Questions

A 38-year-old investor places $25,000 into a single premium deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is...

$16,450 - Only the deferred growth is taxable. In this case, it is the difference between the surrender value of $72,000 and the cost basis of $25,000. That $47,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is younger than 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $47,000.

According to MSRB rules, what are stipulations for a quotation to be considered bona fide?

-

Bond Buyer Indices

- 25 Revenue Bond Index - 40 Bond Index - 11 Bonds Index

Total Takedown

- Additional takedown is retained by the syndicate - Selling Concession is paid to the selling group TT = AT + SC

What is an Income (Adjustment) Bond?

- An income bond, also known as an adjustment bond, is issued when a company is going through a reorganization and attempting to emerge from bankruptcy - These bonds will only pay interest if the company has sufficient income to meet those payments - Not suitable for investors looking for stable income streams

Additional Takedown

- In a municipal underwriting, the total takedown is the additional takedown plus the selling concession.

What will not appear on a when-issued trade?

- Settlement date - Accrued interest - Total price

SIMPLE Plan Requirements

- To institute a SIMPLE plan, the business cannot have any other retirement plan in place. - The limit is 100 or fewer, not fewer than 100. - The catch-up provision is $3,000, and both employee and employer contributions are made with pre-tax funds.

Timeframe to appeal decisions rendered through the Code of Procedure

25 days

Records relating to terminated representatives must be retained for how many years? A) 3 years B) 5 years C) 1 year D) 6 years

3 years - Records generated by and about terminated representatives are among those records retained for 3 years.

A municipal securities representative has terminated from her broker-dealer. The Form U-4 and Form U-5 must be retained for...

4 years from date of termination - Employee records, such as Form U-4 and Form U-5, must be maintained for a minimum of 4 years from the date of employee termination.

How long are order tickets maintained for recordkeeping purposes

6 years

Timeframe to file under the Code of Arbitration Procedure

6 years

A customer complaint involving a municipal bond trade has been resolved to the mutual benefit of all parties. A record of this matter must be retained in the firm's files for...

6 years - Complaints involving municipal securities trades must be preserved for 6 years following the date of the closing of the matter.

What is a special assessment?

A special assessment is a type of tax used to redeem a special assessment bond, in which the beneficiaries from the proceeds of the bond pay the debt service

Which agency has the ultimate authority for determining the amount of the discount on original issue discount municipal bonds? A) IRS B) MSRB C) SEC D) FRB

A) IRS - The IRS determines the amount of the discount on OID bonds as they set the guidelines for OID's, and because it relates to taxes, OID's are under their jurisdiction

Ken has sold 1 EUR May 145 call and purchased 1 EUR May 135 call. Which of the following statements is correct? A) Ken has executed a debit spread and is bullish on the EUR B) Ken has executed a long straddle and is seeking volatility in the EUR C) Ken has sold a straddle and is expecting little change in the value of the EUR D) Ken has executed a credit spread and is bearish on the EUR

A) Ken has executed a debit spread and is bullish on the EUR - Ken has executed a debit spread on the EUR and thus is taking a bullish position on the EUR

An investor who purchased 100 shares of REDP common stock on February 28, 2019, would receive long-term capital gain treatment if the stock is sold at a profit starting A) March 1, 2020. B) February 29, 2020. C) February 28, 2020. D) March 2, 2020.

A) March 1, 2020. - Investors must own a security for more than 12 months before it becomes long term for tax purposes. - The first day after February 28, 2019, is March 1, 2019. Twelve months later is March 1, 2020. - Always count 1 day and then add 12 month so that, in this case, you don't come up with February 29 because 2020 is a leap year.

In a municipal offering, the management fee is subtracted from the general spread, leaving which portion of the spread to be divided accordingly? A) Total takedown B) Reoffering price C) Additional takedown D) Selling concession

A) Total takedown - Once the managers fee has been removed from the total spread, the portion of the spread that remains is the total takedown

HighTechInc wants to raise $100 million in capital via a private placement. Assuming that they plan to publicly advertise the transaction, how many accredited and non-accredited investors can participate in the deal? A) Unlimited number of accredited and zero non-accredited B) Unlimited number of both accredited and non-accredited investors C) 35 accredited and 35 non-accredited D) Unlimited number of accredited and a maximum of 35 non-accredited investors

A) Unlimited number of accredited and zero non-accredited - In a Regulation D 506 deal in which the securities are publicly advertised, there can be an unlimited number of accredited, but zero non-accredited investors. - If there was no public advertising, then there could have also been 35 non-accredited investors.

A purchase of $200,000 of listed put options in a margin account requires A) a deposit of $200,000. B) a deposit of $100,000. C) a signed hypothecation agreement to be delivered within 15 days. D) the posting of collateral equivalent to 50% of the purchase price of the options.

A) a deposit of $200,000. - Conventional option contracts may not be purchased on margin; therefore, a full cash payment must be made in the account.

A customer who has, as part of her account holdings, unlisted REITS, as well as a limited partnership interest in an oil and gas program, may expect her servicing member firm to show A) a per share estimated value of the securities. B) no valuation for the unlisted REITS and the original investment made in the DPP interest. C) an exact per share value as calculated on the last business day of the month. D) the amount shown on Tape B the business day before the account statement closing date.

A) a per share estimated value of the securities. - A general securities member must include in a customer account statement a per share estimated value of a DPP or unlisted REIT security, in a manner reasonably designed to ensure that the per share estimated value is reliable.

A broker-dealer is serving as a syndicate manager for the IPO of JKL Inc. This firm may publish a research report on JKL A) after 10 days. B) as long as a price target and risk statement is included. C) with the prior written consent of the firm's compliance department. D) after 3 days.

A) after 10 days - There is a research quiet period for broker-dealers who participate in the underwriting of certain issuers. - This period is 10 days for a manager and syndicate member, and 3 days for a manager doing a follow-on offering. - It is during these time periods that the underwriter may not publish a research report on the company or make a public appearance on behalf of that issuer.

A company that is highly leveraged has as the smallest portion of its capitalization A) common stock. B) debentures. C) preferred stock. D) convertible debentures

A) common stock. - A highly leveraged company means that the company has taken on lots of debt and raises the smallest portion of capital from its equity, or common stock.

A broker-dealer is creating a sales and marketing script, to serve as the basis for an upcoming seminar to be delivered by firm personnel. At least 100 retail clients will be invited to join the seminar. According to FINRA rules, this script A) is considered retail communication and must be approved by a principal prior to use. B) must be filed with, and approved by, FINRA at least 10 days prior to the delivery of the seminar. C) may be used without principal approval provided no specific recommendation or advice is provided during the seminar. D) is considered institutional communication and must be approved by a principal prior to use.

A) is considered retail communication and must be approved by a principal prior to use. - A sales script will be considered retail communication if it is distributed or made available to more than 25 retail investors within a 30 calendar-day period.

A client is in the process of changing the registered representative who will handle her account at a broker-dealer. The new registered representative who will be handling this account should initially A) review the account to become familiar with client's current investments and financial situation. B) update the client's new account form with their name and CRD number. C) ask the prior registered representative for the investment history and risk tolerance of the client. D) contact the client and ask if she would like to make any trades during this time of transition.

A) review the account to become familiar with client's current investments and financial situation. - In this situation, the new registered representative should review the client's account and become familiar with the important details regarding the client's account.

The Municipal Securities Rulemaking Board (MSRB) and FINRA rules requiring uniformity of business practices by member firms may be altered or modified by a mutual agreement between the broker-dealers concerned. There is, however, an exception to modifying the rules when it comes to the rules regarding A) the content of confirmations. B) the terms of delivery. C) the payment of shipping costs. D) the price and date of delivery.

A) the content of confirmations. - The contents of confirmations are specified in SEC Rule 10b-10 and followed by the MSRB and FINRA. They cannot be altered by a mutual agreement.

What is reciprocal dealing?

Accepting portfolio trades from the fund as compensation for sales of the fund's shares - Prohibited Practice

The target audience for a private sale of limited partnership interest is usually...

Accredited investors

ABC Co. has 100M authorized shares it may issue. If the company wanted to issue 150M shares they must...

Amend the corporate charter through a shareholder vote - For a corporation to be able to issue more shares than are authorized by the company charter, the charter must be amended through a shareholder vote.

Can RRs compare CMOs and US Gov't agency bonds?

As an industry standard, CMO's may not be compared with any other investment product

Disregarding commissions, and investor purchasing $10,000 face amount of Treasury notes at a price of 98.12 would expect to pay A) $983.75. B) $9,837.50. C) $9,812.00. D) $981.20.

B) $9,837.50.

An investor purchasing 1,000 shares of a certain mutual fund that has a maximum sales charge of 8½ % and a NAV of $10.30 at the time of purchase will pay a total sales charge of (rounding to the nearest dollar) A) 96 B) 957 C) 875 D) 88

B) 957 - POP = (NAV/ 100% - SC%) = $10.30/.915 = $11.26 - SC = POP - NAV = .957 - Total Sales Charge = .957 x 1000 shares = $957

An investor looking for current income while wishing to reduce interest rate risk would most likely find which of the following investments suitable? A) U.S. Treasury STRIPS maturing in five years B) A bond unit investment trust (UIT) with a duration of five years C) A $100 par preferred stock callable at 102 in three years D) A U.S. Treasury note maturing in eight years

B) A bond unit investment trust (UIT) with a duration of five years - One of the features of a unit investment trust is that it has a defined end date. - The bonds held in the UIT in our question all mature in five years. - Regardless of how high current market interest rates rise, bonds pay off at face value when they mature. - The longer the investor has to wait for maturity, the greater the interest rate risk. - That makes the Treasury notes a less acceptable choice. You can assume that a callable security, preferred or debt, is not going to be called unless interest rates go down. Remember, when interest rates decline, fixed income investment rise in price so the investor would not want the stock called away. - The STRIPs will mature in five years but, as zero coupon securities, will pay no income in the interim.

Which of the following will not affect special memorandum account (SMA)? A) A deposit of cash into the account by the customer B) A stock dividend on stock held long in the account C) A cash dividend on stock held long in the account D) A long sale at a profit

B) A stock dividend on stock held long in the account - The value of the stock dividend received will be offset by the decline in current market value (CMV) of the long position on which the dividend is paid. - The account's long CMV will not change; it will just be represented by more shares. - There will be no change in the overall CMV, debit balance, or equity, and therefore no change in the SMA. **On the other hand, a cash dividend means that new money is coming into the account, which will reduce the debit balance and be credited to SMA so the customer may withdraw the dividend, if desired.**

You are in the process of collecting information to open an options account for a client. Which of the following items is unnecessary for this purpose? A) Current employer B) Employment history C) Tax ID number D) Date of Birth

B) Employment History - You do not need the client's employment history to open this account. - Their current employment status and financial information will be necessary, along with their current investment objectives.

Which of these records does not have a minimum recordkeeping requirement of three years? A) Firm trial balances B) Trade blotters C) Order memorandums D) Fingerprint cards

B) Trade blotters - Blotters are 6 years

May hypothetical illustrations depicting assumed rates of return in variable life insurance contracts be used by a FINRA member firm? A) No, the SEC strictly prohibits the use of hypothetical illustrations in life insurance marketing materials. B) Yes, so long as the illustrations are not used to project investment outcomes. C) Yes, provided the illustrations are pre-filed with FINRA and approved by a principal. D) No, since hypothetical illustrations can be misinterpreted as investment guarantees and are therefore prohibited.

B) Yes, so long as the illustrations are not used to project investment outcomes. - These types of illustrations are permitted, but they may not be used to project or predict investment results.

A registered representative may never A) act as a broker. B) approve advertising. C) act as a sales agent. D) act as a buyer's agent.

B) approve advertising. - Advertising or sales pieces are considered to be a form of communication with the public. All such pieces must be approved by a principal of the member firm.

The antifraud provisions of the Securities Exchange Act of 1934 apply to all of the following except A) municipal bonds. B) commodities. C) options. D) Nasdaq- and exchange-listed securities.

B) commodities. - All securities are subject to the antifraud provisions of federal securities laws. It should be recognized that commodities like wheat or oil are not securities.

All unpaid coupons must be attached to a corporate bond to make a delivery when the A) bonds have been called. B) issuer is in default. C) bonds have been pre-refunded. D) bonds have been converted.

B) issuer is in default - When an issuer of a corporate bond is in default, all of the unpaid coupons must be attached for it to be considered a good delivery.

Fred has placed an order to buy 100 shares of LEG at 33. The current quote for LEG is 31.75-32.15. Fred's order will A) be filled at 32.15. B) not be filled. C) be filled at 33. D) be filled at 31.75

B) not be filled. - This is an example of 'marketable limit order'. Since Fred's desired price is higher than the market offer, Fred would receive the best offer in the market, which is now 32.15.

Aggregated account purchases into one investment for a mutual fund may qualify for...

Breakpoints - Investments made in a retirement account may be aggregated with purchases made in a traditional brokerage account to qualify for discounts. - Investors may combine purchases made across different accounts (and even accounts at different securities firms) when determining sales charges via breakpoints.

A customer has filed a serious complaint against your firm and is threatening to take the firm to court. When informed that he has signed a predispute arbitration agreement, he demands to see a copy of it. How long does your firm have to supply the customer with a copy of the signed agreement upon receipt of his request A) 3 business days B) 7 business days C) 10 business days D) 5 business days

C) 10 business days

If a member wishes to appeal an adverse decision in a Code of Procedure hearing, the member first must appeal to the National Adjudicatory Council within how many days of the decision date? A) 25 B) 40 C) 30 D) 45

C) 30

Margin requirements on exempt securities (U.S. government securities and municipal securities) are set by A) the Department of Enforcement (DOE). B) the Federal Reserve Board (FRB). C) the designated examining authority (DEA). D) the Securities and Exchange Commission (SEC).

C) the designated examining authority (DEA). - The FRB sets the initial margin requirements for nonexempt securities. The margin requirements for exempt securities, such as U.S. governments, are set by a firm's self-regulatory organization or DEA.

Which of the following terms is not applicable to shares issued under Regulation D? A) Letter stock B) Legend stock C) Control stock D) Restricted stock

C) Control stock - Control stock refers to shares of a company owned by a control, or affiliated person of the issuer. - These shares are registered with the SEC, unlike shares sold under Regulation D, which are not SEC registered

An ETF is heavily invested in various fixed income securities. Individuals who own this ETF are holding a(n) A) basket of bonds. B) closed-end mutual investment company. C) equity security. D) exchange-traded note.

C) an equity security - An exchange-traded fund (ETF) is considered an equity security and is actively traded in major securities markets.

A broker-dealer is preparing a private placement memorandum for an upcoming offering. The intended audience for this item will be A) high-net-worth investors. B) accredited investors. C) non-accredited investors. D) qualified institutional buyers.

C) non-accredited investors. - A private placement memorandum (PPM) is the disclosure document that must be provided to non-accredited investors in a Regulation D offering.

An investor holding a variable rate demand obligation (VRDO) can A) exercise the option to purchase municipal bonds under a refunding covenant, as outlined in the indenture. B) acquire municipal bonds from the issuer at a discount to par. C) sell the security back to the issuer at par, using a put feature contained within the instrument. D) reset the interest rate on the security on a periodic basis.

C) sell the security back to the issuer at par, using a put feature contained within the instrument - A variable rate demand obligation (VRDO) is a municipal security where the interest rate resets on a periodic basis and the investor can sell the security back to the issuer at par, through a 'put' or 'tender' feature.

A client with an options account contacts the registered representative handling the account with instructions to open the following spread: Buy 1 ABC 100 call and Sell 1 ABC 105 call at a 5-point debit. Under FINRA rules, this order A) will be executed at the next available trade meeting the 5-point limit. B) is for a bull call spread. C) should be refused. D) should be turned in immediately.

C) should be refused. - This is a bull call spread (but that is not the correct answer here because it has nothing to do with FINRA rules) and will become profitable when the spread widens. With strike prices of 100 and 105, it can never widen more than 5 points. If the client paid 5 points for the spread, once commissions are factored in, the client must lose money and certainly cannot profit. **FINRA looks at this as an uneconomic position, and the firm should refuse to take the order.**

Ratings or guarantees of variable annuity and variable life products are typically based on the

Claims Paying Ability of the issuing insurance company

When a customer is declared incompetent, the party who is appointed to represent their interests is a...

Conservator - This is a conservator, often appointed by the law

When opening an options account, the customer must be provided with A) the options prospectus. B) the options arbitration agreement. C) the options risk disclosure document. D) the options disclosure document (ODD)

D) the options disclosure document (ODD)

In order for an investment company to qualify as a regulated investment company (RIC), thereby avoiding triple taxation, it must act as a conduit (pipeline) and distribute a minimum of its net investment income (NII) to shareholders. At least what portion of the NII must be distributed? A) 80% B) 50% C) 89% D) 90%

D) 90% -Under Subchapter M of the Internal Revenue Code (IRC), an investment company must distribute at least 90% of the NII to be classified as a RIC to avoid triple taxation.

In the time before a registration statement becomes effective, which of the following statement is (are) true? I. No sales may be solicited II. Sales literature may not be used III. Unsolicited inquiries may be answered A) I and II only B) I and III only C) III only D) I, II and III

D) I, II and III - During the cooling off period an underwriter may not solicit any sales, nor can the underwriter issue any sales literature or advertisements other than a tombstone ad. - An underwriter may answer any unsolicited indications of interest expressed by potential investors

Which term describes the following position? Write 1 DOH Jan 30 call Write 1 DOH Jan 40 put A) Short straddle B) Diagonal spread C) Price spread D) Short combination

D) Short combination - A combination is composed of a long call and long put, or a short call and a short put, each having different strike prices and/or expiration months on the same underlying security

A corporation has an outstanding issue of 8% convertible debentures with a conversion price of $25. The bond indenture contains an antidilutive clause guaranteeing the debt holders the right to maintain proportionate equity conversion in the corporation. If the company pays a 10% stock dividend to its common shareholders, how will that affect the debenture holders? A) They will receive four shares of the common stock. B) The interest rate on the debentures will increase to 8.8%. C) Each debenture holder will receive a check for $100. D) The bonds will now be convertible at approximately 22.73.

D) The bonds will now be convertible at approximately 22.73. - The antidilutive provision means the debenture holders will be able to convert into an equivalent share value as before. - With a conversion price of $25, the bond is convertible into 40 shares ($1,000 ÷ $25). - After the 10% stock dividend, they should be able to have 10% more shares, or 44 shares. - That means the conversion price must be reduced. Divide $1,000 by 44 shares and the result is $22.73. - Remember, anytime there is a stock dividend, prices go down

A client who does not need annual interest income but is seeking exposure to the real estate market would be most interested in considering a A) zero-coupon bond. B) master limited partnership. C) real estate investment trust. D) Z-tranche CMO.

D) Z-Tranche CMO - This client might be interested in adding a Z-tranche CMO to their portfolio. It is a zero-coupon security and provides exposure to the real estate market via the mortgage sector.

All of the following items of information must be included in a municipal securities confirmation except A) the capacity in which the broker-dealer acted. B) whether the securities are fully registered or book entry. C) the date of maturity that has been fixed by a call notice. D) an extraordinary call provision.

D) an extraordinary call provision. - Municipal Securities Rulemaking Board rules require that certain information be included on all municipal confirmations, including the capacity in which the firm acted in filling the order, whether the bonds are in registered or book entry form, and any relevant call provisions. Information on catastrophe or extraordinary call provisions is not included on a confirmation because catastrophes have no planned dates of occurrence.

Another term for municipal overlapping debt is A) defeased debt. B) refunded debt. C) double-barreled debt. D) coterminous debt.

D) coterminous debt. - In the context of municipal securities, the term coterminous refers to two or more taxing agencies that share the same geographic boundaries and are able to issue debt separately. - Overlapping debt occurs when two or more issuers are taxing the same property to service their respective debt.

FINRA Rule 2330 deals with a member's responsibility in the sale of certain insurance company-based products. Specifically the concern is with A) fixed-index annuities. B) immediate variable annuities. C) variable life insurance. D) deferred variable annuities.

D) deferred variable annuities. - The subject of the FINRA rule is deferred variable annuities. It applies to the sale or exchange of this specific product

Two weeks ago, a broker-dealer learned that one of its registered representatives (RR) became the subject of a customer complaint alleging misappropriation of customer assets. The firm must A) suspend the RR and withhold all compensation until a full investigation is conducted. B) terminate the RR immediately and conduct an investigation into the matter. C) notify FINRA of this situation within 30 days. D) notify FINRA of this situation within the next two weeks.

D) notify FINRA of this situation within the next two weeks. - A broker-dealer must notify FINRA of this situation within 30 days of learning of the allegation.

Tranche A of a CMO offering has an average life of 2.5 years, Tranche B has an average life of 6 years, while Tranche C has an average life of 11 years. This type of CMO structure is characterized as A) floating-rate. B) planned amortization. C) companion. D) plain vanilla

D) plain vanilla - The CMO structure that contains tranches that pay off in a defined sequence is known as a "plain vanilla" offering. - Each tranche receives regular interest payments, while principal payments received are made to the first tranche only. - As this first tranche is retired, principal payments are then applied to the second tranche until it is retired. - This process continues until the last tranche is retired

The primary address of the customer of a registered representative (RR) would appear on A) neither the order memorandum nor the trade confirmation. B) the order memorandum and trade confirmation. C) the customer statement of account and order memorandum. D) the trade confirmation but not the order memorandum.

D) the trade confirmation but not the order memorandum. - The home address of a customer would appear on a trade confirmation, but not the memorandum (or trade ticket)

When customers receive their account statements, they will generally not include A) interest charged on debit balances in margin accounts during the statement period. B) security positions at the end of the statement period. C) total cost of purchases and net proceeds of sales made during the statement period. D) trade dates of all transactions during the statement period.

D) trade dates of all transactions during the statement period. - Trade dates appear on the trade confirmations

An investor sold ABC stock for a loss two weeks ago and today has purchased a convertible bond on ABC. The purchase of the bond A) provides important diversification to the investor's portfolio. B) will trigger the wash sale rule only if the bond is actually converted by the investor. C) is prohibited by IRS rules as it occurred within 30 days of the sale of the stock. D) will likely trigger the wash sale rule and prevent the investor from using the loss for tax purpose.

D) will likely trigger the wash sale rule and prevent the investor from using the loss for tax purpose. - The wash sale rule provides that if an investor closes a position for a loss, and within the ensuing 30 days makes a purchase of the same, or substantially similar security, the loss on the closing position will be disallowed for tax purposes.

GO Bonds are issued through what bidding Revenue Bonds are issued through which bidding

GO: competitive Revenue: negotiated

Which of the following are required to be given to retail customers at settlement in municipal new issue transactions? I Confirmation showing the purchase price II Official statement III Names of syndicate members with their participation amounts IV Copy of the agreement among underwriters

I Confirmation showing the purchase price II Official statement - Municipal Securities Rulemaking Board rules state that a confirmation and an official statement must be sent to the investor no later than at settlement.

Income from which of the following investments is passive income? I Real estate direct participation programs (DPPs) II Vacation cottage rentals III Real estate investment trusts (REITs) IV Collateralized mortgage obligations (CMOs)

I Real estate direct participation programs (DPPs) II Vacation cottage rentals - Passive income results from DPPs and personal real estate rentals. **REITs and CMOs are securities, and income from securities is considered portfolio income.**

Which of the following is applicable to the Nasdaq PHLX? I. Regional exchange operated by Nasdaq II. Offers trading in equity securities and options contracts III. Completely electronic exchange with no physical trading floor IV. Regional exchange operated by FINRA for the execution of over-the-counter stocks only

I. Regional exchange operated by Nasdaq II. Offers trading in equity securities and options contracts - The Nasdaq PHLX is a regional exchange operated by Nasdaq where equity securities and options contracts are traded both electronically and on the floor.

Financial footnotes found in which of the following would be of the greatest importance to your broker-dealer's retail customers? I The broker-dealer's principal-approved advertising II Balance sheets of stocks you've recommended to them III Income statements of stocks you've recommended to them IV Your broker-dealer's website page showing the history of the firm

II Balance sheets of stocks you've recommended to them III Income statements of stocks you've recommended to them - While footnotes found anywhere are of importance, those found in financial statements, such as balance sheets and income statements, would be the most important to your broker-dealer's customers when evaluating investment recommendations.

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? I Transfer $2,000 from SMA II Deposit $2,000 cash III Deposit $4,000 of fully paid marginable stock IV Deposit $2,000 of fully paid marginable stock

II Deposit $2,000 cash III Deposit $4,000 of fully paid marginable stock - 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.**

Which of the following statements regarding the exercise of options contracts are true? I The exercise of equity options settles the next business day. II The exercise of equity options settles in two business days. III The exercise of index options settles the next business day. IV The exercise of index options settles in two business days.

II The exercise of equity options settles in two business days. III The exercise of index options settles the next business day. - Listed equity options, if exercised, settle in two business days (regular way settlement for equities). - Index options, if exercised, settle on the next business day—and in ca

If an investor sells 1 AMF Apr 50 put for 2.50 and buys 1 AMF May 60 put for 7.75, the investor has profit when I the spread narrows. II the spread widens. III both puts are exercised. IV both puts expire.

II the spread widens. III both puts are exercised. - The investor created a debit spread, which is profitable when both sides are exercised or the spread widens. - Conversely, credit spreads are profitable when both sides expire or the spread narrows.

The sales charge levied to investors in a variable annuity is defined as...

It is not technically defined but must be fair and reasonable - There is no specific sales charge maximum as proscribed by FINRA; rather the charges must be fair and reasonable.

An investor has an account at a BD and hold primarily penny stocks in this account. This investor will receive a...

Monthly statement showing the estimated market value of each penny stock owned - SEC rules require penny stock customers to receive a monthly statement that shows an estimated market value of each penny stock owned.

Is it suitable for a client to take out a HELOC to fund an annuity purhcase?

Never - Industry regulations deem it egregious behavior to suggest that a client take out a HELOC to fund the purchase of a deferred variable annuity

As a general matter, U.S. government agency debt is an obligation...

Of the particular agency issuing debt - In most cases, the debt of a U.S. Government agency is backed by that particular agency, the one exception being the debt of the Government National Mortgage Corporation (GNMA).

Trading authorization permits who to trade in an account?

Only that RR, and the customer, can place trades for the account - When a customer provides written trading authority to an RR, both the RR and the customer can enter trades for the account. Key point to remember is that since the customer is the legal owner of the account, he/she can always place trades.

Withdrawals from a variable annuity contract, in excess of cost basis, are treated and taxed as...

Ordinary Income - Any distributions or withdrawals from a variable annuity which exceed the investor's cost basis are treated and taxed as ordinary income.

Which of the following is not a typical issuance structure for a new municipal bond offering: - Serial maturity - Balloon maturity - Term maturity - Pyramid maturity

Pyramid Maturity - Of these choices, the pyramid structure is not a recognized format for issuing municipal bonds.

Which has more price volatility, REITs or real estate assets outright?

REITs - REITs generally have greater, not lower, price volatility as compared to real estate itself. - As a publicly traded entity, a REIT will be influenced by stock market conditions much more acutely than actual real estate properties.

Pursuant to FINRA rules, a temporary hold may be placed on the account of a specified adult, during which time the firm would not...

Remit proceeds from a recent sale to the account owner's bank account

Expiration and Strike Price are known as...

Series

Cumulative Voting tends to benefit...

Smaller investors

An investor contributed $50,000 to her non-qualified variable annuity ten years ago, and the contract is now valued at $90,000. If, at the age of 58 the investor withdraws $30,000 from the annuity, what are the consequences?

The distribution is subject to ordinary income taxes and a penalty - Using the conventional LIFO rules, earnings (the last monies in) are subject to ordinary income taxes, and in this case a (10%) penalty would apply since the investor is under the age of 59 ½ at the time of the distribution.

An investor opened a new "qualified" variable annuity contract with a deposit of $100,000, and in the first year the contract appreciated in value by 10%. Should the investor take a distribution after this first year, the cost basis would be...

The distribution would be against a zero cost basis - Contributions into a "qualified" annuity are made with 'pre-tax' dollars, which means that no income taxes were paid on the contributed funds. As the result, the investor's cost basis is considered to be zero.

An investor purchased a $200,000 face value "zero-coupon" bond at $100,000 and held the bond until its 20XX maturity date. At maturity, what cap gains / losses are realized?

The investor does not realize a cap gain or loss - When an investor holds a zero-coupon bond to maturity, there is no tax consequence at the time of the bond's maturity. - The investor does have a tax liability each year that the bond is held, based on the "accreted value" of the bond.

An investment in a 'target-date' fund is one where...

The mix of assets will be adjusted every year as the target date approaches - The types of funds will gradually reduce risk by altering the composition of the portfolio from more risky to more conservative. - They are sometimes called "life-cycle funds".

A 'regulated investment company' is one where...

The mutual fund acts a conduit for the distribution of net investment income - A 'regulated investment company' is one that acts as a "conduit" for the distribution of the net investment income of the mutual fund.

How are Zero-Coupon bonds taxed? An investor holding a 25-year ZR for the past 8 years would be required to pay...

The required income taxes on the phantom interest during the past 8 years - With zero coupon bonds, investors are required to pay income taxes on the 'accreted' interest income each year. - So even though the investor has not actually received any interest, the tax code requires that the appropriate income taxes be paid each year.

The authorization given to the Government National Mortgage Association (GNMA) to issue debt securities is provided by the...

US Congress

The separate account of a variable annuity is usually legally organized as a...

Unit Investment Trust - The separate account is usually organized as a unit investment trust, which is a type of investment company.

An investor holding a portfolio of bonds issued by various U.S. territories will be taxed...

Will not be subject to any income liability on the interest received from these bonds - The interest income generated by bonds issued by U.S. territories is exempt from all levels of taxation.

A customer of yours expresses an interest in purchasing a deferred variable annuity. After a careful analysis, you have determined that this is a suitable investment for the customer. Under FINRA rules, principal approval of this sale must be obtained...

Within seven business days of receipt of a complete and correct application package - FINRA Rule 2330 requires a registered principal to review and determine whether to approve a customer's application for a deferred variable annuity before sending the application to the issuing insurance company. This must occur no later than seven business days after the broker-dealer receives a complete and correct application. - ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

What qualifies a cash dividend?

- Cash dividends from common stock may receive a preferential rate if the investment has been held for at least 61 of the 121 days surrounding the ex-dividend date

An investor purchased $10,000 of the Class B shares of the ABC Growth Fund. Sixty days later, the investor received an inheritance of $40,000. The investor contacts you and asks about the possibility of backdating a letter of intent to add the original purchase to this new money and reach the breakpoint at $50,000. You would reply that A) Class B shares do not have breakpoints because they do not have a front-end load. B) the investor should redeem the Class B shares and then invest the entire $50,000 into the Class A shares to take advantage of the breakpoint. C) it would be wise to put the new money into the Class A shares of the fund and, once that is done, use the conversion privilege to move the old shares to take advantage of the $50,000 breakpoint. D) a letter of intent can be backdated up to 90 days so the investor is in luck.

A) Class B shares do not have breakpoints because they do not have a front-end load. - Class B shares are sold without a front-end load, so there are no breakpoints and no letter of intent (LOI). - In almost every fund, the only way to include that original purchase is to exchange the Class B shares for Class A shares, but that might result in the investor paying both the back-end load to get out of the B shares and the front-end load of the A shares—not a good plan. - The registered representative would have to examine the fund's prospectus to determine what is the best step to take. - That does not change the correct answer here because, regardless of the investor's decision, Class B shares do not have breakpoints or LOIs

All of the following will cover a short call except A) cash equal to the aggregate exercise value. B) a long call with a lower strike price and later expiration. C) a long position in the underlying stock. D) an escrow receipt for the stock.

A) cash equal to the aggregate exercise value. - Cash never covers a short call because the cost to purchase the stock in the market for delivery at the strike price is unknown. - If assigned, the customer must sell (deliver) at the strike price.

Under Options Clearing Corporation (OCC) rules regarding options communications with the public, if an educational piece making no projected performance figures or recommendations is distributed to customers, it A) need not be preceded by an options disclosure document (ODD). B) can only be distributed to institutional customers. C) can only be distributed to retail customers. D) need not be approved by a registered options principal (ROP).

A) need not be preceded by an options disclosure document (ODD). - OCC communications rules do not distinguish between retail and institutional customers. - Therefore, their communications rules apply to all customers. All communications pieces must be approved by an ROP. - If the educational piece makes no recommendations or performance projections, it need not be preceded by an ODD, but it must be accompanied by a notice containing a name and address where the ODD can be obtained.

If a customer has a long margin account with a market value of $12,000, a debit balance of $8,000, and special memorandum account (SMA) of $2,000, how much can the customer withdraw from the account? A) $1,000 B) $1,500 C) $0 D) $2,000

A) $1,000 - SMA is a line of credit with one restriction: it may not be used if account equity would fall below minimum maintenance. - In this account, maintenance equity is $3,000 (25% of $12,000),0 and the current equity in the account is $4,000 ($12,000 MV − $8,000 DB). - Therefore, only $1,000 may be withdrawn to keep the current equity at the minimum of $3,000.

When calculating the total spread on a municipal underwriting, one bond point is equal to A) $10.00 B) $100.00 C) $1.00 D) $1,000.00

A) $10.00 - One point is the equivalent of $10 for every $1,000 of par value.

One of your customers has $135,000 in her cash account. She also has a long margin account with a market value of $17,000, a debit balance of $10,800 and no SMA. The customer wants to open a custodial account for her niece and transfer money from the cash and the margin accounts into that account. How much can be transferred into the niece's account? A) $135,000 B) $141,200 C) $6,200 D) $15,000

A) $135,000 - Custodial accounts for minors can only be opened as cash accounts. - Clearly, the $135,000 in the cash account is no problem. Do not be concerned about the $15,000 annual gift limit because the question is not dealing with gift taxes. - If the margin account had SMA, it could be withdrawn and the cash put into the child's account. - Without SMA and with the account being restricted (below the 50% Regulation T requirement), it is only the money in the cash account that can be transferred.

In a cash account, if a customer buys 300 XYZ at 48 and simultaneously writes 3 XYZ Jan 50 calls at 1, the customer must deposit A) $14,100. B) $14,550. C) $14,700. D) $14,400.

A) $14,100. - In a cash account, the customer must deposit 100% of the value of the stock purchased ($14,400). - However, to determine the actual deposit, subtract the $300 in premium income received. - By depositing $14,100, the customer will have $14,400 in the account—the difference being the premium income credited to the account on settlement date.

A corporation has $12,000,000 net income after taxes, 5,000,000 common shares outstanding and $10,000,000 of 6% preferred stock ($100 par). What is the corporation's earnings per share? A) $2.28 B) $2.15 C) $2.40 D) $1.20

A) $2.28 - To calculate this company's earnings per share you would need to use the following: (Net Income - Dividends) / Shares Outstanding. ($12,000,000 - $600,000) / 5,000,000 = $2.28

If an investor has an established margin account with a current market value of $4,400 and a debit balance of $1,750 with Regulation T at 50%, how much buying power does the investor have in the account? A) $900 B) $4,400 C) $2,200 D) $2,650

A) $900 - The Regulation T requirement is 50% of the current market value of $4,400, which equals $2,200. - Equity equals the current market value of $4,400 minus the debit balance of $1,750, which equals $2,650. - Excess equity is calculated by subtracting the Regulation T requirement of $2,200 from the current equity of $2,650, which equals $450. - Buying power is then calculated by multiplying the excess equity of $450 by 2, which equals $900.

On May 5 a client purchased 100 shares of ABC at 18. On May 19, when ABC was trading at 21.50 the client went long 1 ABC Oct 20 Put @ 3.50. Two months later, when ABC was trading at 15.50 the client exercised the put. What are the sales proceeds per share as the result of the exercise of the put? A) 16.5 B) 23.5 C) 12 D) 15.5

A) 16.5 - The sales proceeds upon the exercise of a put option is found by subtracting the premium paid for the put option from the strike price of the put. In this case, the sales proceeds are 16.50 per share.

A corporation wishes to raise additional capital by making use of a rights offering. One of your clients owns 200 shares of the issuing corporation's common stock and 100 shares of its preferred stock. The terms of the offering state that four rights will be necessary to purchase one new share at the subscription price of $20. The current market price of the stock is $24 per share. How many rights will your client receive? A) 200 B) 300 C) 75 D) 50

A) 200 - No matter how many new shares are being offered and how many rights it takes to buy each new share, on your exam, shareholders will always receive one right for each share of common stock they own. - With this client owning 200 shares, that is 200 rights. There are never rights with preferred stock.

An abstract of a municipal securities issue official statement must be maintained on file for how long? A) 4 years B) 12 months C) There is no requirement to file abstracts of official statements. D) 5 years

A) 4 years - The Municipal Securities Rulemaking Board requires firms to retain abstracts of official statements for four years—the same as all pieces intended to communicate with the public.

Mr. Jones is long 100 shares of ABC Corp. at 51. He establishes a short straddle on ABC Corp. with a strike price of 50. The premium on the call is 3.25 and the premium on the put is 2.25. What is Mr. Jones's maximum gain on the position if the call option is exercised? A) 4.5 B) 3.25 C) 2.25 D) 5.5

A) 4.5 - If the call option is exercised, that means the MV is greater than the SP. - This also implies that the put option expires. The writer earned 5.50 in premiums for writing both options. - If the MV increases from 50 to 51 he will lose 1 on the call position. However, as it goes up beyond 51, he will gain $1 on the long stock position for every $1 he loses on the short call position. Therefore, his max gain is 5.50 - 1 = 4.50

Information gathered to verify a customer's identity must be maintained by a member firm for at least A) 5 years. B) 3 years. C) 6 years. D) the lifetime of the firm.

A) 5 years. - The USA PATRIOT Act requires that information gathered to verify a customer's identity must be maintained for at least five years.

The SEC recognizes all of the following under the Credit Rating Agency Reform Act as being registered with the commission to rate debt instruments. Which of them historically has specialized in ratings for the insurance sector? A) A.M. Best B) Fitch Ratings C) Standard & Poor's D) Moody's

A) A.M. Best - A.M. Best historically has specialized exclusively on the insurance marketplace. - They issue financial strength ratings measuring insurance companies' ability to pay claims and rate financial instruments issued by insurance companies, such as bonds and notes. - They can issue debt and financial strength ratings for other sectors as well under the Credit Rating Agency Reform Act.

When discussing mutual funds with a customer, which of the following statements is not prohibited? A) Buy shares of different funds in the same fund family, and you may qualify for a breakpoint on the total purchase. B) The income yield of the fund consists of both dividends and capital gains. C) Buy the shares on record date to receive the dividend. D) Get a few friends to join with you to form an investment club, and you may qualify for a breakpoint.

A) Buy shares of different funds in the same fund family, and you may qualify for a breakpoint on the total purchase. - Most funds provide a combination privilege, allowing investors to aggregate purchases made in different funds in the same family to qualify for a breakpoint. - The income yield of a mutual fund includes dividends only. - A group of friends is not eligible for a breakpoint. (Investment clubs are not eligible.) - Selling dividends is a prohibited practice because of the immediate tax liability incurred with the dividend and the share price adjustment that results after the dividend distribution.

ABC Corp. is declaring a cash dividend to stockholders of record as of June 9, payable on July 18. Which of the following actions is not occurring upon the declaration of this dividend? A) Current assets are reduced. B) Stockholder equity is reduced. C) Current liabilities are increased. D) Working capital is reduced.

A) Current assets are reduced - When a corporation declares a cash dividend, stockholder's equity is reduced, and current liabilities are increased. - Working capital is also reduced, since there is no change to current assets. Recall that working capital is CA-CL

In order to form a limited partnership, the tax ID and signature of which of the following parties is required? A) General partners B) General counsel C) General partners and all limited partners D) Limited partners

A) General partners - In order to form a limited partnership, the tax ID numbers and signatures of all general partners will be required.

A bond analyst checking a general obligation municipal bond will examine the I. Past performance of the payment of interest II. Per capita income of the citizens III. Population growth of the area IV. Industrial development of the area A) I, II III and IV B) II, III and IV only C) I, II and IV only D) I, II and III only

A) I, II III and IV - A bond analyst would look at all the listed factors with regard to a general obligation bond, the interest payment history, the per capita income, industrial development and the population growth in the area to determine the credit of the bond and how likely it would be that the municipality would repay the interest and principal on time.

Miss Jones is bullish on the market. In December she buys 1 Jul 490 call on the XMI. Which of the following options might she write to create a debit spread? I. Jan 485 call II. Jan 490 call III. July 500 call IV. July 505 call A) II or III or IV B) I C) I and II D) III or IV

A) II or III or IV - To create a debit spread the long call must be the dominant position, meaning it will have the higher premium. - The Jul 490 call would have a higher premium than the Jan 490 call because there is more time value, and it would have a higher premium than both the July 500 and the July 505 because of the lower strike price. - It will have a lower premium than the Jan 485 call because the Jan 485 call would come into the money first due to the lower strike price.

HMK Industries is paying a cash dividend to stockholders of record on May 20. Which of the following is not true? A) Net worth declines B) Current liabilities decline C) Retained earnings are unchanged D) Current assets decline

A) Net worth declines - When a corporation pays a cash dividend, both assets & liabilities decline, meaning there is no change to net worth. Dividends payable is a current liability that will decline once the dividend is paid. Cash is a current asset, and upon paying the dividend, cash and therefore, current assets, will also decline. The firm's net worth is unchanged.

Lorne Walters is a registered representative with Pecuniary Profits Securities, PPS, a FINRA member firm. Walters has decided to conduct virtual meetings using a system called Xoom. Because he has never used the system before, Walters decides to make a trial run of his securities presentation to six family members who are PPS customers. All of these family members are accredited investors. Which of the following choices best describes this situation? A) Prior approval of PPS may be required, but it is not mandated by FINRA for this public appearance. B) Walters may not recommend securities during the presentation, unless a principal of PPS provides prior approval. C) This constitutes an institutional communication to accredited investors and does not require preapproval by a principal of the firm. D) The virtual meeting may not be archived for later viewing.

A) Prior approval of PPS may be required, but it is not mandated by FINRA for this public appearance. - The virtual meeting is defined as a public appearance. Prior approval of a broker-dealer is not mandated by FINRA but may be required by the broker-dealer. An associated person of a broker-dealer may make a recommendation of a security in a public appearance but must have a reasonable basis for the recommendation. Individual accredited investors are not institutional investors unless they have assets of at least $50 million, and there is nothing in the question to indicate that is the case with these customers. If such electronic presentations are recorded, the recording must be preserved for a minimum of three years.

Regulation BI calls for broker-dealers and their associated persons to meet a care obligation when making a recommendation to a retail customer. In describing the nature of the care, the rule requires that those making recommendations adhere to all of these except A) reasonable prudence. B) reasonable diligence. C) reasonable skill. D) reasonable care.

A) Reasonable Prudence - In the original rule proposal, the SEC had four care requirements, including prudence. After careful consideration of comments received, it "concluded that its inclusion creates legal uncertainty and confusion, and it is redundant of what we intended in requiring a broker-dealer to exercise diligence, care, and skill, and its removal does not change the requirements under the Care Obligation. Accordingly, the Care Obligation requires broker-dealers to ''exercise reasonable diligence, care, and skill'' to meet the three components of the Care Obligation." **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

Under the Uniform Transfer to Minors Act (UTMA), how can stock subscription rights be handled in a custodial account? A) The custodian can exercise or sell the rights as he deems prudent. B) The custodian can exercise, sell, or allow the rights to expire as he deems prudent. C) The custodian cannot exercise rights; they can only be sold. D) The rights can be exercised or sold only if the custodian is also the donor.

A) The custodian can exercise or sell the rights as he deems prudent. - One thing that is never considered prudent is to let the rights expire. - Even if the custodian does not believe adding more of the stock to the account is proper, there is a value to the rights, and the best interest of the minor is served by turning those rights into cash. - Custodians in these accounts are able to sell or exercise the right, regardless of any relationship existing between them and the donor.

A registered representative's customer is speaking of a variable life insurance contract she owns. She makes several statements regarding the contract. Which of the following is not an accurate statement concerning a variable life insurance contract?\ A) The death benefit can never be more than the guaranteed benefit. B) There is no guarantee regarding the investment results of the separate account. C) The policy provides a minimum guaranteed death benefit. D) The portion of the premium invested in the insurance company's general account is used to provide for the minimum guaranteed amount of the death benefit.

A) The death benefit can never be more than the guaranteed benefit. - The minimum guaranteed death benefit is provided by that portion of the payment invested in the insurance company's general account. - The remainder of the premium is invested in the separate account. While there is no guarantee on how investments in the separate account will perform, depending on its investment performance, the separate account could provide for a larger death benefit than the minimum guaranteed amount.

A client has sold an XYZ 30 straddle for 6. If at expiration XYZ is trading at 25, what is the result? A) The put will be exercised, giving the client a gain of $100. B) The put will be exercised, giving the client of loss of $100. C) The client will have a capital gain of $600. D) The call will be exercised, giving the client a gain of $500.

A) The put will be exercised, giving the client a gain of $100. - A client has sold both a call and a put on XYZ (creating a short straddle), both contracts having a strike price of 60. The client received a premium of 6, or $600 for the trade. - If the shares trade at 25 at expiration, the put will be exercised, and the call will expire. The client will experience a loss of $500 on the put, which means an overall gain of $100, considering the $600 premium initially received

A registered representative has a client who is a CPA, and this client is offering, for a fee, to direct some of her accounting clients to the registered representative for potential participation in an upcoming IPO the firm will be a managing underwriter on. May the brokerdealer compensate the CPA for these leads? A) Yes, but any compensation must be in the form of cash (not securities), and it should only be a flat or hourly fee, and not tied to the success of any deals. B) No, these types of compensation arrangements are prohibited by FINRA rules. C) No, the broker-dealer cannot make any compensation arrangements with the CPA, as such relationships are considered conflicts of interest. D) Yes, but the CPA would need to be a FINRA registered person in order to receive any such compensation, often called a finder's fee.

A) Yes, but any compensation must be in the form of cash (not securities), and it should only be a flat or hourly fee, and not tied to the success of any deals. - These types of compensation arrangements are known as "finders fees", and are permitted, even if the individual (the CPA in this case) is not FINRA registered. - Any fees paid should be in cash only, and represent a flat or hourly fee, and not tied to the success of any deals or transactions. If the individual is FINRA registered, the fees may be commission based.

According to MSRB rules, all of the following are required customer account information EXCEPT the A) age and birth date. B) name and address of employer. C) tax ID or Social Security number. D) signature of the municipal securities representative or general securities representative introducing the account and of a municipal securities principal or general securities principal indicating acceptance of the account.

A) age and birth date. - MSRB rules do not require the age or birth date for a new customer account. However, FINRA rules do require this information.

An investor who makes transactions once a month using dollar cost averaging would A) buy the same dollar amount of a stock. B) buy equal amounts of speculative and blue-chip securities. C) put 70% of the money in a bond fund and buy stocks with the rest. D) buy the same number of shares of a stock.

A) buy the same dollar amount of a stock. - An investor using dollar cost averaging always invests the same amount of money. - Depending on the market value of the security, he may buy more or less shares every time he invests

An open-end investment company that does not distribute at least 90% of its net income A) continues to qualify as a registered investment company based on interpretations of the IRS. B) does not require a restricted type of management. C) is liable for federal taxes on its net income. D) is unable to retain all or part of its realized capital gains.

A) continues to qualify as a registered investment company based on interpretations of the IRS. - Investment companies that do not distribute at least 90% of their net investment income become liable for federal income taxes on all the net investment income. - Shareholders would also be responsible for taxes on any distributions received. By distributing 90% of investment income, open-end companies can avoid double taxation

Registered representatives must amend their Form U4 when all the following occur except A) if they obtain a college degree. B) if they obtain a professional credential. C) if they move residences. D) if they are arrested for a misdemeanor involving financially related issues.

A) if they obtain a college degree. - Registered representatives must amend their Form U4 if they move, are arrested for any felony for financially related misdemeanors, or obtain a professional credential. College degrees are not disclosed on the Form U4.

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 $2. B) increases by more than $9.60. C) decreases by more than $2. D) increases by more than $17.40.

A) increases by more than $2. - 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. **That tells us that the highest the price of FTS shares can be is $60 per share.** - Anything above that will trigger the maintenance call. - With the current market price of $58, anything in excess of a $2 per share increase will result in a maintenance call. Remember, when an investor sells short, losses occur as the market price rises.

An individual has received a death benefit from the life insurance policy of his father. The payment of this benefit to the beneficiary A) is not a taxable event to the recipient. B) increases the tax liability of the recipient. C) is considered a long-term capital gain distribution to the recipient and is taxed at a preferential rate. D) may be claimed as a tax credit by the recipient

A) is not a taxable event to the recipient. - A life insurance benefit paid to a beneficiary is not a taxable event to that individual. However, if the benefit is paid to the estate of the deceased party, it then becomes a taxable event.

An individual has received a death benefit from the life insurance policy of her mother. This death benefit A) is not taxable when paid to the named beneficiary. B) must be declared to the State Insurance Dept upon receipt. C) would be taxable if the cash value of the policy exceeded the premiums paid. D) is included in the deceased's estate for probate purposes.

A) is not taxable when paid to the named beneficiary. - The death benefit of a life insurance policy is not taxable when paid to a named beneficiary

If a registered rep volunteers advice to her clients about how to vote in a proxy contest, she A) may have to file under SEC proxy contest rules as a participant. B) may do so only if her firm specializes in that stock. C) may do so only on listed securities. D) has acted illegally

A) may have to file under SEC proxy contest rules as a participant. - If a registered rep volunteers advice regarding a proxy contest, the rep may be required to register as a participant as the rep is potentially influencing the outcome of the vote.

A customer who has $100,000 in government bonds, $35,000 in NYSE-listed equity securities, $4,000 in penny stocks, and no account activity in the last eight months must have a statement sent A) monthly. B) quarterly. C) weekly. D) semiannually.

A) monthly. - Any account that has penny stocks in it, regardless of whether there was activity or not, must be sent a statement at least monthly.

Net overall debt of a municipality is A) net direct debt plus overlapping debt. B) funded debt plus overlapping debt. C) funded debt minus overlapping debt. D) net direct debt minus overlapping debt.

A) net direct debt plus overlapping debt.

Upon arriving for work on Monday morning, you hear a voicemail message left by Peter, one of your clients, over the weekend. The message asks that at the open on Monday, you sell his 2,500 shares of ABC Industries. He asks that you phone him upon completion of the order. You should A) notify Peter that you are unable to complete this order based on the instructions he left for you. B) follow Peter's instructions once you verify that he has the shares in his account. C) check with your supervisor to be sure you are allowed to act on these instructions. D) execute Peter's order once you notify your manager about Peter's message.

A) notify Peter that you are unable to complete this order based on the instructions he left for you. - Your clients are usually told never to leave trading instructions or other time sensitive information in a voice message, as their instructions will not be honored

Short-term municipal notes generally have all of the following characteristics EXCEPT that they A) pay interest every six months. B) mature in less than one year. C) are issued in anticipation of a bond sale. D) pay interest that is exempt from federal taxation.

A) pay interest every six months. - Short-term municipal notes trade as zeroes. They are issued at a deep discount and mature at par, they have maturities of less than one year.

A broker-dealer is using Monte Carlo simulation as part of its investment strategy platform. The primary goal of this methodology is to A) present a sampling of returns for a portfolio, with consideration given to a wide range of economic and market conditions. B) calculate the level of risk that must be taken to achieve a desired investment outcome. C) determine the number of securities a client must own to achieve ample diversification and protection from market volatility. D) enable an investor to achieve a desired return based on the maximum level of risk the investor is willing to take.

A) present a sampling of returns for a portfolio, with consideration given to a wide range of economic and market conditions. - The Monte Carlo simulation allows an investor to see the various possible outcomes that may occur under a wide range of different economic and market conditions.

According to Regulation SHO, a "locate" for a short sale must be performed A) prior to the effecting of the sale. B) at or prior to settlement date. C) within one business day of the short sale. D) by the close of business on the trade date.

A) prior to the effecting of the sale. - Federal securities law requires that the "locate" be performed prior to the execution of any short sale.

Regulation NMS is intended to assure that investors A) receive the best price executions for their orders by encouraging market competition. B) receive audited financial statements from their broker-dealers each year. C) do not trade on material non-public information. D) have long positions in the securities they place orders to sell

A) receive the best price executions for their orders by encouraging market competition. - This is the primary objective of Regulation NMS. NMS means National Market System. - It was established in 2005 to foster competition among markets and among individual client orders.

Transactions effected in NYSE-listed securities must be A) reported to the consolidated tape within 10 seconds. B) reported to the SEC within 10 seconds. C) reported to the SEC within 30 seconds. D) reported to the consolidated tape within 30 seconds.

A) reported to the consolidated tape within 10 seconds - These transactions must be reported to the consolidated tape within 10 seconds.

Your broker-dealer has prepared an advertising piece for general distribution to all of its retail customers regarding numerous option strategies. Filing the piece with FINRA is A) required at least 10 business days before first use or publication. B) required to occur no later than the end of the month during which it was used. C) not required. D) required within 10 business days of the time it is first used or published.

A) required at least 10 business days before first use or publication. - Filing with FINRA is required at least 10 business days before first use or publication for retail communications having to do with options.

State and local government securities (SLGS) are purchased by A) state and local governments. B) accredited investors. C) commercial banks. D) institutions.

A) state and local governments - SLGS securities are purchased by municipal issuers that are subject to IRS yield restrictions when they invest the proceeds of a prerefunding. - The monies placed in escrow are invested in SLGS, which are government securities whose interest rates are arranged to comply with IRS restrictions.

An investor has received a $500 cash dividend from an ADR. This cash dividend is A) subject to ordinary income taxes in US, consistent with the tax treatment of domestic equites. B) not subject to US taxes but qualifies for a tax credit from the issuing corporation abroad. C) subject to mandatory withholding taxes in the jurisdiction issuing the primary security. D) only taxable in the country where the foreign company is located.

A) subject to ordinary income taxes in US, consistent with the tax treatment of domestic equites. - Dividends received from ADRs are subject to the same tax treatment as domestic US equites. - If the foreign country has withheld taxes from the dividend, the ADR investor may receive a tax credit from the US government

If a limited partnership interest is sold, the gain or loss in the sale is the difference between the sales proceeds and A) the adjusted basis. B) the total of the deductible losses taken by the investor. C) the original basis. D) the total of tax preference items allocated to the investor.

A) the adjusted basis. - The adjusted basis is a limited partner's cost basis at any point in time. Gain or loss on the sale of the partnership is determined by comparing the sales proceeds to the adjusted basis.

Proceeds from the sale of securities in a customer's account are usually kept in the account unless the customer requests a payment. Those funds are swept into a money market mutual fund or an interest-bearing bank deposit account. One of the advantages of having cash swept into the bank deposit account rather than the money market mutual fund is that A) the bank deposit account is insured by the FDIC. B) the bank deposit account offers a higher yield. C) the bank deposit account is insured by the SIPC. D) the bank deposit account offers a check-writing feature.

A) the bank deposit account is insured by the FDIC. - **One question that seems to appear on the exam with high regularity deals with knowing that money market mutual funds are not protected by FDIC insurance.** - That is only available to banking accounts. - SIPC insures broker-dealers. - The difference in yields varies with neither option constantly offering higher rates. - Money market funds usually have check-writing provisions, and some broker-dealer bank deposit accounts do as well.

Under FINRA Rule 2273, a registered representative leaving one member firm and licensing with another must follow certain rules when recruiting former clients. Among those is the delivery of a disclosure document in educational format explaining certain issues the current customer should evaluate. Among those issues are all of the following except A) the change will require the customer complete new account forms. B) potential costs related to transferring assets to the recruiting firm, including differences in the pricing structure and fees imposed by the customer's current firm and the recruiting firm. C) differences in products and services between the customer's current firm and the recruiting firm. D) that some assets may not be directly transferrable to the recruiting firm and, as a result, the customer may incur costs to liquidate and move those assets or account maintenance fees to leave them with his current firm.

A) the change will require the customer complete new account forms. - It should be obvious to any customer that moving the account to a new firm will require completing new forms. Even it if it is not, FINRA does not believe that the decision whether to stay or move should be dependent on the effort to complete some forms. Each of the other disclosures are relevant to costs or other concerns involved in this kind of change. LO 15.d

An economist is comparing the yields on 20-year U.S. Treasury bonds and AAA-rated corporate bonds with the same maturity. The economist is analyzing A) the credit spread. B) the duration spread. C) the value spread. D) the risk spread.

A) the credit spread. - You should understand that the greater the risk, the higher the yield on the bond. - Many analysts compare the difference between yields on bonds with the same maturity but different quality (rating) to get a sense of the market sentiment. - One common measurement is the difference in yields between Treasuries and corporate bonds. This difference is called the yield or credit spread and tends to widen when economic conditions sour and narrow when they get better. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

In order for a person associated with a FINRA member firm to open a securities account at a different FINRA member firm, A) the person must receive written consent from their employer prior to opening such account. B) FINRA must be notified by the firm that will carry the account. C) prior written consent from FINRA is necessary in order to open an outside securities account. D) the person must provide prior written notice to their employer before opening such account.

A) the person must receive written consent from their employer prior to opening such account. - An associated person of a FINRA member firm must receive prior written approval from their firm in order to open or maintain a securities account at a firm other than their employer

If a registered representative participates in an internet chat room A) the representative may not provide projections of investment performance of any investment strategy. B) the representative may not present a hypothetical illustration of mathematical principles. C) the representative must notify FINRA in advance. D) the representative may only speak from a prepared script.

A) the representative may not provide projections of investment performance of any investment strategy. - When a registered representative participates in an internet chat room, the RR is making a public appearance and must comply with all applicable industry regulations. - Amongst these requirements is that the RR may not predict or project the performance of any investment or investment strategy. - The RR may present a hypothetical illustration of mathematical principles, provided that no predictions or projections are made.

A customer sells securities and uses the proceeds to buy more securities at the same cost. Under the 5% markup policy, the markup is calculated on A) the total of both sides. B) the sell side only. C) the buy side only. D) each side separately.

A) the total of both sides. - The firm must consider the entire transaction (a proceeds transaction) when calculating the markup.

Two weeks ago, Ethan closed a short position in ABC Inc. common stock that he'd been carrying for a few months. He realized a five-point loss on the transaction. Today, Ethan tells you he is considering another short sale, this time of ABC Inc. convertible bonds. You should tell Ethan that A) there may be an adverse tax consequence connected to the common stock position that he closed two weeks ago if he chooses to proceed with this trade. B) selling convertible bonds short is never a good idea since they are always more challenging to borrow than the common stock. C) he may incur a substantial loss if interest rates rise. D) you first need to check with your stock

A) there may be an adverse tax consequence connected to the common stock position that he closed two weeks ago if he chooses to proceed with this trade. - If Ethan proceeds with his short sale, this may be considered a wash sale, which would disallow the loss Ethan realized when he covered his short position. - A wash sale occurs when a securities position is closed for a loss and that same, or substantially similar, security position is re-established within 30 days

A registered representative prepares a summary of the preliminary prospectus, which contains no unverified claims or statements. The registered representative can send the summary to customers A) under no circumstances. B) without restriction. C) when approved by the manager, if a file is kept of the synopsis for three years. D) when approved by both the manager and the supervisory analyst and kept on file for three years.

A) under no circumstances. - Neither a preliminary prospectus nor a final prospectus can ever be modified, annotated, or summarized in any way.

Under FINRA rules, if a member wants to have the terms of a clearly erroneous trade adjusted, it must notify Nasdaq Market Operations A) within 30 minutes of the execution. B) within 1 hour of the execution. C) before 4:00 pm ET on trade date. D) before 4:00 pm ET on settlement date.

A) within 30 minutes of the execution.

The primary role of an RR is to...

Assist their customers in satisfying their financial objectives - The relationship between an RR and his/her customer is founded on the premise that the RR will be able to assist the customer in meeting his/her financial objectives.

Lindsey Wolfe, a public school teacher, has been contributing to a 403(b) TSA plan for the past 20 years. Contributions total $50,000 and the current value is $200,000. Wolfe is still teaching full time for the school system. When does Wolfe have to begin taking required minimum distributions? A) At age 72 B) At age 72 or when no longer working for the school system, whichever is later C) Required minimum distributions are never required for annuities D) At age 59½

B) At age 72 or when no longer working for the school system, whichever is later - Wolfe is invested in a qualified annuity. Therefore, the minimum distribution requirements are the same as for any qualified account. RMDs must begin at age 72 but can be postponed as long as continuously employed by the same employer. Unless qualifying for an exception, any withdrawals from a qualified annuity before reaching age 59½ are taxed as ordinary income with the additional 10% penalty

Which of the following is a required disclosure on the Form U4? A) Residency for the previous 3 years B) Residency for the previous 5 years C) Employment history for the previous 3 years D) Employment history for the previous 5 years

B) Residency for the previous 5 years - Form U4 requires an applicant to provide a 5-year residency history and a 10-year employment history. **With regard to the employment history, the member firm must verify the previous 3 years.**

All of the following statements regarding the 5% markup policy are true except A) the markup policy does not apply to securities sold at a specific price and with a prospectus. B) a riskless transaction is not generally covered by the 5% markup policy. C) the type of security is a factor to consider. D) a transaction in common stock customarily has a higher percentage markup than a bond transaction of the same size.

B) a riskless transaction is not generally covered by the 5% markup policy.

Sales materials for options distributed by a broker-dealer must include which of the following disclosures? A) "Options trading can result in significant financial losses, so investors should be mindful of these important financial risks" B) "Options may not be suitable for all investors" C) "Options trading is best suited for high-net-worth and accredited investors" D) "Options are very speculative products and should only be traded by investors who have a high risk tolerance"

B) "Options may not be suitable for all investors" - All options sales material must include the disclosure "Options may not be suitable for all investors"

f an investor has an established margin account with a current market value of $6,000 and a debit balance of $2,500, with Regulation T at 50%, how much buying power does the investor have? A) $2,500 B) $1,000 C) $6,000 D) $3,500

B) $1,000 - The Regulation T requirement is 50% of the current market value of $6,000 ($3,000). - Equity is equal to the current market value of $6,000 minus the debit balance of $2,500 ($3,500). - Excess equity is calculated by subtracting the Regulation T requirement of $3,000 from the current equity of $3,500 ($500). - Buying power is calculated by multiplying the excess equity of $500 by 2 ($1,000).

A TIPS bond has a coupon of 3%. Over a two-year period, the annual inflation rate has been 4.5%. At the end of that time, the principal value of the TIPS would be A) $1,061.36. B) $1,093.08. C) $1,090.00. D) $1,060.00.

B) $1,093.08. - TIPS bonds have the special feature of adjusting the principal value every six months by the inflation rate. - With an annual rate of 4.5%, the adjustment is 2.25% semiannually. - There are two ways to solve this. One is to take the calculator given to you at the test center and multiply $1,000 × 102.25%. Take the result and multiply that times 102.25%. Do that two more times (there are four adjustments in two years), and the ending number will be 1,093.08. - A faster way is to take the simple interest of 4.5% per year. That is $45 per year or $90 for the two years. Add that to the original principal to get $1,090. That is not the correct answer, but the next highest number in the answer choices is.

A margin account with a short credit balance of $39,000 will receive a call for additional funds if the SMV rises above A) $40,000. B) $30,000. C) $20,000. D) $10,000.

B) $30,000. - When the price of a stock sold short rises, the account loses money. - At a certain point, the margin maintenance level is reached. Once the stock rises above that point, a maintenance call will be issued demanding more money. - With the maintenance call, the investor has to return the account to the margin maintenance requirement (30% of CMV here). **Dividing the credit balance by 1.30 will give the call level: $39,000 divided by 1.30 equals $30,000.**

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 profit C) $150 profit D) $50 loss

B) $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 0.50 (0.50 × 100 = $50).

In September, an investor writes 2 ABC Jan 60 puts at 3. If the 2 ABC Jan 60 puts expire in January, what are the tax consequences for the writer? A) $600 loss realized in January B) $600 gain realized in January C) $600 loss realized in September D) $600 gain realized in September

B) $600 gain realized in January - The tax consequences of the premium for an option are realized when the option is exercised or expires, not when the position is opened. This investor wrote the option, and is therefore earning $600 for the premiums, recognized when the options expire in January.

On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes? A) $40 B) $75 C) None D) $100

B) $75 - Because he purchased the convertible bond less than 30 days after realizing the loss, the sale of the stock falls under the wash sale rule. Investors who sell a security at a loss, and repurchase it, including its equivalent (e.g., convertible bond, warrant, or call option), 30 days before or after the sale will have the loss disallowed by the IRS. - With a conversion price of $40, the bond could be converted into 25 shares (1,000 / 40) of KLP common stock. - Hence, the investor has "bought back" the equivalent of 25 shares and may only declare a $75 loss, as the remaining $25 loss will be disallowed. **Look at this question as if it said, "On September 15, he purchased 25 shares of KLP stock." That washes out $25 of the loss, but the rest is okay.**

Betty has a margin account with the following: XYZ long position: $175,000 ABC short position: 65,000 Debit balance: 70,000 Credit balance: 90,000 The total equity balance in Betty's account is A) 80000 B) 130000 C) 90000 D) 50000

B) 130,000 - The total equity position in Betty's account is $130,000. This is found by taking the long market value ($175,000) and adding the credit balance ($90,000), then subtracting the short market value ($65,000) and the debit balance ($70,000)

An investment banking firm has been hired to roll up various partnerships into one master limited partnership. What is the compensation limit for this activity? A) 8.5% B) 2% C) 5% D) 10%

B) 2% - Maximum compensation in a limited partnership roll-up is limited to 2%. - That amount must be paid to the brokerage firm, whether the partners vote for or against the proposed roll-up

A tender offer must remain outstanding for a minimum of A) 5 business days. B) 20 business days. C) 10 business days. D) 25 business days.

B) 20 business days - Answer Explanation: A tender offer must remain open for at least 20 business days

After a mutual fund's 10th year, performance statistics must show results for each of the following periods except A) 5 years. B) 3 years. C) 1 year. D) 10 years.

B) 3 years. - Mutual fund performance statistics must show results for one, five, and 10 years, or for the life of the fund—whichever is shorter.

A fundamental analyst is reviewing GEMCO's financial statements. The company has a current ratio of 4:1, a price-to-earnings (P/E) ratio of 12:1, $10 million in 5% debentures, and net income after preferred dividends of $4 million. If the current market price of GEMCO stock is $60 and the company pays dividends at a rate of $0.75 quarterly, the dividend payout ratio is A) 5%. B) 60%. C) 40%. D) 20%.

B) 60%. - As with many computational problems, there is some unnecessary information given. - The current ratio is irrelevant, and so is the information on the debentures. - What is needed is the amount available to pay the common so that we can compare that to the amount actually paid. - We see that $0.75 in quarterly dividends are paid. That is equal to $3 per year. The next key is determining the earnings. With a market price of $60 per share and a price-to-earnings ratio of 12:1, the earnings per share must be $5. - The dividend payout ratio should be thought of as "dividends paid out of earnings made." The dividends paid are $3; the earnings made are $5. - That is a 3 to 5 ratio, or, as usually expressed in percentage form, 60%.

Which of the following permits the highest annual contributions? A) A Coverdell Education Savings Account B) A SEP IRA C) A traditional nondeductible IRA D) A traditional spousal IRA for which the contribution has been deducted

B) A SEP IRA

Which of the following describes an advantage of using the Direct Registration System (DRS)? A) Gives investors direct access to the current stockholder list of NYSE-listed issuers. B) Allows shareholders to hold their stock on the records of the transfer agent in book-entry form. C) Permits investors to purchase US treasury bonds directly through the Treasury department. D) Facilitates the receipt and delivery of cash and securities with a clearing corporation

B) Allows shareholders to hold their stock on the records of the transfer agent in book-entry form. - The Direct Registration System is a service of the Depository Trust Corp - Enables shareholders to have their stock held in book-entry form with the issuer, rather than holding physical certificates

An investor anticipating that the Federal Reserve Board is likely to increase its target fed funds rate would likely take which of the following actions? A) Buy U.S. listed USD call options B) Buy U.S. listed EUR put options C) Variable annuity D) Buy U.S. listed EUR call options

B) Buy U.S. listed EUR put options - When U.S. interest rates rise, the U.S. Dollar is likely to strengthen as investors chase the higher returns offered by U.S. - Dollar-denominated investments. As a result, foreign currencies would be expected to weaken against the U.S. Dollar. - In the U.S., USD options do not exist, so the only viable choice on this question is to buy EUR puts.

Which of the following statements regarding IRAs is NOT true? A) IRA rollovers must be completed within 60 days of receipt of the distribution. B) Cash-value life insurance is a permissible IRA investment, but term insurance is not. C) An investor of any age can contribute to an IRA as long as they have earned income. D) Distributions may begin at age 59 1/2 and must begin by the year after the year in which the investor turns 72.

B) Cash-value life insurance is a permissible IRA investment, but term insurance is not. - No life insurance products are permissible IRA investments according to the IRS. Note that the Secure Act, which went into effect on January 1st, 2020, raised the required minimum distribution date from 70.5 to 72 and allows investors of any age to contribute to an IRA as long as they have earned income

Under FINRA's Rule 2210 on communications with the public, which of the following is excluded from the filing requirements? A) Retail communications that previously have been filed with FINRA and that are to be used with material change B) Correspondence with prospective clients that is delivered through electronic media C) Retail communications concerning collateralized mortgage obligations registered under the Securities Act of 1933 D) Retail communications concerning public direct participation programs

B) Correspondence with prospective clients that is delivered through electronic media - In most cases, retail communications must be filed with FINRA while correspondence, regardless of the method of delivery, is not. If the retail communication has previously been filed with FINRA and is being used without material change, it does not have to be refiled.

You received a signed broker-to-broker transfer initiation form (TIF) from an established customer desiring to transfer a specifically designated part of his account to your firm, which is eligible to use the Automated Customer Account Transfer Service (ACATS). Your firm is obligated to submit the transfer instruction to the carrying member by establishing the instruction in the ACATS A) within 3 business days. B) Immediately. C) within 1 business day. D) within 2 business days.

B) Immediately. - FINRA's Uniform Practice Code requires that the receiving member firms immediately forward the TIF to the firm currently carrying the account. A customer may transfer all or part of the securities held in the account.

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) Original issue premium B) Original issue discount C) High-yield bond D) Secondary market discount

B) Original issue discount - 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.

One of your wealthier clients invests $100,000 into a real estate limited partnership (RELP) investing in shopping centers. During the first three years, the partnership makes no distributions. The Schedule K-1s received over that period total passive losses of $50,000. The client then invests $75,000 into an exploratory oil and gas DPP. Six months later, the program strikes the largest pool of oil in the United States. The K-1 for that partnership declares $500,000 of reportable income for the year. Which of the following statements is true? A) Passive losses may only be used against passive income in the year of occurrence, so the entire $500,000 is taxable this year. B) Passive losses may be carried over indefinitely, so the $50,000 can be used to offset the passive income generated by the new program. C) The carryover loss can be added to the $75,000 cost basis of the new program, with the difference between the $500,000 income and the $125,000 cost being treated as capital gain. D) The $50,000 may be claimed, but because it was generated over a three-year period, one-third of the amount may be used for the three forward years.

B) Passive losses may be carried over indefinitely, so the $50,000 can be used to offset the passive income generated by the new program. - This is an example of a question that contains far more information than is necessary. The simple answer is that passive losses may be used against passive income. There is no time limitation—there just has to be passive income.

Which of the following is not considered when trying to diversify a municipal bond portfolio? A) Maturity B) Price C) Geographical location D) Quality

B) Price - One of the purposes of diversifying a municipal bond portfolio is to spread the risk among the portfolio's issues. - This can be accomplished by buying bonds of differing maturities, geographical locations, and quality.

A customer wishes to diversify an investment portfolio to include real estate. However, the customer is concerned that real estate tends to be illiquid. Which of the following would be a suitable recommendation? A) Real estate limited partnership offerings B) Real estate investment trusts C) Diversified open-end investment companies D) Government National Mortgage Association securities

B) Real estate investment trusts - REITs (real estate investment trusts) allow investors the opportunity to invest in real estate and provide a high level of liquidity because they are publicly traded on exchanges and OTC. - The real estate DPP does provide an opportunity to invest in real estate, but it is considered illiquid because there is generally no available secondary market. - When a mutual fund is a diversified company, it means that it complies with the 75-5-10 rule, not that its portfolio is diversified into real estate. - GNMA securities are debt obligations and do not provide the equity diversification this investor is seeking. Please note: As pointed out in the LEM, there has been a growth in the number of nontraded REITs. - Obviously, they do not have the liquidity of those that are publicly traded. For exam purposes, unless something in the question indicates that the REIT is nontraded, you can safely assume it is a liquid investment.

Which of the following covers a customer who sold 1 Jul 50 put at 4? A) Short 1 Jul 50 put B) Short the underlying stock C) Long 1 Jul 50 call D) Long 1 Jul 50 put

B) Short the underlying stock - For an investor to cover a short put, the investor must either be short the stock or be long a put option that is in the money first (has a higher strike price).

In which of the following instances is a customer not considered to be "long" a stock? A) The customer owns a convertible bond of the same issuer and has delivered conversion instructions. B) The customer owns convertible preferred stock of the same issuer. C) The customer has purchased the stock but has not yet received delivery of the shares D) The customer owns a call option of the same issuer and has tendered exercise instructions.

B) The customer owns convertible preferred stock of the same issuer. - To be considered "long" a stock, an individual must own the actual stock, or have exercised a convertible security.

One of your new customers indicates that he does not want the securities transferred into the name of the brokerage firm nor does he want the securities held in his name at the firm. At the same time, he wants to be able to make trades easily without delivery issues. What would you recommend? A) Open the account as a DVP/RVP account B) The customer should use the DRS C) Use the transfer and ship option where the certificates are transferred into his name and then shipped to him D) Have all securities kept in street name

B) The customer should use the DRS - DRS stands for the Direct Registration System. DRS provides a book-entry service. The issuer keeps the records of ownership with no certificates issued. When there is a sale of securities in the account, the customer tells the DRS to deliver to the broker-dealer and there are no hassles with signature guarantees or mutilated certificates. Transfer and ship creates potential delivery issues because the customer will have to be sure to have everything in good deliverable form to the broker-dealer by T+2. DVP and RVP are for institutions and street name means in the name of the brokerage firm, something the customer specifically does not want

When describing a new offering of municipal bonds, which statement is true regarding presale orders? A) There is no takedown on a presale order; the buyers purchase at a discounted price. B) The takedown on presale orders is split among the syndicate members based on their participation. C) The takedown on presale orders is credited to the account of the syndicate manager. D) The takedown on presale orders is credited to the account of the syndicate member making the sale.

B) The takedown on presale orders is split among the syndicate members based on their participation. - Unlike registered corporate issues, investors may place orders for a new municipal bond issue before the issue has even been awarded to the syndicate. These presale orders have the highest priority in terms of allocation, and all syndicate members share proportionately in the takedown (their underwriting compensation).

For which of the following holdings of a customer will a statement of account reflect a per-share estimated value? A) Money market mutual fund B) Unlisted real estate investment trust (REIT) C) Closed-end investment company D) Exchange-traded fund (ETF)

B) Unlisted real estate investment trust (REIT) - Per-share estimated values will typically be used for unlisted REITs as well as DPPs.

Moody's Investment-Grade (MIG) rating would be applicable to A) a New York state revenue bond. B) a New York state revenue anticipation note. C) a New York state university bond. D) a New York state general obligation bond.

B) a New York state revenue anticipation note. - A MIG rating is provided for short-term municipal debt commonly referred to as notes (revenue anticipation notes)

An investor purchases a zero coupon bond at a price of 64. The bond matures in nine years. Five years later, the investor sells the bond at a price of 80. This would result in A) a long-term capital gain of $160. B) a long-term capital loss of $40. C) a long-term capital loss of $200. D) no gain and no loss.

B) a long-term capital loss of $40. - This question deals with accretion of the discount. The discount here is $360 (the difference between the $640 paid and the $1,000 maturity value). With nine years until maturity, the annual accretion is $360 divided by nine, or $40 per year. After five years, the bond's basis has increased by $200 ($40 times 5 years) to $840. The sale at $800 represents a long-term loss of

If an indenture has a closed-end provision, this means A) a sinking or surplus fund must be established. B) additional issues will have junior liens. C) additional issues have no lien on the revenue stream. D) the bonds must be called before maturity.

B) additional issues will have junior liens. - These additional issues are also known as junior lien bonds. - Under a closed-end indenture, additional bonds issued against the same stream of revenues have a junior (subordinate) claim to those already outstanding unless the funds are required to complete construction of the facility.

A municipal finance professional (MFP) is A) an employee of the Municipal Securities Rulemaking Board (MSRB) responsible for broker-dealer compliance regarding MSRB rules. B) an associate of a broker-dealer engaged in municipal securities representative activities other than retail sales. C) an elected official of a municipality with decision-making responsibilities regarding municipal issues. D) a registered representative engaged in the sale of municipal securities to public customers.

B) an associate of a broker-dealer engaged in municipal securities representative activities other than retail sales. - An MFP is an associate of a broker-dealer engaged in municipal securities representative activities other than retail sales. - Those activities can include the solicitation of municipal bond business. MFPs are subject to the MSRB reporting rules regarding gifts to elected officials and political parties (MSRB Rule G-37).

An investor purchased a REIT from her broker-dealer in an SEC-registered public offering. The following year, she asked her registered representative for a quote. When told there is no current quote available, you would gather that this is A) an OTC traded REIT. B) an untraded REIT. C) a hybrid REIT. D) an unregistered REIT.

B) an untraded REIT. - Untraded or unlisted REITs are those not traded in the secondary markets (exchanges or OTC). Therefore, there is limited to no liquidity. - As described in the question, this security is registered with the SEC, so it is not a private placement. - Hybrid REITs are those that take equity and debt positions. With this lack of liquidity, you can expect suitability standards to be higher, and the trades would be subject to increased regulatory review.

The AML Compliance program of a broker-dealer must be A) reviewed and approved by the chief compliance officer of the firm. B) approved by a member of senior management. C) approved by FINRA. D) approved by the chief counsel of the firm.

B) approved by a member of senior management. - The AML Compliance program must be approved in writing by a member of the firm's senior management team.

A stock mutual fund wishes to advertise itself as diversified. To be able to do so, the fund must invest its total assets, such that A) it holds no more than 10% of the voting stock of any one company. B) at least 75% of its assets meet stated diversification requirements. C) its portfolio consists of at least 15 different stock holdings D) no more than 5% of its assets in any one company.

B) at least 75% of its assets meet stated diversification requirements.

The Village of A has received a qualified legal opinion from its bond counsel with respect to a new debt offering. The rendering of this opinion indicates that A) the issue has been approved through the mandatory voter referendum. B) bond counsel has concerns about the issue. C) the issuer is authorized under the by-laws of the village to issue this debt. D) bond counsel is signaling its endorsement of the issue to investors.

B) bond counsel has concerns about the issuer - A qualified legal opinion is prepared when the issuer's counsel has concerns or reservations about the issue. Investors would prefer to see an unqualified legal opinion.

For purposes of the SEC Rule 15g-9 dealing with penny stocks, the term established customer does not include a person who has A) effected a securities transaction in an account more than one year before the proposed penny stock transaction. B) both a cash and a margin account with the firm. C) purchased the securities of three different penny stocks on three different days involving three different issuers. D) deposited funds or securities in an account more than one year before the proposed penny stock transaction.

B) both a cash and a margin account with the firm. - Rule 15(g)9 deals with sales practices relating to penny stocks. If a member is soliciting new customers to buy penny stocks, the member must prepare a suitability statement showing why the proposed penny stock trade is suitable for that customer. - A suitability statement is not required if the member is soliciting an established customer. The type of account or the number of accounts is not part of the definition. - An established customer is one who has effected a securities transaction, made a deposit of funds or securities in an account at least 1 year before the proposed penny trade, or made 3 purchases of penny stocks on 3 separate days involving 3 different issuers.

In addition to an investor's long stock position, she has purchased a put and sold a call. If the premium received for the call is greater than the premium paid for the put, this would be an example of a A) covered call. B) cashless collar. C) credit spread. D) long straddle.

B) cashless collar. - This is an example of a cashless collar. - The position is intended to protect an unrealized gain on a long stock position. - If more cash was received from selling a call, this would negate the need to make a payment for the long put, thus making this a "cashless collar".

A 71-year-old client calls her registered representative and asks him to wire $10,000 to an offshore account. The rep asks the reason and she responds that she won money in a lottery and this is to pay the taxes. The registered representative is concerned that this might be a case of senior exploitation and should A) get the wire instructions and escalate this to his supervisor. B) contact the client's trusted contact person on this account and inform them of the request. C) wire the money as instructed. D) refuse to wire the money.

B) contact the client's trusted contact person on this account and inform them of the request. - Being 65 or older qualifies this client for the designation of specified adult. As such, the firm should attempt to obtain the name of a person who will act as the account's trusted contact person. Whenever the registered representative suspects something unusual, it is always prudent to reach out to that contact person.

Limited partners assisting the general partner to solicit new investors A) is permitted if stated in the partnership agreement. B) could jeopardize their limited partner status. C) is permitted if no compensation is paid. D) is permitted if done within 90 days of her acceptance as limited partner.

B) could jeopardize their limited partner status. - If limited partners—either individually or as a group—become too involved with the business of the partnership, they could be considered general partners and lose their limited liability.

Regulation T applies to both long and short margin accounts, and requires that a 50% deposit be made into the account based on the A) credit balance in the short account. B) current market value of the position. C) net equity in the account. D) debit balance in the long account.

B) current market value of the position. - Regulation T is always based on the current market value of the long or short position.

) The private placement memorandum prepared by a broker-dealer for non-accredited investors in a Regulation D offering must be maintained A) in an easily accessible location for the first three years from the date of final use. B) for three years from final use. C) for four years from final use, the first two years in an easily accessible location. D) at the broker-dealer's main office for six years from the date of publication of the memorandum.

B) for three years from final use - Records related to a Regulation D (private placement) offering must be maintained for three years from date of final use.

Corporate bonds that are guaranteed are A) guaranteed as to payment of principal and interest by the U.S. government. B) guaranteed as to payment of principal and interest by another corporation. C) insured by Assured Guaranty Corporation. D) required to maintain a self-liquidating sinking or surplus fund.

B) guaranteed as to payment of principal and interest by another corporation. - A guaranteed corporate bond is one guaranteed by another corporation that typically has a higher credit rating than the issuing corporation and is in a control relationship with it.

When recommending the purchase of a DPP to a client, as with all other investments, the recommendation must be suitable. FINRA adds some extras requirements in the case of DPPs. Among those is the requirement that the investor is A) an accredited investor. B) in a position to take full advantage of any tax benefits generated by the DPP. C) able to emotionally handle the ups and downs of the market. D) in need of a liquid investment.

B) in a position to take full advantage of any tax benefits generated by the DPP. - FINRA's Rule 2310 lists a few suitability standards necessary for recommending DPPs. Among those is the ability of the investor to make use of any potential tax benefits. - Although DPPs are frequently sold as private placements, even then not all of the investors have to be accredited. - DPPs are considered illiquid investments, and without a secondary market, there are no "roller coaster" ups and downs.

The ABCD Corporation has a beta coefficient of 1.25. Your client's portfolio contains $20,000 worth of ABCD common stock. After a rise in the overall market of 10%, we would expect the value of this client's ABCD common stock to A) increase by $2,000. B) increase by $2,500. C) decrease by 25%. D) increase by $5,000.

B) increase by $2,500. - A stock with a beta coefficient of 1.25 could be expected to rise in value at a rate 25% greater than the overall market. - Because the market has increased by 10%, this stock should increase by 12.5% or $2,500 (10% × 1.25 × $20,000 = $2,500).

If another member broker-dealer has already received clearance from FINRA for a retail communication, filing the piece with FINRA so that your broker-dealer can now use it A) must be done within three days after use by your broker-dealer, even if unaltered. B) is not necessary if unaltered and used as originally intended. C) must be done before publication by your broker-dealer, whether it is altered or unaltered. D) must be done 10 days before your broker-dealer can use it, even if unaltered.

B) is not necessary if unaltered and used as originally intended. - If unaltered and used as it was originally intended, refiling with FINRA is not required. - If the piece had been altered or was intended to be used in a manner inconsistent with how it had been originally intended to be used, filing with FINRA would be required.

An investor has purchased ten bonds that will mature one year after the next. As one bond matures, the proceeds are reinvested in a ten-year bond. This is an example of a A) serial bond structure. B) laddered portfolio. C) positive yield curve. D) balloon maturity.

B) laddered portfolio. - This is an example of a laddered bond portfolio. This strategy is often employed to minimize interest-rate risk and to increase liquidity. - If interest rates rise, you are able to reinvest the proceeds from the maturing bonds into higher yielding bonds. - If interest rates fall, there is protection against reinvestment risk from the longer-maturity bonds at the top of the ladder. These bonds will also appreciate in market value.

Sell order tickets must be A) marked only if they are long sales. B) marked as either long or short. C) marked only if they are short sales. D) executed in accordance with the appropriate rules but not necessarily marked.

B) marked as either long or short. - Every sell order must be marked as either long or short.

A registered representative (RR) purchased 1,000 shares of XYZ for client who had requested 500 shares. This error A) can only be reversed through the FINRA Code of Procedure process. B) may only be corrected by a principal, with appropriate justification. C) will be entered into the firm's error log and reviewed by a principal. D) must be corrected by the RR using the firm's error account.

B) may only be corrected by a principal, with appropriate justification. - Only a supervisory person, such as a principal of the firm, has the authority to correct a trade error. The RR is not permitted to take these steps on their own.

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) approval by a principal is required within 10 days after first use. B) member alterations to the contents are only to make it consistent with applicable regulatory standards or to correct factual errors. C) filing a copy with FINRA is required. D) the name of the underwriter who commissioned the article must be prominently displayed.

B) member alterations to the contents are only to make it consistent with applicable regulatory standards or to correct factual errors. - 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. Preapproval by a principal is required and there is no filing necessary with FINRA. - If the publisher is independent but received money from an issuer or underwriter for authoring the article, it may not be used.

Records prepared by a broker-dealer that do not have a defined period for recordkeeping A) must be stored as a digital file and retained for at least 3 years B) must be retained for at least 6 years C) must be retained for a minimum of 30 days D) must be retained for 3 years and may then be discarded using a FINRA approved shredding service.

B) must be retained for at least 6 years - These records must be maintained for a minimum of 6 years.

A customer has placed a market order to purchase EMD with a broker-dealer, and requests that the order be directed to a specific exchange which is not currently posting the best national price for the stock. The broker-dealer A) may notify the client that a more favorable price is available elsewhere and suggest that the order be directed to that venue. B) must execute the order in the venue as directed by the customer. C) should not accept this order as it will result in an inferior execution for the customer. D) would be in violation of best execution rules if the order was not executed in the best available marketplace.

B) must execute the order in the venue as directed by the customer - Regulation NMS requires that a broker-dealer route a customer order to that exchange currently posting the most favorable price. - A customer may, however, request that their order be directed to a specific venue and the firm must comply with this request

A broker-dealer is serving as a manager on an equity IPO for XYZ Corporation. The broker-dealer A) may publish a research report on XYZ at any time following the closing of the IPO offering. B) must wait 10 days before publishing a research report on XYZ. C) must wait 3 days before publishing a research report on XYZ. D) may not publish a research report on XYZ as doing so would be deemed a conflict of interest between itself and XYZ.

B) must wait 10 days before publishing a research report on XYZ. - A broker-dealer that serves as a manager for an issuer's IPO must wait 10 days before publishing a research report covering the equity securities of that issuer. - In the case of a follow-on offering, the waiting period is 3 days. These waiting period are referred to as the "quiet period"

Member firms employing registered representatives who have a disciplinary history or who have been associated with disciplined firms may have to install taping systems to record all telephone conversations between their registered persons and existing and potential customers, review those recordings, and file reports with FINRA under Rule 3170. All tape recordings made pursuant to the requirements of this rule shall be retained for a period of A) not less than six years from the date the tape was created, the first two years in an easily accessible place. B) not less than three years from the date the tape was created, the first two years in an easily accessible place. C) not less than four years from the date the tape was created, the first two years in an easily accessible place. D) not less than two years from the date the tape was created, the first year in an easily accessible place.

B) not less than three years from the date the tape was created, the first two years in an easily accessible place.

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 forecasted return exceeds the required return. B) overvalued, because the required return exceeds the forecasted return. C) overvalued, because the forecasted return exceeds the required return. D) undervalued, because the required return exceeds the forecasted return.

B) overvalued, because the required return exceeds the forecasted return. - We compare the expected return, based on the security's beta, with the return of the market (a beta of 1.0). - If the market is estimated to return 6% and our security has a beta of 1.3, it should return 30% more than the market. **The math is: 6% ××1.3 = 7.8% expected return** - According to the analyst's estimates, the security is overvalued because the forecasted return (7%) is less than the required return (7.8%).

The ABC Insurance Company is advertising its variable annuity product as "ABC Lifetime Income—income generated from mutual fund returns." This advertisement is A) permitted. B) prohibited because it implies returns from mutual funds. C) prohibited because it doesn't reference an annuity. D) permitted as long as there's no guarantee.

B) prohibited because it implies returns from mutual funds. - Variable contracts or their underlying accounts cannot be advertised as mutual funds. Proprietary terms can be used instead of words such as "annuity."

Arbitration awards are A) publicly available, for a fee. B) publicly available, at no charge. C) never made available to the public, to maintain confidentiality. D) reported by FINRA on the last day of the calendar quarter.

B) publicly available, at no charge. - Arbitration awards are made publicly available by FINRA at no cost to the public. Resolved arbitration claims may be viewed on FINRA's BrokerCheck service.

A client has sold an ABC Feb 65 call and purchased an ABC Feb 55 call. This client has A) purchased a covered call. B) purchased a call debit spread. C) sold a straddle. D) purchased a call credit spread.

B) purchased a call debit spread - This is an example of a bull call debit spread. The purchased Feb 55 call will have a higher premium (money going out) than the sold Feb 65 call (money coming in), making this a debit spread (more cash went out in buying the 55 call than selling the 65 call)

A maximum of $3,000 of net capital losses may be used by an investor each year to A) offset tax deductions. B) reduce ordinary income. C) reduce capital gains. D) increase tax deductions.

B) reduce ordinary income. - An investor may use up to $3,000 per year of net capital losses to reduce ordinary income. **Note that there is no limit to the amount of capital losses than can be used to offset capital gains.**

During the last statement period, a client's margin account received a dividend of $150 and incurred interest charges of $35. The effect of these events is a(n) A) reduction of the debit balance of $185. B) reduction of the debit balance of $115. C) increase of the credit balance of $185. D) increase of the credit balance of $115

B) reduction of the debit balance of $115. - Dividends paid into a margin account will reduce the debit balance, while interest charges increase the debit balance. - The net effect of these charges is a reduction in the balance in the amount of $115

A website owned and operated by a broker-dealer is considered A) a public appearance and must be periodically audited by a FINRA. B) retail communication and must be reviewed and approved by a principal prior to first use. C) institutional communication and must be approved by a principal prior to launch. D) social media content, and must be filed with, and approved by, FINRA at least 10 business days prior to first use.

B) retail communication and must be reviewed and approved by a principal prior to first use. - Websites are considered retail communication and are subject to the same rules as all over forms of retail communication

A registered representative is preparing a PowerPoint slide presentation, to be delivered in a live seminar, for a group of invited institutional clients. To use the slides, they may have to be A) submitted to both FINRA and the SEC for preuse approval. B) reviewed by a principal of the broker-dealer. C) submitted to the SEC for review and approval. D) approved by FINRA in writing.

B) reviewed by a principal of the broker-dealer. - Communications material that is intended for use with institutional customers only need be supervised and reviewed by a principal of the member firm. - Alternatively, if the member's procedures do not require review of institutional communications, they must include a provision for the education and training of associated persons so that they will understand the firm's requirements. - Though FINRA can request spot checks of any material used to communicate with the public, submission of institutional communications to FINRA or the SEC for review or approval is not required.

A client holding an individual account has requested that their spouse be added to the account, thereby enabling the spouse to place trades for the account. The registered representative handling this account A) must request a Power of Attorney from the person who is being added to the account. B) should inform the client that this change will need to be approved by a principal of the firm. C) must inform FINRA of the proposed name change and await FINRA approval. D) may not execute any orders for this account until the requested change is made

B) should inform the client that this change will need to be approved by a principal of the firm. - Changes to account name or designation must be approved in writing by a registered principal of the firm.

Depletion allowances in oil and gas programs are based on the amount of oil A) lost to shrinkage. B) sold. C) extracted. D) in reserve.

B) sold. - Depletion allowances are allowed to compensate for a mineral resource, which is considered accomplished when it is sold.

A standard selling group agreement may contain all the following elements except A) the portion of the underwriting spread to be paid to the firm. B) the designation of an Eastern or Western account. C) procedures for payments to the managing underwriter. D) the number of shares the firm will be allotted for public sale.

B) the designation of an Eastern or Western account. - These types of accounts are related to municipal syndicates and are applicable to the underwriters who are signed on as syndicate members.

The Options Clearing Corporation (OCC) is accorded each of the following responsibilities except A) the designation of expiration months and strike prices for new contracts introduced into the market. B) the determination of premium. C) the determination of when new contracts will be offered to the market. D) supporting the seller of a contract in the event they are unable to perform when assigned.

B) the determination of premium. - The OCC does not set the premiums for options contracts. Premiums are determined in the marketplace by the trading participants.

A portion of the OTC market where companies that have been delisted for regulatory reasons are usually traded is A) the third market. B) the grey market. C) the "pink" market. D) the fourth market.

B) the grey market. - The grey market is sometimes called the "dumping ground" for stocks that cannot trade on the organized markets for regulatory reasons or have such little investor interest that broker-dealers are unwilling to quote them. - The third market is the trading of listed securities OTC, and the fourth market is institution-to-institution trading to avoid the use of broker-dealers. - The "pink" market is part of the OTC Markets Group and does not handle issues with regulatory problems.

Company X has recently completed a 3:2 stock split. A client owns 200 pre-emptive rights and is asking his RR what the consequences of this event is on his rights. The RR would tell the client that A) the rights have decreased in value owing to the stock split. B) the value of the 200 rights does not change since the value of their equity position is unchanged. C) the rights must be exercised within 30 days of the stock split or they will expire. D) the rights have increased in value as the result of the stock split.

B) the value of the 200 rights does not change since the value of their equity position is unchanged. - The value of the preemptive rights will not be effected by a stock split, as the value of the customer's overall position does not change

Features of an employee stock purchase program (ESPP) include all of the following except A) participants can sell the stock at any time. B) contributions are a percentage of pre-tax income. C) contributions are made with pre-tax dollars. D) the purchase price is discounted.

C) contributions are made with pre-tax dollars. - Employee stock purchase plans (ESPPs) are not qualified plans. That means that the employee purchases the stock with after-tax dollars. For example, an individual has a monthly salary of $5,000 and elects to contribute 10% of gross salary to the plan. The employer will take $500 per month out of the paycheck after subtracting withholding tax and Social Security contributions and any other deductions. Before enrolling in the plan, this employee's monthly take-home pay might have been $3,700. Now it will be $3,200.

If an M&N 1 corporate bond issued at par with a 6% coupon is later purchased in August for 97 plus accrued interest of $16, how much taxable interest must the investor report for the year? A) $16 B) $60 C) $14 D) $30

C) $14 - The purchaser of a bond pays the seller the interest that has accrued since the last interest payment date. - A purchaser in August will pay the interest that has accrued since May 1. - Then, on November 1, the investor will receive the entire six months of interest. - We are told that the investor paid $16 in accrued interest. That is income to the seller. Then, when the November payment of $30 (6% coupon is $30 semiannually) is made, the investor must report the amount over the accrued interest paid out as income. In our question, that is $30 minus $16 = $14.

If an investor opens a new margin account and sells short 100 shares of ABC at 32.50, with Regulation T at 50%, what is the investor's required deposit? A) $1,625.00 B) $3,250.00 C) $2,000.00 D) $812.50

C) $2,000.00

In her new margin account, a client purchases $60,000 of ABC and pays for the shares in full. As the result of this trade, the SMA in the account would be: A) $60,000.00 B) 0 C) $30,000.00 D) $15,000.00

C) $30,000.00 - If a client makes full cash payment in her margin account, the SMA would increase by 50% of the trade. - SMA = Special Memorandum Account

Nickelplate Manufacturing Corporation (NMC) is capitalized with 1 million shares of a 6% $50 par callable preferred stock and 10 million shares of $1 par common stock. Your customer's required rate of return on fixed income investments is 8%. The NMC preferred stock would be an appropriate addition to this customer's portfolio only if the stock was not priced in excess of A) $66.66. B) $40.00. C) $37.50. D) $75.00.

C) $37.50. - How does a 6% preferred stock return 8%? Remember the inverse relationship between interest rates and fixed income security prices. - As one goes up, the other goes down. An increased return results from a decreased price. The math is basic algebra. - **We know the annual dividend is $3 per share (6% of $50 = $3); that is fixed. What number results in a payment of $3 providing an 8% return? Divide 3.00 by $8 and the answer is $37.50.** - You could also do this question by working backwards. Multiply each of the choices by 8% and the one where the product is $3 is correct.

A client's margin account has $650,000 across 3 different securities positions, a debit balance of $275,000, and an SMA balance of $125,000. In the event of the bankruptcy of the broker-dealer, SIPC will cover this client for A) $400,000.00 B) $625,000.00 C) $375,000.00 D) $500,000.00

C) $375,000.00 - In a margin account, SIPC will cover the net equity in the account. In this example, we subtract the debit balance of $275,000 from the market value of $650,000, to arrive at the net equity position of $375,000. **SMA is not covered by SIPC.**

An investor purchased 100 shares of a stock three years ago at $38 per share. Disappointed with the stock's performance, the investor sells it for $35 per share. Two weeks later, after the company announced higher-than-expected earnings, the investor purchased 100 shares at $44 per share. When this investor decides to sell the newly purchased shares, the cost basis will be A) $44 per share. B) $41 per share. C) $47 per share. D) $38 per share.

C) $47 per share. - This is a wash sale situation. Selling a stock at a loss and repurchasing it within 30 days "washes" out the loss for current tax purposes. - The loss, in this case $3 per share, is added to the cost of the repurchased stock. Thus, $44 plus $3 equals a new cost basis of $47 per share.

A $50,000 20-year 7% municipal bond with semi-annual M/S coupon payments is issued on March 1, 2020. The full price for a trade of this bond, with a 7% yield to maturity to settle on June 30, 2020, is closest to A) $51,166.67. B) $51,147.22. C) $51,156.94. D) $52,313.89.

C) $51,156.94. - The full price of a bond includes the accrued interest. First, we calculate the number of days of accrued interest. Because this is a municipal bond, each month has 30 days. Accrued interest is always paid up to, but not including, the settlement date. That means 30 days each for March, April, and May (90 days). Because we do not pay accrued interest for June 30, (on settlement date, the new owner is entitled to the entire six months of interest), there are 29 more days, giving us a total of 119 days. You can set it up like this: 6/30 minus 3/01 = 3 months, 29 days = 119 days. - The next step is computing the amount of accrued interest in dollars and cents. With a coupon of 7% and semi-annual payments, each payment is 3.5% of the $50,000 par value. That is $1,750 each six months. We are going to solve for 119/180 days' worth of accrued interest. With the test center calculator, multiply $1,750 times 119 and divide the product by 180. The result is accrued interest of $1,156.94. Alternatively, you could find the interest for each day by dividing the semiannual interest of $1,750 by 180 days = $9.72222 per day. Multiply that times 119 days and the product is $1,156.94. - Finally, when a bond with a 7% coupon has a yield to maturity of 7%, that tells us the bond is selling at par. All we need to do now is add the accrued interest to the $50,000 par value to arrive at $51,156.94.

If 1 OEX 375 call is purchased at 3.25 and exercised when the S&P 100 closes at 381, the writer delivers which of the following to the holder? A) $325 cash B) $381 in securities C) $600 cash D) $600 in stocks

C) $600 cash - Index options settle in cash. Physical delivery does not occur. The call buyer receives cash equal to the difference between the strike price and the index closing value on the day the option is exercised. With the index closing price of 381 and the strike price at 375, that difference is 6 points. With a multiplier of $100, the settlement is $600.

A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund? A) $7.80 B) $8.42 C) $8.30 D) $8.57

C) $8.30 - The investor pays the public offering price (POP) when purchasing mutual fund shares. - For a Class A share upon purchase, the POP is the NAV plus the sales charge. - In this case, the NAV is $7.80 and we are told the sales load is $0.50. - Adding the two numbers together equals the public offering price of $8.30. - The underwriter's concession of $0.12 is part of the $0.50 as is the $0.15 administrative fee.

A customer sells short 100 shares of XYZ Corporation at $78 per share. The support and resistance levels for XYZ are at $70 and $80, respectively. If he wishes to protect his position, which of the following is the best place to put in a buy stop order? A) $70.10 B) $69.85 C) $80.10 D) $78.10

C) $80.10 - The client will want to place a buy stop a little above the resistance level to protect himself against an upside breakout. Entering a buy stop order too close to the purchase price (78.10) would not afford the client an opportunity for gain.

A municipal A & O bond is issued on October 1, 2010, with a 10-year stated maturity. If a trade in this bond settles on April 1, 2020, how many days' worth of accrued interest will be added to the price of the bond? A) 1 B) 90 C) 0 D) 180

C) 0 - Interest on a municipal bond begins to accrue on the previous payment date and ends the day before settlement date. Always assume a bond pays interest on the first of the month unless told differently. - In this case, interest is payable on April 1 and October 1 each year. **Whenever a bond trade settles on a payment date, it trades flat (without accrued interest).**

A company has annual sales of $15,000,000, operating expenses of $9,000,000, interest expense of $2,000,000 and principal payments on bonds totaling $1,000,000. What is the company's debt service ratio? A) 4 to 1 B) 5 to 1 C) 2 to 1 D) 3 to 1

C) 2 to 1 - Debt service ratio = [Earnings before Interest & Taxes (aka EBIT)]/(Principal + Interest due). Net income - $15,000,000 in sales -$9,000,000 in expenses = $6,000,000. Total debt due = $2,000,000 + $1,000,000 = $3,000,000. Debt service ratio = $6.0mm/$3.0mm = 2 to 1

Client Smith invested $50,000 in a 2X Inverse ETF. The market declines 5% on Day 1 and rises 2% on Day 2. What is the current value of the ETF? A) 49500 B) 58200 C) 52800 D) 48450

C) 52800 - An inverse exchange-traded fund (ETF) is designed to deliver the opposite performance of an underlying index or other benchmark. - Some ETFs use leverage to generate their results, which may be double or triple the performance of the benchmark they track. In this example, since the market declined by 5% on Day 1, this ETF would have risen by 10%, or $5,000, bringing its value at the end of Day 1 to $55,000. - On Day 2, the market increased by 2%, causing this ETF to decline by 4%, or $2,200, bringing its value at the end of Day 2 to $52,800. **Note that the Day 2 change is based on the resulting change from Day 1. Thus, we must subtract $2,200 from $55,000 to arrive at the closing value on Day 2.**

A municipal bond originally issued at 90 with a 10-year maturity will have a compound accreted value (CAV) after five years equal to A) 100. B) 5. C) 95. D) 10.

C) 95 CAV is the cost basis of the bond, in this case, after five years accretion. There are 10 points to accrete (the difference between the issue price of 90 and par) over 10 years. One point each year will be added, so after five years, the adjusted cost basis will be 90 + 5, or 95.

When a customer transfers the proceeds of a sale from one fund to another within the same family of funds, what are the tax consequences? A) Losses are deducted at the time of the transfer, but gains are deferred until the final redemption. B) Gains are taxed at the time of the transfer, but losses are deferred until the final redemption. C) All gains and losses are recognized on the transfer date. D) No gains or losses are recognized until the final redemption.

C) All gains and losses are recognized on the transfer date. - Although a transfer within a family of funds is generally not subject to a sales charge, the customer is liable for any taxes due. - The IRS considers this transaction a sale and a purchase. Any losses or gains must be declared on that year's tax form.

Your manager notifies you that a new municipal revenue bond issue you have been working on has been oversubscribed. How is the order acceptance priority for this issue determined? A) As outlined in the indenture B) On a first-come, first-served basis C) As outlined in the agreement among underwriters D) As outlined in the legal opinion

C) As outlined in the agreement among underwriters - The priority of filling municipal orders is established by the managing underwriter in the release terms letter sent to the syndicate once the bid is won. - This letter is an amendment to the agreement among underwriters. The priority is also disclosed in the official statement.

When the issuer of an insured municipal bond defaults, what does the insurance company do? A) Only the principal is returned with the bondholder losing the interest. B) Both principal and interest are returned over the remaining term of the bond. C) Both principal and remaining interest payments are paid immediately to the bondholder. D) Principal is returned immediately, and the interest is paid out based upon the normal schedule.

C) Both principal and remaining interest payments are paid immediately to the bondholder. - Both interest and principal are paid as scheduled over time through the life of the bond. - The idea is that the bondholder should not see a problem. - The insurer will just take up the liability and run with it without missing a beat.

Reggie owns a convertible bond that converts into 20 shares of common stock. The current market value of the bond was 118½ at the close on Friday, April 1. A 30-day call is announced before the opening on Monday, April 4, at a price of 102. The stock is trading at $57.75. What should Reggie do? A) Redeem the bond at the call price B) Hold the bond to maturity C) Convert the bond into the stock D) Sell the bond

C) Convert the bond into the stock - Reggie will not be allowed to hold the bond to maturity because it is being called. - The real question is whether he should sell the bond, allow it to be called, or convert it to the underlying stock. Now that the call has been announced, the market value of the bond will fall to meet the call price. - **This occurs as a result of declining demand. (Who wants to buy a bond that is about to be called at a lower price?)** - Thus, redeeming the bond at the call price and selling the bond would both yield the same results: $1,000 times 102% equals $1,020. - If he converts the bond, he will get the following results: 20 shares times $57.75 equals $1,155. Therefore, it makes the most sense to convert the bond.

Mrs. Jones purchases 2 XYZ Jul 30 calls at 2 and 2 XYZ Jul 30 puts at 2.50. She will break even when the price of the underlying stock is I. 25.50. II. 27.50. III. 32. IV. 34.50 A) IV B) II and III C) I and IV D) III

C) I and IV - Ms. Jones has purchased a straddle by simultaneously buying a call and put. Long straddles have two breakevens, the strike price plus total premium and strike price minus total premium, so the breakevens are 34.50 and 25.50.

A corporation has 1 million shares of common stock outstanding. There is also a $100 par 6% cumulative convertible preferred issue with 100,000 shares outstanding. If the corporation wishes to use a rights offering to raise additional capital by selling 500,000 new shares of common, which of the following statements is true? A) Each common share will receive half of a right. B) It will require five rights granted to the preferred stockholders to buy one new share. C) It will require two rights to buy one new share. D) Each preferred share would receive five rights.

C) It will require two rights to buy one new share. - The number of rights necessary to acquire one new share is computed by dividing the number of outstanding shares of common stock by the number of new shares being issued. In this question, that is 1,000,000 ÷ 500,000 = 2. **Note: Preferred stock does not receive preemptive rights; the information about the 100,000 shares is included as irrelevant information (makes the question more difficult for some and is something the test loves to do).**

Which of the following best describes an intangible drilling cost? A) Exploratory well drilling B) Proven reserve of oil or gas C) Labor, fuel, or drilling rig rental D) Tax liability

C) Labor, fuel, or drilling rig rental - Intangible drilling costs are the noncapital costs of putting in a well. - They are currently deductible expenses such as fuel, wages, and rent. - An intangible drilling cost is one that, after expenditure, has no salvage value.

A client wants to put on a credit spread. In addition to the sale of a Nov 60 Put, which of the following positions must be added? A) Long Nov 50 Call B) Short Nov 60 Put C) Long Nov 50 Put D) Long Dec 60 Put

C) Long Nov 50 Put - A credit spread involves the purchase and sale of two option contracts, both of the same class. - The contract which is sold has a higher premium than the contract purchased. In this question, the Nov 60 put will have a higher premium than the Nov 50 Put, creating a credit spread.

If a member firm wishes to have a clearly erroneous trade reviewed, it must notify A) the Uniform Practice Committee. B) the National Adjudicatory Council (NAC). C) Nasdaq Market Operations. D) the contra party to the trade.

C) Nasdaq Market Operations. - To have a clearly erroneous trade reviewed, a member must notify Nasdaq Market Operations within 30 minutes of the trade. The NAC is where appeals of disciplinary hearings are made.

Which of the following is not an accurate description of the recordkeeping requirements for a broker-dealer? A) General ledger maintained for six years B) Fingerprint card of terminated employee maintained for three years C) Order ticket maintained for six years D) Minutes of board meetings maintained for the lifetime of the firm

C) Order ticket maintained for six years - Order tickets must be preserved for a minimum of three years, not six.

An investor holds 'lettered stock', as the result of his purchase of shares in a A) Rule 147 offering. B) Regulation A+ offering. C) Regulation D offering. D) Regulation S offering.

C) Regulation D offering. - "Lettered stock," also known as 'legend' stock, is stock issued in a Regulation D offering. The investor must sign a letter stating that he plans to hold the securities for investment purposes only.

A client made a payment of $100,000 in her margin account for the purchase of 2,000 shares of XYX @ 50. Consequently, A) the debit register will increase by $50,000. B) the credit register will decrease by $50,000. C) SMA will increase by $50,000. D) SMA will increase by $100,000

C) SMA will increase by $50,000. - If full payment is made for a trade in a margin account, the SMA will increase by 50% of the value of the trade.

An investor who executes a short sale in her margin account is required to meet the Regulation T requirement based on the A) DR. B) LMV. C) SMV. D) CR.

C) SMV - The Regulation T requirement is always based on the current market value of the position being traded. - In this case, the investor must deposit 50% of the market value of the securities being sold short (SMV)

A customer is short 600 shares of HMK while also maintaining a long position of 1,000 shares of HMK. If the customer placed an order to sell 500 shares of HMK, the order ticket for this sale must be marked as A) "sell 400 shares short and 100 shares long". B) "sell 500 shares short". C) "sell 400 shares long and 100 shares short". D) "sell 500 shares long".

C) Sell 400 shares long and 100 shares short - When a customer is long and short the same security simultaneously, the positions must be netted out to determine if the customer is net long or net short. - In this example, the customer is net long 400 shares, so the order ticket must indicate "Sell 400 shares long and 100 shares short"

James would like to create a credit spread. He begins by purchasing an ABC Oct 50 Put. Which additional position should James execute? A) Sell ABC Sept 50 Put B) Short ABC Oct 45 Put C) Sell ABC Oct 60 Put D) Purchase ABC Oct 50 Cal

C) Sell ABC Oct 60 Put - In a credit spread, the contract sold will have a higher premium than the contract purchased. James should sell a put with a higher strike price compared to the one he purchased. - This will result in a net credit to the account. If James wished to sell a put with the same 50 strike price and enter a credit put spread, the option would have to expire after Oct, e.g. an ABC Dec 50 put.

Which of the following options positions is not a bullish strategy? A) Long ABC Dec 45 Call, Short ABC Dec 45 Put B) Short MNO June 80 Call, Long MNO June 70 Call C) Short RST Oct 30 Call, Long RST Oct 40 Call D) Long XYX May 50 Put, Short XYX May 60 Put

C) Short RST Oct 30 Call, Long RST Oct 40 Call - Since the lower strike price is being sold and the higher strike price is being purchased, this is an example of a bear call credit spread. The other positions will benefit when the market rises

Which of the following option strategies, besides going long a call, can be used to purchase stock below its current market value? A) Short call B) Short straddle C) Short put D) Long put

C) Short put - If the put is exercised by the owner, the writer of the put will be obligated to purchase the stock. - The cost of the stock is reduced by the amount of premium taken in when the put was written, allowing the investor to purchase the stock at a net cost lower than the stock's current market value.

In an interdealer trade, if the seller delivers before the settlement date, which of the following statements is true? A) The buyer must only accept delivery if the seller gave advance notice of his intention. B) The buyer must accept delivery. C) The buyer may accept the stock or refuse it without prejudice. D) The seller has violated the Uniform Practice Code.

C) The buyer may accept the stock or refuse it without prejudice. - In a regular way trade, the firm is not obligated to accept securities delivered before the settlement date (two business days after the trade date), but it may do so if it wishes.

A registered representative of a FINRA member firm has developed a LinkedIn friendship with a registered investment adviser. This has resulted in the investment adviser directing transactions for many of their clients to this representative's broker-dealer. The broker-dealer is promoting an all-day seminar with presentations to be delivered by a number of outstanding economists and securities analysts. The seminar location is in a hotel ballroom down the street from the member firm's office. The firm has invited the investment adviser to attend as its guest. That location requires the adviser to fly in the night before and stay at the hotel. As the broker-dealer's guest, which of the following expenses are reimbursable by the broker-dealer without violating the safe harbor provisions of Section 28(e)? A) The registration fees for the seminar plus all of the travel expenses B) The travel expenses, but not the registration fee C) The registration fees for the seminar D) The registration fees for the seminar plus the hotel room for the night

C) The registration fees for the seminar - Under the safe harbor provisions of Section 28(e) of the Securities Exchange Act of 1934, broker-dealers are permitted to extend seminar invitations to investment advisers with whom they do or hope to do business. - The only expense reimbursable by the broker-dealer is the fee to attend the seminar.

Which of the following details would not be found on the bond resolution for a revenue bond? A) The insurance covenant B) The maintenance covenant C) The tax covenant D) The rate covenant

C) The tax covenant - Unless something in the question refers to special taxes, revenue bonds do not have tax backing. - The other items are included in the bond resolution (or trust indenture). - The rate covenant is a promise to maintain rates sufficient to pay expenses and debt service. - The maintenance covenant is a promise to maintain the equipment and facility/facilities. - The insurance covenant is a promise to insure any facility.

An equity put option is exercised on Friday. The exercise settlement date is A) Friday. B) Wednesday. C) Tuesday. D) Monday.

C) Tuesday. **NOTE: pay attention to the wording of 'purchasing an option' (T+1) and 'exercising an option' (T+2)**

Two sisters have opened a joint account, 'tenants-in common', at a broker-dealer. Subsequently, one of the sisters passes away. May her husband recover her funds? A) No, unless the account was organized as a 'joint tenants with rights of survivorship" account. B) Yes, if he presents his late wife's will showing he is legally entitled to recover these funds. C) Yes, if he files the proper paperwork to recover his wife's portion of the account. D) No, as he was not a named owner on the account

C) Yes, if he files the proper paperwork to recover his wife's portion of the account. - The spouse of a now deceased individual who was a named owner of a brokerage account may recover her ownership interest once all the necessary papers have been filed with the appropriate parties.

An investor is following the new issue municipal bond market. The primary source material is found in the Daily Bond Buyer. This publication is distributed on A) a weekly basis. B) an hourly basis. C) a daily basis. D) an as needed basis.

C) a daily basis. - This is a "Who is buried in Grant's Tomb" type of question, and there are students who do miss it. We won't say there are many questions this easy on the exam, but there are a few—please do not miss them.

During the prior month, a client's margin account incurred a $100 interest charge while a cash dividend of $150 was credited. The result is A) an increase of the debit register of $50. B) a decrease in the SMA in the margin account. C) a decrease of the debit register of $50. D) an increase of $50 to the market value.

C) a decrease of the debit register of $50. - In this question, we need to find the "net" outcome of the two events. The interest charge of $100 will cause the debit register to rise, while the incoming cash dividend of $150 will cause the debit register to fall. - Therefore, the "net" result of these events is a decrease of $50 to the debit register

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) 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. D) 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. - The collection ratio measures taxes collected versus taxes assessed. It is a tool used in analyzing general obligation bonds, which are backed by the taxing authority of the issuer. Revenue bonds are backed by user fees, not taxes.

The purchase of 200 shares of HGF at 45, and the subsequent sale of 2 HGF 50 calls at 3, could produce all of the following except A) a loss of $6,000. B) a profit of $1,600. C) a profit of $2,000. D) a loss of $8,400.

C) a profit of $2,000. - This is covered call writing. - The maximum loss that could be incurred is $8,400 ($9,000 paid for shares less premiums of $600 received). If you can lose $8,400, then you can certainly lose $6,000 (if, for example the value of the stock drops to 12). - The maximum profit that can be expected is $1,600 (strike price of $10,000 received when calls are exercised minus the purchase price of $9,000 plus $600 in premiums received). - Because the maximum profit possible is $1,600, it is impossible to have a profit of $2,000.

As the result of a complaint from a member firm, FINRA has determined that an order was filled for 10 times the requested number of shares. In this case, FINRA would most likely A) ask both parties to reach an amicable resolution amongst themselves. B) order an arbitration case to resolve this error. C) adjust the trade to reflect the correct number of shares. D) enter a disciplinary order against the firm who caused the error.

C) adjust the trade to reflect the correct number of shares. - In the situation of a "clearly erroneous transaction", FINRA can declare an interdealer trade null & void, or can adjust the terms of the trade.

Your firm is distributing units of a direct participation program (DPP) to several high net worth clients. Fred maintains a discretionary account with you. You may purchase these units for Fred's account A) with prior written permission from your supervisor. B) once you have established that these securities are suitable for him. C) after receiving his written consent. D) after informing him that he needs to send in his payment within three business days.

C) after receiving his written consent. - A registered representative may not use standing discretion to purchase non-traditional instruments in a customer account. - Because of the heightened suitability standards applicable to products such as a direct participation programs, the client must provide advance written consent when purchasing these products.

A transaction that will create or increase a long position in an option contract is A) a covered writing transaction. B) a closing purchase transaction. C) an opening purchase transaction. D) an opening writing transaction.

C) an opening purchase transaction. - One takes a long position by buying an option. Creating or increasing the position is opening not closing. - A closing purchase transaction eliminates the position. An open writing transaction creates or increases a short, not long, position.

Mr. Jones buys 100 shares of a mutual fund on December 28, 2001, for $4,000. He receives a capital gains distribution of $2.40 per share on March 6, 2002. He sells his 100 shares for $4,300 on June 19, 2002. For tax purposes, these transactions will result in A) a $240 capital gain. B) a $300 capital gain. C) both A and B. D) neither A nor B

C) both A and B. - When Mr. Jones receives the capital gains distribution he has a $240 capital gain. Additionally, when he sells his mutual fund shares for $4,300 versus his cost basis of $4,000, he has another capital gain of $300

The main objective of Regulation SHO is to ensure that A) all short sales are profitable. B) the seller has sufficient equity in his account prior to the short sale. C) broker-dealers will be able to borrow the security that a client wishes to sell short. D) short sales are executed in margin accounts.

C) broker-dealers will be able to borrow the security that a client wishes to sell short. - Regulation SHO is an SEC rule requiring broker-dealers to make sure they can borrow a security and be able to make a timely delivery of that security, prior to a client effecting a short sale in that security

An Australian fabric company is selling goods to a US department store and is being paid in US Dollars. The best way for the Australian company to protect itself against an adverse movement in the value of the USD is to: A) buy put options on the US Dollar. B) buy put options on the Australian dollar. C) buy call options on the Australian dollar. D) buy call options on the US Dollar.

C) buy call options on the Australian dollar - A foreign exporter selling products into the US and receiving US dollars as payment would buy call options on their own currency to protect against an adverse movement in the US dollar. - As the US dollar weakens, the value of the AD strengthens, and call options on the AD would likewise gain value. **The key here is that there are no options available on the US dollar.**

The settlement of a securities transaction is an integral part of the trade process, and is typically handled through the A) customer onboarding team of the firm. B) compliance department of the firm. C) cashier's area of the firm. D) purchase and sales (P&S) department of the firm.

C) cashier's area of the firm. - The margin/cashiering department of a broker-dealer is the final stop in the life cycle of a trade. - This is where final trade settlement procedures are handled.

A client has a diversified portfolio of mostly liquid securities. The account statement reflecting these holdings will provide a valuation for these assets based on A) estimated per share value. B) appraised value. C) current market value. D) book value.

C) current market value. - Account statements will reflect current market value for liquid assets **- For illiquid assets, an estimated per-share value may be used.**

The "40 Bond Index" provides A) daily prices of 20 GO bonds and 20 revenue bonds with average maturity of 25 years. B) weekly prices of 40 revenue and GO bonds with average maturity of 20 years. C) daily prices of 40 revenue and GO Bonds with average maturity of 20 years. D) average weighted prices of the 40 most heavily traded GO and revenue bonds issued in the last 30 days.

C) daily prices of 40 revenue and GO Bonds with average maturity of 20 years. - The "40 Bond Index" is a financial tool found within the Bond Buyer which provides a daily price index of 40 GO and revenue bonds with an average maturity of 20 years.

A customer, age 75, who is retired and on a fixed income wants to invest $50,000 in speculative stocks in an account set up as joints tenants with right of survivorship (JTWROS) with a spouse. As a registered representative (RR), you feel the transactions are unsuitable for the customer. Therefore, you should A) enter the trade without question or discussion. B) refuse the trade as unsuitable. C) discuss with the customer why speculative stocks might not be appropriate, given the circumstances as you know them before entering any orders. D) require documentation from the other party to the JTWROS account showing they agree with the proposed transactions.

C) discuss with the customer why speculative stocks might not be appropriate, given the circumstances as you know them before entering any orders. -

One of the effects of Regulation BI is to place a limitation on the use of the descriptive term A) agent. B) stockbroker. C) financial advisor. D) registered representative.

C) financial advisor. - Regulation BI limits the use of the words adviser or advisor to those who are registered as investment advisers or representatives of those who are - Passing the Series 7 exam legally qualifies one as a registered representative. Under state law, the legal term is agent and the historical, and not misleading term, is stockbroker. Most of our Series 7 students go on to pass the Series 66 exam and become IARs. In that case, investment adviser representative is permitted. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

If a member firm suspects exploitation in the account of a specified adult, proceeds from sales may be put on temporary hold A) for one month. B) until the need for the hold ends. C) for a maximum of 55 business days. D) for a maximum of 55 calendar days.

C) for a maximum of 55 business days. - FINRA Rule 2165 permits a member that reasonably believes that financial exploitation has occurred, is occurring, has been attempted, or will be attempted to place a temporary hold on the disbursement of funds or securities from the account of a specified adult customer. - The maximum length of the hold is 55 business days. **Do we expect the exam will ask you to choose between 55 business and 55 calendar days? No, that is not FINRA's style, but we do want you to know the correct count.**

A complaint has been received from a long-standing customer of the firm, and the matter has been escalated to the compliance department of the firm. The complaint must be kept on file for A) two years following the receipt of the complaint. B) six years following resolution of the complaint. C) four years following resolution of the complaint. D) four years following receipt of the complaint

C) four years following resolution of the complaint. - Customer complaints must be maintained for four years in broker-dealer files following the resolution of the matter. - It is important to note that the MSRB requires customer complaints to be maintained for six years

A client has purchased a market-linked investment. All the following are reasonable expectations of holding this investment except A) access to market sectors typically difficult to reach for retail investors. B) an enhanced income stream. C) full recovery of original principal investment. D) exposure to a particular market.

C) full recovery of original principal investment. - Market-linked investments may only offer investors full downside protection only at maturity. These are securities products designed and sold typically by financial institutions, such as broker-dealers.

One of the key requirements in offering a DPP to a customer is that the program must be suitable. FINRA has some specific suitability requirements for DPPs. Among those is the investor A) has sufficient net worth to be deemed an accredited investor. B) has sufficient experience in the type of business the program is undertaking. C) has a net worth sufficient to sustain the risks of the DPP, including loss of investment. D) does not own a DPP that will compete with the program being offered.

C) has a net worth sufficient to sustain the risks of the DPP, including loss of investment. - FINRA's Rule 2310 lists a few suitability standards necessary for recommending DPPs. - Among those is the need for the investor to have a net worth sufficient to sustain the risks of the DPP, including loss of the investment. - Although many DPPs, but not all, are limited to accredited investors, that is not a FINRA suitability standard; that is an SEC requirement. It is the general partner who cannot be in a business that competes with the DPP.

While making a public appearance on behalf of her broker-dealer discussing ABC, a research analyst is required to disclose that her A) mother, whom she doesn't live with, owns 300 shares of ABC. B) broker-dealer is a market maker in the equity securities of ABC. C) husband owns 500 shares of ABC in his personal brokerage account at a different firm. D) broker-dealer owns convertible bonds of ABC.

C) husband owns 500 shares of ABC in his personal brokerage account at a different firm. - One of the required disclosures that must be made by a research analyst during a public appearance is the fact that they, or a member of their household, has a financial interest in the company being discussed (the 'subject' company)

The use of a press release or webcast by a public company A) must be authorized by the director of public communications of the issuer and retained for 3 years following the event. B) must be approved by FINRA prior to public dissemination. C) is considered a legitimate form of public disclosure of material information. D) is an acceptable form of public disclosure if the specific platform is pre-approved by the SEC.

C) is considered a legitimate form of public disclosure of material information - Press releases and webcasts both are considered SEC legitimate forms of public disclosure. They do not require SEC or FINRA approval.

A client order to purchase 500 shares of ABC was executed and reported to the client for 5000 shares. The client A) must contact FINRA Market Operations to begin the process of correcting the error. B) must accept the trade as executed. C) is not responsible for 4,500 shares. D) must submit a request to the compliance department in order to have the trade reversed

C) is not responsible for 4,500 shares. - The client is not responsible for trades (or portions of trades) that are outside of their instructions

The bid for WXYZ is 5.27 and the ask is 5.31. Jim wants to place an order to buy WXYZ at 5.275. This order A) will be rounded up to 5.28 and then placed on the firm's limit order book. B) will be filled against another customer with an order to sell XYZ at 5.275. C) may not be accepted. D) will be rounded down to 5.27 and then placed on the firm's limit order book

C) may not be accepted. - Securities regulations prohibit the placement of orders to buy or sell securities in increments of less than $.01. - This applies to all securities priced for at least $1.00. **Orders are not rounded up or down.**

A registered representative (RR) is creating her own website for use with her retail clients. This website A) must be filed with, and approved, by the SEC prior to launch. B) must be approved by a principal and monitored by the firm's director of communication. C) must be filed with FINRA and approved by a principal prior to launch. D) may be used without filing, approval, or supervision if it is only accessible to institutional clients.

C) must be filed with FINRA and approved by a principal prior to launch. - Websites are considered retail communications and must adhere to all the standard rules for retail communication, including potential filing with FINRA, as well as principal approval

Guarantees on insurance products A) are permissible for principal values in the separate account. B) are not allowed. C) must be specific to the insurance contract and not associated investments. D) are only permissible for companies with an A+ rating from A.M. Best.

C) must be specific to the insurance contract and not associated investments.

A resolved customer complaint has been in an "easily accessible location" for two years. This complaint A) may be moved into a digital storage facility and retained there for four more years. B) may now be removed from the firm's recordkeeping platform. C) must remain in firm storage for at least two more years. D) must remain in firm storage for at least one more year.

C) must remain in firm storage for at least two more years. - Answer Explanation: Resolved customer complaints must be retained for four years in broker-dealer files.

A stock index option has been exercised. Settlement date for this event is A) three business days. B) two business days. C) next business day. D) same business day.

C) next business day. **NOTE: exercising index options settle (T+1), whereas exercising equity options settle (T+2)

Upon receiving transfer instructions, a broker-dealer has A) three business days to verify the account and four business days to transfer and ship the securities to the new broker-dealer. B) three business days to verify the account and one business day to transfer and ship the securities to the new broker-dealer. C) one business day to verify the account and then three additional business days to transfer and ship the securities to the new broker-dealer. D) one business day to verify the account and then one additional business day to transfer and ship the securities to the new broker-dealer.

C) one business day to verify the account and then three additional business days to transfer and ship the securities to the new broker-dealer. - Upon receipt of a transfer instruction, the carrying firm has one business day to validate the account and then three more business days to transfer and ship the securities to the new broker-dealer.

A FINRA member firm must retain customer complaints A) at the main office of the firm for three years. B) in an easily accessible location for four years. C) for four years, the first two years in an easily accessible location. D) for six years, the last three years in an easily accessible location.

C) or four years, the first two years in an easily accessible location. - Customer complaints must be maintained by a FINRA member firm for four years, the first two years in an easily accessible location.

Bob and Tori are a married couple in their 40s filing a joint tax return. Both contribute to their employer's qualified retirement plan and will have a combined adjusted gross income of $4,000,000 this year. Bob and Tori are A) permitted to make tax-deductible contributions to their traditional IRAs. B) permitted to make fully deductible contributions to their traditional IRAs, as long as their contributions to their employer-sponsored plans do not exceed certain limits. C) permitted to make nondeductible contributions to their traditional IRAs. D) not permitted to contribute to their traditional IRAs

C) permitted to make nondeductible contributions to their traditional IRAs. - Once both parties to a joint tax return participate in qualified employer-sponsored retirement plans, there are limits beyond which contributions are no longer tax-deductible. The exam will never ask for those exact numbers because they change every year. As example of the numbers is found in your LEM. - That said, the earnings level for this couple is so far above the allowable limits that you are expected to recognize that their contributions would not be tax favored. The key point this question is making is that anyone with earned income, regardless of how much, can open a traditional IRA and receive tax deferral on the earnings in the account. Compare this to the Roth IRA, where there is a limit beyond which contributions are nonallowable.

An arbitration panel has determined that a registered representative (RR) must pay a judgement of $10,000, in settlement of a trade dispute with a customer. This settlement must be paid A) and reported to the SEC within 10 business days. B) within 5 business days and reported to FINRA once satisfactory payment has been paid. C) promptly, but within 30 days, and need not be reported to FINRA. D) in a timely manner, the RR's Form U-4 must be amended, and FINRA must be notified within 10 days.

C) promptly, but within 30 days, and need not be reported to FINRA. - Settlements in civil litigation or arbitration are reportable to FINRA within 30 days if they exceed $15,000 against an RR or $25,000 against a broker-dealer.

Upon the settlement date of an equity trade, the purchasing broker-dealer sends a "due bill" to the counterparty. The purpose of this is to A) remit an interest payment to the seller's account. B) remind the seller that they must deliver the shares by settlement date to avoid failing on the trade. C) recover the dividend due to the customer. D) ensure the seller is properly credited for the exact amount of the dividend.

C) recover the dividend due to the customer. - The purpose of a "due bill" is to ensure that a dividend (or interest payment) is properly credited to the correct party on a transaction.

A registered representative (RR) lost an arbitration case and must pay the claim of $20,000. This event must be A) recorded on the RR's Form U-4 and is cause for suspension. B) reported to FINRA within 10 days. C) reported to FINRA within 30 days. D) reported to the FINRA mediation committee.

C) reported to FINRA within 30 days. - These types of events must generally be reported to FINRA within 30 days

Steve has written 20 JKL June 25 puts. To complete the combination, Steve should also A) purchase 20 JKL June 25 puts. B) sell 20 JKL June 25 calls. C) sell 20 JKL July 25 calls. D) purchase 20 JKL July 25 puts.

C) sell 20 JKL July 25 calls. - To create a combination, Steve must sell both puts and calls on the same security. - Options of a different series must be used, thus either the strike price and/ or expiration month of the two contracts must be different.

A client will be making a down payment on a new home in six months and seeks the advice of her registered representative on the best way to invest funds. The registered representative is most likely to recommend a(n) A) hedge fund. B) money market fund. C) six-month CD. D) exchange-traded not

C) six-month CD. - The registered representative would likely recommend the six-month certificate of deposit (CD), which would return a higher yield than the money market fund. - The hedge fund and exchange-traded note are not liquid investments and would not be appropriate choices for this client

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

C) the spread. - 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

A research report prepared by a broker-dealer must disclose A) any compensation received by a contributing research analyst that is derived from investment banking revenues. B) if the firm has ever been a market maker in any of the securities covered in the research report. C) whether a contributing research analyst or household member has a financial interest in any company covered in the research report. D) if, within the past 12 months, the firm has received any investment banking fees from a company in the same sector(s) discussed in the report.

C) whether a contributing research analyst or household member has a financial interest in any company covered in the research report. - The research report must disclose whether any research analyst contributing to the report, or a member of their household, has any financial interest in any of the companies covered in the research report.

A client would like to change the official designation on her account. This change may occur A) if the request is received in writing, along with proof of identity. B) provided there are no current liens on the account. C) with prior written consent of a registered principal. D) with prior written consent of FINRA.

C) with prior written consent of a registered principal. - Any changes to account title/designation must be approved by a registered principal of the broker-dealer

A customer's confirmation for a municipal bond callable at par and quoted higher than the nominal yield would show A) current yield. B) coupon yield. C) yield to maturity (YTM). D) yield to call (YTC).

C) yield to maturity (YTM) - Because the quoted yield is higher than the nominal yield, the bond is offered at a discount; the lower of YTM or YTC is the bond's yield to maturity.

Treasury STRIPS and Treasury receipts are quoted based on A) 0.125 (⅛ of a point in dollars). B) amortization of premiums. C) yield to maturity. D) 0.03125 (1/32 of a point in dollars).

C) yield to maturity. - Noninterest-bearing securities, like zeroes, are quoted based on their yield to maturity. They are sold at a discount and mature at par.

A rise in the "40 Bond Index" generally indicates that A) there will be an increase in new municipal bond issuance over the next 30 days. B) the yield curve will become inverted within the next 30 days. C) yields are falling and prices are rising. D) yields are rising and prices are falling.

C) yields are falling and prices are rising. - A rise in the"40 Bond Index" indicates that bond prices are rising while yields are falling.

An applicant for registration as a registered representative of a FINRA member firm requires disclosure of significant personal information. Among the responsibilities of the member firm is verification of the previous A) three years of residency. B) five years of residency. C) ten years of employment. D) three years employment.

D) three years employment.

A customer's restricted margin account shows the following: LMV $30,000 DB $16,000 SMA $0 If the customer sells $2,000 of securities, how much could be withdrawn from the account? A) $0 B) $15,000 C) $2,000 D) $1,000

D) $1,000 - In this restricted account, half of the sales proceeds will be used to reduce the DB balance to $15,000 and half of the sales proceeds are released to the special memorandum account (SMA). - Therefore, when $2,000 of stock is sold, $1,000 is credited to SMA. This is the amount that can be withdrawn from the account

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) $22.50. B) $50.00. C) $45.45. D) $22.73.

D) $22.73. - 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.

In active trading, a bond of standard size rises in price from 98 5/8 to 101¾. This represents a dollar change of A) $3.125. B) $0.3125. C) $312.50. D) $31.25.

D) $31.25. - Let's take this step by step remembering that every point in a bond quote equals $10 and every 1/8 of a point equals $1.25 ($10/8=$1.25). Method #1 - 1) The increase is 3 1/8 points (101 ¾ minus 98 5/8 = 101 6/8 minus 98 5/8 = 3 1/8 - 2) 3 1/8 = $30 (3 times $10 per point) + $1.25 which equals $31.25 Method #2 - 1) 101 3/4 = 101 x $10 = $1,010 + 3/4 of $10 = $7.50, total price is $1,017.50. - 2) 98 5/8 = 98 x $10 = $980 + 5/8 of $10 = $6.25. total price is $986.25. - 3) The difference between the two prices is $1,017.50 minus $986.25 which = $31.25. LO 5.d

In her new margin account, a client has placed an order to sell 100 shares of ABC short at a price of 18.50. Upon satisfying the margin requirement for this trade, the credit balance in the account will be A) $2,000.00 B) $4,000 C) $1,850.00 D) $3,850.00

D) $3850 - Answer Explanation: For a short sale in a new margin account where the proceeds from the sale are less than $2,000, the client must deposit $2,000. - This cash deposit, combined with the $1,850 short sale proceeds, will create a credit balance of $3,850.

A dealer that quotes a concession of half to another dealer means A) 0.5% of the market price. B) 0.5% of the dealer's price. C) a 50% commission split. D) $5 per $1,000 of par.

D) $5 per $1,000 of par. - A concession between broker-dealers on secondary market transactions is a discount from the yield that the broker-dealer is quoting. It is common for a broker-dealer to offer bonds to other broker-dealers at a price, less the concession. The net price becomes the purchase price for the buying broker-dealer. - If simultaneously sold to a retail account, the markup is from the net price paid. If not simultaneously retailed but held in the broker-dealer's inventory, it is fair for the broker-dealer to market her inventory and mark up from there for retail sale.

The following is taken from the S&P Bond Guide: FLB Zr 37 87 87½. What is the coupon rate on this bond? A) 8.70% B) 0.37% C) 8.75% D) 0%

D) 0% - FLB is the issuer, Zr means zero coupon - 37 indicates the year of maturity (2037) - 87 is the bid price ($870) - 87½ is the asked price ($875).

Under the de minimis exemption, an initial public offering of common stock may be sold to an account where restricted persons have a beneficial interest, as long as their interest in the account does not exceed A) 5%. B) 25%. C) 20%. D) 10%.

D) 10%. - If the beneficial interests of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue.

Which of the following items of information will not be included on the Form U-4 of an applicant for registration? A) Felony conviction for possession of controlled substance B) 10-year employment history C) Any aliases used D) 10-year residential history

D) 10-year residential history - Form U-4 will include a 5-year residential history, not 10.

DJX Corporation's charter has authorized 10 million shares of common stock. It has issued 5 million shares and has 1 million shares in its treasury. How many shares of DJX common stock are authorized but unissued? A) 6 million B) 9 million C) 4 million D) 5 million

D) 5 million

A public purpose municipal bond is purchased at a discount in the secondary market at 90. The face amount is $10,000 and the bond has ten years to maturity. The bond is sold for 97 after five years. For tax purposes the investor uses cost. What is the taxable gain? A) 0 B) Capital gains on municipal bonds are not taxable. C) 200 D) 700

D) 700 - This bond was purchased in the secondary market and the investor uses cost accounting. - Therefore, the discount is not accreted. The cost basis for a secondary market purchase is the purchase price of 90. Therefore, upon sale there is a taxable gain of 7 points, or $700.

Which of the following quotes represents a municipal dollar bond quote? A) $850 - $870 B) 0.085 C) 8.20 - 8.00 D) 85½

D) 85½ - Dollar bond quotes are based on a percentage of face amount (Par $1,000). Therefore, a quote of 85½ is 85.5% of $1,000, or $855.

A financial institution buys $90,000 of 8%, 20-year revenue bonds. For book purposes, the institution uses straight-line accretion, but for tax purposes the institution uses cost. The bonds are sold after three years for $99,000. What will be the taxable gain? A) 3000 B) 7500 C) 5000 D) 9000

D) 9000 - For tax purposes, the institution uses the cost basis, which is the price at which it purchased the bonds - $90,000. Consequently, they sold the bonds for $99,000 with a $90,000 tax basis, yielding a taxable gain of $9,000.

Preferential tax treatment does not apply in which of these instances? A) Jerry purchased 2,000 shares of Company K on May 1, 75 days prior to the ex-dividend date for the next common share distribution for which Jerry received $.20 per share B) Ben took a distribution of $12,500 from his Section 529 Plan to cover his daughter's next tuition payment at her community college C) Company X owns the preferred shares of Company Y and receives a $35,000 cash dividend from Y D) Abagail received a distribution of $2,500 from her real estate investment trust which she has owned for three years

D) Abagail received a distribution of $2,500 from her real estate investment trust which she has owned for three years - Distributions from a Real Estate Investment Trust are subject to regular income tax, unlike ordinary cash dividends from common or preferred shares, which may be subject to regular tax liability depending on the length of time the shares were held surrounding the ex-dividend date. If the shares were held for at least 61 of the 121- day period surrounding the ex-dividend date, any dividends received would be taxable at a preferred rate. - Distributions from a Section 529 plan are not taxed if used for qualified educational expenses. - Dividends paid to a corporation are taxed at a preferred rate depending on the level of ownership the company has in the business.

An investor owns 100 shares of the 4% $80 par convertible, callable, cumulative preferred stock issued by HBH Creations. With a conversion price of $20 and a current market price of $84, HBH issues a call of all of the outstanding preferred shares at $82. If the HBH Creations common stock is currently selling at $18 per share, what is likely the wisest choice for the investor? A) Convert the preferred into the common at the stated conversion rate B) Sell the preferred stock C) Hold on to the preferred stock D) Accept the call at $82

D) Accept the call at $82 - Although issuers generally exercise the call privilege when the common stock's price is above the conversion price, there are cases when the call is exercised with the hope of eliminating some of the preferred shares with their preferred dividend payout. - Let's go through the math of this question. With a par value of $80 and a conversion price of $20, each share of the preferred stock is convertible into 4 shares of the HBH Creations common stock. If the investor converts, those 4 shares are currently worth $18 each or a total of $72 for each share of preferred converted. - That being the case, the investor's decision is, "Do I convert and have stock worth $7,200 (remember, there are 100 shares of the preferred, each convertible into 4 shares of the common), or do I accept the call at $82 per share of preferred totaling $8,200?" - Why not sell the preferred stock at $84? Because the moment the call is announced, the price of the preferred will fall. - Holding on to the preferred stock doesn't make sense because after the call date, the preferred will no longer receive dividends.

Which of the following best represents the total takedown in a municipal underwriting? A) Manager's fee plus selling concession B) Manager's fee plus additional takedown C) Additional takedown plus underwriting fee D) Additional takedown plus selling concession

D) Additional takedown plus selling concession - In a municipal underwriting, the total takedown is the additional takedown plus the selling concession.

A U.S. manufacturing company is exporting goods to a Canadian retailer. The company will receive Canadian Dollars (CAD) as payment. How would the U.S. company hedge? A) Buy CAD calls B) Sell CAD puts C) Sell CAD calls D) Buy CAD puts

D) Buy CAD puts - This U.S. company should buy puts on the Canadian Dollar. They want to lock in a sale price for the currency that they will own

An investor has a long stock position that he would like to protect, and at the same time generate some income for his portfolio. How should this investor proceed? A) Buy a straddle B) Sell a straddle C) Buy a call & sell a put D) Buy a put & sell a cal

D) Buy a put and sell a call - In order to protect a long stock position an investor would buy a put option, and to generate income he might sell a call option for the income. - The use of a long put and a short call creates a position referred to as a collar

An order memorandum contains many details regarding a specific trade. Which of the following items is not included on this document? A) Registered representative (RR) identification number B) Price qualifications C) Time of order entry D) Current market price of the security

D) Current market price of the security - The current market price of the security, as well as the client's name/address, would not appear on an order memorandum.

Under the USA PATROIT Act of 2001, which of the following must be maintained by financial institutions, such as banks and broker-dealers, to prevent the financing of terrorist operations and money laundering? A) Specially Designated Nationals and Blocked Persons list B) Privacy notices C) Do-not-call lists D) Customer identification programs (CIPs)

D) Customer identification programs (CIPs) - The USA PATRIOT Act of 2001 requires financial institutions to maintain CIPs to protect against financing terrorist operations or activities and potential money laundering activities. - The Office of Foreign Asset Control (OFAC) publishes and maintains the Specially Designated Nationals and Blocked Persons list, which financial institutions use to determine if any customers or potential customers have been identified by OFAC as posing a terroristic threat or are involved in money-laundering activities.

A registered representative has a CPA who is in a position to introduce new clients to the RR's broker-dealer and asks for a fee based on commissions generated by the accounts introduced. Which of the following statements is true? A) Finder's fees must be approved by FINRA and documented on the broker-dealer's books. B) Finder's fees can be scaled to the performance of any introduced accounts, but only if the individual is an accredited investor. C) If the CPA is not registered with FINRA, the payment of this fee would be prohibited. D) Finder's fees for introducing new clients to the firm may be paid to unregistered persons, provided they are hourly or flat fees, and not based on any commissions generated by these accounts

D) Finder's fees for introducing new clients to the firm may be paid to unregistered persons, provided they are hourly or flat fees, and not based on any commissions generated by these accounts - Finder's fees are compensation paid to persons who introduce new business to a broker-dealer. - These parties are not required to be FINRA registered, and if they are not registered, finder's fees may only be paid as a flat or hourly fee

An investor is interested in deploying capital into a limited partnership focused in the oil & gas sector but is unwilling to accept a high degree of risk. A RR would most likely recommend which of the following products to this investor? A) Exploratory drilling program B) Exchange-traded fund holding oil stocks in its portfolio C) Exchange-traded note linked to the S & P Oil & Gas Index D) Income program

D) Income program - The best option for this investor would be an oil & gas income program, due to its concentration in oil wells that are currently producing.

An investor holding an equity linked CD may be least concerned with which of the following risks? A) Liquidity risk B) Call risk C) Market risk D) Inflation risk

D) Inflation risk - Equity linked CDs typically carry liquidity risk, which is the risk that the investor may not be able to liquidate the investment prior to maturity. - There may be a very limited secondary market for these products. Additionally, if the CD is sold prior to maturity, it may be worth less than its purchase amount or face value. - These products may also be called by the financial institution that issued them

A summary statement of all interest and dividends credited to a customer's account must be sent to the primary accountholder each year in A) April. B) July. C) December. D) January.

D) January. - Member firms must provide an IRS Form 1099 to the primary account holder of all the interest and dividends credited to the account in January. This form is used in the customer's tax return preparation.

A client has purchased a nonqualified variable annuity from a commercial insurance company. Before the contract is annuitized, your client, age 60, withdraws some funds for personal purposes. What is the taxable consequence of this withdrawal to your client? A) A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn B) Capital gains taxation on the earnings withdrawn in excess of the owner's basis C) A 10% penalty plus the payment of ordinary income tax on funds withdrawn in excess of the owner's basis D) Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis

D) 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 last-in, first-out basis, with the income taxed first. - Once the cost basis is reached, any further withdrawals are a nontaxable return of principal. Because the client is older than 59½ at the time of distribution, the additional 10% penalty tax is not incurred.

A customer is primarily concerned about maintaining a portfolio of liquid investments. In this case, you would be least likely to recommend which of the following products? A) Open-end investment company B) Exchange-traded fund C) Real estate investment trust D) Real estate limited partnership

D) Real estate limited partnership - Of these choices, the real estate limited partnership would be the least liquid.

Which of the following increases the special memorandum account (SMA)? A) Withdrawal of margin securities B) Decline in market value of long positions C) Purchase of margin securities D) Receipt of a cash dividend

D) Receipt of a cash dividend - Cash dividends are credited to SMA dollar for dollar.

lanned amortization class (PAC) collateralized mortgage obligation were designed to provide which of the following benefits, compared to plain vanilla tranches? A) Increase prepayments to tranche holders B) Match the prepayment risk of plain vanilla tranches C) Eliminate prepayment risk for tranche holders 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.

What are the tax consequences an investor incurs when exercising the conversion privilege within a family of funds? A) There are no tax consequences if completed within 60 days. B) There are no tax consequences because the funds are all part of one family. C) There are no tax consequences, as long as this is done through a Section 1035 exchange. D) The investor treats the exchange as a sale and new purchase.

D) The investor treats the exchange as a sale and new purchase. - When exchanging one fund for another in the same fund family, the exchange is done at NAV. - This avoids any sales charges. The IRS considers this as the sale of the old fund (capital gain or loss applies) and the purchase of the new fund. - That begins a new cost basis and holding period. The Section 1035 exchange allowing investors to move from one investment to another without current tax consequences is applicable only to insurance products.

Which of the following would not be found within the protective covenants for a municipal revenue bond issue? A) Additional bonds test B) Flow of funds C) Catastrophe clause D) The issue's rating

D) The issue's rating - There are different sources for bond ratings, but they would not be found within the revenue issue's protective covenants. - The municipality agrees to abide by the covenants, and a trustee appointed in the bond indenture supervises the issuer's compliance with them. - Some common covenants include rate or fee (promise to maintain user fees high enough to pay expense and debt service) maintenance, insurance, additional bonds test, sinking fund, catastrophe, flow of funds, books and records, and call or put features.

One of your customers set up a Section 529 plan for a child of one of his neighbors and contributed to it for some years. When the child reached age 17, it was obvious that she had no plans to pursue education beyond high school and your customer decided to redesignate the account. Which of the following would be a permissible new beneficiary? A) One of the donor's own grandchildren B) One of the children of another of your customer's neighbors C) The winner of an informal essay contest to be held among high school-aged children in the neighborhood D) The original beneficiary's younger sister

D) The original beneficiary's younger sister - There are few restrictions on who may be the first beneficiary of a Section 529 plan. - However, if the beneficiary is redesignated, the new beneficiary must be a close family member of the first.

Typically, new municipal bond issues are sold to investors before the bonds are issued and available for delivery. An investor receives a when-issued confirmation describing the bonds. What information is included on this confirmation? A) The total amount due B) The settlement date C) The accrued interest D) The trade date

D) The trade date - The trade is known, so it is on the confirmation. - Because the bonds are not available for delivery, the settlement date is unknown. - Without a settlement date, accrued interest cannot be computed. - Without accrued interest, there is no way to compute the total price.

Which of the following is true with respect to excess capital losses realized by an individual taxpayer? A) No more than $3,000 per year may be used against capital gains. B) They may be carried forward with a time limit of five years. C) They may be carried back up to three years and carried forward indefinitely until exhausted. D) They may be carried forward indefinitely until exhausted.

D) They may be carried forward indefinitely until exhausted. - Any taxpayer is permitted to reduce capital gains with realized capital losses. If the capital losses exceed the capital gains, up to $3,000 of the net capital loss may be deducted against taxable income. - Anything in excess of that is carried forward and used against gains without limitation, or if there are no gains, taxable income, again with a $3,000 annual limit. - Those losses can be carried forward with no time limit until they are all used against gains or income. Remember, the $3,000 limit applies only to the net losses that may be deducted against income; there is no limit to the amount of loss that can be netted against gains.

Which of the following items is not included on a "when-issued" confirmation? A) The yield of the bond, if serial structure B) Date of transaction C) Description of the security D) Total money amount of the trade

D) Total money amount of the trade - A "when-issued" confirmation will not include the total dollar amount of the trade, since the settlement date of the offering is not yet known. - This means that any accrued interest cannot be determined at this time

Which of the following is not good delivery for 470 shares of stock? A) Forty-seven 10-share certificates B) Eight 50-share certificates, one 40-share certificate, and one 30-share certificate C) Four 100-share certificates and one 70-share certificate D) Two 100-share certificates and three 90-share certificates

D) Two 100-share certificates and three 90-share certificates - The key to making good delivery is the ability to stack certificates in piles of 100 shares or multiples of 100 shares (such as a 200-share or 1,300-share certificate). - If there is an odd lot (fewer than 100 shares) in the trade, that can be made up of one or any number of certificates totaling that odd lot. - If delivery is attempted of two 100-share certificates plus three 90-share certificates, the two 100-share certificates are fine, but there is no way to stack those 90s into piles of 100 shares. Let's look at the choices that are good delivery. Four 100s and one 70 has gives us four stacks of 100 shares plus a stack for the complete odd lot of 70 shares. Eight 50s can be combined two at a time to make four piles of 100 shares; the 40 and the 30 add up to the odd lot of 70 shares so this is a good delivery. Although 47 10-share certificates is a bit awkward (reminds me of being in line at the supermarket when the person in front is paying for their groceries with nickels and dimes and taking forever), 10 shares taken 10 times is 100 shares, and there are enough to do that four times. Then the remaining seven 10-share certificates completes the odd lot. **Remember, when using certificates smaller than 100 shares, you must be able to combine them into 100-share lots.**

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

D) a long coupon. - In many cases, the dated date of a new issue, (the first date from which interest begins to accrue), is not the same as one of the semiannual interest payment dates. In this question, those semiannual dates are April and October 15. With a dated date of March 1, the first interest payment will not be made until October 15. That is a period of 7½ months and is why it is a long coupon (longer than 6 months).

Paying for a securities transaction with all of the following could raise concern about the possibility of money laundering except A) a travelers' check. B) cash. C) a postal money order. D) a personal check.

D) a personal check. - If the amount is large enough, the use of currency to pay for a securities transaction could be a "red flag" indicating potential money laundering. **Personal checks are not included as currency for purposes of the money laundering rules because the source of funds is easily traceable**

Démodé Classic Investments (DCI) is planning a direct mail campaign to several thousand potential investors. The topic of the campaign deals with owning real estate through direct participation program limited partnerships. Under FINRA Rule 2210 on communications with the public, this is considered A) a retail communication that needs approval, but not filing, by a designated DCI principal. B) correspondence and needs review, not approval, by a designated DCI principal. C) a retail communication and must be filed with FINRA at least 10 business days before first use or publication. D) a retail communication and must be filed with FINRA within 10 business days of first use or publication.

D) a retail communication and must be filed with FINRA within 10 business days of first use or publication. - A direct mail communication to more than 25 existing and/or potential clients within a 30-day period is a retail communication. - Unless an exception applies, a designated principal of the firm must approve all retail communications. - DPPs are part of a group of securities (other common examples are investment companies and CMOs) where filing with FINRA within 10 business days of first use or publication is the rule.

When a broker-dealer sends a communication to its customers that the sweep account used for customer credit balances will be changed from one money market fund to a different one, the communication must include A) a detailed explanation of the reason for the change. B) a description of the objectives of the new fund and its prospectus. C) a statement that the change will not take place until at least 45 days after the communication was sent. D) a tabular comparison of the nature and amount of the fees charged by each fund.

D) a tabular comparison of the nature and amount of the fees charged by each fund. - The only one of these meeting FINRA's requirement when a negative response letter is sent is the tabular comparison. - While a description of the new fund and its prospectus is required, the communication must also include a comparison of the objectives of the two funds. - The minimum time is 30 days (not 45) and there is no requirement to include an explanation.

Upon the execution of the subscription agreement, an individual will be A) qualified to subscribe to units of a unit investment trust. B) eligible to purchase shares in a master limited partnership (MLP). C) authorized to execute partnership democracy provisions. D) accepted as a limited partner in a limited partnership.

D) accepted as a limited partner in a limited partnership. - The subscription agreement is the document an individual must sign and have approved in order to be granted status as a limited partner in a limited partnership.

A gain on the sale of a long equity put option is A) always a long-term capital gain. B) ordinary income. C) a short- or long-term capital gain. D) always a short-term capital gain.

D) always a short-term capital gain. - Any trading in options produces only short-term gains or losses; therefore, any gain on the sale of a long put option must always be a short-term capital gain. **(If a question wishes you to consider LEAPS, the question will refer to them.)**

A 75-year-old investor purchased shares of ABC six months prior to his death, and the shares were inherited by his grandson. These inherited shares A) will be subject to ordinary income taxes if sold for greater than their original cost basis. B) must be reported to the IRS as a long-term capital gain. C) are considered to have a short-term holding period for tax purposes. D) are considered to have a long-term holding period for tax purposes.

D) are considered to have a long-term holding period for tax purposes. - Inherited securities are always considered to have a long-term holding period, regardless of the actual amount of time they were held by the beneficiary.

One of your customers has asked you about trading penny stocks. After discussing the risks, the customer decides to go ahead. The firm sends the individual a copy of the special penny stock risk disclosure document. The firm needs the customer's signed and dated acknowledgment of receipt of the document. Trading in penny stocks may not begin in that account until A) at least two business days after receiving the statement. B) the day the signed acknowledgment has been received. C) at least $25,000 in equity is in the account. D) at least two business days after sending the statement.

D) at least two business days after sending the statement. - It is SEC Rule 15g-2 that requires the firm to wait at least two business days after sending the risk disclosure document before executing the first penny stock trade for a new customer. The $25,000 is the minimum equity in a pattern day trading account.

A broker-dealer is preparing sales literature for an investment company that it serves as a distribution agent for. They will include performance data for the fund, and must also include A) historical return for the fund manager covering the most recent five - year period. B) weighted cost of capital covering the most recent fiscal year. C) average expense ratio for the fund covering the most recent three fiscal years. D) average annual total return for 1, 5, and 10 -year periods.

D) average annual total return for 1, 5, and 10 -year periods. - In this sales literature, where performance data is going to be displayed, the firm must include information on average total return covering a 1, 5, and 10-year time period.

An increase in the "short-interest" figures for a NASDAQ listed company is typically interpreted as a A) sell signal in the market. B) bearish indicator. C) signal that the yield curve will change from positive to negative. D) bullish indicator.

D) bullish indicator. - An increase in short interest data is generally regarded as a bullish indicator by technical analysts. - All of the 'shorted' shares will need to be purchased by these investors, which creates eventual demand for the shares and, consequently, a price boost.

If a customer sold 1,000 shares of XYZ at a loss, a wash sale will result within 30 days of the date of sale if your customer A) writes 10 XYZ at-the-money puts. B) buys 10 XYZ at-the-money puts. C) writes 10 XYZ at-the-money calls. D) buys 10 XYZ at-the-money calls.

D) buys 10 XYZ at-the-money calls. - If, within 30 days of the date of sale, the customer buys back the security or the right to buy it back (a call option), the loss is disallowed. - It will also be disallowed if, within 30 days, the customer writes deep in-the-money puts on the security sold. - A deep in-the-money put will likely be exercised, forcing the customer to buy stock.

A client order to purchase 1,000 HMK Inc. may be executed A) based on verbal instructions provided by the client and relayed via email to the trading desk. B) as long as a supporting order memorandum is prepared within one hour of the trade execution. C) after verbal instructions have been submitted to the trading department. D) by the trading department based upon written instructions contained on an order memorandum.

D) by the trading department based upon written instructions contained on an order memorandum. - An order may only be executed based on written instructions on an "order memorandum" provided to the trading desk.

Morgan is a successful registered representative with a well-known broker-dealer. An equally prominent firm has made Morgan an offer that is too good to refuse. Under FINRA Rule 2273, if Morgan wishes to recommend that any existing customers move their accounts to the new firm, A) no contact can be made until at least three months after Morgan's registration is transferred. B) this would be considered a violation of the Conduct Rules. C) approval from Morgan's current supervising principal would be required before this recommendation could be made. D) certain disclosures have to be made in an educational format using a FINRA template.

D) certain disclosures have to be made in an educational format using a FINRA template. - "A member that hires or associates with a registered person shall provide to a former customer of the registered person, individually, in paper or electronic form, an educational communication prepared by FINRA when the member, directly or through that registered person, individually contacts the former customer of that registered person to transfer assets." **This educational communication has to be delivered to any former customer who transfers during the first three months of Morgan's new association.**

One of your customers owns 10 HBH Creations 4.5% convertible callable debentures. The conversion price into HBH common stock is $40. With the current market price of the HBH Creations stock at $44, the company publishes a notice that all of the debentures will be called in thirty days at a price of 104. When the customer calls for your advice, you would probably recommend A) selling the debenture. B) selling the stock. C) accepting the call. D) exercising the conversion privilege.

D) exercising the conversion privilege. - Generally, a corporation exercises the call privilege when the call price is below the parity price. - With a current market price of the stock at $44 per share, the parity price of the debenture is 110 ($1,100). - The effect of this call is that it, in essence, forces the investors to convert, and the issuer never has to pay off the debt. Let's take a look at the math here. - With a conversion price of $40, a debt security with a par value of $1,000 is convertible into 25 shares ($1,000 ÷ 40). If the stock is currently selling at $44 per share and the investor could convert into 25 shares, it makes the conversion worth $1,100 (25 shares times $44 = $1,100). - In our question, the call price is 104 ($1,040) so the question becomes, "What is a better deal for your customer: exercising the conversion privilege that gives the customer stock with a value of $1,100 or accepting the call worth $1,040?" - Why not just sell the debentures? Because once the call at 104 has been issued, the price of the debentures will decline to approximately that level. - Why not sell the stock? The investor doesn't own any stock until conversion, so there is nothing yet to sell.

Broker-dealer X is preparing a retail communication consisting of a comparison of two different mutual funds illustrating their differing performance rankings over a six-month period. This ranking data has been created by an affiliate of the broker-dealer. This information must be A) submitted to each mutual fund company to ensure it is not misleading. B) verified for accuracy by an independent source and this verification must be maintained on the broker-dealer's records while the comparison remains in publication. C) filed with FINRA within 10 business days of first use. D) filed with FINRA at least 10 business days prior to first use.

D) filed with FINRA at least 10 business days prior to first use. - Retail communication concerning investment companies that include or incorporate performance rankings or comparisons where the data is created by the investment company itself or one of its underwriters or affiliates must be filed with FINRA at least 10 business days prior to first use.

An issuer recently conducted a primary offering and provided a prospectus to all investors. Subsequently, the issuer provides an additional item of information, supplementing material that was outlined in the original prospectus. This additional material is a A) Statement of Additional Information (SAI) and must be filed with the SEC by the date of first use. B) correspondence, and must be approved by a principal prior to first use. C) retail communication and must be filed with FINRA at least 10 days prior to first use. D) free-writing prospectus and must be filed with the SEC by the date of first use.

D) free-writing prospectus and must be filed with the SEC by the date of first use. - This is an example of a free-writing prospectus (FWP), which must be filed with the SEC by the date of first use. An FWP allows an issuer to provide ongoing information to investors without having to refile its registration statement or prospectus

FINRA's rule on communications allows member firms to use testimonials in retail communications as long as certain disclosures are made. Among those disclosures is A) indicating that if $100 or more in value is paid for the testimonial, the fact that it is a paid testimonial. B) indicating that if any compensation is paid for the testimonial, the fact that it is a paid testimonial. C) indicating that if less than $100 in value is paid for the testimonial, the fact that it is a paid testimonial. D) indicating that if more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial.

D) indicating that if more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial. - Retail communications or correspondence providing any testimonial concerning the investment advice or investment performance of a member or its products must prominently disclose that if more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial. - Would the exam ever want you to know that it is more than $100 rather than $100 or more? Yes. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

So called "soft dollar" programs between broker-dealers and investment advisors provide may provide for all of the following items of compensation except A) quantitative analytical software programs. B) virtual training seminars covering appropriate content. C) sector research. D) internet, or wifi service.

D) internet, or wifi service. - Following SEC guidelines, soft dollar compensation may not include internet service, as well as phone lines and rent.

A municipal bond issued to finance the construction of a new office complex will most likely be serviced and retired from A) a moral obligation. B) refunding. C) a special tax. D) lease payments from pooled rentals.

D) lease payments from pooled rentals. - An office complex is a revenue producing facility, as tenants will pay rent to occupy the space. - Therefore, the construction of the building would be financed with a revenue bond, and debt service would be paid with lease payments on the property.

A corporation has $25 million of 5% bonds outstanding. The bonds are callable at 102. Current market interest rates are 6%. If the company would like to retire $10 million of the debt, it might be smart to A) issue $10 million of treasury stock and use the proceeds to retire the bonds. B) issue $10 million of new bonds at current rates and use the proceeds to call in outstanding ones. C) exercise the call provision for $10 million face amount of the bonds. D) make a tender offer to purchase $10 million face amount of the bonds.

D) make a tender offer to purchase $10 million face amount of the bonds. - When current market interest rates are 6%, bonds with a 5% coupon are selling at a discount. - That means the company could make a public offer to buy the bonds back at a price somewhat below par value. - In simple terms, they could retire $10 million of debt for less than $10 million. It would make no sense to call the bonds at 102 ($1,020) when they can be purchased for less than $1,000 each in the open market. Issuing new bonds to retire old ones, a practice known as refunding, is done when interest rates have fallen. In this question, interest rates have gone up making that plan incorrect. - A company cannot issue treasury stock. Issued and outstanding stock becomes treasury stock when it is reacquired by the issuer

All of the following orders could be placed on the designated market maker's order display book except A) limit orders. B) stop limit orders. C) stop orders. D) market orders.

D) market orders. - Market orders are executed immediately. The order display book is for orders that are away from the current market, such as stop and limit orders.

In a previously published research report, a broker-dealer stated a price target for ABC, and now, 6 weeks later, is changing their target. Notice of this change A) is a form of correspondence that must be approved by a member of the compliance team. B) requires a new research report to be prepared showing the revised price target. C) must be filed with FINRA and approved by a principal. D) may be disseminated to their customers and does not constitute a new research report.

D) may be disseminated to their customers and does not constitute a new research report. - Notices of ratings or price target changes may be done through standard communication channels and is not considered a research report in and of itself.

An investor who has purchased multiple lots of the same stock over a period of several months may decide to liquidate the shares purchased at the highest price to A) facilitate a short against the box sale. B) avoid short-term capital gains taxes. C) maximize the benefit of a dollar cost averaging strategy for the portfolio. D) minimize the tax consequence to the portfolio.

D) minimize the tax consequence to the portfolio. - An investor may opt to sell those shares that were purchased at a higher price to minimize the size of the capital gain, and thus reduce the tax burden to the investor

A registered representative was arrested for a misdemeanor involving a securities trade. This event A) requires the RR to serve a mandatory 30-day suspension. B) may be appealed under the Code of Arbitration. C) is grounds for immediate termination from employment. D) must be supplemented with additional information on a DRP.

D) must be supplemented with additional information on a DRP. - Disclosure of an arrest or conviction for any felony or securities related misdemeanor requires a detailed explanation on a disclosure report, or DRP

A registered representative pleads guilty to a traffic violation. This event A) must be reported to FINRA within 30 days. B) will be removed from the RR's official record after one year. C) must be reported to FINRA within 10 days. D) need not be reported to FINRA.

D) need not be reported to FINRA. - Traffic violations are not required to be reported to FINRA.

If a company issues $10 million in par value convertible debentures, all of the following balance sheet items will be affected except A) liabilities. B) assets. C) working capital. D) net worth.

D) net worth. - Net worth is not affected by the issuance of long-term debt because it does not represent ownership. - Assets will be affected (increased) by the issuance of long-term bonds. Liabilities will be affected (increased) by the amount of the issuance. Working capital will also increase. - How does the working capital increase if the net worth does not? - Because this company now has $10 million more in cash, and the liability is the debenture that is included in long-term debt, not current liabilities.

When an investor purchases an initial public offering (IPO), the investor can anticipate that A) a commission not to exceed 5% will likely be applied to the purchase. B) the broker-dealer will use its best judgment in applying the 5% policy to the purchase. C) the 5% fee that is initially charged when the order is submitted will be rebated once the issue successfully begins trading. D) no additional service fee will be charged beyond the public offering price.

D) no additional service fee will be charged beyond the public offering price. - Certain transactions are exempt from the application of the FINRA 5% policy, including IPOs and mutual funds. - These are purchases made under a prospectus, where any transaction fees are imbedded in the public offer price.

If a customer purchases a nonexempt security in a cash account for regular way delivery, Regulation T requires the executing broker-dealer to receive payment in full A) within 10 business days. B) on the second business day after the trade. C) before the purchase. D) no later than 4 business days after the trade.

D) no later than 4 business days after the trade. - Note that the question is referring to Regulation T, not the Uniform Practice Code regular way delivery requirements. - Regulation T requires that a broker-dealer receive payment in full (from a customer making a purchase of this type in a cash account) no later than four business days after the trade date (regular way settlement plus two additional business days).

The locate requirement of Regulation SHO for short sales does not apply to A) over-the-counter equity securities. B) American depositary receipts traded on the Nasdaq Stock Market. C) preferred stock traded on the NYSE. D) nonconvertible bonds traded on the NYSE.

D) nonconvertible bonds traded on the NYSE. - The locate requirement is applicable to all short sales of equity securities. It is unlikely to be tested, but, just in case, for purposes of this rule, convertible bonds are considered equity securities.

A customer has opened a margin account at a broker-dealer and intends to effect a short sale in XYZ. This short sale may be effected A) if the customer's margin account is not restricted. B) as long as the customer has signed all of the appropriate documents with respect to short selling. C) with the advance written consent of a securities principal. D) provided the security can be borrowed to effect good delivery on a timely basis.

D) provided the security can be borrowed to effect good delivery on a timely basis. - Investors must be able to borrow the security that they wish to sell short. Otherwise, the sale would not be permitted.

Disclosure of fees received by a broker-dealer for providing investment banking services to an issuer must be made in A) independently prepared reprints. B) correspondence. C) all retail communications. D) research reports.

D) research reports. - This is a disclosure that will appear in a research report prepared by a broker-dealer.

An investor owns ten ABC 6s of 2045. The debentures have a conversion price of $50 with an anti-dilution provision. After ABC distributes a 20% stock dividend, the investor's position will be A) ten ABC 6s of 2045 convertible into 20 shares plus forty additional shares. B) twelve ABC 6s of 2045 with conversion price of $50. C) ten ABC 6s of 2045 convertible into 16.67 shares. D) ten ABC 6s of 2045 with a conversion price of $41.67.

D) ten ABC 6s of 2045 with a conversion price of $41.67 - This question deals with the anti-dilution provisions of a convertible security. - When there is a stock dividend or a stock split, the holder of the convertible maintains the same equity proportion as before. - With a conversion price of $50, the debenture is convertible into 20 shares ($1,000 ÷ $50). After a 20% stock dividend, the holder should be able to acquire 20% more shares. - That makes the security convertible into 24 shares. Divide the $1,000 par value by 24 shares and the conversion price is now $41.67.

FINRA Rule 2210, communications with the public, has a number of filing requirements. Some communications are prefiled, others are postfiled, and some are excluded from filing with FINRA. Included in the list of exclusions would be retail communications A) that do no more than identify and recommend a specific registered investment company or family of registered investment companies. B) that do not make any financial or investment recommendation, but only promote a service offered by the member. C) dealing with specific index funds that previously have been filed with FINRA and that are to be used, with the only change being a recommendation of index exchange-traded funds from the same sponsoring organization. D) that do no more than identify a national securities exchange symbol of the member or identify a security for which the member is a registered market maker.

D) that do no more than identify a national securities exchange symbol of the member or identify a security for which the member is a registered market maker. - A communication limited to identifying the member's exchange or market-maker symbol is excluded from the FINRA filing requirements. A communication that identifies and recommends a specific investment company or companies must be filed. When previously filed material is used, no filing is necessary as long as there is no material change. However, changing from recommending specific funds to specific ETFs is a material change and would require filing. A retail communication promoting a service offered by a member firm is a communication that would likely need filing with FINRA.

A client has $5,000 in SMA in her margin account. Should she elect to withdraw this cash, A) the debit register will increase by $2,500. B) the long market value will decrease by $5,000. C) the long market value will decrease by $2,500. D) the debit register will increase by $5,000.

D) the debit register will increase by $5,000. - The withdrawal of SMA from a margin account will cause the debit register to increase by the exact amount of the withdrawal.

The opening quote for issues listed on the NYSE is set by A) the floor brokers based on the level of opening orders. B) the third-market makers. C) the exchange. D) the designated market maker.

D) the designated market maker. - The designated market maker is responsible for setting the opening quote for issues listed on the NYSE. - The set quote is based on orders in hand.

ll of the following are required by the Municipal Securities Rulemaking Board on customer confirmations except A) the source of any commission received on an agency transaction. B) the amount of any commission received on an agency transaction. C) the amount of markdown or markup on a principal transaction. D) the price the dealer originally paid for the bond.

D) the price the dealer originally paid for the bond. - The dealer's cost of a bond sold to a customer is not required to be disclosed.

An investor believes that bond prices will fall. This investor should sell A) inverse floaters. B) yield based straddles. C) yield based calls. D) yield based puts.

D) yield based puts. - If an investor believes bond prices will fall, he should also believe interest rates will rise. - The appropriate strategy in this case is to buy yield-based calls or sell yield based puts - Here, the question asks which option to sell, and the puts will expire worthless when rates increase, and the writer will keep the premium.

When must discretionary orders be approved by a principal of the firm?

Discretionary orders must be approved promptly, but not necessarily prior, to order entry

A trustee and an executor are examples of a...

Fiduciary - A fiduciary is a party who has the legal authority to act on behalf of another person. Often these are court-appointed persons.

A convertible debenture has a conversion price of $40 per share. If the market value of the debenture rises to a 12.5-point premium over par, which of the following are true? I Conversion ratio is 25:1 II Conversion ratio is 28:1 III Parity price of the common stock is $42 IV Parity price of the common stock is $45

I Conversion ratio is 25:1 III Parity price of the common stock is $42 - The conversion ratio is computed by dividing par value by the conversion price ($1,000 par ÷ $40 = 25). - The next step is calculating the market price of the debenture. A 12.5% premium to par means the market price is 112.5% of the $1,000 par. That computes to $1,125.00. - Parity price of the common stock is computed by dividing the market price of the convertible debenture by the conversion ratio ($1,125 ÷ 25 = $45). - Alternatively, if the debenture is at a 12.5% premium, the common stock will be at parity (equal) when it is selling at 112.5% of the $40 conversion price. Or, 112.5% × $40 = $45.

The initial confirmation of a when-issued municipal bond contains which of the following? I Number of bonds involved in the transaction II Settlement date III Yield to maturity IV Total dollar amount due

I Number of bonds involved in the transaction III Yield to maturity - On a new municipal bond offering, where the customer receives a when-, as-, and if-issued confirmation, the final settlement date is not known; therefore, the amount of accrued interest is unknown (because it is payable up to, but not including, settlement). - Thus, the total dollar amount is unknown because it includes accrued interest. - The number of bonds purchased and the yield to maturity (price) are known and must be included on the confirmation.

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

I Prepayment risk will increase III Prices of each tranche will rise - 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

A customer buys 100 shares of ABC at 56.50 and writes 1 ABC Aug 60 call at 2. If the call is exercised, the consequences are I a cost basis of $56.50 per share. II a cost basis of $58.50 per share. III sales proceeds of $60 per share. IV sales proceeds of $62 per share.

I a cost basis of $56.50 per share IV sales proceeds of $62 per share - The premium of the option affects the basis of the stock (bought or sold) as a result of exercise, adding the premium per share ($2) to the price per share ($60), for total sales proceeds of $62. - The original cost basis is not affected by the exercise, so it remains $56.50.

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

II License taxes paid by businesses III Special liquor and tobacco taxes - 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.

If a registered representative hosts an investment seminar intending to discuss general investment concepts and a specific mutual fund for which she has performance charts, which of the following statements are true? I She may discuss the investment returns of the mutual fund in general, provided she does not use a specific time frame. II She may discuss the investment returns of the mutual fund using a specific time frame. III She must disclose to the audience all material facts regarding the mutual fund. IV She may emphasize the positive aspects of the mutual fund and refer prospective investors to the prospectus for further details.

II She may discuss the investment returns of the mutual fund using a specific time frame. III She must disclose to the audience all material facts regarding the mutual fund. - She may discuss the investment returns of the mutual fund, as long as she uses a specific time frame. When discussing an investment, she must disclose all material facts pertaining to the investment—both negative and positive.

A retail customer purchases a municipal bond from your firm. According to Municipal Securities Rulemaking Board rules, the confirmation must disclose which of the following? I Where your firm acquired the bonds II Whether your firm acted as agent or principal III Your firm's address IV The price your firm paid for the bonds

II Whether your firm acted as agent or principal III Your firm's address - The broker-dealer must always disclose the capacity in which it acted (principal or agent). - The confirmation must show the name of the person for whom the trade was executed (the customer). - The name, address, and telephone number of the broker-dealer must be shown so the customer may easily contact the firm. - The settlement date is also required. The broker-dealer is not required to disclose where it acquired the bonds or the price it paid.

With which of the following must variable annuities be registered? I. State banking commission II. State insurance commission III.SEC IV. FINRA

II. State insurance commission III.SEC - Variable annuities must be registered with both the state insurance commission and the SEC as they are sold by insurance companies but are nonetheless a security.

There are several conditions found in the Securities Act of 1933 permitting the offering of control stock to the public without filing a Form 144. Included in that list are I the dollar amount is $1 million or less. II 100,000 shares or fewer are sold. III 5,000 shares or fewer are sold. IV the dollar amount is $50,000 or less.

III 5,000 shares or fewer are sold. IV the dollar amount is $50,000 or less. - Under Rule 144, when shares are sold by an affiliate (control), Form 144 need not be filed if 5,000 or fewer shares are sold or the dollar amount is $50,000 or less. Meeting either of these conditions is considered the de minimis exception. This de minimis rule applies to sales in any 90-day period.

Which of the following events will cause the special memorandum account (SMA) to decrease? I An increase in the short market value (SMV) II A decrease in the long market value (LMV) III The purchase of long securities on margin IV The short sale of securities

III The purchase of long securities on margin IV The short sale of securities - SMA, once created, does not go away until used. - Using the SMA to buy more securities or sell more securities short will decrease the amount of SMA.

A client did an exchange of a deferred variable annuity in 2019 and two years later was advised by her registered representative (RR) to exchange the contract for a different contract offering better features. This recommendation...

Would be deemed inappropriate given the date of the last exchange - FINRA has a "36-month" rule when it comes to exchanging one variable annuity contract for another. For suitability reasons, it must be investigated as to whether the client engaged in a prior "1035 Exchange" within the past 3 years. It can be a 'red flag' when such a transaction is done more frequently than once every 3 years.

What is Dollar Cost Averaging?

a funding technique that will cause the average cost per share to be less than the average price per share. - Dollar cost averaging is beneficial to the client because it achieves an average cost per share that is less than the average price per share over time. Using a fixed dollar amount each investment period, it enables the investor to purchase more shares when prices are lower and fewer shares when prices are higher. While dollar cost averaging does not ensure profits in any market or ensure against losses, it is an economical and convenient method for acquiring shares.

The Tennessee Valley Authority (TVA) can best be described as a..

federally owned electric utility company in the US - The Tennessee Valley Authority (TVA), created in 1933, is a federally owned electric utility corporation. It is not backed by the US government - The bonds of the TVA are supported by the revenues created by the agencies' projects.