S7-Final 4

Customer Name:Jane DoeAge:41Marital Status:MarriedDependents:1 Child, Age 13Occupation:HomemakerHousehold Income:$140,000Net Worth:$240,000 (excluding residence)Own Home:YesInvestment Objectives:Total Return / Tax AdvantagedInvestment Experience:12 yearsCurrent Portfolio Composition:8% Common Stocks62% Corporate Bonds30% Money Market Fund In order to make an appropriate recommendation to this customer, the registered representative should be concerned about the customer's: I investment time horizon, with specific emphasis on whether the 13 year old child will go to college and how this expense will be fundedII strategic asset allocation needs with specific emphasis on the fact that the customer's portfolio mix might be overly conservative for a person that is only 41 years oldIII retirement needs, with specific emphasis on whether the customer's spouse is covered by a pension plan or if the customer must fund her retirement on her ownIV life insurance coverage, with specific emphasis on the fact that this non-working wife and child must be supported if the husband dies A. I and III only B. II and IV only C. I, II, IIID. I, II, III, IV

ALL-meaning that life insurance IS IMPORTANT

A customer who places an order to sell 100 shares of Adap Fund will receive: A. $745 B. $745 less a commissionC. $750D. $750 less a commission

$750 less a commission

Publicly traded fund shares are: I NegotiableII RedeemableIII ManagedIV Non-Managed A. I and III B. I and IV C. II and III D. II and IV

Negotiable and managed

The expense ratio of a mutual fund is a measure of: A. profitabilityB. operating efficiency C. liquidity D. stability

Operating efficiency

Which statements are TRUE about LEAPs? I Contracts are available on individual equity securitiesII Contracts are available on indexesIII Contracts for equity securities may be exercised only at expirationIV Contracts have maximum expirations of 9 months A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is A. LEAPs (Long term Equity AnticiPation options) are long term stock options that are traded on both individual stocks and stock indexes. Unlike regular individual stock options, which have maximum lives of about 9 months, or index options, which have a maximum life of 4 months, LEAPs are available in 28-month expirations for stocks; and 36-month expirations for index options.LEAPs allow investors to position themselves for market movements that are expected over a longer period of time. LEAPs are issued in the same style as the regular option contract for that underlying instrument. Since equity options and OEX options are American style, their LEAPs are American style as well (can be exercised at any time). In contrast, virtually all other index options and therefore other index LEAPs, are European style. LEAPs are traded on the CBOE, alongside the regular stock options, and the OEX and SPX indexes. If LEAP equity contracts are exercised, the actual underlying security must be delivered, as is the case with a regular stock option. Each contract covers 100 shares. If LEAP contracts on indexes are exercised, the writer must pay the holder the "in the money" amount (identical to the exercise of regular index options). For LEAP index contracts, the multiplier is 100. question # 5-9-18-1Options: Index Options: Index LEAPs: SummaryCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved

Which callable municipal bond issue MUST be priced to a "refunding call" date? A. premium bond callable in 5 years at 100 B. premium bond callable in 5 years at 105 C. discount bond callable in 5 years at 100D. discount bond callable in 5 years at 105

The best answer is A. Municipal bonds trading in the secondary market must be priced on a "worst scenario" basis. It would be inappropriate to quote a municipal customer a yield to maturity, and then have the bond called early, reducing the customer's promised yield. This will always occur if a bond is priced at a premium, and is called early at par. In this case, the price computed must give the customer the promised yield computed to the call date. If the premium bond is called early and there is a substantial call premium, the customer's yield may be improved by that call premium. In this case, the bond would be priced to maturity. If a bond is priced at a discount, it will always be priced to maturity. If the bond is called early, the customer earns the discount faster and the customer's effective yield increases.

A client receives a $75 gift card from a broker-dealer for giving a testimonial about her highly positive experience with her registered representative. What must the broker-dealer disclose if the testimonial is used in a retail communication? A. The fact that the testimonial may not be representative of the experience of other customersB. The fact that the maker of the testimonial was paid, along with the amount of compensation C. Whether any guarantee of growth was made by the representative to induce the giving of the testimonial D. The length of the time that the maker of the testimonial had an account with the broker-dealer

The best answer is A. The FINRA rule on testimonials used in communications states that: "Retail communications or correspondence providing any testimonial concerning the investment advice or investment performance of a member or its products must prominently disclose the following: The fact that the testimonial may not be representative of the experience of other customers. The fact that the testimonial is no guarantee of future performance or success. If more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial." question # 9-4-104-1Regulations: FINRA Rules: Communications with the Public: Advertising Content - TestimonialsCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved

A prospective options customer must receive which of the following at, or before, the time that sales literature that includes recommendations is sent to the client? I Options Disclosure DocumentII Options AgreementIII Broker-dealer financial statement A. I only B. II only C. I and II D. I, II, III

The best answer is A.A customer who receives any options communication that makes a recommendation; shows past performance; or includes a performance projection; must get the latest Options Disclosure Document (ODD) at or prior to the receipt of the material. There is no requirement to give the customer a new account form or a broker-dealer financial statement.

A long margin account is restricted under Regulation T if the margin percentage falls below: A. 50% B. 40% C. 30%D. 25%

The best answer is A.A long margin account is "restricted" under Regulation T if it falls below the initial 50% margin percentage.

VA customer buys 1 ABC Jan 70 Call @ $5 and buys 1 ABC Jan 70 Put @ $6 when the market price of ABC is $71. At which market prices is the position profitable? I $57II $59III $81IV $84 A. I and IV only B. II and III only C. II and IV onlyD. I, II, III, IV

The best answer is A.A long straddle is the purchase of a call and the purchase of a put on the same stock at the same strike price and expiration. If the market moves up, the call will be exercised. If the market moves down, the put will be exercised. Since $11 in premiums was paid, the market must move down by more than 11 points to profit on the put; or must move up by more than 11 points to profit on the call. Thus, the position is profitable either below $70 - $11 = $59; or above $70 + $11 = $81. Thus, the profitable prices here are $57 and $84. At $59 or $81, the customer breaks even. To summarize, the breakeven formulas for a long straddle are:

A customer who is long 1 ABC Jan 75 Put wishes to create a "debit put spread." The second option position that the customer must take is: A. Short 1 ABC 65 PutB. Short 1 ABC 85 Put C. Short 1 ABC 65 Call D. Short 1 ABC 85 Call

The best answer is A.A spread consists of the purchase and sale of the same type of option, with different strike prices or expirations - therefore Choices C and D are incorrect. In a bear put spread (long put spreads are bearish strategies), the customer purchases the higher strike price - the long 75 put - (higher premium since the contract gives the right to sell at the higher strike price) and sells the one with the lower strike price - the short 65 put (lower premium since the contract gives the right to sell at the lower price). The customer wants the market to fall, so that he can exercise the long put with the higher strike price for a profit. However, if the market falls too much, the short put is exercised at the lower strike price, and the customer must buy the stock, locking in the gain of 10 points (sell at $75; buy at $65). Conversely, if the market rises above $75, both puts expire and the customer loses the net premium paid.

All of the following indicators would be evaluated by a technical analyst EXCEPT: A. Quick Ratio B. Chart Formations C. 200 Day Stock Price Moving Average D. Advance / Decline Ratio

The best answer is A.A technical analyst makes buy and sell decisions on "technical" market factors such as trading volume, breadth of market movement (advance / decline line), and the movement of market averages. Fundamental analysts are concerned with the "fundamentals" of a company such as the quality of its management, earnings, balance sheet, etc. Therefore, a fundamental analyst would examine a company's Quick Ratio (Current Assets net of inventories divided by Current Liabilities) as well as its Price-Earnings Ratio.

Which of the 4 corporate characteristics is MOST difficult for a limited partnership to avoid? A. Centralization of management B. Free transferability of interestsC. Limited liability D. Indefinite life

The best answer is A.Centralization of management is the most difficult corporate characteristic to avoid. Both corporations and limited partnerships have centralized management (the GP being the manager in a limited partnership). Limited partners can't manage because that would jeopardize their limited liability status. The partnership agreement will restrict transfer of partnership interests and will place a fixed life on the partnership, so these corporate characteristics are avoided. If the general partner is "substantial," because he is assuming unlimited liability, the corporate characteristic of limited liability is avoided.

Regularly scheduled investments of the same dollar amount in fund shares will most likely result in a: A. lower average price per share B. higher average price per share C. lower average return on investment D. higher average return on investment

The best answer is A.Dollar cost averaging results in slightly more shares being bought as prices fall than when prices rise. Thus, if the market is fluctuating fairly evenly, periodic investments of the same dollar amount result in a lower average cost per share. This will not work if the market moves straight up or straight down.

A registered representative receives an order to sell 100 shares of ABC stock that has been "transferred and shipped" to the customer. Before executing the order, the registered representative must: I Ascertain the location of the stockII Ascertain that the securities can be delivered in 2 business daysIII Validate that the securities are in "good form"IV Obtain physical possession of the securities A. I and IIB. II and III C. IV only D. I, II, III, IV

The best answer is A.FINRA rules require that orders to sell cannot be accepted unless the firm has reasonable assurance that the securities can be delivered in 2 business days. There is no requirement to obtain physical possession of the securities before placing the sell order, nor is there a requirement to validate the securities as "good for delivery."

A customer is short 1 ABC Jan 90 Put @ $5. The put is exercised when the market price of ABC is $80. The cost basis of the shares is: A. strike price minus premium B. strike price plus premium C. market price minus premium D. market price plus premium

The best answer is A.If a short put is exercised, the writer is required to buy the stock at the strike price ($90). Since $5 per share was received in premiums, the writer's cost of the stock is $85 per share for tax purposes. Note that this is the same as the breakeven on the position, which is the strike price minus the premium.

A customer sells short 100 shares of ABC stock at $60 and sells 1 ABC Oct 60 Put @ $6. The market falls to $30 and the put is exercised. The gain or loss is: A. $600 gain B. $600 loss C. $2,400 gainD. $2,400 loss

The best answer is A.If the market drops, the short put is exercised and the customer must buy the stock at $60. She can use this stock to replace the borrowed shares sold (short) at $60. There is no gain or loss on the stock. Since $600 was collected in premiums for selling the put, this is the gain.

An investor must file a 13D report with the SEC if a: A. 5% or greater common stock holding is purchased of one issuerB. 10% or greater common stock holding is purchased of one issuer C. 15% or greater common stock holding is purchased of one issuer D. 20% or greater common stock holding is purchased of one issuer

The best answer is A.Investors who accumulate a 5% or greater position in the common stock of one registered issuer are required to file a 13D notice with the SEC within 10 business days of date that the 5% threshold was passed. This information is made public (and is of great interest to the management of the company, since the new large stockholder will probably want a say in how the company is being run!) There is no requirement to file for holding a large portion of a corporation's debt.

Under MSRB rules, which of the following are prohibited? I Guaranteeing a customer account against lossII Recommending the purchase of a put option to the customer as protection against lossIII Agreeing to repurchase bonds from a customer personally at a preset priceIV Recommending the use of a repurchase agreement to the customer as a means of protecting against loss A. I and III B. II and IV C. I, II, III D. All of the above

The best answer is A.It is prohibited to agree to repurchase bonds from a customer personally at a preset price since this is a guarantee against loss to the customer that is prohibited. Guaranteeing a customer's account against loss is prohibited. Recommending the use of put options or repurchase agreements to protect against loss are both valid strategies and are permitted under MSRB rules.

Which of the following issuers must report to the SEC under the Securities Exchange Act of 1934? I CorporationsII Investment CompaniesIII MunicipalitiesIV Federal Agencies A. I and II B. II and III C. I, II, III D. I, II, III, IV

The best answer is A.Only corporations and investment companies (which are either corporations or trusts) file annual and semi-annual reports with the SEC. Municipal and federal issuers are exempt from the Securities Exchange Act of 1934.

Which of the following describes a position trade? A. Buying a security into inventory directly from a customer with a mark-down B. After receiving a buy order from a customer, the dealer then purchases the stock into inventory and resells it to the customer C. Simultaneously buying and selling short the same or equivalent securityD. Selling stock at the direction of a customer and using the proceeds to buy another stock for that customer

The best answer is A.Position trading is trading for a firm's own account. This is either selling a security out of inventory direct to a customer with a mark-up; or buying a security into inventory direct from a customer with a mark-down. When the firm "position trades," the firm can take both long and short positions as it speculates in the market. Choice B describes a "riskless principal" transaction; Choice C describes an "arbitrage transaction;" and Choice D describes a "proceeds transaction."

Under Rule 606 of Regulation NMS, if requested by a customer, broker-dealers must disclose the market venues to which that customer's orders were directed during the preceding: A. 6 months B. 9 monthsC. 12 months D. 18 months

The best answer is A.Rule 606 of Regulation NMS covers reports that broker-dealers must prepare on their order-routing procedures.Upon customer request, a member firm must disclose the markets to which the customer's orders were routed during the past 6 months; whether the orders were directed (that is, the customer specified the market where the order was to be filled) or non-directed (the member firm chose the market where the order was to be filled); and the time of execution of the orders.

Under Regulation Crowdfunding: I The maximum investment amount is $100,000II The maximum investment amount is $500,000III The maximum offering amount is $1,000,000IV The maximum offering amount is $5,000,000 A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is A.The maximum amount that can be invested in a single offering under Regulation Crowdfunding is $100,000. The maximum offering amount is limited to $1,000,000. (Test Note: The maximum investment amount and the maximum amount that can be raised are subject to an inflation adjustment every 5 years. In April 2017, the maximum investment amount was raised to $107,000 and the maximum amount that can be raised was adjusted to $1,070,000. For the exam, know the base amounts and the fact that they are indexed for inflation periodically.)

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

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

The transfer agent is typically responsible for all of the following functions EXCEPT: A. maintaining the integrity of the record of all shareholder names and addresses B. acting as disbursement agent for the corporation C. issuing new stock certificates D. canceling old stock certificates

The best answer is A.The transfer agent cancels old shares and issues new shares. It is the responsibility of the registrar to maintain the shareholder list, and to ensure that the number of shares transferred from one shareholder to another always matches. The transfer agent typically performs the role of paying agent as well. When a corporation makes a distribution, the paying agent actually prepares and mails the checks (using the current shareholder list provided by the registrar - the registrar is responsible for maintaining the integrity of the shareholder list).

As stated in the flow of funds found in a revenue bond issue's trust indenture, before the revenues collected are applied to the operations and maintenance fund, revenues are placed in the: A. Revenue Fund B. Debt Service Reserve FundC. Sinking Fund D. Reserve Maintenance Fund

The best answer is A.The trust indenture of a revenue bond issue includes a "flow of funds" - meaning how revenues will be applied by the issuer. As revenues are collected, they are first deposited to a revenue fund. The monies are then applied, in sequence, to the operation and maintenance account; sinking fund; debt service reserve fund; reserve maintenance fund; renewal and replacement fund; and finally to the surplus fund.

Which of the following participate in the Eurodollar bond market? I Domestic investment banksII Foreign commercial banksIII Domestic commercial banksIV Domestic thrift institutions A. I, II, III B. II, III, IVC. I, III, IV D. I, II, III, IV

The best answer is A.Thrift institutions do not operate in the foreign markets. They only conduct business in the State in which they are organized, with their primary purpose being to give mortgages on local real estate, funded by deposits raised locally. All the others participate in the Eurodollar bond market.

If the alternative minimum tax computation is greater than the regular income tax computation, which statement is TRUE? A. The alternative amount is due B. The regular amount is due C. The alternative amount is added to the regular amount, with the combined amount due D. The taxpayer selects the computation he wishes to use for that year, but must continue using that method in future years

The best answer is A.Under the tax law, each tax filer must compute both the regular income tax and the alternative minimum tax (known as the "tax on tax preferences"), and must pay the higher amount.

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

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

A customer buys $100,000 face amount of G.O. bonds in the secondary market at 90 and $100,000 face amount of Revenue bonds in the secondary market at 110. The investor opts not to accrete the G.O. bonds. If the bonds are held to maturity, the tax consequences are: A. capital gains tax on the G.O. bonds; capital loss on the Revenue bondsB. a gain taxed as interest income on the G.O. bonds; no gain or loss on the Revenue bonds C. capital loss on both the G.O. and Revenue bonds D. no gain or loss on both the G.O. and Revenue bonds

The best answer is B. Investors that purchase municipal discount bonds in the secondary market have the option of accreting the bonds. If there is no accretion, the bonds are valued at cost. If they are held to maturity, there is a taxable gain at that point (with no accretion). The gain is taxed as interest income, though, and not as a capital gains. Municipal premium bonds purchased in the secondary market must be amortized. If they are held to maturity, the full premium has been amortized and the adjusted basis is par. Since the bonds are redeemed at par, there is no capital gain or loss.

On November 23rd, an officer of MNO Corporation wishes to sell stock under Rule 144. MNO has 50,000,000 shares outstanding. The previous weeks' trading volumes are: Week EndingVolumeNov 21Nov 14Nov 7Oct 31Oct 24500,000 shares525,000 shares485,000 shares450,000 shares400,000 shares If the Form 144 is filed today, the maximum sale is: A. 490,000 sharesB. 500,000 shares C. 506,250 shares D. 515,725 shares T

The best answer is B. Rule 144 allows the sale of the greater of 1% of the outstanding shares or the weekly average of the preceding 4 weeks trading volume every 90 days. 1% of 50,000,000 shares = 500,000 shares. The last 4 weeks' trading volumes are: 500,000 shares525,000 shares485,000 shares450,000 shares1,960,000 shares/ 4 weeks = 490,000 share average The greater amount is 1% of outstanding shares, or 500,000 shares.

TRACE reports trades of all of the following EXCEPT: A. corporate bondsB. municipal bonds C. government bonds D. agency bonds

The best answer is B. TRACE is FINRA's Trade Reporting and Compliance Engine. It reports trades of corporate, government, and agency bonds. Municipal bond trades are reported via RTRS - the Real Time Reporting System - operated by the MSRB. Trades must be reported to TRACE "as soon as practicable," but no later than 15 minutes after execution. TRACE disseminates the trade report immediately.

A 60-year old man is looking to create a portfolio that will provide current income and preservation of capital. Which of the following portfolios would be the BEST recommendation to the client? A. Long term corporate bonds rated AA or better, high yield corporate bonds and blue chip stocksB. Treasury bills, a money market mutual fund and bank certificates of deposit C. Treasury STRIPS, corporate income bonds and PO tranches D. Growth stocks, defensive stocks and foreign stocks

The best answer is B. This customer wants current income and preservation of capital. Choice A provides current income, but does not provide preservation of capital. Long term bonds are subject to loss of value if interest rates rise; high yield corporate bonds have this risk as well as higher default risk; and blue chip stocks also can lose substantial value in a bear market. Choice B meets both objectives. Treasury bills, money market funds and bank certificates of deposit all provide income (but not high levels of income) and safety of principal. Choice C consists of long term securities that do not provide income, and that also have high levels of interest rate risk. Treasury STRIPS are zero coupon Treasury obligations - they have high levels of interest rate risk and do not provide current income. Corporate income bonds only pay interest if the corporation has enough earnings. PO tranches are CMO tranches that pay "Principal Only." Because mortgage payments in the early years are mostly interest and in the later years are mostly principal, they pay very little in the early years and make most of their payments in their later years. Thus, they are most similar to a long-term zero coupon bond with high levels of interest rate risk. Choice D consists only of common stocks, which do not provide for preservation of capital.

An individual who is 25 years from retirement has $500,000 to invest today. He is risk tolerant and is looking to withdraw $80,000 per year once he retires. Which asset allocation is BEST for this client? A. 25% Stocks / 25% Bonds / 25% REITs / 25% Money MarketsB. 50% Stocks / 40% Bonds/ 10% Cash C. 100% Bonds D. 100% Stocks

The best answer is B. We are not given the age of this customer, but since he or she is 25 years from retirement, we can guess that the customer is around 40-50 years old. Based on the rule of thumb that "100% minus the customer's age" should be allocated to stocks for growth, a stock allocation of 40-50% is about right. This makes Choice B the best offered. No asset class diversification (Choices C and D) is not the way to go (100% stocks is too risky and 100% bonds is too conservative). The asset allocation offered in Choice A is not weighted heavily enough in stocks and is too conservative to meet the customer's goal. Also note, that while not relevant to the question, if the $500,000 invested earns 5% per year, after 25 years, the account will be worth about $1,700,000. If the customer is now age 65 or so, this would give retirement income for around 20 years at the rate of $80,000 per year.

A 5 year 3 1/2% Treasury Note is quoted at 98-4 - 98-9. The note pays interest on Jan 1st and Jul 1st. A customer buys 5M of the notes. Approximately how much will the customer pay, disregarding commissions and accrued interest? A. $4,906.25B. $4,914.06C. $4,920.00 D. $4,945.00

The best answer is B."5M" means that the customer is buying $5,000 par value of the notes (M is Latin for $1,000). A customer will buy at the ask price, which is 98 and 9/32nds = 98.28125% of $5,000 par = $4,914.06.

Which of the following is a potential money laundering activity? A. LadderingB. Structuring C. Diversifying D. Amortizing

The best answer is B."Structuring" is the illegal patterning of cash transactions so they fall under the $10,000 reporting limit - such patterns require the filing of a "CTR" (Currency Transaction Report); and if the firm is suspicious about the customer, an "SAR" report (Suspicious Activities Report) must be filed as well.

A new issue corporate bond with dated date of June 1st is bought from the underwriter with settlement occurring on Monday, June 28th. How many days of accrued interest is owed the underwriter? A. 26B. 27C. 28 D. 29

The best answer is B.Accrued interest on a new issue is calculated from the dated date up until, but not including settlement date. This new issue is bought from the underwriter. The customer pays the underwriter the price of the bond plus any accrued interest. This interest accrues from June 1st (the dated date) until, but not including the settlement date of the 28th. Thus, 27 days of accrued interest are due. (Note: Don't let the weekend date fool you! Accrued interest for corporates is calculated on an arbitrary 30 day month / 360 day year basis. The weekend has no effect on the computation.)

If the SEC sends a deficiency letter to the issuer regarding an issue in registration,: A. it disapproves of registering the issueB. disclosure is not considered to be adequate C. the underwriters have failed to establish the Public Offering Price D. due diligence has not been performed by the underwriters

The best answer is B.An SEC "deficiency letter" indicates that there is not adequate disclosure in the registration documents to allow investors to make an informed decision. The deficiency must be cured before the SEC will allow the registration to be effective.

CMO investors are subject to which of the following risks? I Default riskII Credit riskIII Prepayment riskIV Reinvestment risk A. I and II onlyB. III and IV only C. II, III, IVD. I, II, III, IV

The best answer is B.CMO investors have almost no default risk (the same thing as credit risk), since the underlying mortgages are usually implicitly backed by the U.S. Government. CMO tranch holders are subject to extension risk - the risk that the expected life of the tranch becomes much longer due to a rise in interest rates causing homeowners to keep their existing mortgages longer than expected. CMO tranch holders are subject to prepayment risk - the risk that the expected life of the tranch becomes much shorter due to a decline in interest rates causing homeowners to refinance and prepay their existing mortgages earlier than expected. The purchaser of a CMO tranch is subject to interest rate risk - if interest rates go higher, then the value of the tranch will decline. Finally, CMO tranch holders are subject to reinvestment risk, since monthly payments must be reinvested at the same interest rate to maintain the same rate of return on the investment. The only securities that do not have reinvestment risk are zero-coupon obligations.

Distributions after age 59 ½ from non-tax qualified retirement plans are: A. 100% taxableB. partial tax free return of capital and partial taxable income C. 100% tax free D. 100% tax deferred

The best answer is B.Contributions to non-tax qualified plans, such as most variable annuities, are not tax deductible. They are made with "after-tax" dollars. Earnings accrue tax deferred. When distributions commence, the return of original capital is not taxed; the earnings are taxed.

A new issue municipal bond is purchased at 105. Which statement is TRUE? A. The premium is immediately deductible in full for that tax yearB. The premium must be amortized on a straight line basis over the life of the bond C. The premium is deductible as a capital loss at maturity D. The premium cannot be amortized, nor is it deductible at any time

The best answer is B.If a municipal bond is purchased at a premium, whether in the primary or secondary market, the premium must be amortized on a straight line basis over the life of the bond. This results in an annual reduction in interest income received (non-taxable); and a downward adjustment in the bond's cost basis towards par. Also note that there is no tax deduction permitted for the annual amortization amount. At maturity, the cost basis has been adjusted to par. The bond is redeemed at par; so there is no capital gain or loss.

Upon customer request, a dealer in a competitive municipal syndicate must disclose: A. the spread taken by the underwritersB. order priority provisionsC. names of syndicate members D. name(s) of the person(s) from whom orders have already been received

The best answer is B.MSRB rules require that if a customer requests, the dealer must disclose the order priority provisions on a new issue (the usual priority is Pre-Sale; Group Net; Designated; Member Takedown). There is no requirement to disclose to a customer the underwriter's spread in a competitive bid issue (that is true for negotiated issues only). There is no required spread disclosure for competitive bid issues because the spread is very thin on such offerings. The names of the syndicate members do not have to be disclosed to customers (though this information is readily available), nor the names of persons from whom orders are received. The MSRB does require that syndicate members disclose the identity of the person for whom an order is placed, to the managing underwriter.

Municipal syndicate expenses are allocated: I by the managerII by the issuerIII based upon sales of the issue made by each memberIV based upon the underwriting participation of each member A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is B.Municipal syndicate expenses are usually allocated by the manager among syndicate members based upon underwriting participation of that member. This will be detailed in the Syndicate Agreement.

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

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

Orders on the Specialist/DMM's book are filled on a: A. Last In, First Out basisB. First In, First Out basis C. First In, Last Out basis D. Random Selection basis

The best answer is B.Orders on the book are handled on a FIFO basis - first in-first out. If an order is canceled and resubmitted as a different order (i.e., change the order from "Buy 100 shares at $50" to "Buy 200 shares at $50"), the new order goes to "last place" on the book.

All of the following statements are true about REITs EXCEPT: A. REITs are similar to closed end investment companiesB. REITs issue redeemable shares C. REITs are listed and trade on stock exchanges D. REITs must invest at least 75% of their assets in real estate related activities to qualify for conduit tax treatment

The best answer is B.REIT shares are not redeemable; they are negotiable and trade on exchanges. REITs are similar to closed end investment companies and must invest at least 75% of their assets in real estate activities to qualify as a "regulated" investment company under Subchapter M of the Internal Revenue Code.

To buy a listed stock in a margin account requires a deposit of: A. 25% of the price of the transactionB. 50% of the price of the transaction C. 25% of the closing price of the security that day D. 50% of the closing price of the security that day

The best answer is B.Regulation T requires that 50% of the purchase amount, based on the price of the trade, be deposited. The closing price has no effect on the deposit amount required.

The Vice-President of ACME Corporation, an NYSE listed firm, places an order to buy 10,000 shares of ACME common at the market. 3 months later, ACME stock's price has increased by 20% and the officer places an order to sell. Which statements are TRUE? I The sale of the stock is subject to Rule 144II The stock cannot be sold unless it has been held, fully paid, for 6 monthsIII The sale is prohibited until a "waiver of liability" has been obtained from the issuerIV The officer must forfeit the profit on the sale A. I and II onlyB. I and IV only C. II and III onlyD. I, II, III, IV

The best answer is B.Since the seller is an officer of that company, he is a control person under Rule 144, and any sales must conform with the Rule. Rule 144 requires that restricted shares be held for 6 months, fully paid, before being sold. Since these shares are registered, they are not "restricted" and the 6-month holding period requirement does not apply. There is no requirement for a "waiver of liability" from the issuer. Since the officer did not hold the appreciated securities for at least 6 months, he or she has a "short swing" profit that must be paid back to the issuer under the Securities Exchange Act of 1934 "Insider" rules.

A municipal securities firm based in Los Angeles that effects transactions solely on an agency basis places the following advertisement in the local newspaper:"We Are Market Makers Of Large SizesIn Los Angeles General Obligation Bonds" Which statement is TRUE regarding this advertising claim? A. This is prohibited under MSRB rules because dealer ads can only be placed in trade publicationsB. This is prohibited under MSRB rules because the statement is materially untrue C. This is prohibited under MSRB rules because the advertisement must be approved by the MSRB prior to useD. This is permitted under MSRB rules without restriction

The best answer is B.Since this firm effects trades solely on an agency basis, it carries no inventory and is not a market maker. Thus, its claim to make large size markets in municipal bonds is untrue. The MSRB does not require any filing of advertising, and advertisements can be placed in any medium. However, statements made in advertising cannot be fraudulent.

Which statement is FALSE about stabilizing bids? A. A stabilizing bid is placed by the syndicate managerB. Stabilization is permitted during the 20-day cooling off period C. Only 1 stabilizing bid is permitted at any time D. Stabilization is permitted under Regulation M

The best answer is B.Stabilization of new issue prices in the aftermarket is permitted under Regulation M. The bid cannot be placed until the effective date; it is not permitted during the 20-day cooling off period. Only 1 stabilizing bid is permitted at any time. The manager of the syndicate places the stabilizing bid on behalf of the syndicate.

The Public Offering Price for a new issue is set at $25 per share. Which of the following are likely to be stabilizing bids? I $20.00II $24.88III $25.00IV $30.00 A. I and IIB. II and III C. III and IV D. I, II, III, IV

The best answer is B.Stabilizing bids are entered at or just below the public offering price, never above. If the public offering price is $25 per share, bids of $25 and $24.88 can be stabilizing bids. A bid of $20 is too low; a bid of $30 is too high.

Information about the municipal primary market can be obtained from all of the following EXCEPT: A. MunifactsB. CRD C. EMMA D. The Bond Buyer

The best answer is B.The Bond Buyer is the "new issue" municipal newspaper. Municipal issuers place announcements of new issues in this publication. Munifacts is the newswire service of the Bond Buyer, that mainly announces new issue offerings by syndicates, and also includes some general news items that can affect the secondary market. EMMA (Electronic Municipal Market Access) is the MSRB's website which includes copies of municipal new issue Official Statements. CRD is the Central Registration Depository, run by FINRA, which keeps the records of every registered individual in the U.S.

Stabilization rules for new issues are set forth under the: A. Securities Act of 1933B. Securities Exchange Act of 1934 C. Trust Indenture Act of 1939 D. Investment Company Act of 1940

The best answer is B.The Securities Exchange Act of 1934 prohibits market manipulation - with one exception. Stabilization of new issues is permitted as long as the stabilizing trades (which take place in the secondary market) conform to the requirements of the 1934 Act.

A customer buys 100 shares of ABC at $60 and buys 1 ABC Jan 60 Put @ $7. The breakeven point is: A. $53B. $67 C. $70 D. $77

The best answer is B.The customer paid $60 for the stock and paid $7 for the put, for a total outlay of $67. To breakeven, the stock must be sold for $67. To summarize, the formula for breakeven for a long stock / long put position is:

In 2019, a self-employed person earning $300,000 wishes to open a Keogh Plan. The maximum yearly contribution is: A. $6,000B. $56,000 C. $60,000D. $75,000

The best answer is B.The maximum contribution to a Keogh is effectively 20% of income (prior to taking the Keogh "deduction") or $56,000 in 2019, whichever is less. 20% of $300,000 = $60,000. However, only the $56,000 maximum can be contributed in 2019. (Note that this amount is adjusted each year for inflation.)

A security which gives the holder an undivided interest in a pool of mortgages is known as a(n): A. equity real estate investment trustB. pass through certificate C. first mortgage bond D. mortgage real estate investment trust

The best answer is B.The question defines a pass through certificate - an undivided interest in a pool of mortgages, where the mortgage payments are passed through to the certificate holders. Real Estate Investment Trusts (REITs) are investment companies similar to closed end funds. In such an investment, one owns a trust unit; however the unit does not represent a undivided ownership interest in the underlying real estate or mortgages. Mortgage bonds are issued by corporations pledging real estate as collateral.

An 80-year old client lives on his social security payments that total $25,000 per year. 3 years ago, on the advice of the broker, he invested in a technology fund where he lost most of his assets. The remaining balance in his brokerage account is $17,000. The client has annual living expenses of $30,000 and a net worth of $128,000. The customer approaches a new broker to take over management of his account. The representative that receives the account should: A. do nothingB. sell the holding in the account and invest the proceeds in a more conservative fund within the same family of fundsC. sell the holding in the account and invest the proceeds in a more conservative fund outside the family of funds D. sell the holding in the account and invest the proceeds in a more conservative fund that has a deferred sales charge

The best answer is B.This customer should be invested in a safe income fund that will provide the "extra" $5,000 in annual income needed to meet this customer's income shortfall (the customer is living on $25,000 of social security but has $30,000 of annual living expenses). The question does not give an option of selling the tech fund and investing the proceeds in an income fund! Of the choices offered, Choice B is best because there will be no (or a lower) sales charge for moving assets within a family of funds, as opposed to investing the proceeds in a new fund family. Choice D is not correct because this customer is elderly and has a high probability of dying before the contingent deferred sales charge would be depleted to "0" (this usually occurs over a 7-year time frame, and this customer is now 80 years old). If the customer died, say 2 years later, and the estate liquidated the holding, then the CDSC (Contingent Deferred Sales Charge) would have to be paid.

An investor holds shares of a stock that declares a 10% stock dividend. Which of the following statements are TRUE regarding the stock position after the dividend is paid? I The cost basis per share is adjustedII The cost basis per share remains the sameIII The distribution is taxableIV The distribution is not taxable A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is B.Under IRS rules, stock dividends are not taxable at the time of receipt. The stock dividend results in the cost basis per share being reduced, with the number of shares held increased proportionately. In aggregate, the customer's cost basis remains the same.

Use the following information to answer the next question: BAXYZ Jan 40 Call55.25XYZ Jan 40 Put22.25XYZ Jan 50 Call11.25XYZ Jan 50 Put77.25 A customer who wishes to create a credit call spread must deposit: A. 3.75 B. 5.75C. 6.25 D. 7.25

The best answer is C. A Credit Call spread is created by selling a call with a lower strike price and buying a call with a higher strike price. Sell 1 XYZ Jan 40 CallBuy 1 XYZ Jan 50 Call The XYZ Jan 40 Call is sold at the bid price of 5; the XYZ Jan 50 Call is bought at the ask price of 1.25, creating a net credit of 3.75 or $375. The deposit is found by taking the difference in the strike prices of 10 (this is the maximum loss if both contracts are exercised), net of the $3.75 credit received. The net deposit is 6.25 = $625. Also note that this is the maximum potential loss on the position. question # 6-5-12-1Customer Accounts: Margin on Options: Credit Spread - DepositCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved

A smaller business with variable cash flow is looking to establish a pension plan for its 50 employees. It wants a plan that allows it to contribute the largest possible amount for its employees, but wants the flexibility to reduce contributions in lean years. The BEST recommendation is a: A. 401(k) plan B. 403(b) planC. SEP IRAD. SIMPLE IRA

The best answer is C. A SEP IRA is a Simplified Employee Pension IRA, which is easier to set up and administrate than most other pension plans. It allows the employer to make a deductible contribution of a maximum of 25% of an employee's income (20% effective rate), capped at $56,000 in 2019. It also allows the employer to vary the contribution percentage each year - a key advantage of a SEP IRA. A SIMPLE IRA is another employer sponsored plan that is "simple" to set up, but it only allows an employee to contribute $13,000 in 2019 as a salary reduction. In addition, the employer must make a matching contribution of either 2% or 3% of the employee's salary - and this must be made in either good or bad times. So a SIMPLE IRA does not meet the requirements of maximum contribution amount and flexibility as to the annual contribution amount. 401(k) plans are employer sponsored, salary reduction plans, but the maximum contribution is limited to $19,000 in 2019. 403(b) plans allow for the same contribution as a 401(k), but are only available to not-for-profit employers.

ABLE accounts are: A. used to save funds on a tax-deferred basis and may only be used to pay for medical expensesB. used to save funds on a tax-deferred basis to pay for the ongoing care of disabled children below age 21C. regulated by the MSRB D. regulated by FINRA

The best answer is C. ABLE accounts were enacted by Congress in late 2014. ABLE stands for "Achieving a Better Life Experience Act." It allows each state to set up a "municipal fund security" regulated by the MSRB that permits an account to be established to pay for the ongoing expenses of a disabled person. One of the key features of an ABLE account is that accumulated savings do not affect that person's eligibility for other Federal benefits (it used to be the case that having too much in assets would disqualify that person from other Federal benefits such as Medicaid). Up to $15,000 per year (the Federal gift tax exclusion amount) can be contributed to an ABLE account, with no tax deduction. The account grows tax-deferred, and payments to pay for qualified expenses are tax-free. Qualified expenses include medical care, transportation, housing, education, and assistive technology. The account must be established before the disabled individual reaches age 26, and proof that the beneficiary is disabled or blind must be provided. ABLE accounts are permitted under Section 529A of the Internal Revenue Code. Do not confuse these with 529 Plans, which are a municipal fund security to save for education expenses. question # 7-3-18-5Retirement Plans: Education And Health Savings Plans: ABLE AccountsCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved

XYZZ ADR represents 10% of the value of an XYZZ ordinary share. The ordinary shares trade on the London Stock Exchange, where the current price is 400 British Pounds (BP). The current exchange rate for the British Pound against the U.S. Dollar is $1.40. The ordinary share pays an annualized dividend of 12 BP. The XYZZ ADR is listed on the NYSE. If a customer places an order to buy $560,000 of the ADR on the NYSE, the customer will buy how may shares of the ADR? A. 1,000 B. 1,400C. 10,000 D. 14,000

The best answer is C. Because the XYZZ ordinary share trades for 400 BP in London, and the BP is worth $1.40, each ordinary share is worth 400 x $1.4 = $560. The ADR created for the U.S. market is 1/10th of this amount, or $56 per U.S. ADR. A customer who invests $560,000 will buy $560,000 / $56 = 10,000 ADR shares.

Speculators in foreign currencies would be subject to all of the following risks EXCEPT: A. political risk B. market riskC. interest rate risk D. exchange rate risk

The best answer is C. Interest rate risk only affects fixed income securities. As interest rates rise, the stream of future fixed interest payments and final principal repayment are devalued, reducing the current value of the bond. This risk would not affect foreign currencies, which do not give investors an income stream. Speculators in foreign currencies are simply placing bets on the future value of that currency. They assume political risk, exchange rate risk, and market risk. Market risk in this case is simply the risk of being on the wrong "side" of the market - e.g., being long the currency only to have its value fall; or short the currency only to have its value rise.

A customer with additional funds to invest seeks income, but thinks his portfolio is too heavily weighted in debt securities. The BEST recommendation to the customer is: A. Treasury securities B. Municipal securitiesC. Preferred stocks D. Industrial development bonds

The best answer is C. This customer does not want to buy any more bonds. Preferred stock is a fixed income equity security, so it meets the customer's requirement that the recommendation not be a bond; and it pays a fixed dividend rate (similar to bonds) for income. Treasury and municipal securities are all debt instruments, and are municipal industrial development bonds.

Which of the following are components of total long term capital of a corporation? I Common Stockholders' EquityII Preferred Stockholders' EquityIII Long Term Bonded DebtIV Current Liabilities A. I and II only B. III and IV onlyC. I, II, III D. I, II, III, IV

The best answer is C.A corporation's long term capital consists of common stockholders' equity (common at par; capital in excess of par; and retained earnings); preferred stockholders' equity; and long term debt. These are all sources of long term capital for the corporation. Current liabilities are just that, bills that must be paid within 1 year. They are not a source of capital for a corporation.

Which of the following are purchase and payout options for variable annuity contracts? I Lump sum payment; Immediate annuityII Lump sum payment; Deferred annuityIII Periodic payments; Immediate annuityIV Periodic payments; Deferred annuity A. I and II only B. III and IV onlyC. I, II, IV D. I, II, III, IV

The best answer is C.An investor can buy a variable annuity contract with a lump sum payment. Once the monies are used to purchase accumulation units, annuitization can occur immediately or can occur years in the future. An investor can also make periodic payments into a variable annuity contract, but cannot annuitize until payments stop. Thus, there is no option of periodic payments with an immediate annuity. The annuity must be deferred until the payments are completed.

Which statements are TRUE regarding European style foreign currency options? I The contracts can be exercised at any timeII The contracts can only be exercised at expirationIII The contracts can be traded at any timeIV The contracts can only be traded at expiration A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.Both European style and American style option contracts can be traded at any time until expiration. The distinction between the contract types relates solely to exercise provisions. American style contracts can be exercised at any time up until expiration. European style contracts can only be exercised at the expiration date. In the U.S., all equity option contracts and OEX index option contracts are American style. Almost all other index options are European style. PHLX World Currency options are only available in European style.

The essential difference between an open end fund and closed end fund is that a(n): A. open-end fund is managed; while a closed-end fund is not managed B. closed-end fund is managed; while an open-end fund is not managedC. open-end fund has a different capital structure than a closed-end fund D. open-end fund computes Net Asset Value daily; while a closed-end fund does not

The best answer is C.Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund's stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange or NASDAQ where they trade. Therefore, open-end and closed-end funds are capitalized differently. Both open-end and closed-end funds compute Net Asset Value per share daily.

Which statement is FALSE about CMBs? A. CMBs are used to smooth out cash flow B. CMBs are sold at a discount to parC. CMBs are sold at a slightly lower yield than T-BillsD. CMBs are direct obligations of the U.S. government

The best answer is C.CMBs are Cash Management Bills. They are sold at auction by the Treasury on an "as needed" basis to meet unexpected cash shortfalls, so they are not part of the regular auction cycle. Because they are sold on an irregular basis, they sell at slightly higher yields than equivalent maturity T-Bills. They are the shortest-term U.S. government security, often with maturities as short as 5 days. They are sold in $100 minimums at a discount to par value, just like Treasury Bills.

Which of the following investments is LEAST liquid? A. Mutual fundsB. Long term corporate bondsC. Private placements D. Closed-end funds

The best answer is C.Closed-end funds trade like any other stock, so they are highly liquid. Corporate bonds are traded OTC and have slightly higher liquidity risk than listed securities, but the trading market for these is active. Mutual funds do not trade, but they are redeemable every business day. In contrast, private placement securities cannot be traded in the public markets, either on an exchange or OTC. The only way to "cash out" is to sell the private placement to someone else in a private securities transaction, which is difficult to do. These are the least liquid securities.

A customer buys $10,000 of 30 year corporate bonds with 10 years left to maturity at 92. The customer elects not to accrete the discount annually. At maturity, the customer will have: A. no capital gain or loss B. an $800 taxable capital gainC. $800 of taxable interest income D. a $9,200 taxable capital gain

The best answer is C.Corporate bonds bought in the secondary market at a discount are termed "market discount bonds." There is an option of accreting the discount and paying tax annually on the accretion amount at full tax rates; or of waiting until the bond is redeemed or sold to pay the tax on the earned market discount at full tax rates. If the holder accretes the bond and holds it until maturity, there is no capital gain or loss, since the entire discount has been accreted and taxed over the bond's life. If the holder opts not to accrete the bond, the bond will be redeemed at par and the entire market discount is taxed as interest income received at maturity (not as capital gains).

The owner of a variable annuity has which of the following rights? I Right to vote for distributions of income and capital gainsII Right to vote to change the separate account's investment objectiveIII Right to vote for the Board of TrusteesIV Right to vote for dissolution of the trust A. I and II onlyB. III and IV onlyC. II, III, IV D. I, II, III, IV

The best answer is C.Distributions of dividends and capital gains are decided by the variable annuity's Board of Trustees. The unit holder can vote for the Board of Trustees and can vote to change the investment objective of the separate account. In addition, terminating the trust (a very unlikely event) would require unit holder approval as well.

In an existing margin account, a customer buys 200 shares of ABC stock at $20 per share and 10 PDQ Nov 25 Calls @ $2. What is the customer's margin call? A. $2,000 B. $3,000C. $4,000 D. $6,000

The best answer is C.In a margin account, the customer needs to deposit 50% of the purchase price to buy the stock and 100% of the purchase price to buy the calls. To buy $4,000 of stock, the Regulation T requirement is $2,000. To buy $2,000 of options, the Regulation T requirement is $2,000. Therefore, the total deposit amount is $4,000.

In a corporate new issue offering, the issuer is responsible for which of the following? I Printing the certificatesII Delivering the certificatesIII Transferring the certificates into the names of the purchasersIV Registering the securities with the Securities and Exchange Commission A. I and II only B. III and IV onlyC. I, II, IV D. I, II, III, IV

The best answer is C.In a new issue offering, the issuer is responsible for originally printing and delivering the certificates; and for registering the securities with the Securities and Exchange Commission, as well as registering the issue in each state where the issue will be sold. These shares go to the transfer agent, who transfers the shares into the names of the purchasers of the new issue.

All of the following securities are quoted on a yield basis EXCEPT: A. Commercial Paper B. Treasury BillsC. American Depositary Receipts D. Banker's Acceptances

The best answer is C.Money market instruments are original issue discount obligations quoted on a yield basis that are priced at a discount to par (with the exception of negotiable certificate of deposit that are priced at par plus accrued interest). The discount from par is the interest earned. American Depositary Receipts are not a money market instrument. They are essentially shares of a foreign company, traded domestically similar to equity securities. They are dollar price quoted in 1/8ths.

New corporate bond issues in excess of $50,000,000 are: I exempt securities under the Securities Act of 1933II non-exempt securities under the Securities Act of 1933III subject to the Trust Indenture Act of 1939IV exempt from the Trust Indenture Act of 1939 A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.New corporate bond issues are non-exempt securities under the Securities Act of 1933 and thus must be registered and sold under a prospectus. In addition, corporate bond offerings in excess of $50,000,000 fall under the Trust Indenture Act of 1939, requiring that the bonds be sold under a Trust Indenture.

Which of the following statements are TRUE? I New issues of Treasury Bills are generally priced at parII New issues of Treasury Bonds are generally priced at par, or at a slight discount to parIII New issues of Agency Bonds are generally priced at par, or at a slight discount to par A. I only B. III onlyC. II and III only D. I, II, III

The best answer is C.New issues of T-Bills are always sold at a discount to par value. These are original issue discount obligations, with the accretion of the discount being the interest income earned on these securities. Treasury Bonds and Agency Bonds are issued at par (or at a very slight discount to par), and make periodic interest payments.

Under which circumstance can a non-taxable distribution be made from a Section 529 Plan? A. The beneficiary does not go to college B. The beneficiary wants to buy a houseC. The beneficiary goes to vocational school D. The beneficiary gets married

The best answer is C.Payments from Section 529 plans made to colleges, universities, vocational schools, and any other accredited post secondary education institution are not taxable. Starting in 2018, up to $10,000 per year can be withdrawn to pay for education below the college level. In addition, refunds made because of death or disability of the beneficiary, or because the beneficiary received a scholarship, are not taxable. Distributions made for any other reason are taxable.

Which of the following transactions are subject to Regulation T? A. Customer borrowing from a bank using securities as collateralB. Broker borrowing from a bank using securities as collateralC. Customer borrowing from a broker using securities as collateral D. Broker borrowing from another broker using securities as collateral

The best answer is C.Regulation T of the Federal Reserve Board controls the extension of credit on securities from broker to customer. Regulation U of the Federal Reserve Board controls the extension of credit on securities by banks.

A customer's margin account is restricted by $1,000. To eliminate the restriction, which of the following actions are appropriate? I Deposit $1,000 cash to the accountII Deposit $2,000 of fully paid marginable stock to the accountIII Sell $2,000 of marginable stock in the accountIV Transfer $1,000 from SMA A. I only B. II and III onlyC. I, II, IIID. I, II, III, IV

The best answer is C.Since the account is restricted by $1,000, equity in the account is $1,000 below initial margin. If $1,000 of cash is deposited, the debit is reduced by $1,000 (which increases equity by $1,000). This eliminates the restriction. If $2,000 of fully paid securities are deposited, the market value increase eliminates the restriction. If $2,000 of marginable stock is sold out of the account, the proceeds are used to reduce the debit, and this eliminates the restriction. SMA cannot be used to reduce the restriction. Using SMA means that additional funds will be borrowed, increasing the restriction.

Which of the following actions taken by a fiduciary would NOT be consistent with the obligations imposed under the "Prudent Man Rule"? A. Diversifying a fixed income portfolio with securities of varying maturities B. Selecting AA rated corporate convertible bond investments to meet an investment objective of both income and capital gainsC. Investing in small capitalization unlisted new issue investments for long term growth D. Writing covered calls against securities positions held in the account to increase income

The best answer is C.The "prudent man rule" is part of Uniform State Law, and it requires fiduciaries to make investments for accounts under their control as would a "prudent man." This makes sense, since fiduciaries are investing for the benefit of others, and the investments are supposed to provide a long term future benefit to these persons. Investing in unproven, speculative new issues would not be consistent with the "prudent man rule." Diversifying a portfolio, investing in AA rated convertible bonds to meet an objective of both income and growth, and writing covered calls against stock positions are all proven, prudent investment strategies.

Which of the following statements are TRUE about capital gains taxes for investors who are not extremely high earners? I The maximum tax rate on a short term capital gain is 15%II The maximum tax rate on a short term capital gain is 37%III The maximum tax rate on a long term capital gain is 15%IV The maximum tax rate on a long term capital gain is 37% A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.The maximum tax rate on short term capital gains is 37% (the same as for earned (ordinary) income). For assets held over 12 months, the maximum tax rate drops to 15%. (Note that this rate is raised to 20% for taxpayers in the highest tax bracket.) question # 10-1-8-2

n a new issue underwriting, which of the following is the largest? A. Underwriter's Concession B. Selling ConcessionC. SpreadD. Management Fee

The best answer is C.The spread is the gross compensation earned by the syndicate. Out of this gross amount, portions can be earned by the members of the underwriting group. The syndicate manager earns the management fee - typically the smallest portion of the spread. Once the management fee is deducted from the spread, this leaves the underwriter's concession. This is the amount earned by a syndicate member who sells the issue to the public. Out of the underwriter's concession, the syndicate member can give up a selling concession to a selling group member for helping find a customer for the issue.

Under the requirements of the USA PATRIOT Act, to open an account for a non-resident alien, which information is NOT required from the customer? A. Passport number B. Tax identification numberC. Driver's license number D. Telephone contact number

The best answer is C.To open an account for a non-resident alien, there is no requirement to get a driver's license number (remember, some people don't drive). The customer's passport number, tax identification number, and telephone contact number are all required.

Which of the following statements are TRUE regarding trades of U.S. Government bonds? I Regular way trades settle on the same day as the trade dateII Regular way trades settle on the business day after trade dateIII Trades settle in Fed FundsIV Trades settle in Clearing House funds A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.Trades of U.S. Government securities settle "regular way" the next business day in Fed Funds (funds payable through Federal Reserve member banks) In contrast, trades of corporate and municipal securities settle in "Clearing house funds."

New issue agency securities are sold: A. by competitive bid at auction B. by non-competitive bids placed with the Federal ReserveC. through a selling group of broker-dealers assembled by the agency D. through commercial banks and savings and loans

The best answer is C.Whereas government securities are sold at auction conducted by the Federal Reserve, agency securities are sold to the public through a selling group of broker-dealers assembled by the agency. This is done on a negotiated basis, with the group consisting mainly of primary government dealers.

Block trades for sales of NYSE listed issues that are too large for Super Display Book are: A. given directly to the Specialist/DMM for execution B. given to Floor Brokers, who may only execute them as "Fill or Kill" orders C. only executable during normal trading hoursD. routed to Third Market Makers who effect the transaction on a principal basis

The best answer is D. Block trades to sell that are too large for Super Display Book (e.g., trades of over 3,000,000 shares for limit orders) are not accepted in the Display Book. Competition from the Third Market has made it much more attractive for institutions to buy or sell large blocks of NYSE listed issues OTC (because the Third Market Makers do these transactions as "price leaders" to attract further institutional business). Also note that orders that are too large for the Display Book can be routed to floor brokers on the NYSE floor for execution, but they are not required to be "Fill or Kill" orders. If anything, they would be routed to a floor broker as a "market-not held" order, which gives the floor broker discretion over price and time of execution.

Under FINRA rules, if a member suspects that a senior citizen is being financially exploited: A. a freeze can be placed on all disbursements from the account for up to 10 business days B. a freeze can be placed for up to 10 business days on suspicious disbursements from the account, but not on other non-suspicious disbursementsC. a freeze can be placed on all disbursements from the account for up to 15 business daysD. a freeze can be placed for up to 15 business days on suspicious disbursements from the account, but not on other non-suspicious disbursements

The best answer is D. FINRA permits member firms to place a temporary hold on disbursements from customer accounts if the firm suspects that the account owner is being financially exploited. The initial hold can be for up to 15 business days. In addition, if the member's review of the situation supports this, the member can extend the hold for another 10 business days. Also note that the temporary hold only applies to disbursements that are suspicious and not to other disbursements from the account. question # 6-1-129-3Customer Accounts: Account Basics: Specific FINRA Product / Customer Suitability Rules: Senior Citizen Citizen Investing - Hold On DisbursementsCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved

403(b) Plans are: I non-tax qualified plansII tax qualified plansIII plans available to "for profit" organizationsIV plans available to "not for profit" organizations A. I and III B. I and IV C. II and IIID. II and IV

The best answer is D.403(b) plans are tax deferred annuity contracts available to non-profit employees who are not covered by qualified retirement plans. The plans allow for investment in tax deferred annuity contracts, that can be funded by mutual fund purchases, as well as by traditional fixed annuities. These plans are tax qualified; thus contributions are tax deductible and distributions are 100% taxable.

Which statements are TRUE regarding warrants? I Warrants generally have a life of 5 years or lessII At issuance, the exercise price of the warrant is set higher than the current market price of the underlying common stockIII The price of the warrant will vary with the price movements of the underlying stockIV The price of the warrant will vary depending upon the time to expiration of the warrant A. I and II only B. III and IV only C. II, III, IVD. I, II, III, IV

The best answer is D.All of the statements are true about warrants. Warrants generally have a life of 5 years or less, because FINRA will not allow offerings of warrants with a longer life (a longer life than 5 years is considered to be unreasonable under FINRA rules). At issuance, the exercise price of the warrant is set higher than the current market price of the underlying common stock. Thus, the warrant is issued at a price that is "out the money" and the market price of the stock must rise to at least this level for it to be worthwhile to exercise the warrant. The price of the warrant will vary with the price movements of the underlying stock. As the stock's price rises, the warrant becomes more valuable; as the stock's price falls, the warrant becomes less valuable. The price of the warrant will vary depending upon the time to expiration of the warrant. The greater the time to expiration, the greater the value of the warrant, since there is a greater probability that the price will rise in the remaining time to expiration.

Which of the following statements are TRUE regarding options sales literature that is accompanied or preceded by delivery of the ODD (Options Disclosure Document)? I It must be approved prior to use by the designated Registered Options PrincipalII It can recommend a specific options contractIII The use of recommendations, or of past or projected performance, is permittedIV The illustration of annualized rates of return achieved from various options strategies is permitted A. I and II only B. III and IV onlyC. I, II, IIID. I, II, III, IV

The best answer is D.All options communications with the public must be approved be the designated ROP (main office compliance ROP). Any communication that shows past performance; makes a performance projection; or that makes a recommendation; must be accompanied or preceded by the ODD (Options Disclosure Document). Options sales literature usually falls under these rules.

Interest charges on customer debit balances are based on the: A. Prime rate B. Federal Funds rate C. Treasury Bill rateD. Broker Loan rate

The best answer is D.Brokers borrow from banks using customer securities as collateral at the Broker Loan rate, also termed the Call Loan rate. The interest charged to customers on loans made by brokers is based on this rate (e.g., the interest rate charged might be "Broker Loan Rate + 1/2%").

A registered representative makes the following recommendation to her customer: "In case of an emergency requiring immediate cash, you may not be able to sell your securities and get a check the same day. I recommend that you send $10,000 of cash to me at my office where I will place it in safekeeping. If you have an emergency cash need, I can bring the cash to you immediately." This action is: A. permitted, since it better serves the client B. permitted only if the registered representative has worked in the business for at least 10 years C. permitted only if the registered representative is also a registered investment adviser representativeD. prohibited under FINRA rules

The best answer is D.Cash can only be accepted from a customer if it is to be deposited to the customer's account.

All of the following statements are true about non-contributory defined benefit retirement plans EXCEPT: A. contribution amounts vary based upon the age of the person covered under the plan B. larger contributions are made for older plan participants nearing retirement than for younger ones C. once benefit payments start, the amount of the benefit is fixedD. contribution amounts remain fixed based regardless of age

The best answer is D.In a "defined benefit" retirement plan, contribution amounts vary based upon the age of the person covered under the plan. Larger contributions are made for older plan participants nearing retirement than for younger plan participants who have many years left until retirement. Once benefit payments start, the amount of the benefit is fixed - since the plan funded a "defined" benefit. The other type of plan is a "defined contribution." In this type, the contribution amount is fixed. The benefit payment depends on the investment results of the fixed contributions made, and hence can vary.

All of the following quotes would be found in the Pink Sheets EXCEPT: A. BW B. OW C. AOND. DNR

The best answer is D.In the Pink Sheets, aside from Firm Bid and Ask quotes, dealers can post Bids Wanted (meaning, the dealer has the security and is soliciting buyers); and Offers Wanted (meaning, the dealer needs the security and is soliciting sellers). BW and OW are used because these are thinly traded securities - and in this manner, a counterpart to complete the trade can be found. An offer made AON in the Pink Sheets is "All or None" - either the whole size stated is traded or the quote is invalid. DNR means "Do Not Reduce" and is a designation on an order placed "below the market" if the customer does not want the price reduced automatically on ex date.

Electronic delivery of a prospectus is NOT permitted for: A. common stock issues B. preferred stock issuesC. corporate debt issuesD. investment company issues

The best answer is D.The "access equals delivery" rule that permits electronic delivery of a prospectus (instead of paper) to those customers that have internet access is permitted for all securities offerings with the exception of investment company issues. For example, the purchaser of a mutual fund must still get a paper prospectus.

In order to open a new account for an individual customer, which information is required on the new account form? I Customer NameII Residence AddressIII Date of BirthIV Social Security Number A. I and III B. II and IV C. I, II, IIID. I, II, III, IV

The best answer is D.There are 4 critical pieces of information that must be collected to open a new account for an individual customer - Name, Address, Birthdate, and Social Security number. The member firm must independently verify the customer's identity - either by matching this information to a government issued identification such as a driver's license or passport; or by using a database service that allows computer matching of this information.

When performing a municipal bond tax swap, the investor is: I selling existing bonds at a gainII selling existing bonds at a lossIII using the proceeds from the sale to buy the same bonds backIV using the proceeds from the sale to buy similar, but not identical bonds A. I and III B. I and IV C. II and IIID. II and IV

The best answer is D.When performing a municipal bond tax swap, the investor is selling existing bonds at a loss and using the proceeds to buy similar, but not identical bonds so that the loss deduction is allowed under the "wash sale rule".

All of the following statements are true about stock options contracts EXCEPT they: A. are American styleB. can be traded at any timeC. can be issued at any time D. can be exercised at any time

he best answer is C. The very first options contracts were single stock options, which started trading on the CBOE in 1973. All single stock options are "American Style" - these are options that can be exercised at any time. In contrast, European style options can only be exercised at expiration and not before. All options contracts can be traded anytime until expiration. Options contracts cannot be redeemed and they can only be issued based on the cycles set by the Options Clearing Corporation.