given notice to the customer that this may happen; and the customer has not elected to opt out of the disclosure. The privacy notice is given at account opening and must be made available annually thereafter

A customer who sells a "put spread" believes that the market will: A. rise B. fall C. remain neutral D. be volatile

A. rise A sale of a "put spread" is similar to simply selling a put. In a rising market, the puts expire "out the money" and the profit is the premium received. The difference is that a short put gives ever increasing downside loss potential - all the way to "0" - in return for the premium received. A short put spread gives limited downside loss potential in return for a lower premium received.

A municipal term bond with 13 years remaining has been pre- refunded at 103 to a call date 3 years in the future. If a customer buys this bond, the yield shown on the confirmation will be computed to: A. the call date including the 3 point call premium B. the call date excluding the 3 point call premium C. maturity including the 3 point call premium D. maturity excluding the 3 point call premium

A. the call date including the 3 point call premium When a municipal bond is pre-refunded, the issuer escrows sufficient government securities to pay the interest on the bonds until the earliest call date, at which point the bonds are called (with any applicable call premiums being paid) and paid off with the escrowed governments. A customer who buys advance refunded bonds knows they will be called. Any yield that is shown must be computed to the call date, including any call premiums - in essence, the call date becomes the new maturity date for the issue.

If the actual interest rate earned in the separate account underlying a variable annuity contract is higher than the "AIR" the annuity payment: A. will increase B. will decrease C. is unaffected D. is capped to a maximum amount

A. will increase The "AIR" is the "Assumed Interest Rate." This is used as an illustration of the annuity payment that will be received if the separate account grows at the AIR. If the assets grow at an interest rate that is higher than the AIR, then the annuity payment will increase. Conversely, if the assets grow at an interest rate that is lower than the AIR, then the annuity payment will decrease.

A customer buys 10M of $1,000 par corporate bonds in the secondary market. The purchase confirmation shows that the customer paid 90 + $150 of accrued interest. Six months later, the customer sells the bonds in the market at 91 + $50 of accrued interest. The capital gain or loss is: A. 0 B. $100 capital gain C. $100 capital loss D. $200 capital gain

B. $100 capital gain The accrued interest on a bond has no bearing on the capital gain or loss that results from the liquidation of a position. Rather, the accrued interest is an adjustment to interest income paid or received for that tax year. These bonds were purchased in the secondary market at 90% of $10,000 = $9,000. The bonds were sold at 91% of $10,000 = $9,100. Thus, the capital gain is $100. The accrued interest paid when the bonds were purchased is a reduction of the investor's investment income in that tax year; while the accrued interest received upon sale is an increase of the investor's investment income for that year. Also note that because the bond was held for less than 1 year, the rule requiring the annual accretion of the market discount to be taxed as ordinary income does not "kick in" because any gain or loss is short term and would be taxed at the same higher tax rate as ordinary income. The bond must be held for more than 1 year to qualify for long term capital gains treatment, and the lower tax rate that comes with it. For positions held over 1 year, the tax rate drops to 15% (or 20% for very high earning taxpayers), from a maximum rate of 37%.

A customer is short 100 shares of PDQ stock at $62 per share. The stock goes up to $67 and the customer covers the position. If, 30 days later, the customer decides to re-establish this short position when the market for PDQ is $65, what will the sale proceeds be? A. $57 per share B. $60 per share C. $70 per share D. $72 per share

B. $60 per share In this transaction, the customer is attempting to take a loss and then reestablish the position. Under the "wash sale" rule, the loss deduction is disallowed if the position is reestablished within 30 days of the date the loss was generated. In this case the customer originally sold short the stock at $62. The stock was repurchased at $67, for a $5 loss per share ($500 loss on 100 shares). Then, the customer sold short another 100 shares exactly 30 days later at $65 (to avoid the "wash sale" rule, the position cannot be reestablished until the 31st day). Thus, the $500 loss is disallowed. The $5 per share loss will be deducted from the sale proceeds of $65, for a new sale proceeds of $60. In essence, this defers the taking of the loss until this short position is covered.

As the initial transaction in a new short margin account, a customer sells 1,000 ABC @ $20 per share. The stock then rises to $23. After the market rise, the customer's equity in the account is: A. $2,000 B. $7,000 C. $10,000 D. $13,000

B. $7,000 Initially the account set up as: Credit Balance - Short Market Value=Equity Credits-Short market value=Equity % Sale $20,000- $20,000=0 Margin $10,000-0=$10,000 -------------------------------- Total $30,000-$20,000=$10,000 50% If the market value rises to $23,000, the account will show Credits-Short Market Value- Equity % $30,000-$23,000=$7,000=30%

ACME Corporation Income Statement for the year ending 12-31-XX($000) Gross Sales25,000 Returns 6,000 Net Sales19,000 Cost of Goods Sold 12,000 Gross Margin 7,000 Operating Expenses 3,000 Operating Margin 4,000 Non Operating Income 2,000 Total Operating and Non Operating Income 6,000 Interest Expense 1,200 Net Income Before Tax 4,800 Taxes 1,920 Net Income After Tax 2,880 Statement of Changes To Retained Earnings for the year ending 12-31-XX ($000) Beginning of Year Retained Earnings2,600 Add: Net Income For The Year2,880 Deduct: Preferred Dividend 80 Common Dividend 200 End of Year Retained Earnings5,200 ACME Corporation Balance Sheet at 12-31-XX Current Assets($000) Cash and Marketable Securities35,000 Accounts Receivable15,000 Inventory 10,000 Current Liabilities($000) Accounts Payable37,200 Wages Payable1,000 Taxes Payable1,200 Interest Payable 600 Total Current Assets60,000 Total Current Liabilities 40,000 Notes Receivable due after one year3,000 Long Term Debt 12%-10,000Property and Equipment (valued at cost less accumulated depreciation of $25,000)5,000 Intangible Costs2,000 Stockholder's Equity Preferred Stock - $100 par 8%1,000 Common Stock - $1 par6,000 Capital in excess of par value7,800 Retained Earnings5,200 Total Long Term Assets 10,000 Total Stockholder's Equity20,000 Total Assets70,000 Total Liabilities and Stockholder's Equity70,000 What is the inventory turnover ratio for ACME Corporation? A. 1.0x B. 1.2x C. 1.5x D. 1.7x

B. 1.2x The formula for the inventory turnover ratio is: Annual cost of Goods Sold ------------------------------ Year End Inventory =Inventory Turnover Ratio 12,000,000 ------------- =1.2 times 10,000,000

A 5 year $1,000 par 3 1/4% Treasury Note is quoted at 100-12 - 100-16. The note pays interest on Jan 1st. and Jul. 1st. A customer buys 1 note at the ask price. What is the current yield, disregarding commissions? A. 3.13% B. 3.23% C. 3.25% D. 3.45%

B. 3.23% The bond is purchased at 100 and 16/32nds = 100.50% of $1,000 = $1,005. The formula for current yield is: Annual Income ------------------ = Current Yield Market Price $32.50/$1,005= 3.23%

Regulation T sets the initial margin to sell short a marginable stock position at: A. 25% of the sale amount B. 50% of the sale amount C. 75% of the sale amount D. 100% of the sale amount

B. 50% of the sale amount Regulation T initial margin for short stock positions is set at 50%.

A high P/E stock would be a suitable investment for which of the following investors? A. A recent college graduate who is currently renting an apartment and who wishes to buy a house in 5 to 10 years B. A recently retired client who has a comfortable level of income from her pension, does not need additional income and is looking for aggressive investing C. A young married couple with 3 children ages 10, 12, and 14, who have minimal savings but wish to start putting away money to pay for their kids' college education D. A middle-aged single man who was just diagnosed with a disabling medical condition that will likely require him to need nursing care for his remaining lifespan that is not covered by his medical insurance

B. A recently retired client who has a comfortable level of income from her pension, does not need additional income and is looking for aggressive investing High P/E stocks are risky. These are high growth stocks that typically pay minimal dividends, and which are expected to grow rapidly in the future. If their growth starts to slow, the price of these stocks can fall dramatically - a risk that should not be assumed in Choices A, C, and D. In Choice B, the customer has plenty of income and wants to take on risk - so a high P/E stock recommendation meets her objective.

The highest investment grade rating is: A. AAA+ B. AAA C. AA+ D. AA

B. AAA The highest investment grade bond rating is AAA. This is the best rating available. There is no such thing as an AAA+ rating.

Which bond portfolio construction is based on a phase-in of purchases in installments over time? A. Ladder B. Bullet C. Barbell D. Balloon

B. Bullet The best answer is B. Bullets, Bond Ladders, and Barbells are portfolio constructions that are used to limit interest rate risk. The idea behind a bond ladder is to spread bond maturities in a portfolio over fixed intervals, typically 10 maturities in intervals of 2 years each. A typical ladder might have 10 maturities ranging from 2 to 20 years, with an average maturity of around 10 years. Because of this broad diversification by maturity, a rise in interest rates will not impact the portfolio as negatively as compared to a bullet or barbell portfolio construction. If interest rates rise, the loss on the longer term bonds in the portfolio is offset by the fact that shorter term bonds are maturing soon and the proceeds can be reinvested at higher rates. A barbell portfolio only has 2 maturities - a very short term and a very long term - say 2 years and 20 years, for an average life around 10 years (actually 11 years here, but we are simplifying things). The longer term bonds give a higher yield but have higher interest rate risk. This risk is offset by the fact that the 2 year bonds will mature soon and the proceeds can be reinvested at higher rates. The big risk here is that long rates rise sharply as compared to short rates (a steepening of the yield curve). In this scenario, the loss on the long term bonds will be much greater than the fact that the short term bond proceeds can be reinvested in 2 years at somewhat higher rates. A bullet portfolio construction only has a single maturity, typically in an intermediate range of around 10 years. The way that interest rate risk is offset here is that all of the investment is not made at one time - rather, the investment is made in installments at fixed intervals. If market interest rates rise, new investment will be made at higher rates, offsetting any loss on the already purchased bonds. A balloon is a type of bond issue structure, where most of the bonds mature as a "balloon" at a long term maturity date. It is not a type of bond portfolio construction.

An investor has a portfolio of diversified blue chip stocks with a current market value of $300,000. The portfolio has a computed beta factor of 1.50. The customer wants to protect the portfolio from a declining market with the use of OEX contracts. The OEX closed this day at 500. To hedge with "at the money" contracts, the customer should: A. Buy 6 OEX Puts B. Buy 9 OEX Puts C. Sell 6 OEX Puts D. Sell 9 OEX Puts

B. Buy 9 OEX Puts To hedge the portfolio, puts should be purchased. If the market value drops, any loss on the portfolio will be offset by a gain on the long puts. If the portfolio were as volatile as the market, 6 put contracts would be needed to hedge. (500 OEX strike price x multiplier of 100 = $50,000 value covered per contract. $300,000 portfolio divided by $50,000 coverage per contract = 6 contracts) However, this portfolio moves 1.50 times as fast as the market, so 1.50 times the number of contracts are needed to hedge. 1.50 x 6 contracts = 9 contracts.

Which of the following money market instruments trades "and interest" ? A. Commercial Paper B. Certificates of Deposit C. Banker's Acceptance D. Treasury Bills

B. Certificates of Deposit Negotiable Certificates of Deposit are issued at par and mature at par plus accrued interest. Though most CDs are held to maturity, if they are traded before this date, the instrument trades at par plus any accrued interest due. Commercial Paper, Treasury Bills, and Banker's Acceptances are all original issue discount obligations. The increase in the value of the security is the interest earned if the security is traded prior to maturity.

The interest rate charged from one Federal Reserve member bank to another Federal Reserve member bank is the: A. Discount Rate B. Federal Funds Rate C. Broker Loan Rate D. Prime Rate

B. Federal Funds Rate The lowest rate is the Federal Funds Rate. This is the rate on overnight loans of reserves from bank to bank. The next highest rate is the Discount Rate. This is the rate that the Federal Reserve charges member banks for borrowing reserves from the Fed. The next highest rate is the Broker Loan Rate. This is the rate that brokerage firms can borrow from banks using securities as collateral. The highest rate is the Prime Rate. This is the rate for unsecured borrowing from banks by the best corporate customers.

Which of the following are violations of FINRA rules? I Sharing in the profits and losses of a customer's account without contributing proportional capital II Selling exempted securities to a customer with a written agreement to buy back the securities at a later date III Orally guaranteeing to buy back customer securities at a preset price A. I only B. I and III C. II and III D. I, II, III

B. I and III A registered representative cannot guarantee a customer's account against loss nor share in the account unless he or she opens a joint account with the customer; contributes capital proportional to any sharing agreement; and obtains the approval of a principal for the account. Selling exempted securities such as U.S. Governments with a written agreement to buy them back at a later date is a "repurchase" agreement, and is allowed (however, such repurchase agreements are typically for very large amounts, and are entered into by U.S. Government securities dealers).

Which of the following statements are TRUE regarding American Depositary Receipts? I Non-sponsored ADRs trade over-the-counter II Non-sponsored ADRs trade on exchanges III Non-sponsored ADRs provide quarterly reports to shareholders IV Non-sponsored ADRs provide annual reports to shareholders A. I and III B. I and IV C. II and III D. II and IV

B. I and IV All exchange listed ADRs are sponsored. Issuers that sponsor ADRs provide quarterly and annual financial reports to shareholders in English. Sponsored ADRs are often called American Depositary Shares or ADSs. Non-sponsored ADRs are assembled by banks and broker-dealers without the issuer's participation. An unsponsored program may have more than one depositary bank, since the issuer does not participate in any way. Holders of non-sponsored ADRs only receive annual reports in the language of the issuer. Non-sponsored ADRs trade over-the-counter.

If Treasury bill yields are dropping at auction, this indicates that: I interest rates are falling II interest rates are rising III Treasury bill prices are falling IV Treasury bill prices are rising A. I and III B. I and IV C. II and III D. II and IV

B. I and IV If Treasury bill yields are dropping at auction, then interest rates are falling and debt prices must be rising.

Which statement is TRUE regarding Regulation A? A. Offerings are limited to a maximum of 35 non-accredited investors B. Offerings are limited to a maximum size of $50,000,000 C. A Prospectus must be delivered to purchasers D. The Offering is exempt from registration with the Securities and Exchange Commission

B. Offerings are limited to a maximum size of $50,000,000 The best answer is B. Regulation A is intended to make it easier for smaller issuers to raise capital. There are 2 "tiers" to the rule. Tier 1 gives an "E-Z" registration process to offerings of no more than $20 million in a 12 month period. Tier 2 requires more detailed information, including audited financial statements, and can be used for offerings of up to $50 million. While no prospectus is required, each buyer must be given disclosure in an Offering Circular. Anyone can purchase a Regulation A offering. Unlike the private placement exemption (Regulation D) that permits offerings to be made to a maximum of 35 non-accredited investors and an unlimited number of accredited investors, Regulation A does not set a limit on the number of non-accredited purchasers.

Issuers that wish to give "earnings guidance" to research analysts must conform with the provisions of SEC: A. Regulation SB B. Regulation FD C. Regulation SK D. Regulation SP

B. Regulation FD Regulation FD (Fair Disclosure), passed in 2000, is basically an elaboration of the insider trading rules. It prohibits issuers from making selective disclosure of non-public information to research analysts, mutual fund managers, and other industry professionals, unless at the same time, the information is broadly disseminated to the public.

Two 20-year corporate bonds are issued at par, with stated interest rates of 10%. One issue is puttable at par in 5 years, while the other is puttable at par in 10 years. If interest rates rise by 200 basis points shortly after issuance, which statement is TRUE? A. The bond puttable in 5 years will depreciate more than the bond puttable in 10 years B. The bond puttable in 10 years will depreciate more than the bond puttable in 5 years C. Both bonds will depreciate by equal amounts D. The rate of depreciation depends on the credit rating of the bonds

B. The bond puttable in 10 years will depreciate more than the bond puttable in 5 years If a bond is puttable at par in the near future, any price decline due to rising interest rates will be suppressed since the holder is able to put the bond back to the issuer sooner. Thus, the bond puttable in 10 years will depreciate more than the bond that is puttable in 5 years if interest rates rise.

A married couple, ages 55 and 52, with no children, are both employed at DEF Corporation. They have asked for an evaluation of their current portfolio. They have a combined annual income of $200,000 per year and a fully paid home worth $500,000. Their current portfolio shows: $50,000Common Stock of DEF Corp in a 401K account$100,000Large Cap Growth Fund$150,000Government Bond Fund$150,000Corporate Bond Fund$200,000Money Market Fund Both intend to retire in 20 years and are conservative investors, looking for moderate growth and moderate risk. Which of the following recommendations is BEST for this couple? A. The current portfolio allocation is consistent with their stated investment objective and risk-tolerance level B. The portfolio should be reallocated based on their stated investment objective, reducing the cash and bond percentage by 50% and using the proceeds to buy a small or mid-cap growth mutual fund C. The portfolio is overweighted in fixed income securities, which should be completely liquidated and the proceeds used to buy aggressive growth stocks D. The current portfolio allocation overexposes the couple to stock-specific risk if the fortunes of DEF Corp. decline in the future

B. The portfolio should be reallocated based on their stated investment objective, reducing the cash and bond percentage by 50% and using the proceeds to buy a small or mid-cap growth mutual fund Since this couple has a stated investment objective of growth with moderate risk, a portfolio that only has about 25% equities and that has 75% fixed income securities is inappropriate - since it will provide income; but little growth. The long-term bond and cash allocation should be reduced and replaced with growth stocks to better balance the portfolio. Choice C is way too speculative for a "conservative investor." Choice D is somewhat true since this couple is investing in their employer's stock - but since the stock only represents 8% of the customer's total portfolio, this is not an excessively large percentage.

To claim a private placement exemption: A. a registration statement must be filed with the SEC B. a Form D must be filed with the SEC C. a Form 144 must be filed with the SEC D. no filing is required with the SEC

B. a Form D must be filed with the SEC Private placements are exempt transactions under the Securities Act of 1933. No registration is required. The issuer must file a Form D with the SEC within 15 days of the offering to claim the exemption. The filing of Form D is not a registration. It simply notifies the SEC that the issue is being offered in compliance with the exemption.

The Federal Reserve will lend funds at the discount rate to: A. savings and loans B. commercial banks C. investment banks D. insurance companies

B. commercial banks Only commercial banks are members of the Federal Reserve System. Member banks can borrow reserves from the Fed at the discount rate.

A registered representative in Minnesota has a customer that has recently moved to Texas. The registered representative: A. can deal with the customer without restriction B. must be registered in Texas in order to deal with the customer C. must be registered in Minnesota in order to deal with the customer D. must be registered in each state between Minnesota and Texas in order to deal with the customer

B. must be registered in Texas in order to deal with the customer In order to deal with a customer in a Texas, the representative must be registered in the State of Texas. An exception is permitted if the representative were only accepting unsolicited trades from customers in Texas, but this is not mentioned in the question. Also note that because the representative is physically in the State of Minnesota, he or she must be registered in Minnesota as well.

A customer has invested in a real estate business that is being managed by a third party. Any income from the investment would be characterized for tax purposes as: A. portfolio income B. passive income C. earned income D. alternative income

B. passive income Passive income and loss is defined as that derived from real estate investments and limited partnership investments. Passive losses can only be offset against passive income. Passive losses cannot be offset against investment income or earned income.

The largest component of the Standard and Poor's 500 Average is the: A. utilities B. technology C. consumer staples D. industrials

B. technology The S&P 500 Index was "recategorized" about 15 years ago into different sectors to allow the creation of "Sector SPDRs" - index funds based on these sectors. The new breakdown, by approximate size, is: Technology24% Financials15% Healthcare14% Consumer Discretionary12% Industrials10% Consumer Staples9% Energy6% Utilities3% Materials3% Real Estate3% Telecoms2% By far the largest weighting in the revised sector breakdown is technology stocks.

A customer sells 1 ABC Jan 50 Call @ $4 and sells 1 ABC Jan 50 Put @ $3 when the market price of ABC = $51. The breakeven points are: A. $46 and $53 B. $47 and $54 C. $43 and $57 D. $45 and $55

C. $43 and $57 The writer of the straddle collected 7 points in premiums. The writer loses the 7 points to breakeven if the market falls by that amount or rises by the amount. If the market falls by 7 points, the writer loses 7 points on the put and the call expires. The breakeven on the put side of the straddle is $50 - $7 = $43. If the market rises by 7 points, the writer loses 7 points on the call and the put expires. The breakeven on the call side of the straddle is $50 + $7 = $57. To summarize, the breakeven formulas for a short straddle are: Upside Breakeven=Call Strike Price+Combined Premium Downside Breakeven=Put Strike Price-Combined Premium

On the same day in a margin account, a customer sells 1 ABC Jan 55 Put @ $7 and buys 1 ABC Jan 45 Put @ $2. Below which of the following prices will every dollar gained on the long put be exactly offset by a dollar lost on the short put? A. $55 B. $50 C. $45 D. $43

C. $45 This is a short put spread. As the market falls below $55, the short 55 put is exercised, obligating the customer to buy the stock at $55. The long 45 put will expire "out the money." If the market continues to fall, the customer loses on the short put until the market falls to $45. If the market falls below $45, the long 45 put goes "in the money" and now gains in value by an amount equal to any loss on the short put. Thus, the maximum loss occurs at $45 or below. If the market falls below $45, both puts are "in the money" and are exercised - locking in the loss at a fixed amount. The customer buys stock at $55; that he or she sells at $45; for a $10 point loss. Since there was a $5 credit collected, the maximum loss is 5 points or $500.

Swiss Franc Jan 94 Calls on the PHLX are quoted at .50. The contract size is 10,000 Swiss Francs. What is the total premium for 10 contracts? A. $5 B. $50 C. $500 D. $5,000

C. $500 World Currency options are standardized, using a multiplier of 100 applied to the premium. A premium of .50 x multiplier of 100 = $50 total premium per contract. Since 10 contracts are purchased, 50 x 10 contracts = $500 total premium. (Another way of doing this - but not necessarily recommended - is contract size = 10,000 units of currency x a premium of 1/2 cent ($.005) = $50 per contract x 10 contracts = $500.)

An investor has sold short stock worth $80,000 in a margin account, depositing the Regulation T margin requirement. If the market value of the stock falls to $65,000, what is the equity in the account? A. $25,000 B. $40,000 C. $55,000 D. $65,000

C. $55,000 Initially the account set up as: Credit Balance - Short Market Value=Equity Credits-Short market value=Equity % Sale $80,000- $80,000=0 Margin $40,000-0=$40,000 -------------------------------- Total $120,000-$80,000=$40,000 50% Tf the market value falls to 65,000, the account will show Credits-Short Market Value- Equity % $120,000-$65,000=$55,000=85%

A single 30-year old investor has no current investments and $20,000 in a savings account. The customer earns $150,000 per year and has discretionary investment funds of $25,000 per year. Which of the following is an appropriate asset allocation for this customer? A. 80% Aggressive Growth Fund, 20% Emerging Markets Fund B. 80% Emerging Markets Fund, 20% Aggressive Growth Fund C. 30% Aggressive Growth Fund, 30% Emerging Markets Fund, 30% Growth Fund, 10% Money Market Fund D. 30% Money Market Fund, 30% Treasury Securities Fund, 30% Blue Chip Stock Fund, 10% Aggressive Growth Fund

C. 30% Aggressive Growth Fund, 30% Emerging Markets Fund, 30% Growth Fund, 10% Money Market Fund Since this customer is only 30 years old and is single, he has a long investment time horizon. The question does not provide any detail in terms of the customer's investment objectives and risk tolerance level. However, the concept of asset allocation is that by diversifying across asset classes, overall risk can be reduced while still achieving the customer's objective. A younger customer should be allocated more heavily into growth stocks. Choice C, with a 30% allocation to an Aggressive Growth Fund, 30% to an Emerging Markets Fund, 30% to a Growth Fund, and 10% to a Money Market Fund gives the customer a heavy concentration in growth stocks, but spread across 3 types of growth investment vehicles. Choices A and B are too concentrated in a single investment vehicle; and Choice D is better for an older investor, not a young investor.

A corporation buys the stock of another company. Which percentage of dividends received from the investment in the acquired company's shares are excluded from tax to the corporate purchaser of those shares? A. 0% B. 30% C. 50% D. 100%

C. 50% If a corporation buys the stock of another company as an investment, 50% of the dividends received are excluded from tax, meaning that 50% of the dividends received are taxable. (Note: If the corporate investor owns 20% or more of the stock of the other company, this exclusion increases to 65%. The question does not mention whether this is the case, and none of the choices fit this rule, so 50% is the best answer offered.)

Which of the following investment portfolios is MOST liquid? A. An aggressive growth fund B. A U.S. Government bond fund C. A money market fund D. An income fund

C. A money market fund By definition, a money market instrument is liquid. They are readily traded at a discount equal to the market rate of interest because any purchaser knows that he or she will be paid when it matures in the near future. Long term governments are not as liquid - there is not nearly as much long term government debt outstanding as there are T-Bills (the biggest of the money market instruments), making these somewhat less liquid. Income funds are composed mainly of high yielding preferred stocks and corporate bonds. These are not as liquid as U.S. Government issues. Finally, aggressive growth stocks are the least liquid of the choices offered, since they are not traded on the NYSE, but rather OTC - which is a less liquid marketplace.

Which of the following securities are redeemable? I Open-end fundsII Closed-end fundsIII Corporate debenturesIV Series EE bonds A. I and II only B. III and IV only C. I and IV only D. II and III only

C. I and IV only Open end funds are mutual funds. These are redeemable securities which do not trade. Closed end funds have a one time stock issuance and then are publicly traded. These are negotiable securities. They cannot be redeemed with the issuer. To "cash out," an investor simply sells them in the market like any other security. Corporate debentures are also negotiable - they cannot be redeemed with the issuer. Savings bonds (Series EE and HH) sold by the U.S. Government are redeemable securities. There is no trading in these issues. To "cash out," they are redeemed with an agent for the Government - a bank or savings and loan.

Which statements are TRUE regarding the conduct of Treasury Bill auctions? I 4 week, 13 week and 26 week T-Bills are auctioned weekly II 1 year T-Bills are auctioned monthly III Non-competitive bids take priority over competitive bids IV Bids are awarded based on the lowest discount yield except for 26 week bills which are sold at par A. I and III only B. I, II, IV C. I, II, III D. II, III, IV

C. I, II, III 4 week, 13 week and 26 week Treasury Bills are auctioned weekly; 1 year T-Bills are auctioned monthly. Because the amount of securities represented by non-competitive bids are withheld from auction and are always filled at the average winning yield, these bids have priority. Competitive bids will not be filled if the yield specified is too high. The bids are always awarded on the basis of lowest discount yield.

Which of the following procedures are required to open a Portfolio Marginaccount? I The account must be approved by the designated ROP for uncovered options writing II The customer must receive a copy of the risk disclosure document, at or prior to, account opening III The customer must sign an acknowledgment that he or she has read and understands the risk disclosure document IV The account must be approved by the CBOE or FINRA for exemption from Regulation T margin requirements A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

C. I, II, III FINRA requires that a portfolio margin account be opened as an options account that is qualified for naked options writing. This requires a more-detailed suitability determination and requires not only branch manager approval, but also separate approval of the designated Registered Options Principal (this is the "main office" ROP in charge of compliance as opposed to a regular branch manager-ROP). The customer must be provided with a portfolio margin risk disclosure document at, or prior to, the initial transaction in the account and must sign an acknowledgment that he or she has read and understands the disclosure document prior to the initial transaction in the account. There is no requirement for the member firm to get each customer account approved by the CBOE or FINRA.

Which sources of REIT income are counted towards the 75% test required by Subchapter M? I Net rental income II Interest income from mortgages III Real estate tax refunds IV Dividend income A. I only B. II and III only C. I, II, III D. I, II, III, IV

C. I, II, III To qualify as a regulated investment company, 75% of REIT income must be real estate related. This income includes rents, mortgage interest earned, and real estate tax refunds received (as a source of income, an REIT can buy a property and attempt to get its tax assessment lowered - any resulting tax refund is income to the REIT).

An issuer is required to make an 8K filing with the SEC for which of the following events? I Election of new members of the Board of Directors II Declaration of bankruptcy III Declaration of a cash dividend IV Proposal of a merger with another corporation A. II and III only B. I and IV only C. I, II, and IV D. I, II, III, IV

C. I, II, and IV An 8K filing with the SEC is required by a corporation if a "major event" happens at the company. These include if there is a change in the composition of the Board of Directors; if the company declares bankruptcy; if there is a major acquisition or divestiture of assets; if the company proposes a merger; or if any other major corporate event occurs. The notice must be filed no later than 4 business days after the event.

Which of the following statements are TRUE regarding the taxation of a municipal security? I Capital gains from selling municipal bonds are exempt from Federal and State tax if the bond is owned by a resident of that State II Capital gains from selling municipal bonds are subject to Federal and State tax III Interest income received from municipal bonds is exempt from Federal and State tax if the bond is owned by a resident of that State IV Interest income received from municipal bonds is subject to Federal and State tax A. I and III B. I and IV C. II and III D. II and IV

C. II and III Capital gains on municipal securities are taxable at the Federal, State and Local levels. Only the interest income from municipal securities is exempt from Federal income tax; it is still subject to State and Local tax unless the bond is purchased by a resident of that State

In the weekly auction of Treasury Bills, which of the following statements are TRUE? I Competitive bids are always filled II Non-competitive bids are always filled III The Federal Reserve allocates securities from the lowest yields to the higher yields IV The Federal Reserve allocates securities from the highest yield to the lower yields A. I and III B. I and IV C. II and III D. II and IV

C. II and III In the weekly T-Bill auction, the amount of non-competitive bids is set aside from the total securities to be auctioned and is filled at the average winning rate. The remaining T-Bills to be auctioned are filled from the lowest interest rate bid on up. Once the issue is "sold out," all of the winning bidders are filled at the highest interest rate bid that completed the sale (so all winning bidders get the same interest rate - this is a "Dutch Auction"). The remaining higher rate competitive bids are void.

Which statements are TRUE regarding a Roth IRA? I Roth IRAs allow a greater contribution than Traditional IRAs II Roth IRA contributions are not tax deductible III Distributions from a Roth IRA are not taxable if the investment is held for at least 5 years IV The legal maximum contribution amount can be made to both a Roth IRA and a Traditional IRA annually A. I and III B. I and IV C. II and III D. II and IV

C. II and III Roth IRAs, introduced in 1998, are an alternate to the Traditional IRA. Both allow the same contribution amount - a maximum of $6,000 per person in 2019 for individuals under age 50. If one contributes the maximum to a Traditional IRA, a contribution cannot be made to a Roth IRA; and vice-versa. Roth IRA contributions are not tax deductible. However, all distributions from a Roth IRA made after age 59 1/2 are 100% excluded from taxation as long as the investment has been held for 5 years. Compared to a Traditional IRA which allows a tax deduction for the contribution, a Roth contribution is not tax deductible. The benefit is that when distributions commence from a Roth IRA, there is no tax due (in contrast, distributions from Traditional IRAs are taxable).

Variable annuity contracts:I have the issuer bear the investment riskII have the purchaser bear the investment riskIII are non-exempt securitiesIV are exempt securities A. I and III B. I and IV C. II and III D. II and IV

C. II and III Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus.

A customer who is retired wants to select an investment that is marketable, and that provides the highest rate of return. The BEST choice would be to recommend: A. Treasury Bills B. Treasury Notes C. Investment Grade Preferred Stock D. Certificates of Deposit

C. Investment Grade Preferred Stock Certificates of Deposit are non-negotiable - they are non-marketable, so this does not meet the client's needs. Preferred stock is marketable, and Treasury securities are extremely marketable, so any of these meet this requirement. However, investment grade preferred stock issued by a top-shelf corporation will provide a higher investment return than ultra-safe Treasury securities, making this the best choice.

Which statement is TRUE regarding management fees imposed by mutual funds? A. Management fees are limited to 8 1/2% of fund average net assets and are deducted from the initial investment B. Management fees are limited to a maximum of 1/2% of fund average net assets and are deducted when fund shares are redeemed C. Management fees are deducted from fund gross investment income before any dividend distributions are made D. Management fees are not imposed by mutual funds

C. Management fees are deducted from fund gross investment income before any dividend distributions are made Management fees imposed by mutual funds are based on a percentage of assets under management, and are an annual reduction of the fund's gross investment income. Thus, these are deducted by the fund to arrive at the net investment income available for distribution to shareholders. Sales charges on mutual funds are limited under FINRA rules to 8 1/2% of Public Offering Price. This is applied to the total of both "up front" sales charges and "back end" redemption fees. Thus, if a fund imposes a 4% sales charge, the maximum permitted redemption fee is 4 1/2%.

A corporation issues $50 par convertible preferred stock, convertible at $20 per share, when the market price of the common is currently $10. Which statement is TRUE? A. The conversion ratio is 10:1 B. The conversion ratio is 5:1 C. The conversion ratio is 2.5:1 D. The conversion ratio is 2:1

C. The conversion ratio is 2.5:1 The conversion ratio is Par Value / Conversion Price. $50 Par / $20 Conversion Price = 2.5:1 Conversion Ratio.

Which technical indicator is considered to be bullish? A. head and shoulder "top" formation B. inverted saucer formation C. breakout through a resistance level D. overbought market

C. breakout through a resistance level A bullish technical indicator is a breakout through a resistance level. If a stock moves through a resistance level, it is breaking out to the upside. A head and shoulders "top" formation is bearish since the market has topped out and is trending downwards. An "inverted saucer" formation is bearish since the market has topped out and is trending downwards. If the market is "overbought," this means that buyers have pushed prices up too high. Thus, the market is overpriced and ready to move lower (bearish).

The Board of Directors of a company will set all of the following EXCEPT: A. declaration date B. record date C. ex date D. payable date

C. ex date The ex-date is set by FINRA (the self regulatory organization or SRO that oversees the securities markets in the U.S.) once the Board of Directors sets the Record date. The Board of Directors, when it announces a dividend, sets the Declaration date, Record date, and Payable date.

Under Regulation SHO, a "threshold" security is one that: A. cannot be sold short under any circumstances but long sales are permitted B. can only be sold short at a price that is $.01 lower than the preceding trade C. if sold short and not delivered within 13 business days of the trade, buy-in is required D. if sold short on a down-tick, must be immediately bought-in on an up-tick

C. if sold short and not delivered within 13 business days of the trade, buy-in is required Regulation SHO (as in SHOrt sale rule) prohibits "naked" short selling. Before a short sale can be effected for a customer, the member must make an affirmative determination that the securities can be borrowed and delivered by settlement. If the security is "difficult to borrow," it is placed on the exchange's threshold list. If a security on the threshold list is sold short, and there is a "fail to deliver" on settlement, Regulation SHO requires that the member firm buy-in the position in no later than "13 consecutive settlement days" from trade date.

Under MSRB rules, yield to worst means that: A. all municipal bonds quoted on a yield basis must be priced to maturity B. municipal par bonds quoted on a yield basis must be priced to maturity C. municipal discount bonds quoted on a yield basis must be priced to maturity D. municipal premium bonds quoted on a yield basis must be priced to maturity

C. municipal discount bonds quoted on a yield basis must be priced to maturity The best answer is C. When municipal serial bonds are quoted on a yield basis, the dealer must compute the dollar price shown on the customer confirmation. This dollar price must assure, that at a minimum, the customer will receive the promised yield. This is known as pricing to the "worst case" scenario. For a premium bond, the "worst case" scenario is having the bond called early (which is the likely case). Bonds trade at a premium because market interest rates have dropped, so the issuer can refund the issue at lower current market rates by calling in the bonds. In this case, the bond is priced based on giving the customer the promised yield using the near-term in whole call date as the redemption date. If the bond were not called, the customer's actual yield would improve, because the annual loss of premium incorporated into the yield would be spread over a longer time frame. For a discount bond, the "worst case" scenario is having the bond held to maturity (which is the likely case). Bonds trade at a discount because market interest rates have risen, so the issuer would not call these bonds. In this case, the bond is priced based on giving the customer the promised yield using the maturity date. If the bond were called early, the customer's actual yield would improve, because the annual earning of the discount incorporated into the yield would be spread over a shorter time frame.

All of the following statements are true regarding a 5% municipal bond purchased at par that has a put option at par EXCEPT the: A. investor's yield cannot rise above 5% B. put would be exercised if interest rates rise C. put option will not affect the market risk of the security D. investor can exercise the put at his or her discretion

C. put option will not affect the market risk of the security If a bond has a put option at par, the holder can always exercise the put and "put" the bond back to the issuer, receiving 100% of par for that bond. Thus, as market interest rates rise, this bond's price will not fall, because it must always be worth par. Thus, such a bond is not susceptible to market risk. The yield on such a bond with a 5% coupon rate cannot rise above this level, because the price will not fall below par. However, the yield can drop below this level, because if interest rates fall, the bond's price will go to a premium and the put option would be worthless.

A customer sells 1 ABC Jan 50 Call @ $4 when the market price of ABC is $51. The stock then moves to $58 and the customer is exercised. The tax consequence upon exercise is a: A. capital loss of $400 B. capital gain of $400 C. sale proceeds of $5,400 D. cost basis of $5,400

C. sale proceeds of $5,400 If a writer of a call is exercised, he or she is selling the stock. The customer's sale proceeds is the sale price of the stock ($50) plus the premium received ($4) = $54. Notice that this is the same as the breakeven. No taxable event occurs until the stock is bought.

The minimum equity for an individual customer to open a portfolio marginaccount is: A. $2,000 B. $25,000 C. $50,000 D. $100,000

D. $100,000 The minimum equity to open a portfolio margin account for an individual customer is $100,000. This compares to the minimum equity requirement of $2,000 for a regular margin account.

Which of the following CANNOT be a stabilizing bid for a new issue that has a Public Offering Price of $20 per share? A. $19.00 B. $19.88 C. $20.00 D. $20.15

D. $20.15 Stabilizing bids can only be entered at or below the public offering price, never above

A customer has purchased 1,000 shares of ABC stock at $44 per share, paying a commission of $1.00 per share for the transaction. ABC stock declares a 20% stock dividend. When the dividend is paid, the tax status of the investment is: A. 1,000 shares held at a cost basis of $44 per share B. 1,000 shares held at a cost basis of $45 per share C. 1,200 shares held at a cost basis of $36.66 per share D. 1,200 shares held at a cost basis of $37.50 per share

D. 1,200 shares held at a cost basis of $37.50 per share The payment of a stock dividend increases the number of shares held by the investor and the cost basis must be reduced accordingly, since each share is theoretically worth less after the stock dividend is paid. The customer will have 1,000 shares x 1.20 = 1,200 shares after the dividend. Each share originally had a cost basis of $45 ($44 price plus $1 commission). After the dividend is paid, the cost basis is adjusted to $45/1.20 = $37.50.

The Official Statement for a new municipal issue discloses that the issue consists of the following general obligation bonds: Issue Size:$6,000,000 Dated Date:January 1, 2019 Due As Follows: January 1, 2020: $2,000,000 January 1, 2021: $2,000,000 January 1, 2022: $2,000,000 The issue structure represents how many bond years? A. 2,000 B. 3,000 C. 6,000 D. 12,000

D. 12,000 To compute the number of bond years represented in a serial bond issue, the calculation is: YTM x Number of $1000 Par Bonds=Bond Years Years To Maturity Number of $1,000 Par Bonds Bond Years1 2,000 2,0002 2,000 4,0003 2,000 6,000Total 6,000 12,000 Therefore, the total number of bond years is 12,000.

Under Keogh rules, distributions from a Keogh Plan must commence the year after the individual turns age: A. 55 B. 59 1/2 C. 60 1/2 D. 70 1/2

D. 70 1/2 Under the Keogh rules, any distributions from a Keogh Plan must start no later than April 1st of the year following the year that the individual reaches the age of 70 1/2.

A counter-cyclical stock would be described by which of the following? A. No earnings variability due to changes in economic growth B. A stock which remains unaffected in good or bad economies C. A stock price that tends to move in the same direction of the market as a whole D. A stock price that tends to move in the opposite direction of the market as a whole

D. A stock price that tends to move in the opposite direction of the market as a whole Counter-cyclical stocks are those whose performance runs counter to the economic cycle. In good economic times, these stocks don't do as well; in poor economic times, these stocks do very well. An example of a counter-cyclical stock is a basic food producer - in good times, people eat out more and do less cooking at home; in bad times, people eat out less and do more cooking at home. Thus, in bad times, the earnings of a basic food producer would improve, and its stock price would rise. In good times, the earnings of a basic food producer would deteriorate, and its stock price would fall.

After the bid is won in a municipal underwriting, a syndicate member that places an order with the manager for a selling group member would earn the: A. Spread B. Concession C. Total takedown D. Additional Takedown

D. Additional Takedown The takedown (also called the "total takedown") is the discount given by the manager to the syndicate members. This amount is earned by the syndicate member when he or she sells a bond directly to the public. The takedown consists of 2 pieces: the selling concession and the additional takedown. When a syndicate member sells a bond to the public, both pieces are earned. If a selling group member found the customer for the bond, the syndicate member gives up the selling concession to the selling group member, leaving the syndicate member with the additional takedown only on that sale.

A technical analyst has been charting the price movements of ABC stock. The stock has been fluctuating in price between $41 and $46 per share for the past 3 months. If the analyst expects a breakout through the resistance level, which order should be placed? A. Buy ABC @ $40 Stop GTC B. Buy ABC @ $41 Stop GTC C. Buy ABC @ $46 Stop GTC D. Buy ABC @ $47 Stop GTC

D. Buy ABC @ $47 Stop GTC If a stock moves through a resistance level, it is breaking out to the upside. In this example, the resistance level is at $46. If the stock moves through this price, it is expected that it will move sharply upward. To buy above the current market, a buy stop order must be used. Therefore, the order to buy ABC @ $47 Stop GTC is appropriate. Once the long stock position is established, the customer believes the price will skyrocket, so that it can be sold at a higher price for a profit.

The formula for Net Working Capital is: A. (Total Assets - Inventory) / Total Liabilities B. Total Assets - Total Liabilities C. (Current Assets - Inventory) / Current Liabilities D. Current Assets - Current Liabilities

D. Current Assets - Current Liabilities Current Assets-Current Liabilities=Net Working Capital (In contrast, the formula for Net Worth is: Total Assets minus Total Liabilities.)

Which of the following is NOT subject to the registration requirements of the Securities Act of 1933? A. American Depositary Receipts B. American Depositary Shares C. American Style Options D. Foreign Currency Contracts

D. Foreign Currency Contracts ADRs (American Depositary Receipts) are non-exempt securities and must be registered with the SEC under the Securities Act of 1933. ADRs are the way that most foreign corporate issues trade in the United States. The bank that structures the ADRs handles the registration. Another name for an ADR is an American Depositary Share. Listed option contracts are registered with the SEC, as are investment company issues. These securities are "continuously issued" and the prospectus delivery requirement is met by giving the customer an Options Disclosure Document (which used to be called the Options Clearing Prospectus); or a fund prospectus. Foreign currency contracts are not securities, and hence are not subject to the 1933 Act (though foreign currency option contracts traded on the Philadelphia Stock Exchange are subject to the Act).

The trade-through rule of Regulation NMS applies to: I NYSE listed issues II NYSE American (AMEX) listed issues III NASDAQ listed issues A. I only B. I and II C. II and III D. I, II, III

D. I, II, III The "NMS" securities under Regulation NMS (National Market System) are NYSE, NYSE American (AMEX) and NASDAQ listed issues. The trade-through rule requires that if an executable order routed to these markets cannot be filled at the best posted price of any market within 1 second, then the order must be routed to that better-priced market for execution. Thus, market makers are prohibited from "trading through" another market's better priced quote. OTCBB and Pink Sheet issues are not subject to Regulation NMS, since these are typically illiquid markets.

Which statements are TRUE about CMBs? I CMBs are sold at par II CMBs are sold at a discount to par III CMBs are sold at a regular weekly auction IV CMBs are sold on an "as needed" basis A. I and III B. I and IV C. II and III D. II and IV

D. II and IV CMBs are Cash Management Bills. They are sold at auction by the Treasury on an "as needed" basis to meet unexpected cash shortfalls, so they are not part of the regular auction cycle. They are the shortest-term U.S. government security, often with maturities as short as 5 days. They are sold in $100 minimums at a discount to par value, just like Treasury Bills.

Which of the following will increase the marketability risk of a bond? I Active trading in that security II Inactive trading in that security III Round lot size transaction amount IV Large block size transaction amount A. I and III B. I and IV C. II and III D. II and IV

D. II and IV Marketability risk is the risk that a security will be difficult to sell. The easiest securities to trade are "round lots" of actively traded issues. For example, a round lot of stock is 100 shares; a round lot of bonds is 5 bonds. Large blocks are more difficult to market; and it is more difficult to sell thinly traded securities than actively traded securities.

Registered representatives:I can trade securities on stock exchange floorsII cannot trade securities on stock exchange floorsIII can trade securities over-the-counterIV cannot trade securities over-the-counter A. I and III B. I and IV C. II and III D. II and IV

D. II and IV Registered representatives cannot trade securities - they can enter orders on behalf of customers to be executed by traders in the market.

ETFs trade on all of the following markets EXCEPT: A. NYSE B. AMEX C. NASDAQ D. OTC

D. OTC Exchange Traded Funds, as the name says, trade on stock exchanges. Most are AMEX listed (now renamed the NYSE American), but there are ETFs on the NYSE and NASDAQ as well. The OTC market for equities is the OTCBB and the Pink OTC Market. These are markets for thinly traded illiquid securities.

When the market price of ABC stock is $54 per share, which of the following choices would create a "strangle"? A. Short 1 ABC Jan 50 Call; Short 1 ABC Jan 50 Put B. Long 1 ABC Jan 50 Call; Long 1 ABC Jan 60 Put C. Long 1 ABC Jan 50 Call; Long 1 ABC Jan 50 Put D. Short 1 ABC Jan 60 Call; Short 1 ABC Jan 50 Put

D. Short 1 ABC Jan 60 Call; Short 1 ABC Jan 50 Put A "strangle" is a specific variation of a combination, where both contracts are "out the money." Choice A is a short straddle; Choice C is a long straddle. Straddles have the same strike price and expiration. Combinations have different strike prices and/or expirations. A long strangle is the purchase of an "out the money" call and an "out the money" put. The "idea" behind the strategy is to profit from a volatile market, just like a long straddle. Because both contracts are "out the money," the premium cost will be lower. However, the market must move more sharply (either up or down) in order for the position to be profitable. In Choice B, the 50 call is in the money by $4 (market = $54) and the 60 put is in the money by $6 (market = $54), so while this is a combination, this is not a strangle. A short strangle is the sale of an "out the money" call and an "out the money" put. The "idea" behind the strategy is to profit from a stable market, just like a short straddle. Because both contracts are "out the money," the premiums collected will be lower. However, the market must move more sharply (either up or down) in order for the position to become unprofitable. In Choice D, the 60 call is out the money by $6 (market = $54) and the 50 put is out the money by $4 (market = $54), so this is a short strangle.

Customer Name:Charlie CustomerAge:69 Marital Status:Single - Widowed Dependents:None Occupation:Retired Household Income:$31,000 (Social Security and Pension) Net Worth:$130,000 (excluding residence) Own Home:Yes $220,000 Value, No Mortgage Investment Objective:Current Income Risk Tolerance:Low Investment Time Horizon:20 years Investment Experience:0 years Current Portfolio Composition:Cash in Bank:$130,000 After reviewing this customer's profile sheet, which recommendation would be most appropriate? A. The customer should take at least $100,000 of cash from the bank and invest the proceeds in 20-year TIPS to meet the customer's desire for current income and his low risk tolerance requirements B. The customer should take at least $100,000 of cash from the bank and invest the proceeds in 20-year STRIPS to meet the customer's desire for current income and his low risk tolerance requirements C. The customer should mortgage his house for $100,000 at current market interest rates and use the proceeds to buy 20 year income bonds to provide current income D. The customer should take at least $100,000 of cash from the bank and invest the proceeds in 20-year Treasury Bonds to meet the customer's desire for current income and his low risk tolerance requirements

D. The customer should take at least $100,000 of cash from the bank and invest the proceeds in 20-year Treasury Bonds to meet the customer's desire for current income and his low risk tolerance requirements This customer is age 69, with no current investments or investment experience. The customer has a fairly low retirement income and needs additional current income to live comfortably. This customer really only has 2 assets to tap for potential current income. He owns a fully paid house worth $220,000; and has $130,000 of cash in the bank. One way to supplement income is for the customer to get a reverse mortgage on the house, but this is not a banking exam, so we will not go near that possibility! The other way to supplement income is to invest the cash in the bank in an investment that is safe and that gives current income. Treasury Bonds pay interest semi-annually at a higher rate than that earned on bank deposits, and are really safe, so these would be the best recommendation. STRIPS do not provide current income since they are a zero-coupon Treasury obligation so these will not work. TIPS give a lower current interest rate than regular Treasury bonds, in return for protecting the investor against inflation - however the inflation protection is not "paid" until maturity, so again, these will not give the greatest additional current income.

When comparing a mutual fund to a hedge fund, all of the following are true EXCEPT hedge funds: A. are subject to less regulation B. use aggressive investment strategies and have higher risk C. are only available to qualified purchasers D. are liquid

D. are liquid Hedge funds are completely illiquid investments. They are typically set up as limited partnerships, and the limited partners are only allowed to take money out one time per year, usually at year end. Hedge funds offer higher returns coupled with higher risk and are only sold to accredited (wealthy, sophisticated) investors who understand the risks involved.

A trade confirmation for an Over-The-Counter Bulletin Board stock shows the following: "We sold to you 100 shares of XXXX @ $7 Net" In this transaction, the member firm acted as a(n): A. agent, and charges a commission in addition to the Net price B. agent, and charges a commission included in the Net price C. dealer, and charges a mark-up in addition to the Net price D. dealer, and charges a mark-up included in the Net price

D. dealer, and charges a mark-up included in the Net price In an over-the-counter principal transaction, the member firm sells a security out of its inventory to a customer who wishes to buy; or buys a security into its inventory from a customer who wishes to sell. In this transaction, the firm acts as a dealer, and marks-up the stock to the customer who wishes to buy; or marks-down the stock from the customer that wishes to sell. There is no requirement to disclose the amount of mark-up or mark-down taken in principal transactions in an OTC security, such as those included in the Pink Sheets or OTCBB - the Over-the-Counter Bulletin Board. Also note that for any exchange trade, whether NYSE, NYSE American (AMEX) or NASDAQ, the commission or mark-up must always be disclosed.

ABLE account distributions are tax-free when used to pay for qualifying: A. lower education expenses B. higher education expenses C. medical expenses D. disability expenses

D. disability expenses ABLE accounts are state-sponsored investment accounts that are used to pay for qualifying disability expenses. Up to $15,000 per year can be contributed (non-deductible). Earnings build tax-deferred and distributions to pay for qualifying disability expenses are tax-free.

Mr. Jones, a New York resident, is a widower with a 6 year old son. He opens an account for the son under the Uniform Gifts to Minors Act. Three years later, Mr. Jones remarries, and moves to California, a community property state. Under what conditions can Mrs. Jones enter orders into the UGMA account? A. Only if a power of attorney is granted by the son B. Only if a power of attorney is granted by Mr. Jones C. Mrs. Jones can enter orders without restriction because California is a community property state D. Mrs. Jones can not enter orders into the account under any circumstances

Mrs. Jones can not enter orders into the account under any circumstances Custodian account are not permitted to have "third parties" that can trade the account. Only the custodian can enter orders. If the wife wishes, she can open a separate custodian account for the minor. The fact that California is a community property state is irrelevant to this question.