Pt 4

A customer opens an account, and payment and delivery instructions are established. Beyond the opening of the account, these instructions may A) be changed for individual transactions, or going forward, for all transactions. B) be changed for individual transactions only. C) not be changed unless a new account is established. D) be changed at any time for all transactions going forward.

A

Market interest rates have risen steadily over the past several months. The market price of which two of the following shares would probably reflect the biggest impact of this change? Growth stock Money market mutual fund Preferred stock Public utility stock A) III and IV B) I and IV C) II and III D) I and II

A

One of your customers buys a new issue municipal revenue bond on March 19. The trade settles on March 21, and the bond pays interest on February 1 and August 1. If the dated date of the bond is March 1, how many days of accrued interest are due? A) 20 B) 19 C) 55 D) 24

A

One of your customers calls you to say that he received a letter saying that his local water works revenue bonds were being defeased. How would that affect the customer? A) The customer would be receiving payment of the principal plus any accrued interest after the defeasance is completed. B) The maturity date is being automatically extended as called for in the official statement. C) The customer will need to file a claim with the appropriate court to receive payment for the bonds. D) Because of failure to generate sufficient revenue, interest payments are suspended temporarily.

A

The MSRB defines an associated person of a broker-dealer who is primarily engaged in municipal securities activities other than retail sales to individuals as A) a municipal financial professional (MFP). B) a municipal securities registered principal (Series 53). C) a municipal securities professional (MSP). D) a municipal securities registered representative (Series 52).

A

Which of the following is federally tax exempt for a corporation? A) Municipal bond interest B) Foreign corporate stock dividends C) Preferred stock dividends D) Capital gains

A

Which of the following regarding a municipal bond broker's broker are true? Protects customer identity Must disclose the identity of customers Has no inventory Maintains an inventory A) I and III B) I and IV C) II and III D) II and IV

A

The SEC has just declared the registration of XYZ Corporation's IPO effective for sale. If XYZ wanted to run a tombstone ad, it would not include A) the dated date. B) the name of the lead underwriter. C) the public offering price. D) the type of security.

A - A tombstone ad for a stock offering, published on or after the effective date, will always include the effective date. It will not include the dated date.

One of the benefits of adding a sinking fund provision to a municipal bond issue is that the bond will generally A) be issued with an interest rate lower than without the sinking fund. B) have a longer maturity. C) be issued without a call provision. D) receive more favorable tax treatment.

A - Adding a sinking fund provision to a bond issue invariably results in a higher rating for the security. The fact that money is put aside to repay the principal on a regular basis offers greater safety. A higher rating results in a lower coupon, not a higher one. After all, the higher the rating, the lower the risk, and that means the issuer is able to borrow at a lower cost. Although the sinking fund itself does not change the maturity date, having a sinking fund enables the issuer to use partial calls to redeem the bond ahead of the final maturity date. A sinking fund has nothing to do with tax treatment.

A municipal bond subject to a refunding call must be quoted at yield to call in which of the following instances? A) A bond at a premium callable at par B) A bond at par callable at a premium C) A bond at a discount callable at par D) A bond at par callable at par

A - An investor's yield would be less on a premium bond if called at par rather than if allowed to mature. Thus, a registered representative must quote the lower potential yield scenario (in this case, yield to call).

Which of the following taxes are considered sources of debt service for special tax bonds? Ad valorem tax License taxes paid by businesses Special liquor and tobacco taxes Real estate taxes A) II and III B) II and IV C) I and III D) III and IV

A - As described by the Municipal Securities Rulemaking Board, a special tax bond is "a bond secured by revenues derived from one or more designated taxes, other than ad valorem taxes." For example, bonds for a particular purpose might be supported by sales, cigarette, fuel, or business license taxes. General obligation bonds are backed by the full faith and credit (taxing power) of the issuer for payment of principal and interest. Their main source of debt service funding is ad valorem (real estate) taxes.

Which of the following is not exempt from SEC registration requirements? A) Shelf offerings B) Regulation D private placements C) Rule 147 intrastate offerings D) U.S. government and municipal offerings

A - As the term indicates, a shelf registration registers with the SEC

Having held 100 shares of GHI stock for 15 months, a customer purchases 1 GHI Jan 50 put in December. If the put is exercised before the expiration date and the long stock is delivered, which of the following statements are true? The premium is added to the sale proceeds. The premium is deducted from the sale proceeds. Any gain is long term. Any gain is short term. A) II and III B) I and III C) I and IV D) II and IV

A - Because the customer already held the stock long term when he purchased the put, he was not trying to stretch a short-term gain into a long-term gain. There is no effect on his established holding period of 15 months. Whenever a put is exercised, the stock's sale price (exercise price) is reduced by the premium paid for buying the put.

In a rising price environment, which of the following inventory valuation methods will result in the highest reported earnings? A) First in, first out (FIFO) B) Straight line C) Last in, first out (LIFO) D) Average cost

A - FIFO means lower cost inventory is used first in determining the cost of goods sold. This has the effect of inflating earnings. Using LIFO means higher cost inventory is used to determine the cost of goods sold. In a rising price environment, LIFO better matches cost with revenue.

Which of the following capital structures would be considered the most highly leveraged? A) A large value of bonds and a small value of common stock B) A large value of common stock and a small value of bonds C) Equal values of common stock and bonds D) Common stock only

A - Leverage is using other people's money to enhance equity value. In this case, borrowing at a fixed rate of payment enhances cash flow, giving the company extra money to invest in its operations. Just as individuals, a company has to be careful not to borrow more than it can afford.

Which of the following capital structures would be considered the most highly leveraged? A) A large value of bonds and a small value of common stock B) Equal values of common stock and bonds C) A large value of common stock and a small value of bonds D) Common stock only

A - Leverage is using other people's money to enhance equity value. In this case, borrowing at a fixed rate of payment enhances cash flow, giving the company extra money to invest in its operations. Just as individuals, a company has to be careful not to borrow more than it can afford.

If interest rates fall, which of the following statements regarding collateralized mortgage obligations are true? Prepayment risk will increase. Prepayment risk will decrease. Prices of each tranche will rise. Prices of each tranche will fall. A) I and III B) I and IV C) II and IV D) II and III

A - Prepayment risk is the risk that the underlying mortgages will be paid off sooner than expected. If rates fall, mortgage holders will refinance, paying off the existing high-rate mortgages with lower rate mortgages. Thus, a tranche with an expected average life of 5.5 years may be extinguished in two years because of an acceleration in prepayments. As rates fall, prices of the remaining tranches will rise.

Gentry is the chief operating officer (CFO) of RMBM, a NYSE-listed corporation. Gentry has an account at your firm, and five months ago, Gentry purchased 1,000 shares of RMBM common stock at $50 per share. The RMBM shares are now $125 per share, and Gentry exits the position at that price. Which of the following statements presents the view of the SEC? A) Gentry has violated the short-swing profits rule. B) Gentry has violated the volume requirements of Rule 144. C) Gentry has violated the holding period requirements of Rule 144. D) Gentry has done nothing wrong because the stock was purchased in the open market.

A - Section 16 of the Securities Exchange Act of 1934 contains the short-swing profits rule. This rule states that any insider of a publicly traded corporation (the CFO would certainly be included in the definition of insider or affiliate) is prohibited from profiting from any purchase or sale (or sale and purchase) of the company's equity securities within a period of less than six months

The Municipal Securities Rulemaking Board (MSRB) is authorized to adopt rules concerning all of the following except A) the information to be provided by municipal issuers. B) the sale of new issues to related portfolios. C) the regulation of municipal securities advertising. D) the form and content of price quotations.

A - The MSRB does not regulate issuers. Rather, it regulates the underwriting of municipal securities and subsequent secondary market trading. Disclosure requirements for issuers are mandated by the SEC.

Which of the following may be affected when a company declares a cash dividend? Shareholders' equity Total assets Total liabilities Current assets A) I and III B) I and II C) III and IV D) II and IV

A - When a company declares a cash dividend, it will reduce retained earnings (part of shareholders' equity) and increase current liabilities (dividends payable), which will increase total liabilities. Assets are not affected until the cash is paid out several weeks later.

All of the following statements concerning IRA contributions are true except A) you may make contributions for the past year after April 15, provided you have filed an extension on a timely basis. B) you may contribute to this year's IRA from January 1 of this year until April 15 of next year. C) between January 1 and April 15, you may make contributions for the current year, the past year, or both. D) if you file your taxes on January 15, you may deduct your IRA contribution even if it is not made until April 15.

A - You may contribute to an IRA only until the first tax filing deadline (April 15) even if you filed an extension.

ABC Corporation has just completed an IPO raising $100 million. The investment bankers handling the offering made total commissions of $4 million. It is most likely that this was A) a best efforts underwriting. B) an all or none underwriting. C) a standby underwriting. D) a firm commitment underwriting.

A -The key to the question is commissions. In a best efforts underwriting, the investment bankers have no financial responsibility and earn a commission on whatever they sell. In a firm commitment underwriting, the syndicate members have taken the financial responsibility and earn the spread (considered to be a markup rather than a commission). T

Which of the following is always affected by a change in the market value of securities in a long margin account? A) Maintenance requirement B) Debit balance C) Credit balance D) Special memorandum account (SMA)

A- In terms of dollars, the maintenance requirement will continuously fluctuate with the market value because it is a percentage of the CMV.

A corporation's income statement reports net income of $10 million for the year. The company has one million shares of 4% $50 par value preferred stock and two million shares of common stock. If the corporation paid a quarterly dividend of $0.60 per share of common stock, A) the dividend payout ratio was 60%. B) the retained earnings increased by $6.8 million. C) the current return on the preferred stock was 4%. D) the earnings per share was $5 per share.

A- The dividend payout ratio is the percentage of the net income (after preferred stock dividends) paid out to the common shareholders. The net income is $10 million. The preferred dividend is $2 per share ($50 par times 4% = $2). With one million shares, the total preferred dividend is $2 million (1 million shares at $2 per share). Because the preferred dividend must be paid before any earnings are available to common stockholders, we subtract that $2 million from the net income. That leaves $8 million in earnings available to common. There are 2 million shares receiving an annual dividend of $2.40 ($0.60 quarterly). That means $4.8 million of the $8 million available is paid, or a ratio of 60% ($4.8 million ÷ $8 million = 60%). Or, the earnings per share is $4.00 ($8 million divided by 2 million shares) and $2.40 in dividends paid out of $4.00 earnings made is 60%. The preferred stock is paying a dividend of 4% of the par value, but that does not tell us the current yield. To know the current yield, we must know the current market price of the stock and the question does not supply that value.

When a mutual fund computes its net investment income, all of the following are included except A) long-term capital gains. B) interest. C) dividends. D) expenses.

A- When calculating NII, capital gains are not included

A company that has issued cumulative preferred stock A) pays the preferred dividend before paying the coupons due on its outstanding bonds. B) pays past and current preferred dividends before paying dividends on common stock. C) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common. D) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends.

B

A customer purchases $100,000 of original issue discount municipal bonds. How will this trade be considered for tax purposes when the bonds mature? A) Fully taxable on capital gain B) No capital gain C) Taxable as long-term gain D) Taxable as short-term gain

B

An investor in the 28% income tax bracket is considering purchasing either a 4% municipal bond or a 5% corporate bond. Which of the following statements regarding the two bonds' after-tax yields is true? A) The yield difference cannot be determined. B) The municipal bond's yield is higher than the corporate bond's yield. C) The corporate bond's yield is higher than the municipal bond's yield. D) The two bonds' yields are equivalent.

B

Compared with selling short, it would not be correct to state that buying a put option A) has a lower loss potential. B) offers a high potential profit. C) requires a smaller capital commitment. D) does not require meeting the locate requirement for short sales.

B

In rating a general obligation (GO) bond, all of the following factors would be considered by an analyst except A) the public's attitude toward debt. B) the flow of funds. C) the total outstanding debt. D) the tax collection ratio.

B

Many years ago, an investor bought a bond with a 5% coupon. At that time, the yield to maturity of the bond was 6.5%. When the bond matures, the investor will receive A) $1,000 plus a call premium. B) $1,025. C) $1,050. D) $1,065.

B

Under Regulation FD, if an officer of an issuer makes an unintentional disclosure of nonpublic, material information to an institutional investor, the issuer A) must prepare and distribute a press release by the close of business on the following day. B) must promptly make public disclosure of the same information. C) must file Form 8-K at or prior to month end. D) is not required to take any specific action because the disclosure was unintentional.

B

Your firm is a member of an underwriting syndicate for an issue of municipal bonds. The municipal syndicate release terms letter states that the bonds are being offered net, with a two-point concession and a half-point additional takedown. If your firm sells $100,000 of these bonds to a retail customer, it will receive a credit of A) $100,000. B) $2,500. C) $2,000. D) $500.

B

An investor who is bearish on the outlook for Fernweh Travel Services (FTS) sells 100 shares short at $52 per share. Three months later, the market price of FTS shares is $58. Under FINRA rules, a maintenance call will be issued when the per share price of FTS A) increases by more than $9.60. B) increases by more than $2. C) decreases by more than $2. D) increases by more than $17.40.

B - A short margin account reaches the maintenance level when the equity in the account reaches 30% of the market value of the short stock. To find that level, divide the credit balance by 130% (or 1.3). The credit balance is the sum of the sale proceeds plus the Regulation T initial margin requirement. In our question, sale proceeds are $5,200 ($100 shares times $52 per share). To that we add the 50% Regulation T requirement ($2,600) resulting in a credit balance of $7,800. Dividing that $7,800 by 1.3 = $6,000.

An analyst observes that the beta of a traded security is 1.3, and the market return is 6%. The analyst forecasts that the security will return 7% over the next year. Based on these assumptions, the security is A) undervalued, because the required return exceeds the forecasted return. B) overvalued, because the required return exceeds the forecasted return. C) undervalued, because the forecasted return exceeds the required return. D) overvalued, because the forecasted return exceeds the required return.

B - According to the analyst's estimates, the security is overvalued because the forecasted return (7%) is less than the required return (7.8%).

An inherent risk associated with auction rate securities (ARS) is the potential to have A) a Dutch auction. B) a failed auction. C) a reset rate. D) a clearing rate.

B - An inherent risk associated with ARS is the potential for a failed auction. These can occur due to a lack of demand, resulting in no bids being submitted when it is time to reset the rate. ARS use a Dutch auction method to reset the clearing rate paid in the upcoming period.

Three years ago, a customer purchased 300 shares of ACE Fund. He sold the shares on August 15 for a loss of $400. He then purchased 300 shares of the same fund on September 4 of the same year. If the investor is in a 10% tax bracket, how will the loss be treated for tax purposes in the current year? A) The loss is only deductible to the extent that gains of an equal or greater amount were incurred. B) The loss is not deductible. C) Ten percent of the loss is deductible. D) The loss is fully deductible.

B - Because the customer repurchased the shares within 30 days of the loss transaction, the loss is disallowed under the wash sale rule, and therefore, is not deductible. A wash sale occurs when the same shares are purchased within 30 days before or after the date of sale in which the loss is incurred.

If a registered options principal is asked to approve a discretionary order to buy 1 XYZ Oct 60 put and sell 1 XYZ Oct 55 put for a net debit of $5, he should A) approve the order in writing. B) not approve the order. C) obtain the best execution for the order. D) approve the order if the customer has sufficient funds in her accounts.

B - Because this is a debit spread, the maximum gain occurs if both sides are exercised. If this occurs, the investor earns $5 (buy stock at 55 when the short put is exercised and sell stock at 60 by exercising the long put). Because the net premium paid for the spread is $5, there can never be any gain. This spread is not economical.

Under FINRA rules, members are prohibited from soliciting votes from limited partners in connection with a proposed rollup unless any compensation to be received by the member A) does not exceed 5% of the value of the securities to be received in the exchange. B) does not exceed 2% of the value of the securities to be received in the exchange. C) does not exceed 10% of the value of the securities to be received in the exchange. D) does not exceed 15% of the value of the securities to be received in the exchange.

B - In connection with a DPP rollup, member firms may not solicit votes from limited partners unless the compensation is 2% or less.

When an existing, long established publicly traded corporation issues a large block of new shares in order to expand or modernize, it is A) a secondary distribution. B) a primary distribution. C) an IPO. D) a refunding.

B - New shares are always part of a primary distribution. When it is the first time, it is an initial public offering (IPO). That does not apply here because this company already has shares publicly trading.

A registered principal must approve all orders A) within one business day. B) by the end of the trading day. C) prior to execution. D) prior to entry.

B - Registered principals must approve all orders promptly after execution. FINRA interprets this term, however, as by the end of the trading day. Orders may always be approved earlier, but are not required to be.

Which of the following would not be examples of overlapping debt? Debt to build a state office building within city limits Debt to maintain a county park district serving a municipality Debt backed by two states cooperating in the construction of a bridge Debt for a high school district within city limits A) II and IV B) I and III C) I and II D) II and III

B - State debt cannot overlap with any other municipal entity.

One of your customers has made periodic purchases of shares of the Castel Growth Fund over the past several years. The customer has decided to take a profit and sell some of those shares. When the investor's tax return is prepared for the year in which the sale of those shares occurs, it is necessary to establish a cost basis of the shares sold. Which of the following methods is available for mutual funds, that is not available for determining the cost basis of stock? A) Share identification B) Average cost basis C) FIFO D) Dollar cost averaging

B - The Internal Revenue Service allows using the average cost basis to determine the cost basis of redeemed mutual fund shares. Investors cannot use this method when selling shares of any security other than a mutual fund. The other methods of determining cost basis are FIFO and share identification

Which of the following factors does not affect the marketability of a municipal bond? A) Rating B) Commissions C) Block size D) Call protection

B - The beginning of the MSRB's definition of marketability says "the ease or difficulty with which securities can be sold in the market." The amount of commissions charged by a specific broker-dealer has no impact on the ability to sell the security.

Shortly before the end of the cooling-off period, the underwriters and representatives of the issuer have a meeting to review the status of the new issue. This is called A) a presales meeting. B) a due diligence meeting. C) a negotiation meeting. D) a syndicate meeting.

B - The final meeting before the end of the cooling-off period is known as a due diligence meeting and is always held before the effective date of the new offering.

A customer buys five municipal bonds maturing in 20 years for 104. If he sells the bonds after 10 years at 103, the customer has A) a $100 capital loss. B) a $50 capital gain. C) a $100 capital gain. D) a $50 capital loss.

B - The premium on the municipal bonds must be amortized. The tax rules require that when you purchase a bond at a premium, you have to reduce the cost basis of the bond each year. Even though there are five bonds in the question, here's the math on one bond and then we'll multiply by five to get the total amount. The investor buys the bond at 104 or $1,040 and the bond is due to mature in 20 years. Take the $40 premium divided by the 20 years to maturity and that will tell us the amount that we amortize/reduce the cost basis by each year. $40/20=$2. It then tells us that the bond is sold after 10 years. Ten years of amortization is $2 per year x 10 years = $20. That lowers the basis of the bond to $1,020 ( $1,040 - $20 = $1,020). The bonds are sold at 103 or $1,030, so the gain is $10 per bond times five bonds for a total gain of $50.

If a customer buys a municipal bond at 110, maturing in eight years, but sells the bond six years later at 103½, the customer will have A) a $65 per bond loss. B) a $10 per bond gain. C) a $35 per bond gain. D) a $10 per bond loss.

B - This bond has a premium of $100, which over eight years, amounts to $12.50 per year. The cost basis of the bond at the time of the sale is $1,100 − (6 × $12.50), or $1,025. If the bond is sold for $1,035, the customer has a gain of $10 per bond.

An investor opens a long position in one XYZ Nov 140 call @7. Disregarding any commissions, on settlement date, the investor A) receives $14,000. B) must pay $700. C) must pay $14,000. D) receives $700.

B - When an investor takes a long position in an option, it means the investor has purchased the option. As a buyer, the investor must pay the premium on the settlement date.

One of the features of variable insurance products is the ability to withdraw money from the policies. Which of the following statements is correct? A) Withdrawals from both are taxed on a LIFO basis. B) Withdrawals from variable annuities are taxed on a LIFO basis, while those from variable life are taxed on a FIFO basis. C) Withdrawals from variable annuities are taxed on a FIFO basis, while those from variable life are taxed on a LIFO basis. D) Withdrawals from both are taxed on a FIFO basis.

B - vantage to withdrawing cash value from a variable life insurance policy is that it receives FIFO treatment. That means there is no tax until the withdrawal reaches the cost basis (premiums paid) of the policy. With annuities, the taxation is LIFO. Therefore, the first money withdrawn is taxable

Information found in The Bond Buyer would include all of the following except A) Revdex. B) the 30-day visible supply. C) secondary market volume. D) the placement ratio.

C

The primary difference between an underwriting syndicate member and a selling group member in a firm commitment underwriting is that A) the securities offered by each differs within the offering. B) the price per share paid by the public is more if purchasing new shares from a selling group member. C) the syndicate assumes liability for unsold shares, while the selling group does not. D) the size of a syndicate member firm will always be larger than a selling group member firm.

C

Who signs the agreement among underwriters for a municipal bond issue? A) Managing underwriter and trustee B) Managing underwriter and bond counsel C) All members of the underwriting syndicate D) Managing underwriter and issuer

C

A corporation has $12 million net income after taxes, 5 million common shares outstanding, and $10 million of 6% preferred stock ($100 par). What is the corporation's earnings per share (EPS)? A) $2.40 B) $1.20 C) $2.28 D) $2.52

C - 6% and that means 6% of the par value. With a total par value of $10 million, a 6% dividend will be $600,000. Alternatively, you can figure it on a per share basis. If the par value per share is $100, then dividing the $10 million total par by $100 equals 100,000 shares. 100,000 preferred shares times $6 per share dividends ($100 par times 6% = $6 per share = $600,000). After subtracting $600,000 from the net income of $12 million, this leaves $11.4 million (earnings available for common stockholders). Compute EPS (earnings available for common stockholders / number of common shares outstanding = $11.4 million / 5 million shares = $2.28

A broker's broker does all of the following except A) assists in placing securities. B) acts as agent for dealers. C) makes a market in securities. D) conceals the identity of the principals.

C - A broker's broker acts as the agent in transactions by facilitating the movement of blocks of bonds. The broker's broker is allowed to conceal the identities of the contra-parties, thus protecting investment strategies. A broker's broker does not make a market in securities.

A 3% bond with 20 years to maturity is being issued by a syndicate with a reoffering yield of 4%. What is the term used to describe this bond? A) Secondary market discount B) Original issue premium C) Original issue discount D) High-yield bond

C - Because the bond is being issued by a syndicate, it is a new issue (i.e., an original issue). Because the yield (4%) is higher than the coupon (3%), it is an original issue discount.

KLM Company has 10 million convertible bonds outstanding that are convertible at $25. The bonds contain an antidilution feature. If KLM declares a 10% stock dividend, the new conversion price will be A) $50.00. B) $22.50. C) $22.73. D) $45.45.

C - Before the stock dividend, an investor would have received 40 shares of stock for each $1,000 bond ($1,000 / $25). A 10% stock dividend would now give an investor 44 shares on conversion (40 shares + 10% = 4 shares more). $1,000 / 44 shares = $22.73 per share for the new conversion price.

Which of the following municipal securities could have been sold in a negotiated underwriting? A) Industrial development bonds B) School bonds C) All of these D) Limited tax bonds

C - Either municipal revenue or general obligation (GO) bonds can be underwritten using a negotiated underwriting process to set the terms of the new issue. Industrial development bonds are revenue bonds, while both limited tax bonds and school bonds are types of GO issues.

If a margin account with special memorandum account (SMA) of $2,000 is restricted by $2,000, which of the following actions may the customer take to eliminate the restriction? Transfer $2,000 from SMA Deposit $2,000 cash Deposit $4,000 of fully paid marginable stock Deposit $2,000 of fully paid marginable stock A) II and IV B) I and II C) II and III D) I and III

C - Equity may be increased by depositing cash. Depositing fully paid securities increases equity because the loan value of marginable stock is equal to 50% of its market value. SMA cannot be used to meet minimum maintenance requirements.

The ABC Corporation has a long-standing policy of maintaining a dividend payout ratio of 45%. ABC's net income for the year is $12 million, and there are 8 million shares of common stock outstanding. After a 3:2 stock split, the annual dividend per share is A) $0.675. B) $1.0125. C) $0.45. D) $1.50.

C - Forty-five percent of $12 million is $5,400,000 in dividends. If there were 8 million shares before the split, there are now 12 million (8 times 3/2 = 24 divided by 2 = 12). Divide the amount available for common ($5.4 million) by the number of shares (12 million) to arrive at a dividend per share of $0.45.

A customer tells a broker to buy 1,500 shares of ABC at 33.60 immediately for the full 1,500 shares. This is A) an immediate-or-cancel (IOC) order. B) an all-or-none (AON) order. C) a fill-or-kill (FOK) order. D) a good-til-canceled order.

C - In an FOK order, the instruction is to fill the entire order immediately at the limit price or better. If this cannot be done, the order will be canceled (killed). An IOC order is similar, except that partial execution is acceptable

Which of the following statements regarding tax-deferred, noncontributory, defined benefit plans are true? Contribution amounts are fixed. Contribution amounts vary. Benefit payments are fixed. Benefit payments vary. A) I and IV B) II and IV C) II and III D) I and III

C - In an employer-sponsored defined benefit plan, the contribution amounts vary according to the assumptions used. The benefit amount, however, will be fixed per person based on a formula combining age, years of service, salary, et cetera.

When a company issues additional bonds, which of the following is true? A) Leverage is not affected when debt securities are issued. B) It cannot be determined by only knowing that additional bonds have been issued. C) Leverage is increased. D) Leverage is decreased.

C - Leverage is the use of someone else's money at a fixed cost to benefit the common shareholders. Issuing additional bonds increases the company's debt (money borrowed from someone else), and therefore, increases leverage for shareholders.

Which of the following orders are reduced on the ex-dividend date for a cash dividend? Buy 100 XYZ 60 DNR Sell 100 XYZ 70 Sell 100 XYZ 60 STOP Buy 100 XYZ 70 STOP A) II and IV B) III and IV C) III only D) I and II

C - Orders placed below the market (buy limits and sell stops) are automatically reduced on the ex-date. The exception to this rule is for orders marked DNR (do not reduce).

Which of the following would be most likely to require a mandatory sinking or surplus fund? A) A general obligation B) A public housing authority. C) A water and sewer revenue bond D) A tax anticipation note

C - RENENUVE BONDS HAVE SINKING FUNDS

A registered representative opens a new account for an investment club. His spouse is a member of the club and owns 15% of the club's assets. The registered representative wants to sell shares of a common stock IPO to the investment club. This is allowed A) with written principal approval. B) with written notice to the SEC. C) under no circumstances. D) only if the IPO is suitable for the investment club.

C - Rules prohibit member firms from selling common stock IPOs to restricted persons. Under the rules, the account would not be restricted if the assets owned by the spouse made up less than 10% of the club's assets. Because the registered representative's spouse is a member of the investment club and owns more than 10% of the club's assets, the registered representative cannot sell shares of the IPO to the club.

All of the following would increase the SMA in a customer's long margin account except A) an increase in the market price of the securities held in the account. B) the receipt of a cash dividend. C) the receipt of a stock dividend. D) a reduction to the debit balance.

C - SMA changes when there is a monetary change to the account. Receiving a stock dividend (or a stock split) does not involve any money or market value change to the account. A cash dividend adds equity to the account. An increase to the market value increases the equity, as does a decrease to the debit balance.

Which of the following securities is sold at auction? A) Corporate bonds B) Freddie Macs C) T-bills D) Ginnie Maes

C - T-bills, T-notes, and T-bonds are sold through auction

A J&J Treasury bond with a 5% coupon having a maturity date of July 1, 2039, is purchased in a transaction for cash on February 24. What is the number of days of accrued interest shown on the trade confirmation? A) 63 B) 53 C) 54 D) 55

C - The day before transaction, 31 days in jan plus 23 in feb

An official statement has a dated date of March 1, but the first interest payment is October 15. This most likely reflects A) a normal payment cycle on the bond of 7.5 months. B) a when-issued transaction. C) a long coupon. D) a misprint in the official statement.

C - long coupons are anything over 6 months

A municipal issuer's net total debt is made up of which of the following? Direct debt Defeased debt Overlapping debt Paid-up debt A) II and III B) III and IV C) I and II D) I and III

D

A technical analyst has been charting XYZ stock and notes that it fluctuates between $36 and $41. The last trade was at $39. If the analyst expects a breakout through resistance, which of the following orders should be placed? A) Buy XYZ 42 GTC B) Buy XYZ 35 Stop GTC C) Buy XYZ 35 GTC D) Buy XYZ 42 Stop GTC

D

All of the following are credit spreads except A) buy 1 ABC Jan 50 put, write 1 ABC Jan 60 put. B) buy 1 ABC Apr 40 call, write 1 ABC Apr 30 call. C) write 1 ABC Nov 35 put, buy 1 ABC Nov 30 put. D) buy 1 ABC Jul 50 call, write 1 ABC Jul 60 call.

D

Reasons to suggest that your customers name a beneficiary for their accounts would include all of the following except A) avoiding probate. B) ensuring the property goes to the proper person. C) the assets generally get into the hand of the heir(s) without delay. D) saving income taxes.

D

The determination as to whether an over-the-counter stock is eligible for purchase on margin is made by A) the Securities and Exchange Commission. B) the Financial Industry Regulatory Authority. C) the Federal Deposit Insurance Corporation. D) the Federal Reserve Board.

D

When purchasing a new issue, investors generally receive a disclosure document. This document contains the essential information (material facts) necessary to make an investment decision. An investor purchasing which of the following new issues would not receive a prospectus? A) A unit investment trust B) A mutual fund C) A closed-end investment company D) A municipal revenue bond

D

Which of the following statements regarding callable municipal bonds are true? Call premiums tend to increase over time. Call premiums tend to decrease over time. Call prices are stated as a percentage of the principal amount to be called. Call prices are stated as a percentage of the market value of the bonds to be called. A) I and III B) I and IV C) II and IV D) II and III

D

Which of the following would be of least concern to a registered representative recommending a municipal security to a customer? A) Customer's state of residence B) Customer's tax status C) Municipal security's rating D) Availability of the security

D

An intrastate offering is exempt from A) FINRA registration. B) blue-sky registration. C) state registration. D) federal registration.

D - An intrastate offering (Rule 147 exemption) is limited to companies that do business in one state and limit stock or bond sales to that state's residents. Even though this offering may be exempt from SEC registration, it is not exempt from registering with that one state. Blue-sky registration (Uniform Securities Act registration) means the same thing as state registration. Securities do not register with FINRA.

Which of the following would have the least market risk? A) AAA corporate debentures B) Fannie Maes C) Corporate or municipal bonds with long-term maturities D) Revenue anticipation notes

D - Anticipation notes are the shortest term, which gives them the least market risk (the risk that price will fluctuate during the time left to maturity).

Your customer wants to know what portion of earnings one of the companies held in her portfolio has available to pay interest expense on bonds the company currently has outstanding. You would be able to find this information A) on a firm's income statement by subtracting preferred dividends from EBIT. B) by contacting the IRS. C) on the firm's most recent balance sheet. D) on the firm's income statement indicated as earnings before interest and taxes (EBIT).

D - EBIT is the amount of money a company has retained before paying taxes and interest on outstanding debt issues. This can be found by looking at the income statement for the company.

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

D - General obligation bonds are also known as full faith and credit bonds.

Which of the following is considered a source of debt service for a city-issued general obligation (GO) bond? A) Sales taxes B) Revenue generated by a hospital C) Tolls on roads D) Real estate taxes

D - General revenues of a city municipality, such as real estate taxes or licensing fees, may be used to pay the debt service on a GO bond.

If a high-income customer is subject to alternative minimum tax (AMT), which of the following preference items must be added to adjusted gross income to calculate his tax liability? A) Distributions from a corporate bond mutual fund B) Interest on a municipal bond issued to finance highway construction C) Income from a municipal security issued to finance parking garages D) Interest on a private-purpose municipal bond

D - If more than 10% of a bond's proceeds go to private entities, the interest on the bond is a tax preference item for AMT purposes.

Last year, ABC Mutual Fund paid dividends of $1.50 per share and distributed $0.80 per share in capital gains. The fund has a bid price of $13.50 and an asked price of $14.20. An investor who purchased shares in this fund nine months before the distributions receives $100 in nonqualifed dividends and $53 in capital gains. All distributions were reinvested in additional shares. If this is the individual's only investment, she will not be required to pay federal taxes on the dividend income. be required to pay federal taxes at the ordinary income rate on the dividend income. be required to pay capital gains tax on $53. not be required to pay capital gains tax on $53. A) II and IV B) I and III C) I and IV D) II and III

D - Investors are required to pay taxes on all distributions from mutual funds; it makes no difference if they are taken in cash or reinvested in additional shares. Nonqualified dividends are taxed at ordinary income rates. Capital gains distributions are always considered long term and taxed at the capital gains rate, unless something in the question states otherwise.

Under the 5% markup policy, which of the following determines the amount of markup in a principal transaction? A) Highest ask B) Lowest bid C) Highest bid D) Lowest ask

D - Markups are always based on the inside offer, which is the lowest ask price in a particular security. Markdowns are based on the inside bid, which is the highest bid price for a particular security.

A syndicate won the bid for a general obligation bond of $1 million issued by a city. The syndicate has received the following orders: $500,000 net designated, $500,000 presale, and $1 million member at takedown. The orders would be filled as A) none to presale, none to net designated, $1 million to members. B) $500,000 presale, $250,000 net designated, $250,000 to members. C) $250,000 presale, $500,000 net designated, $250,000 to members. D) $500,000 presale, $500,000 net designated, none to members.

D - Municipal syndicate customs dictate that presale orders have first priority, with group orders, net designated orders, and member orders following in that order.

Revenue bond rate covenants require the user fees to be high enough to cover all of the following obligations of the issuing authority except A) the debt service. B) the operations and maintenance. C) the debt service reserve fund. D)the optional call provisions.

D - Optional call provisions are at the option of the issuer. Rate covenants of an issue will not require enough to be collected to cover a call on the bonds.

An analyst interested in measuring the breadth of market movement as an indicator of future market direction would monitor A) the betas of the S&P 500 stocks. B) the Value Line Index. C) the Dow Jones Industrial Average. D) the advance/decline line.

D - The advance/decline line, which measures the number of stocks that have advanced versus the number of stocks that have declined, is an indicator of the breadth of the market's advance or decline.

A 4% municipal bond maturing in 2040 has a current yield of 4.4% with a yield to maturity of 4.7%. What is the basis of this bond? A) 4.0% B) 4.4% C) 4.5% D) 4.7%

D - The basis of a municipal bond is its yield to maturity (YTM).

Paying a premium of $10 per bond, Tracey bought 10 municipal bonds with 20 years to maturity. Ten years later, she sold the bonds for 103. For tax purposes, she has A) a $200 loss. B) a $300 loss. C) a $200 gain. D) a $250 gain.

D - The cost per bond is $1,010. The amortization amount each year is 10/20 years, which equals $0.50 per year. $0.50 per year × 10 years = $5 per bond. After 10 years, the adjusted cost basis is $1,005 per bond. She sells the bonds for $1,030 per bond. $1,030 − $1,005 = $25 per bond 25 × 10 = $250 gain.

A stock pays a $0.50 quarterly dividend. The company had earnings per share last year of $10. The company's dividend retention ratio is A) 5%. B) 20%. C) 10%. D) 80%.

D - The dividend retention ratio is the percentage of the earnings per share that were retained rather than paid out as dividends. If the company pays a $2 dividend (four quarterly $0.50 dividends) on earnings of $10, it pays out 20% of the earnings available to common shareholders in the form of the dividend. That means it retains 80% of the available monies

A real estate limited partnership is created for $800,000 with 1 general partner and 10 limited partners. Each of the limited partners has an equal 10% share. The proceeds are used to purchase an office building for $2 million. The additional financing is provided by a nonrecourse bank loan. Economic conditions cause the occupancy rate to fall dramatically, and the partnership is dissolved as insolvent. Each limited partner may claim a loss of A) $120,000. B) $2,000,000. C) $80,000. D) $200,000.

D - The initial $800,000 was divided 10 ways, so each LP had a basis of $80,000. To this was added the share of the financing of $1.2 million. That is another $120,000 basis (10% of $1.2milion) bringing the total to $200,000 ($80,000 + $120,000).

A customer purchased 10 municipal original issue discount (OID) bonds at 92. If he holds them to maturity, he will be federally taxed on which of the following? A) $8,000 B) $800 C) $80 D) $0

D - The key here is OID. The discount on OID bonds is considered interest. A municipal bond interest is tax free. Therefore, the profit realized from the difference between the discounted purchase price and the redemption price at maturity is also considered tax free at the federal level. If the owner lives in the state within which the bonds are issued, they will be state and local tax free as well.

The difference between the syndicate bid and the reoffering price on a competitive bid of a new municipal underwriting is A) the selling concession. B) the scale. C) the discount. D) the spread.

D - The spread, or underwriter's compensation, on a competitive bid underwriting is the difference between the bid to the issuer and the dollar price at which the underwriter reoffers the bonds to the public.

Which of the following records is to be kept for the life of the firm? A) Customer new account form B) Daily journals C) The general ledger D) Minutes of the directors' meetings

D - The stock certificate book, articles of incorporation or partnership agreement, and minutes of the directors' meetings are to be kept on file and accessible for the life of the firm.

A registered representative is reading an article in a popular magazine about the advantages of tax deferral in retirement planning. There is a note that reprints of the article are available. In order to send these reprints to existing and prospective customers, A) filing a copy with FINRA is required. B) approval by a principal is required within 10 days after first use. C) the name of the underwriter who commissioned the article must be prominently displayed. D) member alterations to the contents are only to make it consistent with applicable regulatory standards or to correct factual errors.

D - This is an example of an independently prepared reprint. It is a form of retail communications and can be used only if the preparer is independent of the member firm. In most cases, these are used "untouched." However, if there are factual errors or statements contrary to FINRA standards, they must be fixed.

An investor and his father own 8% and 5%, respectively, of a corporation's outstanding shares, and the father wants to sell his holding. According to Rule 144, which of the following statements are true? He must file Form 144 to sell the shares. He does not have to file Form 144 to sell the shares. He is considered an affiliated person. He is not considered an affiliated person. A) II and III B) I and III C) I and IV D) II and IV

D - Under Rule 144, an affiliate is a person in a control relationship with an issuer. Because neither of the investors own at least 10% of the stock, they are not control persons under Rule 144 and do not have to comply with the rule. Certain family members, such as a spouse or other immediate family member residing in the same home, are required to combine holdings. If the question indicated that the father and son share the same residence, then the filing requirements of the rule would apply because the 13% total would make them control persons.

When an underwriting syndicate commits to distribute an entire offering, it may enlist other FINRA member firms to help in the offering. These member firms are known as A) co-managers. B) syndicate participants. C) affiliated members. D) selling group members.

D - Underwriting syndicates often enlist other FINRA member firms to help with the distribution of an offering. These members become part of the selling group. Unlike the syndicate members, selling group members have no capital commitment. They are acting as agents of the syndicate and earn a selling concession on their sales.

An investor owning an option contract liquidates the position. The liquidation is A) an opening purchase. B) an opening sale. C) a closing purchase. D) a closing sale.

D - When an investor liquidates an existing option position that is owned, the investor is entering a sale that closes the existing position.

Rank the following in the usual sequence of order allocation. Syndicate Member at the take down Presale Designated A) III, II, IV, I B) I, II, III, IV C) II, IV, III, I D) III, I, IV, II

D - presale, syndicate, designated, and member. Orders that benefit all syndicate members have the highest priority.