Series 7: All Missed ExamFX Questions
A customer's margin account has available SMA of $1,000. How much would the customer have to deposit to purchase listed options with premiums totaling $4,000? a) $3,000 b) $4,000 c) $1,000 d) $2,000
a) $3,000 SMA of $1 can buy $2 of stock but only $1 of options premium (which have no loan value and must be fully paid). Therefore, $4,000 of option premium, less $1,000 of SMA equals $3,000 deposit.
XYZ Corporation Primary Distribution: Total Issue: 1 million shares; Retained for sale by underwriters: 800,000 shares; Reserved for distribution to selling group: 200,000 shares. PER SHARE: Public Offering Price: $10.00; Manager's fee and expenses: .10; Underwriter's allowance: .70; Selling concession: .50; Proceeds to issuer: 9.20. Each underwriter will receive what fee per share for the stock he gives up to the selling group? a) $0.20 b) $0.30 c) $0.50 d) $0.70
a) $0.20 The syndicate underwriter's allowance (take-down) is $0.70, but on sales made by the selling group, the syndicate members are conceding $0.50 of the $0.70 to the selling group. The syndicate is, in effect, receiving a $0.20 override on sales made by the selling group.
Under Reg D Rule 504, what is the maximum amount of money that can be raised within 12 months for a private placement? a) $3 million b) $10 million c) $20 million d) An unlimited amount
b) $10 million Under Reg D rule 504, the maximum amount that can be raised in any 12 months would equal $10 million. Additionally, all investors must be accredited investors.
ERISA qualified pension plan fund managers' fiduciary responsibilities regarding plan investments are determined by a) "Prudent Man" rules in the state where the fund operates. b) The Investment Company Act of 1940. c) FINRA. d) SEC.
a) "Prudent Man" rules in the state where the fund operates. When investing pension fund money, pension fund managers must follow the Prudent Man rules in the state where they operate.
An investor has an adjusted basis of $20,000 in a direct participation program. During the year $12,000 in cash distributions is received, and the investor's share of depletion is $6,000. What is the adjusted basis at the end of the year? a) $2,000 b) $8,000 c) $26,000 d) $38,000
a) $2,000 Both cash distributions and depletion lower basis. $20,000 minus $18,000 ($6,000 depletion plus $12,000 cash) = $2,000.
An issuer who has at least $100,000 in average daily trading volume and $25 million in public float is planning to bring additional shares to market. What would the restriction period be? a) 1 day prior to the effective date b) 3 days prior to the effective date c) 10 days prior to the effective date d) 20 days prior to the effective date
a) 1 day prior to the effective date For issuers offering additional shares who currently have an average daily trading volume of at least $100,000 and $25 million in public float, the restriction for offering participants is 1 day prior to the effective date.
An order is entered "buy XYZ 35 stop limit." The tape shows 35.50; 36; 34.50; 35. The order was most likely executed at which price? a) 34.50 b) 35 c) 35.50 d) 36
a) 34.50 A buy stop limit is placed above current market value. This order was triggered at 35.50, and executed at 34.50.
The priority accorded to municipal orders taken for a new issue would be found in the a) Agreement among underwriters. b) Official statement. c) Settlement letter. d) Offering circular.
a) Agreement among underwriters. The order priority of a municipal underwriting may be found in the agreement among underwriters. It would not be in the official statement.
Which of the following is NOT an exempt transaction? a) An issue of 5-year Treasury notes b) An issue of $3.5 million over 1 year c) An issue sold in one state d) An issue sold to 800 accredited investors
a) An issue of 5-year Treasury notes Treasuries are an exempt security. The other three are exempt transactions.
An investor wants a convenient investment strategy that allows her to choose a portfolio with a predetermined mix of stocks and bonds that will automatically rebalance. Which fund should the investor choose? a) Asset allocation fund b) Balanced fund c) Growth and income fund d) Blended fund
a) Asset allocation fund An asset allocation fund is invested based on a specified allocation model, e.g., 60% stocks/40% bonds. The portfolio manager is responsible for rebalancing the fund back to its original allocation as price movements change the original allocation. The investor can choose from various mutual funds with different investment allocation models that match their investment profile and take into consideration age, income, investment experience, other holdings, investment objective, and attitude toward risk.
A municipal dealer has bonds out firm to another dealer. Which is true? I. The bonds are tied up for a specified period of time II. The dealer is locked into a quote III. This is a type of AON IV. The price can be re-negotiated a) I and II b) I and IV c) II and III d) II and IV
a) I and II An "out firm" is a bid price guaranteed to a dealer by another dealer for a period of time.
A municipal dealer has bonds out firm to another dealer. Which is true? I. The bonds are tied up for a specified period of time. II. The dealer is locked into a quote. III. This is a type of AON. IV. The price can be re-negotiated. a) I and II b) I and IV c) II and III d) II and IV
a) I and II An "out firm" is a bid price guaranteed to a dealer by another dealer for a period of time.
Publicly held corporations differ from limited partnerships with respect to which of the following? I. Length of existence II. Transferability of ownership III. Application of the conduit concept a) I, II & III b) I only c) I & II only d) II & III only
a) I, II & III Unlike limited partnerships, corporations do not have a definite life span. Shares of corporate stock are marketable and very liquid; however, there is no secondary market for the resale of limited partnership units. In addition, the transferability of ownership of limited partnership units often requires the consent of the general partner. Corporate dividends are paid after the corporation has paid its taxes; limited partnerships do not pay taxes. Instead, all profits and losses flow through a conduit (pipeline) directly to the investors who then pay individual taxes. Corporate profits, on the other hand, are subject to double taxation (both at the corporate level and at the investor level).
Which of the following should a prospective investor use to evaluate a direct participation program? I. The adequacy of capital II. Its rate of return compared with those of other DPPs III. Its economic viability IV. The past history of its general partners a) I, II, III & IV b) I & IV c) II & III d) III & IV
a) I, II, III & IV In evaluating a DPP, the investor should consider the following factors: adequacy of capital, the rate of return compared to other DPPs, the DPP's economic viability, and the past history of the DPP's general partners.
When a member is liable for its percentage of any unsold securities, the syndicate is a(n) I. Eastern syndicate II. Divided syndicate III. Western syndicate IV. Undivided syndicate. a) II and III b) III and IV c) I and II d) I and IV
a) II and III In an Eastern, or undivided, syndicate, each underwriter is responsible for selling any shares that remain unsold by other members. In a Western, or divided, syndicate, each underwriter is only responsible for its share.
With regard to variable life insurance policies, the largest expense for an insurance company associated with a) Investment management. b) Mortality. c) Insurance. d) Administration.
a) Investment management. The investment management fee is the largest cost incurred by an insurance company with regard to variable life insurance policies.
Utilizing stabilization efforts on a new stock issue a) Is permitted if reported in the prospectus of the new stock issue. b) Can only be done using sell orders. c) Must be done before the issue is sold in the marketplace as new issue. d) Is prohibited under the Securities Act of 1933.
a) Is permitted if reported in the prospectus of the new stock issue. Stabilization is a one-sided bid by the underwriter to stop the decline in the price of a new issue of stock. If the syndicate has the ability to utilize stabilization, it must be disclosed in the prospectus.
Advance refunding is a) Issuing new debt to extinguish old debt at the first opportunity. b) Rolling principal over before its maturity to take advantage of higher rates. c) Making regular deposits to an escrow account to be used only for debt retirement. d) Escrowing sufficient collateral to extinguish debt at maturity.
a) Issuing new debt to extinguish old debt at the first opportunity. Advance refunding is issuing a new, lower coupon bond to lock in a low interest rate, escrowing the funds, and using them to pay off an outstanding, higher coupon bond at the next call date.
Which of the following statements about the Maintaining Qualifications Program (MQP) is true? a) It allows participants to requalify for registration without sitting for an examination. b) It does not require continuing education. c) Continuing education must be completed every 2 years. d) It requires participants to take the related qualification exam within 2 years of registration termination.
a) It allows participants to requalify for registration without sitting for an examination. The Maintaining Qualifications Program (MQP) allows terminated representatives or principals to maintain their qualification for the terminated registration beyond the current 2-year qualification period if certain eligibility conditions are met. The terminated individual must fulfill an annual continuing education requirement.
All of the following are generally true about commercial paper EXCEPT a) It is issued as interest-bearing paper. b) It is issued with a 270-day maturity. c) It is issued on a 360-day basis. d) It is issued on a discount basis.
a) It is issued as interest-bearing paper. Commercial paper is sold by corporations at a discount. Although interest is calculated based on a 30-day month and a 360-day year, commercial paper has a maximum maturity of 9 months. Commercial paper is not an interest-bearing paper; therefore, it does not pay interest until maturity.
A corporation with a low common stock ratio is a) More vulnerable to interest rate changes. b) Conservatively managed. c) Financed more by preferred stock than common stock. d) Less vulnerable to interest rate changes.
a) More vulnerable to interest rate changes. A low ratio indicates a large portion of the corporation's capitalization is debt; it is highly leveraged. This makes the corporation vulnerable to rate changes. A low ratio indicates aggressive, not conservative financial management.
Which of the following is more likely to appear in a notice of sale rather than in an official statement? a) Powers of the issuer b) Debt service requirements c) Method of report d) Population trends
a) Powers of the issuer Municipalities seeking bidders to help them underwrite new issues of muni bonds will publish a notice of sale. This is designed to help bidders prepare their bids in conformance with the issuer's specifications. The official statement, a document similar to a prospectus, is given to prospective customers who need certain information in order to make an informed investment decision.
Which act is most concerned with disclosure? a) Securities Act of 1933 b) Securities Act of 1934 c) Maloney Act of 1938 d) Trust Indenture Act of 1939
a) Securities Act of 1933 The '33 act requires SEC registration and prospectus disclosure
When interest rates are fluctuating, a) Short-term rates move more sharply. b) Long- and short-term rates move in concert. c) There is no relationship between the movement of long- and short-term rates. d) Long-term rates move more sharply.
a) Short-term rates move more sharply. Short-term interest rates are more volatile; they move more sharply (quickly). However, long-term bond prices change more.
Which of the following best describes a variable annuity? a) The method of payment is fixed, but the amount of the payment changes. b) Both the method and amount of payment are fixed. c) The method of payment and amount of payout can change. d) The method of payment can change, but the amount of payment is fixed.
a) The method of payment is fixed, but the amount of the payment changes.
An NYSE member organization reports to a customer that his order to sell 100 shares of stock was executed at 28.50; however, the firm later discovers that it was actually executed at 28.25. The customer will a) Receive 28.25. b) Receive 28.38. c) Receive 28.50. d) Have the option of accepting the order at 28.25 or canceling the trade.
a)Receive 28.25. The price of the actual trade is binding despite the fact that the confirmation was given in error.
Long 1,000 shares at 20, short 1,000 shares at 10. What is the minimum maintenance on these positions? a) $8,000 b) $10,000 c) $12,500 d) $15,000
b) $10,000 Explanation: Long 1,000 shares at 20 or 20,000 with maintenance at 25% or $5,000. For shares sold short, the minimum maintenance is the greater of 30% of the short market value or $5.00 per share. Because the short sale was at $10 per share, both the required deposit and the minimum maintenance are $5 per-share or $5,000. Therefore, the answer is $10,000 ($20,000 X .25 = $5,000; and 1,000 shares short at $5 = $5,000).
What is the holding period to determine long-term capital gains? a) 1 year from settlement date b) 1 year plus 1 day from trade date c) 1 year plus 1 day from settlement date d) 1 year from trade date
b) 1 year plus 1 day from trade date If the holding period is 1 year or less, it is considered a short-term capital gain. If the holding period is 1 year and 1 day or longer, it is considered long-term capital gain.
Under Reg S-P, a broker/dealer's procedures to safeguard its customers' personally identifiable information (PII) must provide for each of the following EXCEPT a) The broker/dealer's responsibility to protect customers' PII extends to the personal equipment (such as laptops and cell phones) of its associated persons. b) A notice to the customer describing the firm's privacy procedures must be sent with the first statement of activity in the account. c) The customer must be given the opportunity to opt out of any disclosure of PII to nonaffiliated parties. d) The broker/dealer is not required to give the customer an opt-out option regarding sharing of PII with its affiliates.
b) A notice to the customer describing the firm's privacy procedures must be sent with the first statement of activity in the account. Remember that we are looking for the EXCEPTION. The initial privacy notice describing the firm's related procedures must be provided at the time a customer relationship is established, which may be well before an initial transaction or the first customer statement showing activity in the account. As soon as the firm obtains the PII for a new customer, the rule would be in effect. In addition, customers must be provided with an annual privacy notice.
The priority for acceptance of orders for an over-subscribed municipal bond offering will be established by the manager in the a) Official statement. b) Agreement among underwriters. c) Official notice of sale. d) Bid form.
b) Agreement among underwriters. The agreement among underwriters conveyed through the syndicate letter or account summary specifies over-allocation priority
Mary Parker has a very large annual salary and is two years from retirement. She has an immediate need to shelter her income from taxes. Which of the following would best suit her objectives? a) Real estate new construction program b) An oil and gas income program c) An oil and gas drilling program d) Raw land
b) An oil and gas income program Oil and gas income, although not the best tax shelter, is conservative for an investor 2 years from retirement.
A registered representative wants to increase his sales and decides to increase his option business. He sends a letter to all of his customers discussing covered call writing, but he makes no specific recommendations. When must the OCC Disclosure Statement be delivered? a) Within 15 days after the account has been approved for option writing b) At or prior to the time the client receives the letter c) At or prior to the opening of the account d) At or prior to account approval
b) At or prior to the time the client receives the letter The options disclosure document must be sent prior to or upon sales literature being sent.
A confirmation of a purchase by a customer in which the firm acted as a principal with securities sold from inventory must contain which of the following items? a) Markup over the price at which the dealer obtained the security b) Best available price in the inter-dealer market c) The firm's inventory position in the security d) Markup over the inter-dealer offer price
b) Best available price in the inter-dealer market The confirmation on a purchase by a customer in which the firm acted as principal must show the markup per share over the best available price in the inter-dealer market at the time of the trade. The remaining choices are not required. When the trade is from the firm's inventory, the dealer's cost is not relevant to the customer.
Which of the following statements is true regarding SIMPLE plans? a) The employee cannot contribute to the plan. b) Contributions and earnings are tax-deferred until funds are withdrawn. c) The employer cannot contribute to the plan. d) The employer can contribute up to 5% of the employee's annual compensation.
b) Contributions and earnings are tax-deferred until funds are withdrawn. Under SIMPLE plans, participating employees may defer up to a specified amount each year, and the employer can then contribute up to an amount equal to 3% of the participating employees' annual compensation. Contributions and earnings are both tax deferred until funds are withdrawn.
Accrued interest on a new issue municipal bond is calculated from a) Settlement date to trade date. b) Dated date to settlement date. c) Settlement date to first coupon date. d) Dated date to first coupon date.
b) Dated date to settlement date. New issue municipals calculate interest from the dated date up to but not including the settlement date. This interest accrues to the issuer and is factored into the re-offered price of the bond.
A put may be sold in a cash account if the customer deposits which of the following? I. Cash equal to the aggregate exercise price of the option II. A bank guarantee letter equal to the aggregate exercise price of the option III. An escrow receipt covering the underlying stock IV. The underlying stock a) I only b) I & II only c) II & III only d) I, II, III, & IV
b) I & II only If a put is exercised, you will need money to purchase shares at the strike price. Either cash or a bank guarantee letter equal to the strike price times the number of shares in the contract are sufficient to cover the put. To cover a call, you need shares. Having the shares does not help you if you sell a put! Remember, the only reason why the shares would be put to you is if they have gone down in value, therefore, if you have the shares, they are down in value too!
#17. Yield curve analysis is useful to an investor purchasing debt securities for which of the following reasons? I. Allows the comparison of rates of return as maturities are extended II. Allows the yield on a particular debt security to be compared to the yield of similar securities on either a current or historical basis III. Is useful in determining the market expectations for interest rates IV. Predicts future of long-term interest rates a) I and II b) I and III c) II and IV d) III and IV
b) I and III Yield curves are used to compare yields at different maturities and to examine market rate expectations (normal - stable to low rates; inverted - high or rising rates). They are not used to compare, judge market demand, or predict interest rates.
Yield curve analysis is useful to an investor purchasing debt securities for which of the following reasons? I. Allows the comparison of rates of return as maturities are extended II. Allows the yield on a particular debt security to be compared to the yield of similar securities on either a current or historical basis III. Is useful in determining the market expectations for interest rates IV. Predicts future of long-term interest rates a) I and II b) I and III c) II and IV d) III and IV
b) I and III Yield curves are used to compare yields at different maturities and to examine market rate expectations (normal - stable to low rates; inverted - high or rising rates). They are not used to compare, judge market demand, or predict interest rates.
Which of the following statements about Regulation Crowdfunding is true? a) Companies can raise up to a maximum of $10 million b) Issuer is permitted to "test the waters" c) Issuer must provide disclosures to the SEC in Form D d) Investors cannot sell the securities for 6 months
b) Issuer is permitted to "test the waters" When using the Regulation Crowdfunding exemption, an issuer is permitted to "test the waters," which means that the issuer can gauge investor interest before filing an offering document with the SEC. Other rules apply investors cannot sell the securities for 12 months; companies can raise up to $5 million; and issuers must provide disclosures in Form C.
When a municipal securities dealer receives a written customer complaint concerning a transaction, which of the following must he or she do? a) Refer the customer to the arbitration procedure established by the MSRB. b) Make a record of the complaint and the action taken in response. c) Cancel the transaction and reimburse the customer for any loss incurred. d) Report the terms of the complaint to the appropriate regulatory agency.
b) Make a record of the complaint and the action taken in response. A written complaint along with the action taken in response to the complaint must be kept on file by a broker/dealer firm.
Each of the following is a violation of FINRA rules EXCEPT a) Free-riding and withholding. b) Marking to the market. c) Backing away. d) Interpositioning.
b) Marking to the market. Under FINRA rules, backing away, interpositioning, and free-riding and withholding are all considered to be violations. Marking to the market (adjusting the value of a security or portfolio to reflect current market value) is allowable. For example, broker/dealers must adjust margin accounts to ensure compliance with minimum maintenance requirements.
A Discretionary Account Agreement giving the customer's registered representative standing authorization to make securities transactions for an account a) Must be renewed on an annual basis. b) Must be accepted in writing by an authorized supervisor. c) Is not permitted under FINRA Rules for margin accounts. d) Is available only for institutional and otherwise sophisticated customers.
b) Must be accepted in writing by an authorized supervisor. FINRA requires written acceptance by someone authorized to act on behalf of the firm. There is no specific restriction on type of account or customer for which this is available, though the firm must use due diligence in approving the account. Many firms renew these agreements on a periodic basis, though there is no specific FINRA requirement in this regard.
An American manufacturer of office equipment has contracted to deliver $1,000,000 worth of equipment to a British corporation payable in British pounds. The American manufacturer could best protect itself from currency fluctuations by purchasing a) Puts on American dollars. b) Puts on British pounds. c) Calls on American dollars. d) Calls on British pounds.
b) Puts on British pounds. As an American exporter, the company is concerned that when it gets paid in British pounds, the value of those pounds may have gone down relative to the dollar. If the company is worried about downside risk on a foreign currency, it could buy a put on the foreign currency.
Which of the following transactions requires distribution of an offering circular to prospective investors? Rule 147 Reg A Rule 144A Reg D
b) Reg A Regulation A or small issue exemptions, use an offering circular for disclosure instead of a prospectus. It must be sent to the prospective buyer either 48 hours prior to the purchase, or at the time of purchase, with a 5-day right of rescission.
Which of the following statements regarding commercial paper is false? a) It can be issued either at a discount or with a coupon rate. b) Registration is required by the SEC. c) Any discount is taxable as ordinary income. d) It is issued by corporations.
b) Registration is required by the SEC. Commercial paper that matures in 270 days or less is exempt from SEC registration
A 30-year term municipal issue has a mandatory early debt retirement provision for the final 10 years of its life. This type of retirement is commonly known as a/an a) Tender. b) Sinking fund. c) Refunding. d) Escrow.
b) Sinking fund. A sinking fund consists of money accumulated by the issuer on a regular basis in a separate custodial account that is to be used to retire the debt. A bond indenture may specify that payments be made to a sinking fund, which assures investors that the issue is safer than bonds for which the issuer must redeem by making a payment all at once without the benefit of a sinking fund.
Which of the following would NOT issue overlapping debt? a) School district b) State c) Water district d) Library district
b) State The state has no direct role in the property tax
Which of the following is the most secure? a) IDR b) TAN c) GO d) Moral Obligation
b) TAN A TAN (Tax Anticipation Note) is GO, anticipates property tax proceeds, and is short-term. It is the safest of the Muni notes.
All of the following are characteristics of a warrant EXCEPT a) The premium has a direct relationship to the expiration date. b) The outlook for the underlying company will have an impact on the current value of the warrant. c) It generally has an unlimited life span. d) Its price has a direct relationship to the price of the underlying stock.
b) The outlook for the underlying company will have an impact on the current value of the warrant. Warrants are often attached to long-term bonds and are good for the life of the bond, usually 30 years. Warrants allow the owner the option to purchase a specific number of shares of the company's common stock at a specific price; therefore, the price of the warrant has a direct correlation to the price of the underlying stock as well as the expiration date. The outlook for the underlying company is also a factor in the value a warrant.
All of the following statements about customer confirmations of principal transactions in municipal securities are true EXCEPT a) They must disclose the capacity in which the dealer has acted. b) They must disclose any dealer markup. c) They must be provided at or before the completion of the transaction. d) They must be in writing.
b) They must disclose any dealer markup. The markup does not have to be disclosed to the client.
Your broker/dealer is a member of the underwriting syndicate and re-offers $100M of bank-qualified municipal debt at 99.75 net. There's a .75 point selling concession, .25 point re-allowance, and 1 point additional takedown. What's the member's profit? a) $2 million b) $1 million c) $1.75 million d) $750,000
c) $1.75 million The takedown or member's profit is selling concession (including re-allowance) plus additional takedown. The total takedown is 1.75 points or percent of $100 million or $1.75 million (times the member's bracket). "99.75 net" simply indicates a dealer/syndicate re-offering or no commission charged.
A retired investor is reinvesting the proceeds from a mature municipal bond. Which of the following would best suit her objectives? a) A toll road bond b) A G.O. issued by a city with a rising tax rate c) A pre-refunded bond d) An airport bond
c) A pre-refunded bond A pre-refunded bond is AAA and trades to an established call date. It is the best of the four choices. Airport and toll road bonds are revenue bonds that are generally not as safe as G.O.s. A rising tax rate is viewed negatively since it can result from falling assessed values, rising delinquency rates, or municipal budget deficits. Therefore, a G.O. issued by a city with a rising tax rate is not the best choice for this retired conservative investor.
To be considered a special tax bond, a bond may be secured by all of the following taxes EXCEPT a) Gasoline. b) Income. c) Ad valorem. d) Sales.
c) Ad valorem. Ad valorem" taxes are taxes that are based on the value of something, such as property taxes, and are therefore not considered to be a special tax bond.
The federal funds rate has been increasing consistently over the last several months. This would indicate which of the following? a) The prime rate will decrease. b) The Federal Reserve Board will increase reserve requirements. c) Banks are having trouble meeting reserve requirements. d) Money market interest rates will decrease.
c) Banks are having trouble meeting reserve requirements. Federal Reserve member banks charge each other the Fed funds rate for overnight loans to meet their reserve requirement. If this rate is rising, it indicates greater loan demand among Fed member banks to satisfy the reserve requirement.
The responsibility of a broker/dealer's cashiering department is all of the following EXCEPT a) Delivering and receiving securities from other broker/dealers. b) Handling loans from banks on hypothecated securities. c) Handling the execution of a customer's orders. d) Transferring customers' securities.
c) Handling the execution of a customer's orders. A cashier handles money and securities for the firm and does not handle the execution of a customer's orders.
Characteristics of U.S. Treasury bills include I. Being offered and traded at a discount from face value. II. Being quoted on a yield basis. III. Being exempt from state income taxes. IV. Maturing 1 to 10 years from their issue date. a) I, II & III only b) I, II, III & IV c) I & III only d) II & IV only
c) I & III only U.S. Treasury bills are sold at a discount. They mature in 4, 13, 26, or 52 weeks. They are quoted on a yield basis and the interest paid is exempt from state income taxes.
A customer shorts 1 XYZ October 50 put for 2 and buys 1 XYZ October 60 put for 7. He will experience a profit from this position if: I. Both puts are exercised; II. The premium difference narrows to less than $5 per share; III. The premium difference widens to more than $5 per share. a) II only b) I and II c) I and III d) I only
c) I and III The position is a debit put spread. Debit profits from exercise and premiums widening.
Concerning the valuation of a variable annuity, which of the following are true? I. The value is expressed in units, similar to mutual fund shares. II. Units are revalued daily similar to mutual fund shares. III. The number of annuity units increases during the accumulation phase. IV. The value of a unit varies with the performance of the separate account. a) I only b) I, II and III c) I, II, and IV d) II, III, and IV
c) I, II and IV Units are valued daily similar to mutual funds and vary with the performance of the portfolio in the separate account. In the accumulation phase, units are referred to as accumulation units. A fixed number of annuity units are determined upon the annuitization of the contract.
Which of the following should a prospective investor use to evaluate a direct participation program? I. The adequacy of capital II. Its rate of return compared with those of other DPPs III. Its economic viability IV. The past history of its general partners a) II & III b) III & IV c) I, II, III & IV d) I & IV
c) I, II, III & IV In evaluating a DPP, the investor should consider the following factors: adequacy of capital, the rate of return compared to other DPPs, the DPP's economic viability, and the past history of the DPP's general partners.
If the yield curve is inverted, I. Short-term yields are less than long-term yields. II. Short-term yields are higher than long-term yields. III. Investors are lengthening maturities in their portfolios. IV. Investors are shortening maturities in their portfolios. a) I and II b) I and III c) II and III d) II and IV
c) II and III In an inverted curve, short-term rates are temporarily higher than long-term rates. Because of the inverted curve's uncertainty, investors move from short-term to long-term yields.
Prior to writing an option in a newly-opened account, which of the following must be completed and delivered? I. Options agreement II. Margin agreement III. Options disclosure IV. Margin disclosure a) I and II b) I and III c) II and III d) II and IV
c) II and III The hypothecation (margin) agreement must be completed prior to the first margin trade, and writing an option is a short sale on margin. The options disclosure document must also be sent. The options agreement needs to be signed only after 15 days of account opening, and margin disclosure is with the opening of the margin account, not the first trade.
Which of the following statements about the Maintaining Qualifications Program (MQP) is true? a) Continuing education must be completed every 2 years. b) It requires participants to take the related qualification exam within 2 years of registration termination. c) It allows participants to requalify for registration without sitting for an examination. d) It does not require continuing education.
c) It allows participants to requalify for registration without sitting for an examination. The Maintaining Qualifications Program (MQP) allows terminated representatives or principals to maintain their qualification for the terminated registration beyond the current 2-year qualification period if certain eligibility conditions are met. The terminated individual must fulfill an annual continuing education requirement.
Confirmations of transactions in a margin account in which the broker/dealer acts in an agency capacity must contain all of the following EXCEPT a) Trade date and settlement date. b) Whether the trade was a purchase or sale. c) Margin deposit required. d) Delivery and payment instructions.
c) Margin deposit required. The dollar amount of the purchase or sale is required, but not the margin deposit needed.
All the following receive copies of an order ticket, buy or sell, EXCEPT a) Purchase and sales. b) Order or wire department. c) Operations department. d) Margin department.
c) Operations department. The operations department is back office and issues, confirms, but does not receive order tickets, which are front office.
In the sale of a new issue of municipal securities, MSRB disclosure requirements specify that a customer must be provided with a copy of the a) Official notice of sale. b) Legal opinion. c) Preliminary official statement. d) Feasibility study.
c) Preliminary official statement. Preliminary official statements are as good as final official statements and constitute prospectus-like risk disclosure.
If certain requirements are met, a corporation can offer securities sold within the borders of one state using the intrastate offering exemption, also known as a) Regulation D. b) Rule 144. c) Rule 147. d) Regulation A.
c) Rule 147. SEC Rule 147 is the intrastate offering exemption. Certain requirements must be met with regard to the company's assets, revenues, and proceeds. Also, 100% of the purchasers must be principal residents of the state.
Under the "wash sale" rule, a loss on the sale of a security is deferred if, within a period beginning 30 days before the sale and ending 30 days after the sale, a customer effects which of the following transactions which remain unexercised involving that security? a) Sells a call b) Buys a put c) Sells a put d) Buys a call
c) Sells a put Sell a put, and if unexercised, collect premium for a gain while attempting to deduct a capital loss.
A customer has requested that an account be opened for trading options. Which of the following would the registered representative do in addition to mailing out the options agreement form? a) Complete a customer suitability form b) Consult the ROP c) Send an options disclosure document d) Obtain the approval of a manager or principal
c) Send an options disclosure document Suitability is already determined at account opening, and the ROP (registered options principal), upon approving the account, would instruct you to send out the options disclosure document.
All of the following are contained in a fund's prospectus EXCEPT a) Method of calculating the fund's net asset value. b) The fund's policy concerning loans. c) The fund's current portfolio of securities. d) Methods of redemption.
c) The fund's current portfolio of securities. The current holdings in a portfolio are included in the fund's semi-annual reports to shareholders, not in the prospectus. Funds must send annual and semi-annual reports to shareholders.
Which of the following is a characteristic of Build America Bonds (BABs)? a) Issuers may be entitled to a tax credit. b) Capital gains are tax-free. c) Their interest is taxable. d) Their proceeds fund debt refinancing.
c) Their interest is taxable. Build America Bonds (BABs) are issued by municipalities to finance public projects, such as bridges and highways. Interest is taxable. BABs provide either a federal subsidy to the issuer or a tax credit to in the investor. Capital gains on ALL municipal bonds, including BABs, are taxable
A client has 200 shares of common stock that have a current market value of $35 and 10 mortgage bonds at par value. Supposing the value of the stocks and bonds increased by 1⁄2 point, what would be the increase in the value of the holdings? a) $50 b) $105 c) $110 d) $150
d) $150 Remember, the value of a point on a stock is $1 and the value of a point on a bond is $10. This means that 1⁄2 point on a stock is equal to $0.50 and that 1⁄2 point on a bond is equal to $5. In this question then, the 200 shares are now worth $100 more and the 10 bonds are now worth $50 more for a combined total of $150
A customer purchased 100 shares of a listed stock for $10 a share on August 4, 2016. On April 22, 2017, he sold the stock for $25 a share. If the customer is in the 33% income-tax bracket, what is the amount of tax liability on this transaction? a) $168 b) $240 c) $420 d) $495
d) $495 $2,500 proceeds - $1,000 cost = $1,500 short-term gain. This is a short-term gain since the long-term holding period is more than 12 months for securities purchased after 12/31/87. 33% x $1,500 = $495 tax.
What is the holding period to determine long-term capital gains? a) 1 year plus 1 day from settlement date b) 1 year from trade date c) 1 year from settlement date d) 1 year plus 1 day from trade date
d) 1 year plus 1 day from trade date If the holding period is 1 year or less, it is considered a short-term capital gain. If the holding period is 1 year and 1 day or longer, it is considered long-term capital gain.
Current interest on municipal bonds is generally calculated using the day count basis most commonly referred to as a) Actual/360. b) Actual/Actual. c) Actual/365. d) 30/360
d) 30/360 Accrued interest calculations on corporate and municipal bonds use a 30-day month and a 360-day calendar year. U.S. government securities use actual calendar days.
A coffee producer, an OTC traded company, did an add-on offering to update its roasting facility and expand into the tea market. The prospectus must be delivered within a) 30 days of the registration date. b) 90 days after the effective date. c) 25 days of the effective date. d) 40 days of the effective date.
d) 40 days of the effective date. Non-NASDAQ OTC issuers must deliver a prospectus for 90 days after the effective date in an IPO, and 40 days from the effective date for APOs.
A customer buys 1 ABC January 50 call at 1.50 when the stock is at 47.50. The customer's breakeven point will be reached when the stock is at a) 46. b) 48.50. c) 49. d) 51.50.
d) 51.50. Breakeven on a call is the strike price plus the premium, or, in this case, $51.50 ($50 + $1.50). The market price would have to go above $51.50 for the customer to have a profit.
Which of the following coupon rates, maturity dates, and yields to maturity would result in the lowest dollar price of a municipal bond? a) 4.80% due in 2 years at a 7.00 b) 6.60% due in 15 years at an 8.10 c) 12% due in 20 years at an 11.50 d) 7% due in 30 years at a 9.60
d) 7% due in 30 years at a 9.60 Look for the bond with the largest difference between the YTM and the nominal yield (i.e. the steepest teeter-totter). 4.80% due in 2 years at a 7.00 has a difference of 2.2; 6.60% due in 15 years at an 8.10 has a difference of 1.5; 12% due in 20 years at an 11.50 has a difference of 0.5; and 7% due in 30 years at a 9.60 has a difference of 2.6. The bond price for 7% due in 30 years at a 9.60 will be the lowest.
Under Reg S-P, a broker/dealer's procedures to safeguard its customers' personally identifiable information (PII) must provide for each of the following EXCEPT a) The customer must be given the opportunity to opt out of any disclosure of PII to nonaffiliated parties. b) The broker/dealer is not required to give the customer an opt-out option regarding sharing of PII with its affiliates. c) The broker/dealer's responsibility to protect customers' PII extends to the personal equipment (such as laptops and cell phones) of its associated persons. d) A notice to the customer describing the firm's privacy procedures must be sent with the first statement of activity in the account.
d) A notice to the customer describing the firm's privacy procedures must be sent with the first statement of activity in the account. Remember that we are looking for the EXCEPTION. The initial privacy notice describing the firm's related procedures must be provided at the time a customer relationship is established, which may be well before an initial transaction or the first customer statement showing activity in the account. As soon as the firm obtains the PII for a new customer, the rule would be in effect. In addition, customers must be provided with an annual privacy notice.
An investment company can perform certain activities only with the approval of a majority of the shareholders. Which of the following is the board of directors allowed to do WITHOUT a shareholder vote? a) Change the fund's investment objectives b) Approve investment advisory agreements c) Change the fees d) Appoint officers of the investment company
d) Appoint officers of the investment company Explanation: The board is elected by the shareholders, but the board has the authority to appoint officers to perform the company's activities.
A registered representative wants to increase his sales and decides to increase his option business. He sends a letter to all of his customers discussing covered call writing, but he makes no specific recommendations. When must the OCC Disclosure Statement be delivered? a) At or prior to the opening of the account b) At or prior to account approval c) Within 15 days after the account has been approved for option writing d) At or prior to the time the client receives the letter
d) At or prior to the time the client receives the letter The options disclosure document must be sent prior to or upon sales literature being sent.
If a Customer Relationship Summary (Form CRS) is required, when must it be provided to the customer? a) After recommending the purchase of a specific investment b) Within 3 days of placing an order c) Within 7 days of opening a rollover IRA account d) Before or at the time of entering into an investment advisory agreement
d) Before or at the time of entering into an investment advisory agreement The Customer Relationship Summary (Form CRS) must be provided before or at the time of entering into an investment advisory agreement with a registered investment adviser (RIA) and when a broker/dealer recommends an account type, a security or an investment strategy; placing an order; or opening a brokerage account.
A confirmation of a purchase by a customer in which the firm acted as a principal with securities sold from inventory must contain which of the following items? a) The firm's inventory position in the security b) Markup over the inter-dealer offer price c) Markup over the price at which the dealer obtained the security d) Best available price in the inter-dealer market
d) Best available price in the inter-dealer market The confirmation on a purchase by a customer in which the firm acted as principal must show the markup per share over the best available price in the inter-dealer market at the time of the trade. The remaining choices are not required. When the trade is from the firm's inventory, the dealer's cost is not relevant to the customer.
Which of the following statements is true regarding SIMPLE plans? a) The employer cannot contribute to the plan. b) The employer can contribute up to 5% of the employee's annual compensation. c) The employee cannot contribute to the plan. d) Contributions and earnings are tax-deferred until funds are withdrawn.
d) Contributions and earnings are tax-deferred until funds are withdrawn. Under SIMPLE plans, participating employees may defer up to a specified amount each year, and the employer can then contribute up to an amount equal to 3% of the participating employees' annual compensation. Contributions and earnings are both tax deferred until funds are withdrawn.
The primary responsibility for the payment of principal and interest on an industrial revenue bond issue rests with the a) Bond counsel. b) Issuer. c) Trustee. d) Corporate lessee.
d) Corporate lessee. The corporate lessee pays debt service on a facility lease from the municipality.
Minimum margin on municipal bonds is determined by the a) Broker/dealer. b) Federal Reserve Board. c) MSRB. d) FINRA.
d) FINRA. The FINRA determines minimum margin, but the broker/dealer may require a higher margin. Municipals are exempt from SEC and Federal Reserve Board jurisdiction.
Which of the following is traded on the NYSE AMEX? a) ELKS b) TANs c) STRIPs d) HOLDRs
d) HOLDRs HOLDRs trade on the NYSE AMEX and allow investors to trade one security representing a bucket of stocks in one sector.
The 1934 Act anti-fraud provisions prohibit I. Indicating to customers that an all or none municipal underwriting is a firm commitment. II. Using a manipulative technique to reduce the price of a municipal security. III. Selling serial municipal issues short. IV. Omitting material information about a municipal issue from a dealer's offering schedule. a) I, II, III & IV b) I & IV c) II & IV d) I, II & IV
d) I, II & IV There is no prohibition against selling municipal issues short; however, the anti-fraud rules in the Securities Exchange Act of 1934 do prohibit telling customers that an all or none municipal underwriting is a firm commitment, using manipulative techniques to reduce the price of an equity security, and omitting material information about a municipal issue from a dealer's offering schedule.
A client of yours joins a limited partnership with an investment of $10,000 in cash, and also signs a recourse loan for $40,000. Which of the following are true concerning the client's tax status? I. Cost basis is $10,000. II. Cost basis is $50,000. III. Tax deduction limit is $10,000. IV. Tax deduction limit is $50,000. a) I and III b) I and IV c) II and III d) II and IV
d) II and IV When the client invests $10,000 in the partnership, basis is $10,000. When the client later signs the recourse loan for $40,000, which adds $40,000 of liability if the partnership ever defaulted on the loan, the basis is adjusted to $50,000. According to the at risk limitation, the IRS stipulates that you may only deduct up to the amount of your basis, so the client's tax deduction limit is $50,000.
A grandfather wants to select an annuity settlement option that will provide the best benefit to both his son and granddaughter. What annuity type would best suit his needs? a) Life income only b) Life income period certain c) Joint annuity in the names of both his son and granddaughter d) Joint and last survivor
d) Joint and last survivor The joint and last survivor annuity would make payments to the son and then the granddaughter as long as one of them survives.
A customer bought 100 shares of XYZ at 48. Within 31 days she sold her shares at 41. She then, within 30 days, wrote an XYZ May 40 put. How can she avoid deferral of her tax loss? a) Exercise the put. b) Allow the put to expire. c) Repurchase the put. d) Nothing. The loss will be deferred.
d) Nothing. The loss will be deferred. By writing a put within 30 days of a sale for a loss, she committed a wash violation, since writing a put with its duty to buy is repurchase of the substantially identical security.
Regulation S addresses a) Extension of credit. b) Boundaries between underwriting and sales departments. c) Private issuance of unregistered securities. d) Off-shore sales of restricted stock.
d) Off-shore sales of restricted stock. Regulation S addresses off-shore sales of restricted stock and requires a 1-year holding period. Debt instruments sold under Reg S have a holding period of 40 days. Regulation M requires that broker/dealers establish a Chinese wall between underwriting and sales/trading departments. Regulation D relates to the issuance of unregistered, nonexempt securities. Regulation T governs the extension of credit from a broker/dealer to its customers.
Which of the following is true regarding the dividends that a corporation pays? a) The effect on a balance sheet of a stock dividend is the same as that of a stock split. b) A company is required to pay a cash dividend to its common shareholders. c) A growth company is more likely to pay cash dividends than stock dividends. d) The amount of cash dividends that a corporation pays can be a significant determinant of the market value of a stock.
d) The amount of cash dividends that a corporation pays can be a significant determinant of the market value of a stock. Dividends are paid at the discretion of the Board of Directors. Cash dividends will affect the corporation's balance sheet differently than stock dividends. Growth companies are more likely to pay a stock dividend than a cash dividend.
When a customer effects a proceeds transaction, the Five Percent Policy states a) The markup that is charged must be 5% on both the sale and the purchase. b) The markup or commission charged must bear a reasonable relationship to the prevailing inter-dealer quotations. c) The markup is computed as two separate trades. d) The combined proceeds to the broker/dealer on the sale and purchase should not exceed the 5% guideline based on the inside ask on the buy side.
d) The combined proceeds to the broker/dealer on the sale and purchase should not exceed the 5% guideline based on the inside ask on the buy side. A proceeds transaction is one in which the proceeds of a sale are used to make an immediate purchase. FINRA states that the fairness of the markup is based on the combined proceeds to the broker/dealer divided by the inside ask on the buy side, and the broker/dealer should NOT consider these as separate trades but as one combined trade.
#27. The husband of an options clients also trades options, but does so in a separate account at another brokerage firm. Both of them are currently hedging short sale positions in stock VVV with options. However, the options client is long 32,000 VVV calls, while her husband is short 30,000 VVV puts. The current contract position limit for VVV stock is 60,000 contracts. Which of the following applies to this situation? a) The position limit rules apply to institutional but not individual investors. b) The position limit rules do not apply to this couple because they trade options in separate accounts at different firms. c) This couple's current options positions are not in violation of the position limit rules. d) This couple's current options positions are in violation of the position limit rules.
d) This couple's current options positions are in violation of the position limit rules. The options exchanges impose limits on the maximum number of puts and calls on a given security that may be held or written on the same side of the market by a single investor or group of investors acting in concert or under common control. These limits apply to all investors, including institutions. Married couples are viewed as acting in concert or under common control, and as such are subject to the limits even if they maintain options accounts at different brokerage firms. In this case, a violation would occur if the couple exceeded the 60,000 contract position limit for VVV stock with combined positions on the same side of the market - that is, on the bull or bear side of the market. The long calls and short puts they own are both bullish. And since they have a combined 62,000 contracts on the bull side of the market, they are in violation of the position limit rules.
XYZ stock is trading at $1.25 per share. With Reg T at 50%, what is the required deposit to sell short 10,000 XYZ @ $1.25 per share? a) $50,000 b) $6,250 c) $12,500 d) $25,000
d)$25,000 For stocks under $2.50 per share, the Rule is $2.50 per share. 10,000 x 2.50 = $25,000.
Who of the following would be considered a restricted person that is associated with an IPO? a)A registered representative's cousin b)A new registered representative's grandparents c)An uncle of a registered representative d)A broker/dealer not involved in the syndicate
d)A broker/dealer not involved in the syndicate FINRA Rule 5130 states that broker/dealers and associated persons are not allowed to purchase IPOs from a syndicate. The broker/dealer's involvement in the syndicate is irrelevant. This restriction extends to a registered representative's in-laws, siblings, children, parents and spouses. Aunts, uncles, cousins and grandparents are excluded. Additionally, anyone financially supported by the registered representative or associated person is also a restricted person.
