Series 7 - 100+ Question Quiz

Your client informs you that a signed discretionary account form is in the mail. Before receiving the form, and unable to contact the client, you notice that one of her stocks is dropping sharply on adverse news. You A) can enter a discretionary order with written permission of a principal of the broker-dealer. B) cannot enter a discretionary order. C) can enter a discretionary order with instructions that the order is not held. D) can enter a discretionary order with written documentation of the situation.

B) cannot enter a discretionary order. A discretionary order cannot be entered until the signed discretionary account form has been received. LO 2.g

A customer buys a 6% Treasury bond, maturing in 10 years, at a price of 91.07. The yield to maturity is A) less than current yield. B) greater than nominal yield. C) same as current yield. D) less than nominal yield.

B) greater than nominal yield. A bond whose price is below par or at a discount has a higher yield to maturity than current yield, which in turn is higher than the nominal yield. LO 7.b

Who attests to the legality of a bond issue and issues a legal opinion on a proposed new municipal bond issue? A) Syndicate manager B) Bond counsel C) State administrator D) Case attorney

B. Bond counsel The issuer hires a firm or an individual to act on its behalf as bond counsel. LO 6.a

ABC has the following recorded on its balance sheet: Current assets $50,000 Fixed assets $100,000 Notes payable $40,000 Accounts payable $25,000 Based on this information, ABC's net worth is A) -$35,000. B) $35,000. C) $85,000. D) $110,000.

C) $85,000. Net worth is assets - liabilities. There are two assets; the current and the fixed. There are two liabilities; the notes and accounts payable. Therefore, ABC's net worth is $150,000 - $65,000 = $85,000. LO 13.c

Svetlana calls her registered representative and places an order to write an XYZ Oct 90 call, and at the same time, write an XYZ Oct 80 put. The orders are executed at a premium of 5 for the call and 9 for the put. Which of the following best describes the customer's investment strategy? A) Mixed B) Bullish C) Neutral D) Bearish

C. Neutral A customer who writes both a call and a put on the same underlying security wishes for little or no market movement. This is referred to as a neutral strategy. Technically, the customer has created a short combination (an investment position very similar to a short straddle, with the same investment characteristics), and in this case, a little less risk than a pure straddle because of the spread in the strike prices. LO 10.f

All of the following may be used to verify a customer's identity except A) a current drivers license. B) a valid passport. C) a certified birth certificate. D) a valid military ID card.

C. a certified birth certificate Verifying a customer's identity requires presentation of at least one government-issued document with a photograph. Your birth certificate may have had a photo of you as a newborn, but that certainly will not suffice to identify you today. LO 1.d

A customer has a short margin account. In it, there is one stock currently trading at $14 per share. The minimum maintenance requirement for this account is A) $2.50 per share. B) 100 % of the short market value. C) 30% of the short market value. D) $5 per share.

D. $5 per shares When it comes to short margin, for stock trading at $5 per share and above, the minimum requirement is the greater of $5 per share or 30% of the short market value. $5 is more than 30% of $14 ($4.20). LO 16.d

The risk of a bond decreasing in value during periods of inflation is known as A) interest rate risk. B) reinvestment risk. C) credit risk. D) marketability risk.

A. interest rate risk Interest rate risk is the possibility that interest rates might rise, causing bond prices to fall. Periods of inflation are accompanied by rising interest rates. LO 14.a

A FINRA member firm making a bulk transfer of customers' assets would most likely give notification through A) a negative response letter. B) a broadly circulated publication such as the Wall Street Journal. C) a positive response letter. D) FINRA's Central Registration Depository (CRD).

A) a negative response letter. An example of a bulk transfer is the member firm deciding to switch money market funds used for sweeps of customer credit balances. A negative response letter is one where the customer's agreement is assumed unless responding negatively to the change. LO 1.e

The managing partner of a limited partnership has responsibility for all of the following except A) providing unlimited capital for the partnership business. B) paying partnership's debts. C) managing the operations. D) organizing the business.

A) providing unlimited capital for the partnership business The general partner organizes and manages the partnership; he assumes unlimited liability, paying all partnership debts. However, it is the limited partners who provide the bulk of the capital. LO 11.d

All of the following are used to determine the suitability of recommendations made to a municipal bond customer except A) the customer's marital status. B) the customer's tax bracket. C) the customer's state of residence. D) the structure of the customer's existing portfolio.

A) the customer's marital status. To determine suitability when recommending municipal bonds, an agent would consider the customer's tax bracket, state of residence (intrastate issues may be double or triple tax exempt), and existing portfolio structure. Some students ask us, "Doesn't the marital status affect the customer's tax bracket?" Yes, it does, but that information is included in the choice the customer's tax bracket. LO 6.c

To qualify for favorable tax treatment, real estate investment trusts (REITs) must do all of the following except A) pass through losses to shareholders. B) be organized as trusts. C) distribute at least 90% of their investment income to shareholders. D) invest at least 75% of their assets in real estate-related activities.

A. REITs engage in real estate activities and can qualify for favorable tax treatment if -they invest at least 75% of their assets in real estate-related activities and - pass through at least 90% of their net investment income to their shareholders. Although they can pass through income, they CANNOT pass through any losses. LO 11.b

If a customer buys $28,000 of ABC stock in April 20XXand at year end, the stock is worth $23,000, how much may the customer deduct on his 20XX tax return? A) $0 B) $5,000 C) $2,000 D) $3,000

A. $0 Until the customer realizes the loss by selling, there is no tax deduction. LO 3.i

An investor purchased 200 shares of DCAST common stock at $200 per share. What is the adjusted cost basis per share of this position after the company pays a 100% stock dividend? A) $100 B) $200 C) $400 D) $50

A. $100 The total value of the initial position is unchanged, remaining at $40,000 (200 times $200). After the stock dividend, the investor owns 400 shares (200 times 100% = 200 + 200 = 400). Therefore, the adjusted cost basis is $100.00 per share ($40,000 divided by 400 = $100). Perhaps you recognized that a 100% stock dividend has the same effect as a 2:1 split. That is, the stock's cost basis is cut in half. It is important to remember that anytime there is a distribution resulting in additional shares (stock split, stock dividend), the cost basis per share is reduced while the total account value remains the same. LO 3.b

A customer, age 62, wants to retire at age 64 and has accumulated investments in an IRA currently valued at $500,000. The IRA portfolio consisting of all mutual funds is allocated as follows: 70% growth funds, 10% corporate bond funds, and 20% sector funds. Still wanting to use mutual funds, which might be the most suitable reallocation of the portfolio as this customer nears retirement? A) 60% U.S. government bond funds, 30% broad market index funds, 10% growth funds B) 70% municipal bond funds, 20% broad market index funds, 10% sector funds C) 30% municipal bond funds, 30% corporate bond funds, 40% growth funds D) 80% broad market index funds, 10% corporate bond funds, 10% U.S. government bond funds

A. 60% U.S. government bond funds, 30% broad market index funds, 10% growth funds Moving toward retirement, the reallocation should move the portfolio away from equities and sector funds toward fixed-income funds. U.S. government securities funds accommodate that, and the U.S. government securities within the fund are considered safe with no default risk. Coupling the U.S. government bond funds with smaller percentages in broad market index and growth funds that mirror the market can help the portfolio keep pace with inflation. Remember that utilizing municipal securities in a tax-favored account, such as an IRA, would be considered unsuitable because the interest paid by municipal bonds is already tax free. LO 14.a

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) 95. B) 5. C) 100. D) 10.

A. 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. LO 6.f

In the purchase of Class A shares, many mutual funds provide quantity discounts to those reaching breakpoints specified in the fund's prospectus. To qualify for the quantity discount, purchases of which of the following may not be combined under the definition of any person? A) A parent and a 35-year-old child investing in separate accounts B) A trustee of an irrevocable trust and the beneficiary of that trust C) A parent's account and the parent's child in a UTMA account D) Spouses investing in a joint account and individual accounts

A. A parent and a 35-year-old child investing in separate accounts For the purpose of qualifying for breakpoints, the definition of any person includes family units, but only minor children are included. Adults, other than spouses, are separate persons. Purchases made by trustees or other fiduciaries may be combined with purchases in the accounts of the beneficiary of the fiduciary account. LO 8.d

A Japanese manufacturer sells recorders to a U.S. retailing firm. The manufacturer is to receive USD$1 million in 90 days. How can he best protect himself against a decline in the dollar? A) Buy yen calls B) Buy yen puts C) Sell yen puts D) Sell yen calls

A. Buy yen calls Because he is receiving U.S. dollars, his risk is that the U.S. dollar will go down in value against the Japanese yen. If the dollar goes down against the yen, the yen will rise. Therefore, to protect his risk against a rising yen, he should buy yen calls. The yen calls will increase in value if the yen rises. LO 10.g

Which of the following securities typically carries the highest dividend rate? A) Callable preferred B) Convertible preferred C) Straight preferred D) Participating preferred

A. Callable preferred Straight preferred is the benchmark rate. As the name suggests, there are no conversion or participating features. Compared to straight preferred, both convertible and participating preferred tend to carry lower dividend rates, as the investor has been given something extra—the right to convert into common shares at a fixed price or the right to earn more than the stated rate if the issuer has a good year and the board of directors elects to make an additional dividend payment. Callable preferred allows the issuer to call the securities away from the investor. From an investor's point of view, this is not an incentive. Therefore, callable preferred tends to pay higher rates. LO 3.e

If a registered representative is seeking to sell shares of an investment company to a client, which of the following statements would be accurate and permissible regarding her recommendation? I. When the client redeems his shares, he will not immediately know their dollar value. II. If the client invests just before the dividend distribution, he can benefit by receiving the added value of that dividend. III. If the client purchases the shares of two or more funds in the same family of funds, he may be entitled to a reduced sales charge. IV. The purchase of Class B shares always provides the greatest return on investment. A) I and III B) I and IV C) II and III D) II and IV

A. I and III The purchase of two funds in the same family of funds may qualify an investor for combination privileges. At redemption, he will receive the next price calculated (forward pricing), which is not yet known. Class B shares, or deferred sales charge shares, may or may not provide the best return. Share class suitability can depend on the amount invested and the client's individual needs. Lastly, while the dividend is received if the fund shares are purchased before the ex-dividend date, there is no added value. The fund share price is reduced by the amount of the dividend on the ex-dividend date, just as it would be for a cash dividend paid on equity securities. LO 8.d

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

A. I and III When a company declarers a cash dividend, it will reduce retained earnings (part of shareholders' equity) and increase current liabilities (dividends payable), which will increase total liabilities. Assets are not affected until the cash is paid out several weeks later. LO 13.c

An investor purchased an interest in a limited partnership, paying $10,000 in cash and signing a recourse note to the partnership under a letter of credit for $40,000. Which of the following statements are true? I. The investor's tax basis will be $10,000. II. The investor's tax basis will be $50,000. III. The investor's maximum loss will be $10,000. IV. The investor's maximum loss will be $50,000. A) II and IV B) I and IV C) II and III D) I and III

A. II and IV Tax-basis = investment in partnership + recourse debt - cash or distributions A recourse note means that the limited partner agrees to pay the note no matter what happens. He is legally liable for the $40,000, which makes both his tax basis and maximum loss potential $50,000. LO 11.f

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) Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis B) A 10% penalty plus the payment of ordinary income tax on funds withdrawn in excess of the owner's basis C) A 10% penalty plus the payment of ordinary income tax on all of the funds withdrawn D) Capital gains taxation on the earnings withdrawn in excess of the owner's basis

A. Ordinary income taxation on the earnings withdrawn until reaching the owner's cost basis Contributions to a nonqualified annuity are made with the owner's after-tax dollars. Distributions from such an annuity are computed on a 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. LO 9.d

Municipal bonds that are backed by the income from specific projects are known as A) revenue bonds. B) general obligation bonds. C) debenture bonds. D) income bonds.

A. Revenue bonds Principal and interest on municipal revenue bonds are paid from revenues of a particular project, whereas general obligation bonds are backed by the full taxing authority of the municipality. LO 6.b

If an officer of a bank wants to purchase new issues, which of the following statements is true? A) She may not purchase a new issue because she is considered a restricted person. B) She may not purchase a new issue unless the amount she wishes to purchase is considered small in relation to the total offering. C) She may purchase a new issue because anyone is allowed to purchase new issues. D) She may purchase a new issue because no banking rules prohibit it.

A. She may not purchase a new issue because she is considered a restricted person Under the rules regarding the purchase of new issues, bank officers would be characterized as restricted persons. They may not, therefore, purchase new issues. LO 20.f

The name of the FINRA system that tracks both NYSE and NASDAQ transactions is A) TRF (Trade Reporting Facilities). B) DMM (Designated Market Maker). C) TRACE (Trade Reporting and Compliance Engine). D) OATS (Order Audit Trail System).

A. TRF (Trade Reporting Facilities) The TRF is the only FINRA system that tracks transactions on the NYSE and Nasdaq, including OTC (over-the-counter) transactions. OATS only tracks Nasdaq transactions. TRACE tracks corporate and government agency bond transaction in the OTC market. DMM's are the specialists who work at each of the trading posts on the NYSE. They are responsible for maintaining a liquid and orderly market for stocks. LO 17.b

Under what circumstances will a dilution of equity occur? A) The conversion of convertible bonds into common stocks B) Stock dividend C) Stock split D) Issue of mortgage bonds to replace debentures

A. The conversion of convertible bonds into common stocks Dilution of equity occurs when stockholders experience a reduction in their percentage ownership of the company. If bonds are converted, more common shares are issued, and the shareholder's equity is diluted. A stock dividend or stock split does not change a stockholder's percentage of ownership. Refunding debts has no effect on stockholders. LO 5.c

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) The original beneficiary's younger sister B) The winner of an informal essay contest to be held among high school-aged children in the neighborhood C) One of the children of another of your customer's neighbors D) One of the donor's own grandchildren

A. 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. LO 6.g

Which of the following best describes a debenture? A) Unsecured corporate debt B) A corporate debt obligation that allows the holder to purchase shares of the company's common stock at specified dates before maturity C) A long-term corporate debt obligation with a claim against securities rather than against physical assets D) An investment in the debt of another corporate party

A. Unsecured corporate debt A debenture is unsecured corporate debt. LO 5.a

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

A. 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. LO 10.a

An investor is short stock at $70. If the stock's market price is $40, and the investor anticipates the price will continue to decline, to hedge against a rise in the price, the investor should A) buy a call. B) buy a straddle. C) buy a put. D) sell a call.

A. buy a call If the investor buys a call on the stock, he has the right to buy it back (cover his short) at a fixed price. The best way to hedge an unrealized gain on a short stock position is to buy a call. LO 10.d

Many fixed-income investors diversify their portfolios by maturity. If one were investing in CMOs, that would be done by buying A) different tranches. B) different issuers. C) yield-based options. D) serial bonds.

A. different tranches Although CMOs technically have maturity dates, it is rare for one to ever last that long. The standard way to vary the expected return of principal is by using different tranches. Serial bonds are generally issued by municipalities and are not mortgage-backed. Different issuers has nothing to do with maturities and yield-based options might be used as a hedge, but not to diversify maturities. LO 12.d

All of the following are investment constraints except A) growth of capital. B) time horizon. C) liquidity. D) investor preferences.

A. growth of capital Growth of capital is an investment objective. The other choices represent obstacles (constraints) that might keep the investor from fulfilling that objective. LO 2.e

Debt service on an industrial revenue bond is secured by A) lease payments paid by a corporation. B) sales taxes. C) ad valorem taxes. D) special assessments.

A. lease payments paid by a corporation Revenue bonds' interest and principal payments are payable to bondholders only from the specific earnings and net lease payments of revenue-producing facilities such as: -utilities (water, sewer, and electric) -housing, -transportation (airports and toll roads), -education (college dorms and student loans), -health (hospitals and retirement centers), -Industrial (industrial development and pollution control), and -sport Industrial revenue bonds are issued by a municipality or an authority established by a municipality. No municipal assets or general revenues are pledged to secure the issue. The net lease payments by the corporate user of the facility are the only source of revenue for debt service. LO 6.b

Parents planning to save for their children's education would probably find all of these suitable except A) money market mutual funds. B) Section 529 plans. C) Treasury STRIPS. D) Coverdell ESAs.

A. money market mutual funds Although money market mutual funds are safe investments, they offer no potential growth of capital and provide low income. The 529 and ESA plans offer tax benefits and investment options that can provide the necessary growth. The Treasury STRIPS are the safest zero-coupon securities available and promise a definite return until maturity. LO 8.g

When viewing the municipal bond portfolio of one of your customers, you notice that the $250,000 of face value has 20% each in bonds rated AAA, AA, A, BBB, and BB. This is an example of A) quality diversification. B) duration diversification. C) geographic diversification. D) maturity diversification.

A. quality diversification By spreading the portfolio among bonds with different ratings, this investor is practicing quality diversification. A bond with a BB rating ("junk") is a speculative venture, but with 80% of the portfolio consisting of investment grade debt, the risk is mitigated. That is a benefit of diversification. Geographic diversification is when the bonds come from issuers in different states (geographic areas). Maturity diversification and duration diversification are similar in concept in that varying the maturities tends to lessen the interest rate risk. LO 13.a

Which of the following positions would create the most risk for an investor? A) Sell short 100 shares of SSS and sell 1 SSS put B) Sell short 100 shares of SSS and buy 1 SSS call C) Buy 100 shares of SSS and buy 1 SSS put D) Buy 100 shares of SSS and sell 1 SSS call

A. sell short 100 shares of SSS and sell 1 SSS put A short sale of SSS stock has unlimited loss potential. Selling a put obligates the customer to buy the stock at the strike price in return for premium. A short sale, coupled with a sale of a put, is equivalent to selling an uncovered call and creates the most risk. LO 10.h

Pass-through securities are issued by all of these except A) the Farm Credit System. B) the Federal National Mortgage Association. C) Government National Mortgage Association approved issuers. D) the Federal Home Loan Mortgage Corporation.

A. the Farm Credit System The Farm Credit System (FCS) is a national network of lending institutions that provides agricultural financing and credit. The federal FCS issues discount notes, floating rate bonds, and fixed-rate bonds. The maturities range from one day to 30 years. Unlike the mortgage agencies, these are not pass-through investments. LO 7.d

Under SEC and FINRA recordkeeping rules, all of the following records must be retained for three years only except A) the blotter or any record of original entry. B) a trial balance. C) order tickets. D) the subsidiary ledgers.

A. the blotter or any record of original entry The six-year records include blotters, the general ledger, the stock record, customer ledgers, and customer account information. LO 15.e

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

A. the syndicate assumes liability for unsold shares, while the selling group does not. The underwriting syndicate makes a financial commitment in a firm underwriting to bring a new issue to market and take liability for unsold shares. A member of a selling group only agrees to provide a sales service for a certain number of shares in exchange for a commission on shares it sells. It has no responsibility for any unsold shares. The securities offered are identical, and the public offering price is the same. Both large and small firms can be either syndicate members or selling group members. LO 20.b

Members of a syndicate receive notice of their share of the offering through A) the syndicate letter. B) the due diligence meeting. C) the official statement. D) the prospectus.

A. the syndicate letter The syndicate letter is sent by a municipal dealer to prospective members inviting them to join the syndicate and setting forth the conditions of the syndicate. Such conditions include who the manager will be, the percentage participation (each member's share), and the amount of good faith deposit required. LO 20.b

If a customer with no other position sells 1 KLP Jul 80 call for 10 and buys 100 shares of KLP stock for $85 per share, he will break even when KLP stock is trading at A) $70. B) $75. C) $92. D) $95.

B. $75 Breakeven for a covered call writer is the purchase price less premiums received. In this case, breakeven is $85 minus $10, or $75 per share; below $75, the customer loses money. LO 10.h

If a customer does not pay for equity securities purchased within two business days of the regular way settlement date, the broker-dealer may request a time extension from A) FINRA. B) its designated examining authority. C) the Philadelphia Stock Exchange. D) the Chicago Stock Exchange.

B) its designated examining authority. A time extension may be requested from the broker-dealer's designated examining authority, which could be FINRA or one of the exchanges. LO 16.d

ou have a client who plans to liquidate some CDL stock to help pay for an upcoming family vacation in late August. When checking the account record, you find the following transactions: Jan 4, 100 shares @ $43 Feb 8 100 shares @ $39 May 11, 200 shares @$48 The client needs about $4,000 and the CDL is currently selling for $44 per share on July 31. From a tax standpoint, you should probably recommend that the client A) sell half of the shares purchased on January 4, and half of the shares bought on February 8. B) sell 100 of the shares purchased on May 11. C) sell all of the shares purchased on January 4. D) sell all of the shares purchased on February 8.

B) sell 100 of the shares purchased on May 11. By using the share identification basis and selling the shares purchased in May at $48 per share, the client realizes a loss of $400. Selling either of the others results in a short-term capital gain, taxed at ordinary income rates (all transactions are less than a 12-month holding period). Don't get hung up on the fact that the investor will receive $400 more than needed (100 shares @ $44 = $4,400); the question is looking for tax considerations. LO 13.h

Revenue bonds may be called for all of the following reasons except A) interest rates have fallen. B) the issuer has reached a statutory debt limit. C) the facility has been destroyed. D) a provision in a sinking fund agreement is calling for a partial call.

B) the issuer has reached a statutory debt limit. Statutory debt limits only apply to general obligation bonds. LO 6.b

If a customer has a margin account with a long position worth $20,000 and a debit balance of $8,000, what is the purchasing power of this customer's account? A) $2,000 B) $4,000 C) $6,000 D) $8,000

B. $4,000 The account has $12,000 of equity. If 50% of the market value is $10,000, the account has $2,000 of excess equity. When Regulation T is 50%, the purchasing power of excess equity is 2:1. LO 16.d

A married couple owns Class A shares of the KAPCO Balanced Fund as follows: The older of the pair has an individual account with a current value of $10,000. The other individual's account is valued at $20,000, and they have a JTWROS account valued at $12,000. KAPCO offers rights of accumulation and has breakpoints at $25,000 (4%), $50,000 (3%), and $100,000 (2%). How much will the sales charge be if they invest an additional $15,000 into the JTWROS account? A) $600 B) $450 C) $300 D) $530

B. $450 We combine all of the accounts under rights of accumulation. Let's chart them: Older:$10,000 Younger:$20,000 Joint: $12,000 Total value: $42,000 Add new purchase: $15,000 New account total: $57,000 Rights of accumulation means that we add a new purchase to the value of the existing accounts. If that total reaches or exceeds the breakpoint, the entire purchase is made with the lower sales charge. The question tells us that the next breakpoint is at $50,000. Once that dollar amount is reached (or exceeded), the sales charge on all new purchases is reduced from 4% to 3%. In this question, adding the $15,000 purchase to the existing $42,000 takes the customer's account well past the $50,000 breakpoint. That means the entire new purchase is charged 3%. Therefore, $15,000 times 3% equals $450 in sales charge. LO 8.d

In an initial transaction in a margin account, a customer sells short 200 ABC at $18 per share and makes the initial required deposit. The credit balance in the account is A) $2,400. B) $5,600. C) $5,400. D) $2,000.

B. $5,600 SMV = 200 shares x $18 = $3,600 Reg T = 50% SMV = $1,800 < $2,000 => Since $1,800 < $2,000, Reg T = $2,000 The minimum equity requirement for short accounts is $2,000. The investor receives $3,600 from the proceeds of the sale and must deposit $2,000; therefore, the credit balance is $5,600 ($3,600 + $2,000 = $5,600). LO 16.d

A 7% convertible debenture is selling at 101, and it is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. What is the parity price of the debenture? A) $929 B) $920 C) $910 D) $850

B. $920 To determine the parity price of the bond, first find the number of shares the debenture is convertible into (conversion ratio) by dividing par value by the conversion price ($1,000 / $25 = 40 shares). Next, multiply the current price of the common by the conversion ratio. The result is the parity price of the bond (40 shares × $23 = $920). LO 5.d

Dividends may be paid to holders of A) Treasury stock. B) American depositary receipts (ADRs). C) warrants. D) rights.

B. American depositary receipts (ADRs) ADR owners have most of the rights common stockholders normally hold. One of these includes the right to receive dividends when declared. Rights and warrants allow holders to purchase stock from a corporation Treasury stock is stock that has been issued by the corporation and then bought back. Rights, warrants, or Treasury stock holders do not have the right to receive dividends. LO 3.g

A UK company exports sweaters to the U.S. and will be paid in U.S. dollars upon delivery. To hedge foreign-exchange risk using listed currency options, the UK company should A) sell British pound puts. B) buy British pound calls. C) buy British pound puts. D) sell British pound calls.

B. Buy British pound calls Normally, exporters buy puts on foreign currency to hedge. There are no listed currency options available on the U.S. dollar, so the British company should buy calls on its own currency. LO 10.g

Which of the following statements regarding collateralized mortgage obligations (CMOs) is true? A) CMOs may not trade at a premium. B) CMO returns are affected by interest rate changes. C) CMO earnings are tax exempt. D) CMOs are considered high-yield bonds.

B. CMO returns are affected by interest rate changes CMOs, like other mortgage-backed securities, respond to changes in interest rates. When interest rates decline, certain CMO tranches are subject to prepayment risk. CMOs are corporate instruments, and their interest is taxable at all levels. LO 12.d

When syndicate members agree to share financial responsibility for any unsold securities on an undivided basis, this contractual arrangement comprises what type of account? A) Best efforts B) Eastern C) Western D) Selling group

B. Eastern An undivided account, which is a shared underwriting liability for unsold securities, is an Eastern account. LO 20.b

Which of the following statements regarding mutual fund dividend distributions are true? i. The fund pays dividends from net investment income. ii. A single taxpayer may exclude $100 worth of dividend income from taxes annually. iii. An investor is liable for taxes on distributions, whether taken in cash or reinvested in the fund. iV. An investor is not liable for taxes if he automatically reinvests distributions. A) I and II B) I and III C) III and IV D) II and IV

B. I and III Mutual funds pay dividends from net investment income, and shareholders are liable for taxes on all distributions, whether reinvested or taken in cash. LO 8.f

In the analysis of a general obligation bond issued by a county, negative factors would include I. an increase in assessed property values. II. an increase in the county's unemployment rate. III. an increase in the percentage of tax payment delinquencies. IV. an increase in the number of office buildings being rehabilitated. A) III and IV B) II and III C) I and II D) I and IV

B. II and III Because general obligation bonds are backed by taxes, an increase in tax delinquencies is negative. When unemployment rates increase, it could lead to an inability of the residents to keep current with their taxes. LO 6.b

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

B. II and III Call premiums tend to decrease over time. The longer a customer has to hold the bond (and receive semiannual interest), the less of a premium an issuer will pay to take away the bond before maturity. Call prices are always state as a percentage of the principal amount (par) to be called. For examples, a call price of 103 means the issuer will pay $1,030 for each bond called. LO 6.c

You have a client who is about to retire and wants to rearrange his portfolio to have predictable income. Which of the following would not be a good investment vehicle? A) AA-rated debenture B) Income bonds C) U.S. Treasury note D) AA-rated IDB

B. Income bonds Income bonds, also known as adjustment bonds, are issued when a company is reorganizing and coming out of bankruptcy. Income bonds pay interest only if the company has enough income to meet the interest payment. As a result, these bonds normally trade flat without accrued interest. Therefore, they are not suitable for customers seeking income. LO 5.a

An investor opens the following options position: Write 1 RAN Dec 35 call @4; short 1 RAN Dec 30 put @1¼. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $525; maximum loss is $2,975; breakeven points are $24.75 and $40.25. B) Maximum gain is $525; maximum loss is unlimited; breakeven points are $24.75 and $40.25. C) Maximum gain is $525; maximum loss is unlimited; breakeven point is $32.50. D) Maximum gain is unlimited; maximum loss is $525; breakeven points are $24.75 and $40.25.

B. Max gain is $525, max loss is unlimited, breakeven points are $24.75 and $40.25 The first step is to identify the position. This is a short combination; a short put and a short call with different terms. That means we are going to have two breakeven points. The maximum loss is unlimited because one of the positions is an uncovered call. The maximum profit is the premiums (credit) received of $525. Breakeven points follow the call-up and put-down rule. That is, add the premiums of $5¼ to the strike price of the call ($35 + $5.25= $40.25) and subtract the premiums of $5¼ from the strike price of the put ($30 ‒ $5.25 = $24.75). LO 10.h

All of the following are minimum requirements for listing on the NYSE except A) earnings per share. B) number of shareholders. C) market value of publicly held shares. D) number of publicly held shares.

B. Number of shareholders While the numerical values are not tested, it is important to know that there is no minimum earnings per share requirement. However, there is a minimum earnings requirement. LO 16.e

Upon notification of the death of a client, which of the following actions would not need to be taken by the registered representative assigned to the account? A) Canceling all good-til-canceled (GTC) orders currently entered for the account B) Obtaining the names of the beneficiaries of the estate for the purpose of notifying all parties C) Canceling all day orders currently entered for the account D) Marking the account Deceased until all proper documentation has been received

B. Obtaining the names of the beneficiaries of the estate for the purpose of notifying all parties Upon being notified of the death of a client, the registered representative assigned to the account should cancel all open orders (GTC and day) and mark the account Deceased. The firm should not permit any trades until proper documents are received from the estate representative. There is no requirement, nor is it the responsibility of the firm to contact the decedent's attorney or beneficiaries. LO 15.f

Which of the following is a required disclosure on the Form U4? A) Employment history for the previous 3 years B) Residency for the previous 5 years C) Residency 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. LO 18.a

A customer owns shares in ACME Income Fund and decides to exchange them for shares in ACME Growth Fund within the same family of funds. Which of the following statements is true? A) The exchange results in a deferral of tax. B) The exchange is a taxable event. C) Tax or loss on the exchange cannot be determined until ACME Growth Fund is sold. D) The exchange is a nontaxable swap.

B. The exchange is a taxable event The IRS deems an exchange to be a sale and repurchase of shares. On any sale of securities, capital gains or losses are realized; as such, exchanges are a taxable event. LO 8.e

Which of the following documents must an existing customer sign to establish a discretionary account? A) New account application B) Trading authorization C) Options agreement D) Customer's agreement

B. Trading authorization To establish a discretionary account, the agent must receive written authorization from the customer(s) in whose name(s) the account has been established. An existing customer has already completed the new account application and signed any required customer agreements. LO 2.g

In a discretionary account where the investment objective is preservation of capital with moderate income, all of the following practices are unsuitable except A) marking the investment objective on the new account form as high risk. B) maintaining a fixed asset allocation mix, which includes some underperforming sectors. C) frequent and profitable short-term trading in volatile stocks. D) marking order tickets solicited or unsolicited when discretion is used.

B. maintaining a fixed asset allocation mix, which includes some underperforming sectors. In some test questions, the best way to select the correct choice is when three of the four options are clearly wrong. This is an example of that case. Preservation of capital is certainly not a high-risk objective and does not call for frequent trading in any stock, volatile or not. Orders in a discretionary account are not considered unsolicited (the client is not the one placing the orders). Allocating the portfolio to fixed-income assets (bonds and preferred stock) would seem to be the most appropriate step to take. LO 2.g

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

B. makes a market in securities A broker's broker acts as the agent in transactions by facilitating the movement of blocks of bonds. The broker's broker is allowed to conceal the identities of the contra-parties, thus protecting investment strategies. A broker's broker does not make a market in securities. LO 6.d

In an IRA, a 6% penalty will be levied if the account owner A) makes a premature withdrawal. B) makes an excess contribution. C) changes the beneficiary designation more than once during any calendar year. D) fails to make a contribution by April 15.

B. makes an excess contribution Excess contributions to an IRA are subject to a 6% penalty tax. LO 1.g

In a direct participation program, a general partner is all of the following except A) one who buys and sells the program's property. B) one who has limited liability. C) one who appoints the property manager. D) a key executive who makes day-to-day business decisions.

B. one who has limited liability A general partner of a limited partnership is a key executive of the program who purchases and sells the property and/or appoints someone to manage the property. The general partner does not have limited liability. By not allowing the general partner to have limited liability, the program is able to rule out limited liability as a corporate characteristic. LO 11.d

All of the following are suitable objectives for a covered call writer except A) providing downside protection for a long stock position. B) profiting from an increase in the price of stock. C) increasing return on a long stock position. D) speculating that a stock will not rise in price.

B. profiting from an increase in the price of stock Covered call writers are not able to benefit from an increase in the price of the underlying stock. For example, you buy stock at $40 and write a 40 call. Now, the stock is 80. Isn't that great? Your long stock position has doubled. Not so fast. With the stock at 80, it is certain that the 40 call will be exercised. So no matter how high the stock goes, the covered writer can't benefit because the call will be exercised and the stock will be sold at the $40 strike price. Why sell covered calls? This strategy provides downside protection to the extent of the premium received, and it increases the rate of return on a long stock position (because of the premium collected). LO 10.d

Without any position in the stock, an investor wrote an ABC Jul 60 put for 6. On the expiration date, ABC is selling for 66, and the investor closes the position at the intrinsic value. For tax purposes, the investor has A) realized ordinary income of $600. B) realized a short-term capital gain of $600. C) broken even. D) realized a short-term capital loss of $600.

B. realized a short-term capital gain of $600 With the stock at 66, the put is 6 points out of the money (put-down rule). That means the option will expire unexercised, and the writer gets to keep the premium. That 6 point premium is a short-term capital gain. Aren't short-term capital gains taxed at ordinary income tax rates? Yes they are, but for IRS and test purposes, they are legally characterized as short-term capital gain. All short positions will result in short-term treatment, even when the options are LEAPS. LO 10.i

All of the following are objectives in a direct participation program (DPP) except A) deductions against passive income. B) short-term capital gains. C) deferment of taxes. D) long-term capital gains.

B. short-term capital gains DPPs are used to defer present income into the future and take advantage of time. In doing so, any gains will be taxed at favorable long-term rates. The expected losses in the early years may be taken as deductions against passive income from other sources. LO 11.g

Performance of the terms of a standardized listed option contract are guaranteed by A) the Chicago Board Options Exchange. B) the Options Clearing Corporation. C) the Securities and Exchange Commission. D) FINRA.

B. the Options Clearing Corporation The Options Clearing Corporation issues, guarantees, and handles the exercise and assignment of listed options. LO 10.b

When a stock or bond certificate is delivered, it must be in good transferable form. If the certificate is badly mutilated, it must be authenticated. Authentication can be done by A) the seller of the security. B) the issuer of the security. C) the buyer of the security. D) the member firm delivering the security.

B. the issuer of the security Authentication of a mutilated certificate may be done only by a party with access to certain corporate records. That would certainly be the issuer, but it could also be the transfer agent or registrar. LO 17.d

All of the following statements regarding a market not-held order are true except A) a small portion may be filled at a time. B) the order ticket must be marked, not held. C) it is given to a specialist (designated market maker). D) it gives the floor broker discretion over the price or time of execution

C) it is given to a specialist (designated market maker). In a market not-held order, the client agrees not to hold the broker responsible if she cannot fill the complete order. Such an order allows the floor broker to use her judgment on the best execution strategy. Specialists (designated market makers) cannot accept market not-held orders. LO 16.a

Jennifer bought 500 shares of Wolfe Industries common stock on October 1, 2019, at $50 per share. On October 24, 2019, she sold all the stock at $40 per share. On November 12, 2019, she buys 200 shares of Wolfe Industries common stock at $42. How much of a loss will Jennifer be able to claim for 2019? A) $5,000 B) $0.00 C) $3,000 D) $2,000

C. $3,000 By repurchasing 200 shares of Wolfe Industries common stock less than 30 days after the sale at a loss, Jennifer has run afoul of the wash sale rule. Because she only purchased 200 rather than the full 500 she sold, those are the only shares affected by the rule. Therefore, of the $5,000 total loss (500 shares × $10 per share as the stock fell from $50 to $40), $2,000 (200 shares × $10) is "washed" but the other $3,000 is allowable. LO 13.h

If a customer is concerned about interest rate risk, which of the following securities is least appropriate? A) 5-year corporate bonds B) 10-year corporate bonds C) 25-year municipal bonds D) Treasury bills

C. 25-year municipal bonds Interest rate risk is the danger that interest rates will rise and adversely affect a bond's price. This risk is greatest for long-term bonds; short-term debt securities are affected the least if interest rates change. LO 14.a

For how long must a FINRA member firm keep a record of written customer complaints? A) 6 years B) Lifetime of the customer's account C) 4 years D) 1 year

C. 4 years According to FINRA Rule 4513, which went into effect in December 2011, written customer complaints and any correspondence related to the complaints must be kept for 4 years. LO 18.b

Which of the following investors may not take advantage of breakpoints? A) Individual B) Corporation C) Investment club D) Trust

C. Investment club Breakpoint discounts are available only to legal persons. An investment club is not considered a legal person, but trusts and corporations are. LO 8.d

A customer opens the following options position: Long 1 ALE Feb 40 put @3¼; short 1 ALE Feb 45 put @6¼. What is the customer's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $300; maximum loss is $200; breakeven point is $43. B) Maximum gain is $200; maximum loss is $300; breakeven point is $42. C) Maximum gain is $300; maximum loss is $200; breakeven point is $42. D) Maximum gain is $200; maximum loss is $300; breakeven point is $43.

C. Maximum gain is $300; maximum loss is $200; breakeven point is $42 Step 1: Net Premiums Long 1 ALE Feb 40 put @ 3¼ = -$3.25 or -$325 Short 1 ALE Feb 45 put @ 6¼ = +$6.25 or +$625 => +$3 or +$300 Credit If Debit Spread, Net premium = Max Loss If Credit Spread, Net premium = Max Gain => Max Gain = $300 Step 2: Net Strikes Net Strikes = $45 - $40 = $5 Step 3: Net Strike +/- Net Premiums Since step 1 found Max Gain, step 3 will find Max Loss Max Loss = Net Strike - Net Premiums Max Loss = $5 - $3 = $2 or $200 Step 4: Breakeven = Strike +/- Net Premium Call Spread BE = Low Strike + Net Premium Put Spread BE = High Strike - Net Premium Put Spread BE = $45 - $3 = $42 Thus, Max Gain = $300; Max Loss = $200; Breakeven = $42

Your margin account client whose account has a long market value (LMV) of $10,000 and a debit balance of $3,000 would have A) SMA of $3,000 and buying power of $6,000. B) SMA of $5,000 and buying power of $10,000. C) SMA of $2,000 and buying power of $4,000. D) SMA of $7,000 and buying power of $14,000.

C. SMA of $2,000 and buying power of $4,000 LMV - Debit = Equity % $10,000 - $3,000 = $7,000 70% SMA = 50% LMV - Debit SMA = $5,000 - $3,000 SMA = $2,000 Buying Power = 2 x SMA Buying Power = 2 x $2,000 Buying Power = $4,000 With LMV of $10,000 and DR of $3,000, the account has equity of $7,000. The Regulation T requirement is 50% of the LMV, or $5,000. That means the account has $2,000 of excess equity that is journaled into SMA. Buying power is the SMA divided by the Regulation T requirement ($2,000 ÷ 50%), which equals $4,000 LO 16.d

Which of the following does not issue commercial paper? A) Finance companies B) Corporations C) U.S. Treasury D) Broker-dealers

C. U.S. Treasury The U.S. Treasury does not issue commercial paper. Its short-term borrowing is done with Treasury bills. Commercial paper is unsecured, short-term corporate debt most commonly issued by finance companies but also by industrial corporations and broker-dealers. LO 4.c

You and your spouse like to invest in option contracts. You each have separate individual accounts with different brokers for executing your trades. The current level of contract position limits for ABC stock is 75,000 contracts. Which of the following would be a violation of the contract limit? A) You are short 38,650 ABC calls, and your spouse is short 36,345 ABC calls. B) You are long 36,650 ABC calls, and your spouse is long 38,350 ABC puts. C) You are long 37,650 ABC puts, and your spouse is short 37,560 ABC calls. D) You are long 37,950 ABC calls, and your spouse is short 37,020 ABC calls.

C. You are long 37,650 ABC puts, and your spouse is short 37,560 ABC calls. A violation would occur if you exceed the 75,000-contract position limit for ABC stock with combined positions that are on the same side of the market. A long put and a short call each represent a bearish position, and the combined positions in the correct answer exceed 75,000. Even though you each have individual accounts, it is deemed that you would each have control over the other's account for determination of contract position limit violations. LO 10.j

If an investor writes 2 DWQ Jan 60 puts at 3 in September, and the investor buys back the 2 puts at 4.50 two months later, the result for tax purposes is A) a $150 short-term capital gain. B) a $300 short-term capital gain. C) a $300 short-term capital loss. D) a $150 short-term capital loss.

C. a $300 short-term capital loss A $900 closing cost minus $600 opening proceeds equals a $300 short-term loss. Here's the math. Writing (selling) 2 puts at a premium of 3 each brings in $600 (2 times $300). Buying back those 2 puts at 4.50 costs $900 (2 times $450). The difference is the loss of $300. LO 10.i

A properly signed and guaranteed stock or bond power is A) a legal right of the owner or proxy to vote stock as he chooses. B) an authorization delegating voting power to another person. C) a document that can be attached to a certificate, authorizing transfer of ownership to another party or when a security is hypothecated. D) a legal power of attorney authorizing the bulk transfer of variable annuities, whose separate accounts are invested in more than 75% equity or debt, to a new custodian.

C. a document that can be attached to a certificate, authorizing transfer of ownership to another party or when a security is hypothecated. A stock or bond power is an instrument separate from the certificate by which an owner indicates the intent to transfer ownership or pledge the securities as collateral for a loan. LO 17.d

All the following would be considered current assets except A) marketable securities. B) inventory. C) a warehouse. D) cash.

C. a warehouse Current assets are those that are either cash or expected to generate cash within the next year. Warehouses are fixed assets used for many years. LO 13.c

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

C. does not exceed 2% of the value of the securities to be received in the exchange In connection with a DPP rollup, member firms may not solicit votes from limited partners unless the compensation is 2% or less. The 10% limitation is the maximum compensation in the sale of a DPP. The 15% limitation is the maximum percentage of the gross proceeds of a DPP that may be used for the organization and offering expenses. The 5% is likely an attempt to make you think about the FINRA 5% markup policy. That does not apply to DPPs. LO 11.h

The SEC requires that all sell orders be identified as either long or short. A person is not considered to be long a security if he A) owns a security convertible into or exchangeable for the security and has tendered such security for conversion or exchange. B) has title to it. C) has sold an in-the-money put option on that security simultaneously with entering the short sale order. D) has purchased the security but the trade has not yet settled.

C. has sold an in-the-money put option on that security simultaneously with entering the short sale order. Selling a put only obligates the investor to buy the stock when the option is exercised. Merely writing the option does not result in possession of the stock. Having title to it does. Once purchased, the investor is long the stock even if the trade has not yet settled. Turning in a convertible security with conversion instruction has the same effect as entering a purchase order and waiting for settlement. LO 14.b

A 27-year-old client is in the lowest tax bracket and seeks an aggressive long-term growth investment. If his investment adviser representative recommends a high-rated general obligation municipal bond, the investment adviser representative (IAR) has A) made an unsuitable recommendation because a municipal revenue bond would have been more appropriate. B) recommended a suitable investment because general obligations are good long-term investments. C) made an unsuitable recommendation based on the client's needs and objectives. D) committed no violation because municipal bonds are well suited for the market's volatility.

C. made an unsuitable recommendation based on the client's needs and objectives In recommending a conservative, tax-exempt investment to this customer, the IAR has failed to make a suitable recommendation given the client's objectives. Municipal bonds are better suited for individuals in high tax brackets and offer little upside appreciation potential. LO 6.f

SEC Regulation Best Interest (BI) focuses on A) customer transaction costs. B) ensuring that customers receive the highest possible interest on their cash balances. C) recommendations to customers. D) ensuring broker-dealer profitability.

C. recommendations to customers Regulation BI became effective on June 30, 2020, and states, "When making such a recommendation to a retail customer, you must act in the best interest of the retail customer at the time the recommendation is made, without placing your financial or other interest ahead of the retail customer's interests." **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback. LO 2.f

All of the following are reasons to consider adding REITs to your client's portfolio except A) reasonable income from mortgage REITs. B) capital appreciation from equity REITs. C) redemption at net asset value. D) low or negative correlation to the stock market.

C. redemption at net asset value Although REITs do compute a net asset value, because of the illiquidity of real estate, that value is only an approximation. The actual price an investor receives when selling is based on supply and demand and may be more or less than the NAV. REITs typically have a low or negative correlation to the stock market. This means that when the stock market is going down, REITs tend to move in the opposite direction. By having an ownership position in the properties, the Equity REITs has an opportunity for capital appreciation. The mortgage REIT receives the interest income paid on the underlying mortgages. LO 11.a

A registered representative's compensation consists of trailer commissions. The most likely reason for this is A) some of the representative's customers own stock in trucking companies. B) the registered representative is sharing the account with another representative. C) some of the representative's customers own mutual funds with 12b-1 charges. D) the registered representative has entered into a deferred compensation package with the firm.

C. some of the representative's customers own mutual funds with 12b-1 charges Trailer commissions are a feature when you have customers owning mutual funds with 12b-1 charges. In most cases, those charges are levied every year and, over time, can add up to considerable compensation to the representative. LO 8.d

All of the following statements regarding a limited partnership subscription agreement are true except A) the investor's registered representative must verify that the investor has provided accurate information. B) the general partner endorses the subscription agreement, signifying that a limited partner is acceptable. C) the general partner's signature grants the limited partners power of attorney to conduct the partnership's affairs. D) the investor's signature indicates that she has read the offering document.

C. the general partner's signature grants the limited partners power of attorney to conduct the partnership's affairs (NOT true) A limited partner's signature on the subscription agreement grants the general partner power of attorney to conduct the partnership's affairs. The subscription agreement for a limited partnership is deemed accepted when the general partner signs the subscription agreement. LO 11.c

All of the following are true of real estate investment trusts (REITs) except A) they must invest at least 75% of their assets in real estate-related activities. B) shares are publicly traded. C) they must pass along losses to shareholders. D) they must, to qualify under Subchapter M, distribute at least 90% of their net investment income.

C. they must pass along losses to shareholders REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their net investment income to their shareholders. While they can pass through income, they CANNOT pass through any losses; they are not direct participation programs. LO 11.b

An investor buys 1 XYZ Nov 50 call at 8 and sells 1 XYZ Nov 60 call at 3.50. At what stock price will the investor break even? A) $60.00 B) $63.50 C) $50.00 D) $54.50

D. $54.50 Step 1: Net Premiums Buys 1 XYZ Nov 50 call @ $8 Sells 1 XYZ Nov 60 call @ $3.5 => $4.5 Debit Net Debit = Max Loss Net Credit = Max Gain => Max Gain = $4.5 Step 2: Net Strikes Net Strikes = $60 - $50 = $10 Step 3: Net Strike - Net Premium Since step 1 found max loss, step 3 will find max gain => $10 - $4.5 = $3.5 => Max Gain = $3.5 or $350 Step 4: Strike Price +/- Net Premiums Call Spread = Low Strike + Net Premiums Put Spread = High Strike - Net Premiums For this question, we are dealing with call spread => Call Spread Breakeven = Low Strike + Net Premiums => Call Spread Breakeven = $50 + $3.5 = $53.5 To determine the breakeven point, net the option premiums (8 − 3.50 = 4.50). For a call spread, add the netted premiums to the lower strike price (50 + 4.50 = 54.50). LO 10.h

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) 8.75% C) 0.37% 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), and 87½ is the asked price ($875). LO 4.e

According to the Investment Company Act of 1940, a diversified mutual fund may hold, at most, what percentage of a corporation's voting securities? A) 50% B) 5% C) 75% D) 100%

D. 100% To be considered a diversified investment company, 75% of the fund's assets must be diversified, such that the mutual fund owns no more than 10% of a target company's voting securities. Additionally, within that 75% of assets, no diversified investment company may invest more than 5% of its portfolio in a single company's securities. However, there are no restrictions on the other 25%. That can all be in one stock, making 30% of the fund's assets in one company. Those assets can theoretically buy all of the outstanding voting shares of a company and control 100%. LO 8.a

The board of directors of DMF, Inc., announces a 5, for-4 stock split. The market price of DMF after the split should decrease in value by A) 10%. B) 25%. C) 30%. D) 20%.

D. 20% The easy way to handle questions about stock splits is to turn the split into a fraction. To find the stock split factor, divide first number by second number => 5 / 4 = 1.25 Example: Suppose the pre-stock split price of DMF stock is $100 Stock-split-factor = 5 / 4 = 1.25 DMF stock price after split = $100 / 1.25 = $80 DMF stock went from $100 to $80 That's a decrease of $20 or 20% You know that after a split, which increases the number of shares outstanding, the market price per share will be reduced. With a 5-for-4 stock split, the new price should be about four-fifths of the old price. A one-fifth change equals 20% (100% / 5 = 20%). LO 3.b

An investor purchases $5,000 of the Quality Performance Balanced Fund, an open-end investment company, on a Thursday. The order is time-stamped at 10:45 am ET. The Thursday morning financial pages show the fund's NAV at $9.60 and the POP at $10.00. The Friday morning financial pages show the fund's NAV at 9.84 and the POP at $10.25 per share. Approximately how many shares did this investor acquire? A) 500.000 B) 508.130 C) 520.833 D) 487.805

D. 487.805 $5,000 / $10.25 = 487.805 There are several steps required to answer this question correctly. The first is to understand that the term open-end investment company always means a mutual fund, at least on the exam. Although most exchange-traded funds (ETFs) are structured as open-end companies, any question about them will always be clear that the subject is an ETF. The second is to recognize that mutual funds use the forward pricing rule to determine purchase or redemption prices. That is, the price is determined after the close of the trading day (4 pm ET). Therefore, this purchase will use the price that appears in the Friday morning financial pages. That purchase price will be the public offering price (POP). The POP is $10.25 per share. Divide the $5,000 purchase by the $10.25 and the result is 487.805 shares. Would you like to know how to do this question in seconds? As long as you realized the forward pricing rule and you know the new POP is higher than the previous one of $10.00 per share, it's a snap. At $10.00 per share, $5,000 buys 500 shares. With a POP above that, the choice must be lower than 500 shares and there is only one choice that is. All of the other choices use the NAV instead of the POP. That is the way the exam does things. LO 8.d

An investor, age 36, has a net worth of $650,000, with an annual income of $65,000. Wanting to add to an existing portfolio, the investor is not concerned about generating more income, as that seems to be adequate already. However, the investor does note that keeping taxes to a minimum is an objective. Which of the following funds would be the most suitable, given the investor's objectives? A) Fund Z: invests in preferred shares; turnover ratio of 50% B) Fund Y: invests in companies that have capital appreciation potential; turnover ratio of 100% C) Fund W: invests in utility companies; turnover ratio of 25% D) Fund X: invests in companies with long-term growth potential; turnover ratio of 25%

D. Fund X: invests in companies with long-term growth potential; turnover ratio of 25% This investor is not concerned about income. This would eliminate the utility and preferred share funds (Fund Z and Fund W). Of the remaining two funds, Fund X and Fund Y both have the same general objective, but the one with the lower turnover ratio would generate less tax liability. The portfolio turnover ratio reflects a fund's holding period of securities being bought and sold by the fund manager. If a fund has a turnover ratio of 100%, the entire portfolio is likely to turn over in a year, and capital gains distributions are likely to be short term and subject to the maximum tax rate. That increases the tax liability, and therefore, is not the best option. By contrast, a 25% turnover ratio means the average holding period of the securities in the portfolio is four years. This would mean that any capital gains distributions are more likely to be long term and subject to a lower tax rate. LO 8.g

A municipal bond in default is in good delivery form if I. past-due and current coupons are attached. II. the bond is insured. III. subsequently due coupons are attached. IV. the issuer files a default guarantee letter with the Municipal IV. Securities Rulemaking Board. A) II and IV B) I and IV C) II and III D) I and III

D. I and III To be in good delivery form, a municipal bond must be accompanied by all unpaid coupons: past due, currently due, and subsequently due. Insurance or letters of guarantee do not constitute good delivery. LO 17.c

In March, a customer sells 1 ABC Oct 50 put for 3 and buys 1 ABC Oct 60 put for 11. The customer will experience a pretax profit from these positions if I. the difference between the premiums narrows to less than $8. II. the difference between the premiums widens to more than $8. III. both puts are exercised at the same time. IV. both puts expire unexercised. A) I and III B) II and IV C) I and IV D) II and III

D. II and III Sells 1 ABC Oct 50 put @ $3 Buys 1 ABC Oct 60 put @ $11 => $8 Debit DEW = Debit/Exercise/Widen CVN = Credit/Valueless/Narrow This debit spread becomes profitable if the spread widens between the premiums. Credit spreads are profitable if the spread narrows between the premiums. If both puts are exercised, the spread is profitable. If the short 50 put is exercised, the customer buys the stock and sells it for 60 by exercising the long 60 put ($1,000 profit − $800 premiums = net $200 profit). LO 10.e

A customer, long 100 shares of QRS at 62.50, writes 1 QRS Sep 65 call at 1.50. If the call is exercised, which two statements are true? I. The gain is $250. II. The gain is $400. III. For tax purposes, cost basis per share is $62.50. III. For tax purposes, cost basis per share is $61. A) I and III B) I and IV C) II and IV D) II and III

D. II and III The customer has paid $62.50 for the stock and has received 1.50 for the call. If the Sep 65 call is exercised, the customer will receive 65 for the sale of the stock. After exercise, the total received is $66.50 ($1.50 + $65). $66.50 received minus $62.50 paid equals four points profit ($400). If a covered call writer is exercised, the cost basis for tax purposes is the purchase price of the stock. Sales proceeds for tax purposes are 66.50 per share (strike price plus premium). LO 10.i

A new municipal bond issue had a dated date of January 1, 2018. The first coupon was due on August 1, 2018. The customer bought for settlement on September 1, 2018. How many months of accrued interest must he pay at settlement? A) Eight months B) Six months C) Seven months D) One month

D. One month What happens to an investor who sells a bond before the semiannual interest payment date? The buyer pays the seller the amount of interest that has accrued since the last interest payment. On a new bond issue, the issuer sets the dated date. That is the date from which interest first begins to accrue. It is not unusual for the first interest payment date to be more than six months from the dated date. That is known as a long coupon (longer than six months). Therefore, on August 1, 2018, seven months of interest was paid (January through the end of July). The customer did not purchase the bond until late August and owes interest only from the August 1, 2018, coupon payment date up to, but not including, the September 1 settlement date (one month). LO 6.e

Market timing is normally associated with which of the following portfolio management styles? A) Modern portfolio theory B) Passive management C) Strategic asset allocation D) Tactical asset allocation

D. Tactical asset allocation Tactical asset allocation, which attempts to capitalize on short-term market swings, is a market timing strategy. LO 14.a

The manager of ABC Municipal Securities is interested in bidding on some general obligation bond issues that will be available in the coming months. Where would the manager find information about these forthcoming issues? A) The Washington Post B) Electronic Municipal Market Access (EMMA) C) Standard & Poor's Bond Guide D) The Bond Buyer

D. The Bond Buyer Municipalities publish their official notices of sale soliciting bids from interest parities in The Bond Buyer. The notice gives the details of the bonds put up for bid and how to bid on the issue. The Standard & Poor's Bond Guide gives details of outstanding issues and their ratings. The EMMA is an online site primarily for retail nonprofessional investors. LO 13.f

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

D. The loss is not deductible Because the customer repurchased the shares within 30 days of the loss transaction, the loss is disallowed under the wash sale rule, and therefore, is not deductible. A wash sale occurs when the same shares are purchased within 30 days before or after the date of sale in which the loss is incurred. LO 13.h

An investor purchases a municipal bond at par to yield 5.5% to maturity. Two years later, if he sells the bonds at a price equivalent to a 5% yield to maturity, the investor incurs A) a capital loss. B) tax-free income. C) no taxable result at this time. D) a capital gain.

D. a capital gain Yields fall as bond prices rise. Because the yield to maturity has dropped, the bond is trading at a higher price than when it was purchased. The consequence of the sale is a capital gain because the investor sold the bond that was purchased for par at a premium. LO 6.e

Benefits of a municipal bond advance refunding include A) tax savings. B) a higher rating and lower coupon rate. C) a decrease to the issuer's current interest cost. D) a higher rating and greater marketability.

D. a higher rating and greater marketability Advance or prerefunding is refinancing an existing municipal bond issue before its maturity or call date by using money from the sale of a new bond issue. Because the proceeds of the new issue are placed into special U.S. government securities, the rating is automatically at the top. The higher rating increases the marketability. The current bond still exists until the specified call date. As such, the coupon has not changed. There are no taxes to be saved. LO 6.d

A company set up to invest in real estate, mortgages, construction, and development loans that must distribute at least 90% of its net income to avoid paying taxes on the income distributed is called A) an open-end investment company. B) a unit investment trust. C) a trust indenture. D) a real estate investment trust.

D. a real estate investment trust A real estate investment trust, to avoid tax on its income, must distribute 90% of its net investment income to investors. LO 11.b

Which of the following municipal issues would least likely involve overlapping debt? A) A library district B) A park district C) A school district D) An airport district

D. an airport district Overlapping debt refers to property tax districts (areas). Airport issues are usually revenue issues of an authority that has no property taxing powers. LO 6.b

An investor wanting to know about the tax consequences of a direct participation program should know which asset types can be depleted or depreciated. All of the following asset types can be depleted or depreciated except A) oil. B) gas. C) buildings. D) crops.

D. crops Oil and gas are examples of asset types that can be depleted, whereas buildings are a depreciable asset. Farm crops are considered renewable assets. LO 11.f

If the dollar price of a municipal bond is 101 and, at that price, the basis is 6.10, the nominal yield is A) exactly 6.10%. B) less than the coupon rate. C) less than 6.10%. D) greater than 6.10%.

D. greater than 6.10% Basis is a common synonym for yield to maturity, especially for municipal bonds. For any bonds trading at a premium, the nominal yield (or coupon) is higher than the basis (YTM). For bonds at a premium, yields from lowest to higest are as follows: Yield to call (YTC) Yield to maturity (YTM) Current yield (CY) Nominal yield (NY) LO 4.e

A blind pool offering A) generates nonallocated income. B) is one in which the properties are purchased on a lottery basis. C) is connected with oil and gas leases. D) is one in which 25% or more of the properties are not specified.

D. is one in which 25% or more of the properties are not specified Many times, large real estate or oil and gas programs are offered in the form of a blind pool. In a blind pool, 25% or more of the specific properties (in real estate) or sites (in oil and gas) have not been identified at the time of the offering. When investing in a blind pool, the participants are relying on the expertise of the program sponsor to select locations that will prove profitable. LO 11.g

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) ten years of employment. B) three years of residency. C) five years of residency. D) three years employment.

D. three years of employment 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. So, the applicant must provide 10 years of employment history. But the firm must only verify 3 years of employment There is no requirement to verify residency history. LO 18.a

Dollar cost averaging (DCA) will always result in a lower cost per share than the price paid per share except A) when the price for each purchase is increasing. B) when the price for each purchase is decreasing. C) when the price for each purchase is fluctuating.. D) when the price for each purchase is the same.

D. when the price for each purchase is the same There are two requirements for a dollar cost averaging program to work. The first is that the same amount must be invested at each specified interval. The second is that the price per transaction does not remain the same. If that is the case, then the average cost per share and average price paid per transaction are the same. The price needs to move for DCA to show a benefit. LO 8.e