Practice Test 5
A customer enters an order to purchase 1000 shares of XYZ common stock at the market when the quote is 18.22 bid, 18.30 ask. If the transaction is executed at the market and the broker charges a $.10 mark-up how will the price be reported to the consolidated tape system? A) 18.30 B) 18.32 C) 18.40 D) 18.22
A) 18.30 When transaction prices are reported to the consolidated tape system they do not include the amount of any commission, mark-up or mark-down. In this instance 1000 shares were purchased at the market meaning the buyer paid the ask price of 18.30. This is the price that would be reported to the consolidated tape system (CTS).
If an individual fails a FINRA qualification exam three consecutive times, a fourth attempt may NOT be made for: A) 6 months. B) 30 days. C) 90 days. D) 60 days.
A) 6 months. If a qualification exam is failed three consecutive times, a fourth attempt may not be made for 6 months.
Your customer in his early 30s has received a modest inheritance from a relative. Listing tax-deferred growth as an objective for retirement income, which of the following investments is most suitable? A) A variable annuity B) Tax-free municipal bonds C) Growth mutual funds D) Corporate debt securities
A) A variable annuity Variable annuities offer tax-deferred growth and are suitable for achieving supplemental retirement income. Ideally they should be funded with readily available cash rather than using funds liquidated from existing investments. None of the other investments listed here offer tax-deferred growth.
Which of the following describes Nasdaq Level 3 service? A) Allows market makers to enter quotations into the system for a security in which they are registered. B) Displays the representative bid and ask quotations on a security in which a minimum of 2 market makers exist. C) Shows the quotations from all registered market makers entering quotes into the system. D) Displays the representative bid and ask quotations on a security in which a minimum of 3 market makers exist.
A) Allows market makers to enter quotations into the system for a security in which they are registered. Nasdaq Level 3 service allows market makers to enter and update quotations on securities in which the market makers are registered with FINRA.
Which of the following persons must sign a stock or bond power to effect good delivery of securities sold from an account set up under the Uniform Transfer to Minors Act? A) Custodian. B) Minor. C) Donor. D) Parent.
A) Custodian The custodian must sign securities in a custodial account to effect good delivery.
A client has purchased a nonqualified variable annuity from a commercial insurance company. Before the contract is annuitized, your client, currently age 60, withdraws some funds for personal purposes. What is the taxable consequence of this withdrawal to your client? A) Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis. B) A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn. C) A 10% penalty plus the payment of ordinary income tax on funds withdrawn in excess of the owner's basis. D) Capital gains taxation on the earnings withdrawn in excess of the owner's basis.
A) Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis. Contributions to a nonqualified annuity are made with the owner's after-tax dollars. Distributions from such an annuity are computed on a LIFO basis with the income taxed first. Once the cost basis is reached, any further withdrawals are a nontaxable return of principal. Since the client is older than 59½ at the time of distribution, the additional 10% penalty tax is not incurred.
All of the following must be considered by an investment adviser representative before recommending a municipal security to a customer EXCEPT: A) The municipality's coverage ratio. B) Municipal security's rating. C) Customer's tax status. D) Customer's state of residence.
A) The municipality's coverage ratio. The coverage ratio is specific to revenue bonds only and tells how many times annual revenue from that issue will cover the debt service of the issue. It is not a factor of suitability to be considered when recommending a municipal bond but more of a factor to consider when comparing two municipal revenue bonds. The customer's state of residence and tax status are essential when determining suitability for a municipal security. The security's rating is also important because it measures the overall safety and quality of the bond.
Which of the statements regarding a member firm's handling of a discretionary account is TRUE? A) The registered representative may not effect transactions excessive in size or frequency in view of the customer's resources. B) A principal must approve each discretionary order prior to execution. C) The registered representative must obtain written authorization from the customer before placing each order. . D) Margin may not be used in a discretionary account.
A) The registered representative may not effect transactions excessive in size or frequency in view of the customer's resources. A discretionary account allows the registered representative to place orders without consulting the customer. It does not relieve him of the obligation to execute only suitable orders.
All of the following regarding a tombstone advertisement for a new issue are true EXCEPT A) They are used to offer the securities for sale B) The advertisement is a statement of facts used to announce the new issue C) They are the only types of advertising allowed during the cooling off period D) Underwriters are not required to publish tombstone advertisements
A) They are used to offer the securities for sale Tombstone advertisements, though not required, are the only type of new issue advertisement that would be allowed during the cooling off period. While they are a statement of facts used primarily to announce the new issue, they may not offer the securities for sale.
REITs can distribute all of the following to their shareholders EXCEPT: A) capital losses. B) capital gains. C) stock dividends. D) cash dividends.
A) capital losses. REITs can distribute their income to shareholders but not their losses. Under subchapter M of the Internal Revenue Code, they must distribute at least 90% of their income to shareholders in the form of cash dividends.
Securities options may be best described as: A) derivatives. B) futures. C) forwards. D) roll ups.
A) derivatives. Options are a derivative because they get their values from the underlying instrument.
All of the following are characteristics of exchange-traded notes (ETNs) EXCEPT A) each note is secured by a single specified asset B) they can be bought or sold during normal trading hours on an exchange C) they are issued by financial institutions such as banks D) their value can be impacted by changes in the credit rating of the issuer
A) each note is secured by a single specified asset Exchange-traded notes (ETNs) are unsecured debt securities generally issued by financial institutions such as banks. Prices can be impacted by changes in the issuer's credit rating, even though the value of the underlying securities has not changed. Like exchange-traded funds (ETFs) or other exchange-traded products, they can be bought or sold during normal exchange trading hours.
An improvement in economic conditions is indicated by an increase in all of the following EXCEPT: A) inventories. B) S&P 500. C) consumer orders. D) industrial production.
A) inventories. Increasing inventories result from a decrease in customer demand. This can occur when disposable income is dropping and economic conditions are deteriorating.
A blind pool offering: A) is one in which 25% or more of the properties are not specified. B) generates nonallocated income. C) is connected with oil and gas leases. D) is one in which the properties are purchased on a lottery basis.
A) is one in which 25% or more of the properties are not specified. Many times, large real estate or oil and gas programs are offered in the form of a blind pool. In a blind pool, 25% or more of the specific properties (in real estate) or sites (in oil and gas) have not been identified at the time of the offering. When investing in a blind pool, the participants are relying on the expertise of the program sponsor to select locations that will prove profitable.
Each of the following statements about SIPC are true EXCEPT? A) it is an agency of the U.S. government. B) it is a nonprofit membership corporation. C) coverage is limited to $500,000 per customer. D) it is funded by broker/dealers.
A) it is an agency of the U.S. government. SIPC is a membership corporation formed to protect investors as of the Securities Investor Protection Act (SIPA) of 1970. It is not an agency of the U.S. government.
Each of the following is a category of communications with the public designated by FINRA EXCEPT A) market letters B) institutional C) correspondence D) retail
A) market letters The three categories of communications with the public designated by FINRA are retail, correspondence, and institutional. Market letters, as all sales or advertising pieces would, can fall under any of the three communications categories depending on to whom they are sent or made available to, and the number of recipients.
Each of the following types of orders will remain open (working orders) until certain conditions are met EXCEPT A) market orders B) good-till-canceled orders C) stop orders D) stop limit orders
A) market orders A market order is executed immediately at the prevailing market price. A stop, or stop limit, order is not triggered until a set price is hit or passed through. A good-till-canceled order remains open until executed or canceled.
The call premium on a municipal bond trading above par is best described as the difference between: A) par and the call price. B) the amortized premium and the annual interest. C) the market price and par. D) the market price and the call price.
A) par and the call price. The call premium represents the difference between the call price and par. The farther away a call date, the lower the call premium.
A city has issued bonds to construct a new sewage treatment facility. If the bonds are not backed by the full taxing authority of the city, all of the following statements about the bond issue are true EXCEPT: A) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. B) there is no debt limitation on the issue. C) if earnings fall short of the amount needed to make principal and interest payments, the debt service reserve can be used. D) the bond issue will mature within the useful life of the sewage plant.
A) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. This must be a revenue bond because it is not backed by the full taxing authority of the city. Rather, the principal and interest are paid by the users of the facility. The public service commission has no approval power over revenue bond interest and principal payments.
All of the following might affect the credit rating of a municipal revenue issue EXCEPT: A) the tax rates of nearby municipalities. B) the rate covenants set forth in the indenture. C) the debt service coverage ratio. D) the quality of the facilities management.
A) the tax rates of nearby municipalities. The credit rating of a revenue issue would not be affected by tax rates in surrounding municipalities.
GHI stock is at $10 par value and is selling in the market for $60 per share. If the current quarterly dividend is $1, the current yield is: A) 10%. B) 6.7%. C) 1%. D) 1.7%.
B) 6.7%. Current yield is determined by dividing the annual dividend of $4 ($1 per quarter × 4 = $4) by the current stock price of $60 ($4 / $60 = 6.7%).
Under MSRB rules, which of the following would indicate a control relationship between a municipal dealer and an issuer? A) The principal of the dealer lives within the municipality. . B) A dealer's officer sits on the issuer's board of trustees. C) The dealer was an underwriter of the municipality's last issue. D) The dealer is engaged as an underwriter for the issuer.
B) A dealer's officer sits on the issuer's board of trustees. A control relationship exists if someone represents both an issuer and municipal securities dealer.
A customer enters an order to buy 1,000 ABC at 50, good for the week only. How will this order appear on the order book? A) Buy 1000 ABC 50 GTM. B) Buy 1000 ABC 50 GTC. C) Buy 1000 ABC 50 GTW. D) Buy 1000 ABC 50 Day.
B) Buy 1000 ABC 50 GTC. Limit orders and stop orders are entered on the order book as either GTC or day orders. Orders that are good for only a particular time frame (good for the week) will appear as GTC. It is the responsibility of the broker/dealer that entered the order to cancel it at the end of the week, if unexecuted.
Under what circumstances would the fiduciary of a qualified corporate retirement plan be permitted to write covered calls on the securities in the portfolio? A) If specifically approved by the covered employees B) If this strategy is consistent with the objectives of the plan C) If specifically approved by the SEC D) Under no circumstances
B) If this strategy is consistent with the objectives of the plan As covered calls are not considered to be a speculative option strategy they would be permitted as long as the strategy is deemed prudent and is consistent with the objectives of the plan. No outside approval is required.
If a customer who has granted a durable power of attorney to her son dies, which of the following statements regarding the power of attorney is TRUE? A) It remains in effect until the son cancels it. B) It is canceled on the death of either principal. C) It remains in effect until the executor of the estate cancels it. D) It remains in effect only if the son is the sole heir to the estate.
B) It is canceled on the death of either principal. When the customer or her son dies, the power of attorney also expires. However, a durable power of attorney will survive a declaration of mental incompetence and is useful in those cases where a parent suffers from dementia.
Which of the following individuals may NOT open a joint account? A) Three sisters. B) Parent and a minor. C) Two spouses. D) Two business partners.
B) Parent and a minor. A minor may not be a party in a joint account because a minor cannot legally exercise control over the account. A custodial account may be set up for the minor.
A registered representative is attempting to close a large municipal bond sale, but the customer voices concern about a potential increase in interest rates. Which of the following actions are permitted by MSRB rules? A) Personally offering to buy the bonds back at a specified price and date. B) Selling the customer a put or entering into a repurchase agreement. C) Offering to share in profits or losses resulting from the transaction. D) Guaranteeing the customer against any loss.
B) Selling the customer a put or entering into a repurchase agreement. MSRB rules prohibit a municipal securities dealer from guaranteeing a customer against loss, or promising to repurchase securities at a set price for their own account. MSRB rules permit the sale of bona fide put options or repurchase agreements to customers by municipal securities dealers. Sharing in any profits or losses is prohibited.
Net asset value per share for a mutual fund can be expected to decrease if the: A) securities in the portfolio have appreciated in value. B) fund has made dividend distributions to shareholders . C) fund has experienced net redemption of shares . D) issuers of securities in the portfolio have made dividend distributions.
B) fund has made dividend distributions to shareholders The NAV per share will rise or fall relative to the value of the underlying portfolio. If dividends are distributed to shareholders, the fund's assets decrease and their per-share value will decline accordingly. Appreciation of the portfolio and dividends received will increase the value. Redemption of shares will have no impact on the NAV per share as the money paid out is offset by a reduced number of shares outstanding.
A customer writes 1 ABC July 60 put at 3 when ABC is at 61. ABC subsequently declines to 54 and the option is exercised. If the customer later sells his long stock position at 58, the customer has a: A) loss of $100. B) gain of $100. C) loss of $400. D) gain of $400.
B) gain of $100. The investor receives $300 for writing the put, then pays $60 per share to acquire the stock when the put is exercised, giving him a cost basis of $5,700. Because the stock is later sold for $58, the investor ends up with an overall gain of $100 ($5,800 - $5,700).
The result of declining inflation on outstanding bonds would be: A) lower prices and higher yields. B) higher prices and lower yields. C) lower prices and lower yields. D) higher prices and higher yields.
B) higher prices and lower yields. Declining inflation means declining interest rates. If interest rates decline, bond prices rise.
The MSRB is authorized under the Securities Exchange Act of 1934 to make rules about all of the following EXCEPT: A) municipal dealer recordkeeping. B) information provided by municipal issuers. C) the dissemination of price and yield quotes by municipal dealers. D) dealers obtaining fair and reasonable prices for customers.
B) information provided by municipal issuers. The MSRB governs the practices of underwriting and trading municipal bonds. It does not govern municipal issuers.
Under FINRA rules, if a member firm receives an order to buy a new equity issue on behalf of an undisclosed principal from a bank, the member must: A) reject the order. B) obtain a representation from the bank that the purchaser is not restricted. C) accept the order. D) determine the identity of the purchaser.
B) obtain a representation from the bank that the purchaser is not restricted. If a member receives an order from a conduit such as a bank, the member must make an inquiry as to whether the ultimate purchaser is restricted. It is not necessary to determine the identity and business affiliations of the purchaser.
T-bills are quoted: A) as a percentage of par. B) on an annualized discount yield basis. C) in 16ths. D) in 32nds.
B) on an annualized discount yield basis. T-bills do not bear interest. T-bills trade and are quoted on an annualized discount yield basis.
If your 40-year-old client wants to withdraw funds from her Keogh, her withdrawal will be taxed as: A) capital gains plus a 10% penalty. B) ordinary income plus 10% penalty. C) capital gains. D) ordinary income.
B) ordinary income plus 10% penalty. An early withdrawal from a Keogh is taxed in the same way as an early withdrawal from an IRA - as ordinary income plus a 10% penalty.
The ex-date for a closed-end fund listed for trading on the NYSE is set by: A) the SEC. B) the NYSE. C) FINRA. D) the board of directors of the fund.
B) the NYSE. The ex-dates for closed-end funds (typically 2 business days before the record date) are determined by the exchanges on which they trade. The ex-date for open-end funds (typically the business day following the record date) is determined by the board of directors of the fund.
A Notice of Defeasance informs bondholders that: A) the purpose of the issue has been defeated and the bonds are called. B) the funds for the principal and the interest are in escrow. C) the facility has been condemned and the bonds have been called. D) the interest and the principal will not be paid.
B) the funds for the principal and the interest are in escrow. A defeased issue is one in which the issuer placed U.S. government securities in the bank as collateral for the old issue.
Libby sees a tombstone advertisement for a new issue of Southwest Barge subordinated convertible debentures. The bonds will carry an 11-1/4% coupon, are convertible into common stock at $10.50, and are being issued to the public at 100. The proceeds of the issue will be used specifically for purchasing new Southwest barges. Libby's concerns about the issue could include: A) she should not be concerned as the bonds will be first in liquidation. B) the issue may be junior-in-lien to another security issue. C) the company might demand that she accept common stock for her bond. D) the new barges might sink, and the collateral would be gone.
B) the issue may be junior-in-lien to another security issue. The word "subordinated" is the key to the question. A subordinated bond has other debt holders ahead of it in the event of liquidation. The barges do not serve as collateral as the bonds are identified as debentures, and having to convert to common stock is not a threat since she is the one that will, if she desires, exercise the conversion privilege.
The SEC regulation requiring that firms holding customer limit orders not trade through or ahead of those orders is A) the Trust Indenture Act B) the order protection rule of the national market security system, regulation NMS C) the telephone consumer protection act (TCPA) D) the locate requirement of regulation SHO
B) the order protection rule of the national market security system, regulation NMS The order protection rule, which comes under the broad sweeping regulation NMS (National Market System) mandates that firms holding customer limit orders do not trade through or ahead of those limits with other customer orders or with the firms own proprietary orders.
All of the following are true of an HR-10 Plan EXCEPT: A) the plan is subject to maximum contribution amounts. B) the plan does not require a sole proprietor making a contribution to his HR-10 plan to make contributions for eligible employees. C) this is a qualified plan subject to the requirement of having an IRS-approved plan document in place. D) the plan allows a self-employed person to create and maintain a retirement plan.
B) the plan does not require a sole proprietor making a contribution to his HR-10 plan to make contributions for eligible employees. This is a qualified form of retirement plan. A self-employed person must also make contributions on behalf of any eligible employees if he is making a contribution on his own behalf.
Regarding the purchase of a new issue, a customer would NOT be considered a restricted person if he were: A) a registered representative working for a FINRA member firm not involved in the issue. B) the retired uncle of a bank clerical employee. C) a registered representative working for the issuing firm's investment banker. D) the wife of a principal of a FINRA member firm.
B) the retired uncle of a bank clerical employee. The definition of a restricted person includes FINRA members and their associated persons. Immediate family members of such persons are also included under the definition.
All of the following are true of REITs EXCEPT: A) they must to qualify under Subchapter M, distribute at least 90% of their net investment income. B) they must pass along losses to shareholders. C) shares are publicly traded. D) they must invest at least 75% of their assets in real estate-related activities.
B) they must pass along losses to shareholders. REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their net investment income to their shareholders. While they can pass through income, they cannot pass through any losses; they are not DPPs.
To tighten credit during inflationary periods, the Federal Reserve Board can take any of the following actions EXCEPT: A) to increase the amount of U.S. government debt held by primary dealers. B) to lower taxes. C) to sell securities in the open market. D) to raise reserve requirements.
B) to lower taxes. To curb inflation, the Fed can sell securities in the open market, thus changing the amount of U.S. government debt institutions hold. It can also raise the reserve requirements, discount rate, or margin requirements. The Fed has no control over taxes, which are changed by Congress.
A company currently has earnings of $4 and pays a $.50 quarterly dividend. If the market price is $40, what is the current yield? A) 15%. B) 10%. C) 5%. D) 1%.
C) 5%. The quarterly dividend is $.50, so the annual dividend is $2.00; $2 / $40 (market price) = 5% annual yield (current yield).
If at expiration for XYZ options, XYZ stock closes at 40.15 which of the following open option positions will automatically be exercised by the OCC? A) A member firm long 1 XYZ 45 call. B) A member firm long 1 XYZ 40 put. C) A customer long 1 XYZ 40 call. D) A customer long 1 XYZ 40 put.
C) A customer long 1 XYZ 40 call. At expiration, the OCC will automatically exercise open option positions if those positions are in-the-money by .01 or more. In this case, the customer's long 40 call position is in-the-money by .15. The member firm 45 call and the 40 puts are out-of-the-money.
Which of the following municipal issues would least likely involve overlapping debt? A) A park district. B) A school district. C) An airport district. D) A library district.
C) An airport district. Overlapping debt refers to property tax districts (areas). Airport issues are usually revenue issues of an authority that has no property taxing powers.
Which of the following is defined as profits after taxes and interest paid, less preferred dividends, divided by the number of shares of outstanding common stock? A) Cash flow per share. B) Book value per share. C) Earnings per share (EPS). D) Price-earnings (P/E).
C) Earnings per share (EPS). Dividing net income after taxes, interest, and payment of preferred dividends by the number of common shares outstanding determines earnings per share (EPS).
Which of the following statements describes an oil and gas blind pool offering? A) The oil exploration occurs in an area that is not adjacent to any known oil reserves. B) The income from producing wells is purchased at a discount from the present value of the projected future flows. C) Money is raised without a specific property being stated, and the GP selects the investments. D) An unknown number of representatives participates in the sale of known partnership units.
C) Money is raised without a specific property being stated, and the GP selects the investments. A blind pool offering, also known as a nonspecified program, involves an investment in a program without specific prospects or properties being identified.
Under the Uniform Gifts to Minors Act, Ralph wants to give some stock to his brother's son, Jose. His nephew's father, Bob, is the legal guardian. If Ralph wants to name himself as custodian, which of the following needs to be done? A) Ralph must have the permission of the guardian. B) Ralph must file the proper legal documents. C) Ralph must open the account and name himself as the custodian. D) Ralph must receive legal permission to act as custodian.
C) Ralph must open the account and name himself as the custodian. Under UTMA or UGMA, no special documentation is required. The account is opened in the name of the minor with the minor's Social Security number and the name of the adult listed as custodian.
Which of the following is an equity security? A) Mortgage-secured bond. B) Government National Mortgage Association pass-through certificate. C) Real estate investment trust share. D) Collateralized mortgage obligation.
C) Real estate investment trust share. A REIT share is an equity security that represents undivided ownership in a portfolio of real estate investments. The other choices are debt securities.
Which of the following exemption provisions of the Act of 1933 may NOT be used for an initial offering of securities? A) Regulation D. B) Rule 147. C) Rule 144. D) Regulation A.
C) Rule 144. Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities.
Which of the following taxes is considered regressive? A) Estate. B) Income. C) Sales. D) Inheritance.
C) Sales. Sales tax is considered regressive because the rate remains constant irrespective of the amount being taxed. Income taxes, for example, take more from a person with a high income than from a person with a low income.
Which of the following is nonnegotiable? A) Treasury bills. B) Treasury notes. C) Series EE bonds. D) Ginnie Mae bonds.
C) Series EE bonds. Series EE bonds, usually known as savings bonds, are sold at face value to the purchaser and are nonnegotiable. Since EE bonds must be redeemed by the original purchaser, ownership cannot be transferred, which makes them a nonmarketable security. Series EE bonds may not be used as collateral for a loan.
All of the following statements regarding a municipality's collection ratio are true EXCEPT: A) the collection ratio measures the municipality's property tax collections. B) a high collection ratio is more favorable than a low collection ratio. C) a poor collection ratio might mean the municipality is likely to default on its revenue bonds. D) the collection ratio is calculated as follows: taxes collected divided by taxes assessed.
C) a poor collection ratio might mean the municipality is likely to default on its revenue bonds. The collection ratio measures taxes collected versus taxes assessed. It is a tool used in analyzing GO bonds, which are backed by the taxing authority of the issuer. Revenue bonds are backed by user fees, not taxes.
Under Regulation T, action by the broker/dealer is NOT required when the: A) amount due does not exceed $100. B) total amount of the transaction does not exceed $1,000. C) amount due does not exceed $1,000. D) amount due does not exceed $200.
C) amount due does not exceed $1,000. Regulation T permits a broker/dealer to disregard any amounts due less than $1,000.
An investor who buys a stock and wishes to limit the potential downside risk should: A) buy a call. B) enter a buy stop order. C) buy a put. D) enter a sell limit order.
C) buy a put. The purchase of a put limits the downside risk to the difference between the stock price and the put's strike price.
A front-end sales load is defined as the: A) fee paid to the investment adviser. B) commissions paid on the purchase or sale of securities. C) difference between the public offering price and the net asset value of a mutual fund share. D) concessions allowed on the purchase or sale of securities.
C) difference between the public offering price and the net asset value of a mutual fund share. A sales load is the difference between the public offering price and the net asset value per share of the fund.
The time value of an option that is at-the-money equals: A) it's intrinsic value less premium. B) its intrinsic value. C) its premium. D) zero
C) its premium. The option has no intrinsic value if the strike price equals the market price (at the money). The only value an option has is its time value, which equals the premium.
If a person wishes to enter orders in his spouse's account, he: A) needs verbal permission from his spouse. B) could never be permitted to do so as there is no provision that would allow for it to occur. C) needs written permission from his spouse via a power of attorney. D) is free to do so.
C) needs written permission from his spouse via a power of attorney. The only persons permitted to enter orders in an account are the account owners. For a person to enter orders in his spouse's account, the spouse who's name is on the account must sign a power of attorney.
Regulation T allows a customer to pay for securities with all of the following EXCEPT: A) marginable securities. B) cash. C) newly purchased mutual funds pledged as collateral. D) check.
C) newly purchased mutual funds pledged as collateral. Regulation T does not allow mutual funds to be used as collateral until they have been owned fully paid for 30 days.
A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are: A) 100% taxable. B) 100% tax free. C) partially a tax-free return of capital and partially taxable. D) 100% tax deferred.
C) partially a tax-free return of capital and partially taxable. The investor has already paid tax on the contributions but the earnings have grown tax-deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income.
Members of a syndicate receive notice of their share of the offering through the: A) due diligence meeting. B) official statement. C) syndicate letter. D) prospectus.
C) syndicate letter. The syndicate letter is sent by a municipal dealer to prospective members, inviting them to join the syndicate and setting forth the conditions of the syndicate. Such conditions include who the manager will be, the percentage participation (each member's share), and the amount of good faith deposit required.
The document attesting to the formation of a limited partnership, filed with designated authorities, is called: A) the registration statement. B) the offering memorandum. C) the certificate of limited partnership. D) the subscription agreement.
C) the certificate of limited partnership. The Uniform Limited Partnership Act requires that two or more persons sign and swear to a certificate of limited partnership. It is filed with the state and is a public document available for review.
Municipal bonds are not normally sold short because: A) short sales are prohibited by municipal statute. B) short sales are prohibited by MSRB rules. C) the municipal bond market is illiquid. D) the transaction is expensive to execute.
C) the municipal bond market is illiquid. While there is no law or industry rule prohibiting short sale of municipal bonds, it is not a common practice. To short a security, it must be borrowed, and because most municipal securities are thinly traded, it is often difficult to locate the specific issue needed to cover the short position.
An option confirmation must include all of the following EXCEPT: A) the number of contracts and premium. B) the type of option and commission. C) the positions market attitude (bullish or bearish). D) the strike price.
C) the positions market attitude (bullish or bearish). An option transaction's confirmation must completely recap the essential elements of the trade including the number of contracts traded, the description of the security traded (type of option and strike price), the price of the security traded (premium), and any commission charges. The positions market attitude (bullish or bearish) is not included on the confirmation.
The last day that stocks can be bought for cash and still receive the dividend is: A) on the ex-date. B) the business day prior to the regular way ex-date. C) the record date. D) the day after the record date.
C) the record date. A cash trade settles the same day. Stocks bought for cash on the record date will be entitled to the dividend under an exception to the 2-business day rule for regular way transactions.
A short sale of stock directed to an exchange must observe all of the following EXCEPT: A) the locate requirement for borrowed shares. B) a minimum maintenance requirement of 30%. C) the symbol "ss" on the consolidated tape. D) a margin requirement of 50%.
C) the symbol "ss" on the consolidated tape. The symbol "ss" does not designate "short sale." It is used to identify stocks traded in 10-share units.
The most current information on new releases of municipal bonds can be found in A) The Bond Buyer's Guide B) Thomson's Muni Market Monitor (formerly Munifacts) C) the broker/dealer's quote sheets D) "The Bond Buyer"
D) "The Bond Buyer" "The Bond Buyer" is a daily trade publication containing news about new municipal bond issues.
An investor with no other positions sells 1 ABC Jun 25 put at 1.50. If the put is exercised when the stock is trading at 24 and the investor immediately sells the stock in the market, what is the investor's profit or loss? A) $150 loss. B) $50 loss. C) $150 profit. D) $50 profit.
D) $50 profit. The investor has the obligation to buy the stock at the strike price of 25. The stock is currently worth 24, which is a loss of 1. The investor's premium of 1.50 minus the loss of 1 leaves a net profit of .50 (.50 × 100 = $50).
If XYZ common stock has a $4 dividend, a yield of 4.2%, a PE ratio of 12, and is trading at $96, its approximate earnings per share (EPS) is: A) $50.40. B) $48.00. C) $4.00. D) $8.00.
D) $8.00. The stock's PE ratio is price to earnings per share (EPS). Dividing the stock's price by the PE will give the earnings per share ($96 / 12 = $8 EPS).
If a customer has a securities account worth $220,000 and a money market account worth $260,000, what is this customer's coverage under SIPC? A) 470,000. B) 220,000. C) 250,000. D) 480,000.
D) 480,000. Coverage under SIPC is up to $500,000 per separate customer. Of that total, SIPC covers no more than $250,000 in cash. Because a money market share is considered an investment company security, not cash, this customer's coverage is $480,000.
If a customer buys 1 OXY Oct 50 call at 3, and the holder exercises the option when the stock is trading at 60, what is the cost basis of the 100 shares? A) 5000. B) 6300. C) 6000 D) 5300.
D) 5300. The cost basis of acquiring the shares is 100 multiplied by the strike price of 50, which equals $5,000, plus the cost of the call, $300. Total cost or cost basis is $5,300.
An investor believes that the U.S. dollar will rise in value against the British pound. To profit with limited risk, which of the following foreign currency option transactions would you recommend? A) Buy British pound calls. B) Sell British pound puts. C) Sell British pound calls. D) Buy British pound puts.
D) Buy British pound puts. This investor should buy puts on the British pound to lock in the highest possible price at which to sell pounds. Any answer must be framed in terms of the British pound because there are no listed options on the U.S. dollar.
Which of the following is the least suitable mutual fund transaction? A) Encouraging a retired 65-year-old investor to invest a small percentage of his savings in a large-cap growth fund. B) Encouraging an investor in a high-tax bracket with an income objective to invest in a municipal bond fund. C) Encouraging an investor in his early 30s to invest in an emerging markets mutual fund. D) Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence.
D) Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence. Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence is not in the client's best interest, as the client might be subject to substantial additional sales charges.
Which of the following order types is permitted in Nasdaq markets but NOT in NYSE equity markets? A) Limit. B) Immediate or cancel (IOC). C) Market. D) Fill or kill (FOK).
D) Fill or kill (FOK). Fill-or-kill (FOK) and all-or-none (AON) orders may no longer be entered in the NYSE equity market but are still accepted in both the bond market and Nasdaq.
All of the following statements regarding nonqualified deferred compensation plans are true EXCEPT: A) Benefits payable to employees at retirement are taxable. B) Board members are not eligible for these plans as they are not considered employees. C) Employees have no right to plan benefits if the business fails. D) Plans must be nondiscriminatory and can not favor employees serving in certain capacities.
D) Plans must be nondiscriminatory and can not favor employees serving in certain capacities. Needing no IRS approval, nonqualified deferred compensation plans may be discriminatory and offered only to certain employees such as key executives. An agreement between a company and an employee in which the employee agrees to defer some income until retirement, the benefits payable at retirement would be taxable at that time. Board members are not considered to be employees and therefore not eligible for these plans.
Planned amortization class (PAC) CMOs were designed to provide which of the following benefits compared to plain vanilla tranches? A) Eliminate prepayment risk for tranche holders. B) Increase prepayments to tranche holders. C) Match the prepayment risk of plain vanilla tranches. D) Reduce prepayment risk for tranche holders.
D) Reduce prepayment risk for tranche holders. PACs reduce but cannot eliminate prepayment risk for tranche holders. The companion tranches will have higher prepayment risk than the PAC, as they were designed to absorb the bulk of the prepayment risk.
Which of the following acts requires full disclosure of all material information about securities offered for the first time to the public? A) Trust Indenture Act of 1939. B) Securities Investor Protection Act of 1970. C) Securities Exchange Act of 1934. D) Securities Act of 1933.
D) Securities Act of 1933. The Securities Act of 1933 regulates new issues of corporate securities sold to the public.
All of the following are characteristics associated with equity-linked notes (ELNs) EXCEPT: A) They are considered to be nonconventional structured investments. B) They can be exchange traded or traded OTC. C) They have final payments at maturity linked to the return of an underlying stock or basket of stocks. D) They are equity securities.
D) They are equity securities. Despite their name, equity-linked notes (ELNs) are debt instruments, not equity instruments. They have a partial fixed return as well as a final payment linked to the performance of a single stock or equity index. Some are exchange traded while others trade OTC. FINRA who considers ELNs to be nonconventional structured investments has expressed concerns that investors might not fully understand ELNs or the risks associated with them.
Which of the following interdealer trades does NOT settle in clearinghouse funds? A) Corporate bonds. B) GO bonds. C) OTC stocks. D) U.S. government bonds.
D) U.S. government bonds Trades in securities backed by the federal government are settled in federal funds, not clearinghouse funds.
All of the following accounts are permitted to write calls EXCEPT: A) an individual in a margin account. B) a mutual fund against a long stock position. C) a custodian in an UTMA account against a long-stock position. D) a corporation against its own stock.
D) a corporation against its own stock. Corporations are not permitted to write calls against their own stock. If exercised, they would have to issue shares at the strike price, and this would have a dilutive effect on shareholders.
A portfolio that invests in blue-chip stocks and growth stocks can best be described as: A) a high-yield portfolio. B) an aggressive portfolio. C) a balanced portfolio D) a growth and income portfolio.
D) a growth and income portfolio. A growth and income portfolio typically combines conservative blue-chip securities for their stability and capital preservation with growth stocks for their appreciation potential. An aggressive portfolio contains securities of smaller companies that have the potential for significant capital appreciation. A balanced portfolio invests in both stocks and bonds.
Under NYSE rules, a not-held order: A) is a limit order. B) requires discretionary authority from the customer. C) is good until canceled. D) is good for the day only.
D) is good for the day only. Under NYSE rules, a not-held order where a customer gives you authority over the price or timing of the order is good for that day only.
If a customer does not pay for securities purchased within 2 business days of regular way settlement date, the broker/dealer may request a time extension from: A) the Chicago Stock Exchange. B) the Philadelphia Stock Exchange. C) FINRA. D) its designated examining authority.
D) its designated examining authority. A time extension may be requested from the broker/dealer's designated examining authority (DEA), which could be FINRA or one of the exchanges.
Continuing commissions in connection with the sale of investment company securities: A) must be paid by a member whether or not the person receiving the commissions is a registered representative of a member. B) are a form of deferred compensation; therefore, when a registered representative resigns, the registered representative must be paid all commissions due. C) is illegal. D) may be paid to a retired employee provided a bona fide contract calling for such payment was entered into by the registered representative while employed by a member.
D) may be paid to a retired employee provided a bona fide contract calling for such payment was entered into by the registered representative while employed by a member. FINRA rules permit the payment of continuing commissions to retired registered representatives in connection with the sale of investment company securities if a bona fide contract to do so exists between the firm and the registered representative.
If a customer attempts to place an order for municipal securities that the registered representative deems completely unsuitable for the customer, the registered representative: A) must obtain the permission of a municipal securities principal before executing the order. B) may execute the order on a not-held basis. C) must refuse to execute the order. D) may execute the order and mark the order ticket as "unsolicited".
D) may execute the order and mark the order ticket as "unsolicited". A registered representative may enter any unsolicited order from a customer despite the fact that the representative believes the trade to be unsuitable for the customer. The representative must mark the order ticket "unsolicited".
According to MSRB rules, a separately identifiable division of a bank engaging in the sale and /or underwriting of securities issued by state and local governments is acting as a(n): A) investment banker. B) mutual fund. C) broker's broker. D) municipal securities dealer.
D) municipal securities dealer. A municipal securities bank dealer is a separately identifiable division within a bank that conducts municipal securities business such as underwriting and/or sales, acting as either an agent or principal. This dealer must comply with all MSRB regulations.
It would be fair and equitable for a brokerage firm to assign an option exercise notice to a customer: A) with the largest open position in that option. B) who last wrote that option. C) with the smallest open position in that option. D) who first wrote that option.
D) who first wrote that option. The assignment of options contracts can be done on a FIFO basis (first in, first out) or by any other method that the OCC considers fair (i.e., random). Determining assignment by size of contract or on a LIFO (last in, first out) basis is not considered fair.
If a bond is sold to a customer at par, under MSRB rules, all of the following must be disclosed to the customer on his confirmation EXCEPT A) information on call features B) number of bonds purchased C) total monies due D) yield based on price
D) yield based on price Information on call features, total monies due, and the number of bonds purchased are all important disclosure items for a confirmation. For a bond sold at par, there is no requirement to show yield.
In which of the following strategies would the investor want the spread to widen? I. Buy 1 RST May 30 put; write 1 RST May 25 put. II. Write 1 RST Apr 45 put; buy 1 RST Apr 55 put. III. Buy 1 RST Nov 65 put; write 1 RST Nov 75 put. IV. Buy 1 RST Jan 40 call; write 1 RST Jan 30 call.
I and II An investor wants a debit spread to widen (choices I and II). As the difference between premiums increases, so does potential profit because the investor may sell the option with the higher premium and buy back the option with the lower premium. With credit spreads, investors profit if the spread between the premiums narrows.
Investment banks or bankers I. assist corporations in raising capital II. assist municipalities in raising capital III. accept deposits IV. make loans to individual customers
I and II Investment banks and bankers assist both corporate and municipal issuers in raising capital by issuing securities to the investing public. Unlike traditional banks, they do not accept deposits or issue loans.
Which of the following would NOT be examples of overlapping debt? I. Debt to build a state office building within city limits. II. Debt to maintain a county park district serving a municipality. III. Debt backed by two states cooperating in the construction of a bridge. IV. Debt for a high school district within city limits.
I and III State debt cannot overlap with any other municipal entity.
When stock prices are below strike prices, which of the following statements are CORRECT? I. Puts are in-the-money. II. Puts are out-of-the-money. III. Calls are in-the-money. IV. Calls are out-of-the-money.
I and IV
If LMN, Inc. has filed for bankruptcy, in what order would interested parties be paid? 1. Holders of secured debt. 2. Holders of subordinated debentures. 3. General creditors. 4. Preferred stockholders.
I, 3, 2, 4
Registered Representative 1, employed by Member Firm 1, sells a new equity issue to Registered Representative 2, employed by Member Firm 2. Which of the following are responsible for violating NASD Rule 2790? I. Registered Representative 1. II. Member Firm 1. III. Registered Representative 2. IV. Member Firm 2.
I, II, III and IV
A legal opinion evaluates which of the following features of a municipal issue? I. Marketability. II. Legality. III. Tax-exempt status. IV. Economic feasibility.
II and III A legal opinion rendered by bond counsel deals with the tax-exempt status of the proposed issue and its legality. The marketability of the new issue of bonds is dealt with by the syndicate. Economic feasibility relates to revenue bond issues and is performed by independent consultants.
Which of the following statements regarding recruiting advertising by FINRA member firms are TRUE? I. It must include the name of the broker/dealer. II. It may not contain exaggerated claims about opportunities in the securities business. III. Principal approval is not required. IV. During a firm's first year of business, it must be filed with FINRA.
II and IV
Which of the following market tiers are included in Nasdaq? I. Nasdaq Regional exchange-listed securities. II. Nasdaq Global Market. III. Nasdaq MidCap Market. IV. Nasdaq Capital Market.
II and IV Nasdaq consists of three market tiers: Nasdaq Global Select Market, Global Market, and Capital Market.
For which of the following investments does SIPC provide coverage to customers? I. Commodity futures contracts II. Unregistered stock III. Foreign currencies IV. Municipal bonds
II and IV SIPC coverage only applies to cash and securities. Commodity futures contracts and foreign currencies are not considered securities.
According to the multi-tiered market making system of NYSE Euronext, a Supplemental Liquidity Provider may: I. never compete with the specialist. II. make markets in NYSE listed securities from an off-floor location. III. never receive rebates of transaction fees from the exchange. IV. make a one-sided market.
II and IV Under the multi-tiered market maker system employed by NYSE Euronext a Supplemental Liquidity Provider may compete with the on-floor Specialist (Designated Market Maker) and receive rebates of exchange transaction fees. Unlike a Designated Market Maker the Supplemental Liquidity Provider makes markets from an off-floor location and is permitted to make a one-sided market.
Which of the following are qualified plans? I. Payroll deduction. II. Deferred compensation. III. Defined benefit. IV. Keogh.
III and IV
