Series 7 Finals: Missed Questions

In an underwriting, which of the following is earned by a syndicate member who sells the issue directly to the public? A. Underwriter's Concession B. Selling Concession C. Spread D. Management Fee

A

An investor believes that interest rates will be flat or falling into the future; and that prices may deflate. The MOST appropriate investment is: A. Long term U.S. Government bonds B. Real estate C. Gold D. Large Capitalization stocks

A. In periods of deflation, interest rates fall. A fixed income security's price will go up as interest rates fall. Furthermore, since prices are deflating, the fixed interest payments received are able to buy more and more over time. This is the best investment choice. In times of deflation, real estate prices fall; as do gold prices. Stock prices tend to fall as well, since companies are forced to cut their prices to maintain sales volume.

Two unrelated persons (Person A and Person B) come into your branch office to open a new account. They tell you that the funds are being deposited by Person A, who will be the owner of the account, and that Person B wants to be able to trade the account. They also tell you that only 1 social security number is to be used on the account. How should the account be opened? A. Individual account in the name of Person A with a Third Party Trading Authorization granted to Person B B. Individual account in the name of Person A with Transfer On Death registration naming Person B as the beneficiary C. Joint Account with Rights of Survivorship in the names of Person A and Person B D. The account should not be opened and you should contact your firm's SAR officer to report suspicious activity

A. Since Person A is the owner of the account, this will be an individual account, using the social security number of Person A for tax reporting. A Third Party Trading Authorization naming Person B as authorized to trade the account, signed by Person A, meets the requirement for Person B to be authorized to trade the account. An Individual Account held TOD does not give Person B trading authority. A Joint Account with Rights of Survivorship gives each person 100% ownership of the account, and this account is only owned by Person A, and not Person B. Choice D is simply garbage.

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

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

Which of the following pay quarterly dividends? A. ADRs B. Bonds C. Preferred stock D. Rights

A. The best answer is A. American Depositary Receipt holders receive quarterly dividends, just like common stockholders. Preferred holders are typically paid semi-annually. Holders of warrants and rights do not receive dividends on these instruments. Only if these are exercised, resulting in the purchase of the common shares, would dividends be received. Bondholders receive interest - a legal obligation to pay on the part if the issuer. They do not received dividends, which are paid to stockholders only if the Board of Directors declares the dividend.

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

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

Treasury bills: I are issued in minimum $100 denominations II are issued in minimum $10,000 denominations III mature at par IV mature at par plus accrued interest A. I and III B. I and IV C. II and III D. II and IV

A. Treasury bills are original issue discount obligations that mature at par, in minimum denominations of $100 each.

A hospital has been financed through a revenue bond issue containing a Net Revenue Pledge. Prior to paying Debt Service, all of the following expenses would be deducted by the issuer EXCEPT: A. Depreciation and amortization B. Garbage disposal costs C. Wages D. General expenses

A. Under a Net Revenue Pledge, operation and maintenance is funded before Debt Service is paid. This is accounted for on a cash basis. Thus, operating costs such as garbage disposal transport, wages, and general and administrative costs are funded before monies go to pay Debt Service. Depreciation and amortization are non-cash expenses and are not counted.

A corporation issues $100 par convertible preferred stock, convertible at $50 per share when the market price of the common is $30. The preferred is issued under an "anti-dilutive covenant." If the company declares a 25% stock dividend, which statements are TRUE? I The conversion price is adjusted to $40 II The conversion price is adjusted to $62.50 III The conversion ratio is adjusted to 2.5:1 IV The conversion ratio is adjusted to 1.6:1

A. I and III The best answer is A. Under an "anti-dilutive" covenant, if there is a stock split or stock dividend resulting in the issuance of additional common shares, the conversion price and hence the conversion ratio are adjusted to reflect the fact that the market price of each common share will drop on the ex date. Prior to the stock dividend, the conversion price was $50 per share. If there is a 25% stock dividend, the new conversion price will be adjusted to $50/1.25 = $40 per share. Since each preferred share is $100 par, the new conversion ratio will be $100/$40 = 2.5:1.

A delivery versus payment transaction would be used by a(n): A. retail customer B. institutional customer C. pattern day trading customer D. portfolio margin account customer

B Regulation T does not cover "delivery versus payment" transactions. These are specified by mutual funds when they purchase securities. The fund specifies that the securities be delivered to the fund's custodian bank, which is authorized to pay upon delivery. FINRA requires that the funds to pay be on deposit at the custodian bank "promptly" (the same as the wording of Regulation T) and also requires that the transaction be settled no later than 35 days from trade date.

A customer asks his broker the following "Who are all those people that I see trading on the NYSE floor on television?" As a broker, you could tell him that: I the individual stationed at each trading post is a market maker in the stock known as the Specialist (DMM) II the individual stationed at each trading post is a trader known as a floor broker III individuals that come to the trading post at any moment to execute orders received from customers are Specialists/DMMs IV individuals that come to the trading post at any moment to execute orders received from customers are Floor Brokers A. I and III B. I and IV C. II and III D. II and IV

B.

Trades of foreign currency options take place: A. in the Interbank Market B. on the Philadelphia Stock Exchange C. on the Chicago Board Options Exchange D. on the American Stock Exchange

B. Trading of foreign currency options in the United States takes place only on the Philadelphia Stock Exchange. (Do not confuse this with the futures market for trading of foreign currency futures and options on futures.)

A customer account holds the following: 10% Market Index-Linked CDs 20% Plain Vanilla CMOs 20% ACME Drug Company shares 10% REITs 25% Health Care Sector ETFs 15% Growth Fund Shares This portfolio is MOST susceptible to which risk? A. market risk B. business risk C. interest rate risk D. purchasing power risk

B. This portfolio is concentrated in the Health Care sector, with 25% of the portfolio being in Heath Care ETFs and 20% in a drug company. A portfolio concentrated in one stock or industry is susceptible to business risk - the risk that the business may turn sour. For drug companies, this can result from existing profitable drugs losing patent protection, so prices and profitability drops; class-action lawsuits for selling dangerous drugs, etc.

Under Rule 144, the Form 144 is filed: I by the seller of the restricted shares II by the buyer of the restricted shares III 10 business days prior of the placement of the order IV at, or prior to, the placement of the order A. I and III B. I and IV C. II and III D. II and IV

B. I and IV The Form 144 is simply a notification to the SEC that stock will be sold in compliance with the Rule - the SEC does not approve of the sale. The Form must be filed by the seller at, or prior to, with the placement of the sell order.

Stopping stock is allowed only for: A. dealer orders B. member orders C. public orders D. agent orders

C.

All of the following items are included as deductible passive losses on the income tax returns of limited partnership investors EXCEPT: A. depletion allowances B. intangible drilling costs C. principal payments on secured debt D. interest payments on secured debt

C. Interest payments on loans, intangible drilling costs (the cost of drilling for oil and gas), and depletion allowances (the recovery of monies paid to buy the oil or gas reserve) are all tax deductible items under the Internal Revenue Code since they are "ordinary and necessary business expenses." Repayment of principal on a loan is not tax deductible.

Under the terms of a municipal revenue bond trust indenture, any funds that are appropriated for additions and improvements are required to be deposited to a(n): A. sinking fund B. escrow fund C. renewal and replacement fund D. reserve maintenance fund

C. By definition, any funds to be used for betterments, additions, or improvements to a revenue producing facility would be deposited to a renewal and replacement fund.

A 65-year old retired teacher living on a pension has $200,000 invested in 2 year certificates of deposit that are yielding 4%. $20,000 of the CDs are maturing and the customer wants to diversify into an investment that gives a higher return and a moderate level of risk. The BEST recommendation would be: A. High yield corporate bonds B. Treasury strips C. Equity REITs D. Income bonds

C. Equity REITs tend to pay a high dividend yield, since they are structured to generate net rental income. Because the underlying real estate investments are diversified, the risk level is moderate. This is the best of the choices offered. High yield bonds (junk bonds) have a very high risk of default and thus are unsuitable. Treasury Strips are zero-coupon Treasuries that do not provide current income and thus are unsuitable. Finally, Income bonds only pay interest if the issuer has high enough net income, so there may not be any "income."

All of the following are "front end" fees that are deducted from the gross investment made in a limited partnership EXCEPT: A. legal and accounting fees B. organization costs C. cost of selling partnership units D. operating costs

D.

John and Joe are successful business associates and have been good friends for many years. John has an options account at BD "A," while Joe has his options account at BD "B." John and Joe have given each other full power of attorney over their respective accounts. John and Joe have been discussing ABCD stock and they are both bullish. John buys 150,000 ABCD call contracts in his account at BD "A." Joe buys 175,000 ABCD call contracts in his account at BD "B." The position limit for ABCD is 250,000 contracts. Which statement is TRUE about their actions? A. This is not a violation of position limits because the positions were taken in accounts at different broker-dealers B. This is not a violation of position limits because the positions were initiated by 2 different persons C. This is not a violation of position limits because John and Joe have a power of attorney over each other's account D. This is a violation of position limits

D.

To satisfy MSRB disclosure requirements for new municipal issues, a customer would be provided with a copy of the: A. indenture B. official notice of sale C. feasibility study D. official statement

D.

Which of the following options communications must be approved by the designated Registered Options Principal prior to use? I Advertising II Sales literature III Independently prepared reprints A. I only B. I and II C. II and III D. I, II, III

D.

Which of the following quotes are found in the Pink Sheets? I Firm Bid II Firm Ask III Bids Wanted (BW) IV Offers Wanted (OW) A. I and II only B. III and IV only C. I and III only D. I, II, III, IV

D.

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

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

Aggregate contributions into 529 plans are: A. subject to dollar limits at both the federal and state level B. not subject to dollar limits at either the federal or state level C. only subject to dollar limits at the federal level D. only subject to dollar limits at the state level

D. There is no aggregate contribution limit on the amount that can be invested in 529 plans at the federal level; though most states have such limits (the intent is that the dollar amount is enough to meet reasonable higher education expenses, but not more than that amount). Also note that gifts given into a 529 plan will be subject to gift tax paid by the donor if they exceed the annual federal gift tax exclusion amount - $15,000 in 2020.

ABC Corporation has recently completed a $20,000,000 offering of 10% debentures due in 2035. Each bond was sold with a warrant attached that allows the holder to buy 10 shares of ABC common stock at $50 per share. The market price of ABC is currently $42. Which statement(s) are TRUE? I The warrants help to increase the issue's marketability II The warrants help to lower the interest cost on the issue III The warrants are "under water" IV The company will raise an additional $10,000,000 if the warrants are exercised

D. I,II,III,IV Warrants are "sweeteners" that are attached to bond and preferred stock offerings to make them more marketable. Because the warrants have potential value, the issue can typically be sold at a lower interest cost (higher price) than if the warrants were not attached. At issuance, the warrants are usually issued "out the money" - as in this example the warrants allow the stock to be purchased at $50 but the stock's current value is $42. Thus, these warrants are said to be "under water" and will not have real value until the stock price rises above $50. If the warrants are exercised, the 20,000 debentures issued ($20,000,000/ $1,000 par) can be converted into 10 shares of stock each for a total issuance of 200,000 shares. The company will receive $50 per share, for a total of $10,000,000.

Restricted securities can be sold under Rule 144 if all of the following conditions are met EXCEPT: A. they are sold on a dealer basis B. they are sold on an agency basis C. solicitation of orders to buy is restricted to customers expressing interest within the past 10 days D. the issuer is reporting currently to the SEC

The best answer is A. Rule 144 requires that restricted securities be sold on an agency basis only. Your firm cannot act as a market maker in "144" shares. Solicitation of orders to buy "144" shares is prohibited (to stop you from soliciting potential customers to buy 144 shares, which would tend to push the price up). However you are allowed to recontact individuals expressing buying interest in "144" transactions within the past 10 days. Since 144 shares are being sold in the open market, the issuer must comply with SEC issuer reporting rules to maintain the public market in the securities.

Under FINRA rules, a written power of attorney is required for a registered representative to choose which of the following order related items? I Security to be traded II Size of the order III Price of Execution IV Time of execution A. I and II B. III and IV C. I, II, III D. I, II, III, IV

The best answer is A. A registered representative can always pick the time and price of execution of an order without requiring a written power of attorney from the customer. However, if the registered representative selects the size of the trade and/or the security to be traded, then the trade is "discretionary" and requires a written power of attorney from the customer.

In order to independently verify the identity of a corporation that wishes to open a brokerage account, which documentation is acceptable? I Certified articles of incorporation II Better Business Bureau membership certificate III State-issued business license IV State-issued driver's license of each corporate officer A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. To verify the identity of a corporation that wishes to open an account, government issued identification is required to perform the match. This would take the form of the company's certified articles of incorporation (which are certified by the state); or a state issued business license. The Better Business Bureau is a private entity, so a membership certificate from the BBB cannot be used for the match. The driver's license of each corporate officer does not prove the existence of the corporation, so these are of no use either.

A 25-year old single client has just started his own small business and is not covered by a retirement plan. He has $5,000 to invest and currently has a low level of income. He wishes to start saving for retirement. The BEST recommendation is a: A. Roth IRA B. SIMPLE IRA C. Traditional IRA D. Roth 401(k)

The best answer is A. Anyone with earned income can open an IRA. Because this individual is in a low tax bracket, a Roth IRA contribution, which is non-deductible, makes sense (there is no real benefit from making a deductible contribution to a Traditional IRA). With $5,000 to invest, this is within the $6,000 contribution limit for 2020. Earnings build "tax-free" in a Roth, and distributions taken at retirement age are non-taxable. Also remember that high-earners cannot open a Roth IRA. In contrast, if a Traditional IRA were opened, this individual would get a tax deduction (he is not covered by another qualified plan), but it would have little value because of his low tax bracket. Earnings would build tax deferred and when distributions are taken at retirement age, they would be taxable, so the Roth is the better deal. A 401(k) is an employer-sponsored salary reduction plan under ERISA that requires major paperwork to establish. It allows a contribution of up to $19,500 in 2020, far more than the $5,000 this individual has to invest. This is not suitable for a very young single person starting a small business. A SIMPLE IRA is another qualified retirement plan that is "simpler" to set up than a 401(k), and that is only available to businesses of 100 or fewer employees. It allows for a larger deductible contribution than an IRA ($13,500 in 2020), which is more than this person needs. Also, it is still not as easy to set up as an IRA.

Individual Retirement Account contributions can be made with: A. Cash B. Exempt Securities C. Non-Exempt Securities D. All of the above

The best answer is A. Contributions to an IRA can only be made with cash. Once the cash is deposited, it can be used to purchase any type of qualified investments (bank certificates of deposit, securities, U.S. minted gold coins, and precious metals).

All of the following statements are true about commercial paper EXCEPT commercial paper: A. is a funded debt of the issuer B. matures on a pre-set date and at a pre-set price C. is quoted on a yield basis D. is an unsecured promissory note

The best answer is A. Corporate "funded debt" represents long term debt financing of a corporation with at least 5 years to maturity. Since commercial paper has a maximum maturity of 270 days, it is not a funded debt. Commercial paper is quoted on a yield basis; matures at a pre-set date and price; and is an unsecured promissory note of the issuer.

What is the main objective of investing in Equity REITs? A. Income and growth B. Capital appreciation and stability C. Tax deductions and tax credits D. Speculation and aggressive gains

The best answer is A. Equity REIT investments typically generate good dividend income, because the REIT distributes most of the net rental income to shareholders. In addition, if real estate prices appreciate, there can be capital gains. Thus, Choice A is the best one offered

A customer buys a municipal bond in the primary market at a discount. Which of the following statements are TRUE regarding the discount and the tax consequence? I The discount must be accreted II The discount may be accreted at the option of the bondholder III If the bond is held to maturity there is no taxable capital gain IV If the bond is held to maturity, there is taxable capital gain A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. If a customer buys a new issue municipal bond at a discount, the discount must be accreted. Every year, a portion of the discount is "earned" and is taxed as interest income. In this case, since municipal issues are exempt from Federal income tax, no tax is due. As the bond is accreted, its cost basis is increased yearly by the accretion amount. At maturity, the bond's cost basis has been accreted to par. Since it is redeemed at par, there is no capital gain or loss at maturity.

A technical analyst has been charting the price movements of ABC stock. The stock has been fluctuating in price between $56 and $61 per share for the past 3 months. If the analyst expects a breakout through the resistance level, which order should be placed? A. Buy ABC @ $62 Stop GTC B. Buy ABC @ $62 GTC C. Buy ABC @ $61 Stop GTC D. Buy ABC @ $57 Stop GTC

The best answer is A. If a stock moves through a resistance level, it is breaking out to the upside. In this example, the resistance level is at $61. If the stock moves through this price, it is expected that it will move sharply upward. To buy above the current market, a buy stop order must be used. Therefore, the order to buy ABC @ $62 Stop GTC is appropriate. Once the long stock position is established, the customer believes the price will skyrocket, so that it can be sold at a higher price for a profit. A buy limit order cannot be used, since these are orders to buy lower than the current market.

A technical analyst has been charting the price movements of ABC stock. The stock has been fluctuating in price between $37 and $45 per share for the past 3 months. If the analyst expects a breakout through the support level, which order should be placed? A. Sell (Short) ABC @ $36 Stop GTC B. Sell (Short) ABC @ $37 Stop GTC C. Sell (Short) ABC @ $44 Stop GTC D. Sell (Short) ABC @ $46 Stop GTC

The best answer is A. If a stock moves through a support level, it is breaking out to the downside. In this example, the support level is at $37. If the stock moves through this price (by going below it), it is expected that it will move sharply downward. To sell below the current market, a sell stop order must be used. Therefore, the order to sell (short) ABC @ 36 Stop GTC is appropriate. This would be a short sale (the sale of borrowed shares), so that these shares could be purchased at a lower price after the market drops and used to cover the short position at a profit. A sell limit order cannot be used, since these are orders to sell higher than the current market.

The use of index funds as investment vehicles for asset classes increases: A. diversification B. expected rate of return C. standard deviation of return D. market risk

The best answer is A. Index funds are broadly diversified, since they hold all of the securities in the designated index. This reduces market risk or the standard deviation of returns. The impact of diversification on rate of return should be one of lowering the rate of return compared to the market average, along with lowering the risk associated with that rate of return.

Primary offerings of agency securities are made at: A. par B. par plus a commission C. par plus a mark-up D. par plus a selling concession

The best answer is A. Primary offerings of agency securities to the public are made at par. The selling concession is paid to the selling group members by the agency issuing the security. The concession is paid out of the proceeds of the offering.

Which of the following statements are TRUE about a stock trade effected "for cash" in a margin account? I Payment is required in part II Payment is required in full III Settlement occurs the same business day IV Settlement occurs in 2 business days A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Trades effected for cash settle the same day. If the trade is effected in a margin account, partial payment is required on settlement. If the trade is effected in a cash account, payment is required in full on settlement.

Which statements are TRUE regarding the annuitization of a variable annuity contract? I A Life Annuity payout option may be elected by the policy holder II Life Annuity-Period Certain is the preferred payout option III The number of annuity units is fixed; the annuity payment may vary IV The annuity payment is fixed; the number of annuity units may vary A. I and III B. II and III C. I and IV D. II and IV

The best answer is A. Variable annuity contracts allow the holder to elect a payout option that meets that person's individual requirements. The statement that a life annuity-period certain is a preferred payout option is erroneous - the choice of payout method depends on the needs of the annuitant. Once the contract is annuitized, the number of annuity units is fixed. However, the value of each unit varies with the performance of the underlying securities, hence the monthly annuity payment may vary.

Which of the following information would be found in a municipal bond resolution? I Any restrictive covenants to which the issuer must adhere II Any call provisions providing for redemption prior to maturity as specified in the contract III The credit rating assigned to the issue by a nationally recognized ratings agency IV The compensation received by the underwriters for selling the issue to the public A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is A. The Bond Resolution is the contract between the issuer and the bondholder. In the resolution will be found all covenants made by the issuer, including any call provisions. The credit rating is given by the ratings agencies (e.g., Moody's or Standard and Poor's); and is found in their publications. The underwriter's compensation is disclosed to investors in new negotiated municipal bond offerings in the Official Statement (the disclosure document, similar to a prospectus, for new municipal issues).

In a limited partnership investment, the cross-over point will occur as the program's: A. income increases at a faster rate than losses B. losses increase at a faster rate than income C. investments increase in market value at a faster rate than their tax basis D. investments increase in tax basis at a faster rate than their market value

The best answer is A. The cross-over point in a tax advantaged investment is the point where income begins to exceed losses; so that no tax "shelter" is left. The cross-over point happens when either income increases from the program; or tax deductions fall off from the program (or some combination of both). When a program "crosses-over," the general partner may refinance any outstanding debt to a larger principal balance to increase interest deductions; and can return the extra cash borrowed to the partners as a cash distribution. Or the general partner can invest in more properties that will generate losses.

The market maker on the CBOE gives the following quotes: Bid Ask ABC Jan 50 Call 4 / 4.50 ABC Jan 50 Put 2 / 2.50 ABC Jan 60 Call 2 / 2.25 ABC Jan 60 Put 8 / 8.50 A customer wishes to buy 5 ABC Jan 50 Calls and sell 5 ABC Jan 60 Calls, but does not wish to spend more than $3 for each combined position; and wants the orders executed as close together as possible. The appropriate order that should be placed is: A. a spread order B. a straddle order C. 1 limit order to buy and 1 limit order to sell D. 1 market order to buy and 1 market order to sell

The best answer is A. This customer is specifying that a spread be purchased at a net debit not to exceed $3. The successful execution of this order requires that both "legs" of the spread be executed at the same time within the customer's limit (the debit). To facilitate the handling of such "one-on-one" orders (the same is also true for straddle and combination orders), the CBOE has the "spread priority rule." This rule states that a spread, straddle or combination order has priority over equivalent single sided orders on the trading floor. In this manner, it is easier for traders to successfully execute spread, straddle and combination orders. In this example, the Jan 50 Call is purchased at the ask price of $4.50; and the Jan 60 Call is sold at the bid price of $2; creating a debit of $2.50 for the spread position.

The Specialist (DMM) accepts which of the following orders on his book? A. Day B. Good Through Week C. Good Through Month D. Good Til Canceled

The best answer is A. The Specialist (now called the DMM - Designated Market Maker) only accepts "Day" orders on his book. If a customer wants an order with a longer "Time in Force," the member firm accepts it into its own internal system and feeds it to the exchange as a new order each day, until either the order expires or the "Time in Force" expires.

A technical analyst who monitors stock advances against declines subscribes to the: A. Odd Lot Theory B. Breadth of Market Theory C. Dow Theory D. Efficient Market Theory

The best answer is B. An analyst who charts advances relative to declines is measuring the "breadth" of the market movement as an indicator of future market direction.

A 60-year old widow is looking for an investment that will provide safety of principal and a moderate level of income. All of the following recommendations are suitable EXCEPT a(n): A. Income mutual fund B. Income bond C. U.S. Government bond D. U.S. Government bond fund

The best answer is B. An income bond is a corporate bond that only pays interest if the corporation earns enough income - so this certainly does not meet the widow's requirement for income. Income mutual funds invest in a diversified portfolio of high interest paying bonds and high dividend paying stocks - this is suitable. U.S. Government bonds or funds holding these securities, provide both income and safety, and thus are suitable as well.

If a corporation has an unfunded pension liability which of the following statements are TRUE? I The expected payments from the retirement plan are in excess of the expected future assets in the plan II The expected payments from the retirement plan are lower than the expected future assets in the plan III The plan is in default and must be liquidated by the trustee IV The trustee must ensure that future funding is adequate A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. An unfunded pension liability means that expected payments from the retirement plan are in excess of the expected future assets in the plan. It is common for defined benefit pension plans to be underfunded, but the plan trustee is responsible to ensure that future funding is adequate as needed.

The measure of stock price volatility relative to the market is: A. alpha B. beta C. delta D. sigma

The best answer is B. Beta measures a security's volatility relative to the market. Alpha measures the risk peculiar to an individual security.

A customer, age 69, has never invested in securities. She is retired with no dependents, living on a fixed pension of $35,000 per year. She has a savings account with $160,000 and her home is fully paid. She desires to supplement her retirement income, assuming minimal risk. The BEST recommendation would be for the customer to invest $100,000 of her cash savings into a(n): A. variable annuity contract B. CMO planned amortization class tranche C. SPDR D. income (adjustment) bond

The best answer is B. CMO planned amortization classes give a good yield that is 50 or so basis points higher than equivalent maturity Treasuries and are extremely safe. These meet the customer's objective of additional income with low risk. Since this customer is only earning $35,000 per year, she is in a low tax bracket - making tax-deferred variable annuities unattractive. SPDRs - Standard and Poor's 500 Depository Receipts are an exchange traded fund that consists of equities - which don't provide much income. Income bonds only pay interest if the corporation has enough "income" - so these are not appropriate either.

If a person under the age of 59 1/2 becomes disabled and wishes to withdraw money from her IRA, which statements are TRUE? I The withdrawal is subject to income tax II The withdrawal is not subject to income tax III The withdrawal is subject to a 10% penalty tax IV The withdrawal is not subject to a 10% penalty tax A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Distributions from tax qualified pension plans such as IRAs and Keoghs prior to age 59 1/2 are subject to regular tax plus a 10% penalty tax, unless the person dies or is disabled. If a person is disabled, withdrawals prior to age 59 1/2 are subject to regular income tax but are not subject to the 10% penalty tax.

Currently, the yield curve is ascending. A customer believes that the Federal Reserve will start to tighten credit by raising short-term interest rates; and also believes that long term yields will move downwards from current levels because of record demand for long-term Treasury obligations by pension funds. To profit from this, the best recommendation would be to: A. buy short term T-Bills and sell long term T-Bonds B. sell short term T-Bills and buy long term T-Bonds C. buy short term T-Bills and buy long term T-Bonds D. sell short term T-Bills and sell long term T-Bonds

The best answer is B. If short term interest rates are expected to rise, then short-term fixed income security prices will fall, so the customer will want to sell these (establishing a short position). If long term interest rates are expected to fall, then long-term fixed income security prices will rise, so the customer will want to buy these (establishing a long position).

A couple has 15 years to retirement. They currently have $100,000 to invest and have expressed a concern about inflation eroding their future retirement income. The BEST recommendation would be to: A. dollar cost average by investing $3,000 a month into 5 different growth funds and when 100 shares are accumulated in any single fund, stop making purchases and use that money to make a bond investment B. dollar cost average by investing $3,000 a month into a single growth fund and choose automatic reinvestment of distributions C. invest $3,000 a month in long term Treasury bonds using Treasury Direct to eliminate transaction fees D. invest $90,000 into a REIT that holds its properties for an average of 15 years and put $10,000 into a money market fund

The best answer is B. If the client is concerned about inflation, then a Treasury Bond investment is inappropriate. Fixed income securities lose real value if there is inflation. A Real Estate Investment Trust usually invests in commercial rental properties. These can be an inflation hedge as real estate values tend to go up with inflation, but they are not as good as growth stocks. Using dollar cost averaging to invest in growth funds, spreading the investment over an approximate 3 year time frame would allow the couple to make their investment while minimizing "timing risk" - which is simply the risk of making an investment just before the market dumps. Furthermore, putting the money into 1 growth fund gets breakpoints (reduced sales charges) as the investment accumulates in the fund. Splitting the investment among 5 different income funds is simply a way of increasing sales charges to customers because then they would not get the benefit of a breakpoint as quickly, since each fund counts separately. This is an illegal practice.

A corporation has issued $100 par, 8% convertible preferred stock, callable at par. The preferred is convertible into 1.4 shares of common stock. Currently, the preferred stock is trading at $104 while the common stock is trading at $71.50. The corporation calls the preferred stock at par. To realize the largest profit, a customer holding 100 shares of preferred stock should: A. tender the preferred shares at the call price B. sell the preferred shares at the current market price C. sell short the common stock and convert the preferred for delivery to cover the short D. continue to hold the preferred shares

The best answer is B. If the preferred shares are tendered at the call price, the owner receives $100 per share. Since par ($100) was paid for each share, there is no profit. If the preferred shares are sold at the current market price of $104, the owner has a profit of $4 per share. Since each preferred share is convertible into 1.4 common shares, the short sale (sale of borrowed shares) of 1.4 common shares will yield 1.4 x $71.50 = $100.10. The preferred can then be converted to common to cover the borrowed short position. This results in a $.10 profit per share. Thus, selling the preferred is the best choice. Continuing to hold the preferred does not make sense since dividend payments will cease. For this reason, buying additional preferred shares does not make sense either.

In determining whether there has been a violation of position limits, long puts will be aggregated with: I Long Straddles II Short Calls III Short Puts A. I only B. II only C. III only D. I, II, III

The best answer is B. Long puts and short calls constitute the "down" side of the market. Long calls and short puts constitute the "up" side of the market. Position limits are applied to each "side" of the market.

A corporation has issued 20,000,000 shares of common stock at $2 par. The corporation has 5,000,000 shares of Treasury Stock on its books. The aggregate value of the outstanding shares is: A. $10,000,000 B. $30,000,000 C. $40,000,000 D. $50,000,000

The best answer is B. Outstanding stock is: Issued stock (20,000,000 shares) - Treasury stock (5,000,000 shares) = 15,000,000 shares outstanding at $2 par = $30,000,000 value.

All of the following statements are true regarding overnight repurchase agreements EXCEPT: A. the investment has no liquidity risk B. the investment has no interest rate risk C. interest rates charged are most similar to the Federal Funds rate D. the issuer loses control of the underlying securities for the duration of the agreement

The best answer is B. Overnight repurchase agreements are typically effected between government securities dealers. A dealer who needs cash will "sell" some of its inventory overnight to another dealer, with an agreement to buy the position back the next day. The difference between the sale price and the repurchase price is the interest earned. There is virtually no liquidity risk, since the loan is of the shortest term and is secured by pledged government securities. The interest rate on such agreements generally parallels and is somewhat lower (since the loans are secured) than the Fed funds rate, since overnight loans using government securities are most similar to overnight loans of reserves (Fed Funds) from bank to bank. Since government securities are pledged as collateral, the dealer gives up custody of the securities overnight.Repos do have interest rate risk, relating to the underlying securities. If interest rates rise, the underlying securities can decline in value. Since the maturity of the underlying securities can be of any length, long maturity values may decline more than the accrued interest to be earned on the agreement. When the borrower of the funds buys back the securities the next day at the pre-agreed price, it buys back securities at more than they are worth! If the borrower of the funds defaults, the lender can sell the collateral - but it will still be worth less than the original loan amount!

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

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

If a customer sells short a security that is on the "threshold list" and the member firm fails to deliver the security on settlement, the: A. customer's account will be frozen for 90 days B. security must be bought-in no later than 13 consecutive settlement days from trade date C. customer's account must be restricted under Regulation T D. customer's margin requirement will be increased from 50% to 100% of the sale amount

The best answer is B. Regulation SHO requires that if a security that is on the exchange's "threshold list" (list of hard-to-borrow securities) is sold short and the seller fails to deliver on settlement, then the member firm must buy-in the position no later than 13 consecutive settlement days from trade date.

A customer buys 1 ABC Jan 60 LEAP Call @ $8 that has 24 months left until expiration in a margin account. Regulation T requires that the customer deposit: A. $400 B. $600 C. $800 D. $6,000

The best answer is B. Regulation T sets the initial margin requirement to buy LEAP options with over 9 months to expiration at 75% of the purchase amount. 75% of $800 = $600 margin requirement.

If the actual interest rate earned in the separate account underlying a variable annuity contract is lower than the "AIR," the annuity payment: A. will increase B. will decrease C. is unaffected D. is fixed at a minimum amount

The best answer is B. The "AIR" is the "Assumed Interest Rate." This is used as an illustration of the annuity payment that will be received if the separate account grows at the AIR. If the assets grow at an interest rate that is higher than the AIR, then the annuity payment will increase. Conversely, if the assets grow at an interest rate that is lower than the AIR, then the annuity payment will decrease.

If a municipal securities firm is subject to a 2-year ban under MSRB Rule G-37, it would be permitted to: A. act as a financial advisor to that municipality during the period of the ban B. place a bid for a competitive offer of general obligation bonds being sold at auction by that issuer C. negotiate with the issuer to be the underwriter on a revenue bond offering D. do none of the above

The best answer is B. The 2-year ban applies to engaging in municipal securities business with that issuer. Municipal securities business includes acting as a financial advisor to that issuer or performing negotiated underwritings for that issuer. It does not include competitive bid underwritings because "favoritism" does not decide the outcome of the auction. Rather, the lowest interest rate bidder wins.

The Dow Jones Transportations Average consists of which of the following? A. 15 stocks B. 20 stocks C. 30 stocks D. 65 stocks

The best answer is B. The Dow Jones Averages consists of 65 stocks - 30 industrials, 20 transportations and 15 utilities. Thus, the Dow Jones Transportations Average has 20 stocks.

Under Rule 144, a customer wishing to sell must file the 144 "Notice of Sale" with the SEC: A. 10 business days prior to the placement of the sell order B. at, or prior to, the placement of the sell order C. 10 business days after the placement of the sell order D. 90 days after the placement of the sell order

The best answer is B. The Form 144 is simply a notification to the SEC that stock will be sold in compliance with the Rule - the SEC does not approve of the sale. The Form must be filed by the seller at, or prior to, with the placement of the sell order.

Many years ago, a customer bought 1,000 shares of XYZ stock at $40 per share. The company spins off a subsidiary to its shareholders, and the customer gets 100 shares of PDQ stock as a result. On the first day of trading after the spin off, PDQ closes at $20, while XYZ closes at $50. The customer will have a: A. $40,000 cost basis in XYZ and a $2,000 cost basis in PDQ B. $38,000 cost basis in XYZ and a $2,000 cost basis in PDQ C. $50,000 cost basis in XYZ and a $2,000 cost basis in PDQ D. $48,000 cost basis in XYZ and a $2,000 cost basis in PDQ

The best answer is B. The aggregate cost basis does not change in a spin-off. The original cost basis in XYZ stock is $40,000. After the spin off, the customer gets 100 shares of PDQ, with a $20 per share value = $2,000. This is the PDQ cost basis, and it comes out of the XYZ cost basis. $40,000 XYZ cost basis - $2,000 PDQ cost basis = $38,000 adjusted XYZ cost basis.

A customer residing in Connecticut that is in the 20% Federal tax bracket and the 5% State tax bracket wishes to make a bond investment with a minimum 10-year life. The customer also wants a high level of safety. The following 10-year bonds are available: Yield AAA Corporate Bond 5.50 U.S. Treasury Bond 4.00 AAA Federal Home Loan Bank Bond 4.50 AAA Connecticut Bond 3.50 The best recommendation for the customer is the: A. U.S. Treasury bond B. AAA Corporate bond C. AAA Connecticut bond D. AAA Federal Home Loan Bank bond

The best answer is B. The rules on taxation of interest income received, generally, are:Treasury/Agency Issues: Interest is subject to Federal Income tax, but is exempt from State and Local taxMunicipal Issues: Interest is exempt from Federal Income tax, and exempt from State and Local tax when purchased by a resident of that stateCorporate Issues: Interest is subject to Federal Income tax, and to State and Local tax If the customer buys the Treasury bond yielding 4.0%, 20% of the yield will go to the Federal Government, so the after-tax yield is (.8 x 4.00%) = 3.20%. If the customer buys the Federal Home Loan Bank bond yielding 4.50%, 20% of the yield will go to the Federal Government, so the after-tax yield is (.8 x 4.50%) = 3.60%. If the customer buys the Corporate bond yielding 5.50%, 20% of the yield will go to the Federal Government and 5% to the State Government, so the after-tax yield is (.75 x 5.50%) = 4.125%. If the customer buys the Municipal bond yielding 3.50%, there is no tax on the income received at either the Federal or State level, so the after-tax yield is 3.50%.

An 80-year old client lives on his social security payments that total $25,000 per year. 3 years ago, on the advice of the broker, he invested in a technology fund where he lost most of his assets. The remaining balance in his brokerage account is $17,000. The client has annual living expenses of $30,000 and a net worth of $128,000. The customer approaches a new broker to take over management of his account. The representative that receives the account should: A. do nothing B. sell the holding in the account and invest the proceeds in a more conservative fund within the same family of funds C. sell the holding in the account and invest the proceeds in a more conservative fund outside the family of funds D. sell the holding in the account and invest the proceeds in a more conservative fund that has a deferred sales charge

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

Which of the following statements are TRUE about CMOs in a period of falling interest rates? I CMO prices rise slower than similar maturity regular bond prices II CMO prices rise faster than similar maturity regular bond prices III The expected maturity of the CMO will shorten due to a slower prepayment rate than expected IV The expected maturity of the CMO will shorten due to a faster prepayment rate than expected A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. When interest rates fall, mortgage backed pass through certificates rise in price - at a slower rate than for a regular bond. This is true because when the certificate was purchased, assume that the expected life of the underlying 15 year pool (for example) was 12 years. Thus, the certificate was priced as a 12 year maturity. If interest rates fall, then the expected maturity will shorten, due to a higher prepayment rate than expected. If the maturity shortens, then for a given fall in interest rates, the price will rise slower.

A hospital revenue bond issue is being underwritten on a negotiated basis. The offering consists of $20,000,000 par value of term bonds. The underwriter has agreed to a spread of $30.00 for each $5,000 bond. The manager has set the additional takedown at $12.00 per bond and the selling concession at $15.00 per bond. If a selling group member sells a $5,000 par value bond directly to the public, the selling group member earns: A. $12.00 B. $15.00 C. $27.00 D. $30.00

The best answer is B. If a selling group member sells a bond to the public, he earns the selling concession of $15.00.

A hedge fund manager has a large short position in 30-year Treasury Bonds. The manager is concerned that market interest rates are going to fall, causing Treasury Bond prices to rise. To hedge the short Treasury Bond position, the manager should: A. Buy TYX Calls B. Buy TYX Puts C. Sell TYX Calls D. Sell TYX Puts

The best answer is B. If market interest rates fall, bond prices rise. To hedge using an interest rate index option (here, the contract is the 30-year Treasury Bond yield index), the contract must offer an offsetting profit during a period of falling interest rates - so buy TYX puts. These give ever-increasing profit as market interest rates fall, offsetting the ever-increasing loss that would be incurred on the short Treasury Bond position rising in value as market interest rates keep falling. Note that selling TYX calls would also be profitable in a falling interest rate environment, because the calls would expire "out the money" and the premium would be earned. However, the premium earned is a fixed amount and if market interest rates fall steeply, this would not offset the loss due to rising prices experienced on the short Treasury Bond position. Finally, index options are "cash settled," so the hedge here is that any loss on the short Treasury Bond position would be offset by a corresponding gain on the long interest rate index put position.

A customer has combined margin account that shows the following: Long: $20,000 of ABC stock Debit:$8,000 Short:$30,000 of XYZ stock Credit:$48,000 If no other activity occurs in the account, the account will show a current SMA balance of? A. 0 B. $5,000 C. $8,000 D. $10,000

The best answer is B. The customer has the following long position: Long Market Value $20,000 / Debit $8,000 / Equity $12,000 / SMA $2,000 The customer could borrow 50% of the $20,000 LMV equals a potential debit of $10,000. Because the customer has borrowed only $8,000, the customer can borrow $2,000 more. This is the SMA in the long account. The customer established the following short position: Credits $48,000 / Short Market Value $30,000 / Equity $18,000 / SMA $3,000 The required equity for the short account to be at 50% is 50% of $30,000 SMV = $15,000. This account has $18,000 of equity, so there is excess equity of $3,000 that can be borrowed. This is the SMA. The total SMA in the account is: $3,000 + $2,000 = $5,000.

Which statements are TRUE regarding Step-Down Certificates of Deposit? I Initial payments are made at an interest rate that is above the market rate II Initial payments are made at an interest rate that is below the market rate III At a predetermined time, the interest rate is increased to a rate that is at, or above, the market IV At a predetermined time, the interest rate is decreased to a rate that is at, or below, the market A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. This question boils down to the fact that you don't get something for nothing. With a step-down CD, you start with a higher-than-market "teaser" rate. This is used as an incentive to the client to buy the CD. Then, at a predetermined date, the rate steps down to a lower rate, and this rate is usually a bit lower than the market rate at that time, so that, on average, the investor will still earn the market rate over the life of the CD.

Regarding leveraged limited partnerships, which statement is TRUE regarding the liability of the limited partner(s)? A. The investor is liable solely for the cash investment B. The investor is liable for non-recourse financing C. The investor is liable for recourse financing D. The investor has unlimited liability

The best answer is C. A leveraged limited partnership uses debt financing to acquire assets, in addition to the funds contributed by the partners. The partners are liable for recourse financing. In a recourse note, each limited partner is personally responsible for his portion of that loan. Partners are not liable for non-recourse financing. In a non-recourse financing, such as a mortgage, the lender only has claim to the financed asset - not to the limited partners. Thus, if the loan turns sour, the lender can foreclose on the property, but cannot go after the limited partner's assets. To summarize, in a leveraged limited partnership, the partner can lose his cash investment plus his portion of recourse financing.

An issuer is required to make an 8K filing with the SEC for which of the following events? I Election of new members of the Board of Directors II Declaration of bankruptcy III Declaration of a cash dividend IV Proposal of a merger with another corporation A. II and III only B. I and IV only C. I, II, and IV D. I, II, III, IV

The best answer is C. An 8K filing with the SEC is required by a corporation if a "major event" happens at the company. These include if there is a change in the composition of the Board of Directors; if the company declares bankruptcy; if there is a major acquisition or divestiture of assets; if the company proposes a merger; or if any other major corporate event occurs. The notice must be filed no later than 4 business days after the event.

A firm's research department issues a research report on ABC Corp. and changes its recommendation from "Reduce" to "Accumulate." Based on this information a registered representative calls all his clients and tells each one to: "Use all available cash to buy as much ABC Corp. stock as you can immediately." This action by the registered representative is: A. appropriate since the recommendation is based on the firm's research B. appropriate only if the proposed investment is not too risky for the customer C. not appropriate because it induces the customer to invest beyond his financial capacity D. not appropriate because it makes a recommendation based on inside information

The best answer is C. First of all, making the same recommendation to every customer is a prohibited practice. A recommendation can only be made based upon a suitability determination specific to that client. Second, it would not be appropriate to use "all available cash to buy as much of the stock as possible" because this would concentrate the customer's exposure to potential loss on that one specific stock position ("capital risk").

An investor holds 1 ABC Jan 80 Call. ABC splits 2 for 1. On the ex date, the holder will have: A. 1 ABC Jan 40 Call B. 1 ABC Jan 80 Call C. 2 ABC Jan 40 Calls D. 2 ABC Jan 80 Calls

The best answer is C. For whole share splits, the number of contracts is increased and the strike price is reduced proportionately. 1 ABC Jan 80 Call becomes (after the 2 for 1 split) 2 ABC Jan 40 Calls (the new strike price is 80/2), with each contract covering 100 shares. Note that the aggregate exercise value of the contracts remains unchanged.

A customer is short 100 shares of DEF stock at $35 per share. The stock goes up to $50 and the customer covers the position. If, 30 days later, the customer decides to re-establish this short position when the market for DEF is $48, which statement is TRUE? A. The cost basis is $33 per share B. The cost basis is $48 per share C. The sale proceeds are $33 per share D. The sale proceeds are $63 per share

The best answer is C. In this transaction, the customer is attempting to take a loss and then reestablish the position. Under the "wash sale" rule, the loss deduction is disallowed if the position is reestablished within 30 days of the date the loss was generated. In this case the customer originally sold short the stock at $35. The stock was repurchased at $50, for a $15 loss per share ($1,500 loss on 100 shares). Then, the customer sold short another 100 shares 30 days later at $48 - exactly the 30 day limit set by the "wash sale" rule. Thus, the $1,500 loss is disallowed. (If the customer had waited for 31 days until reestablishing the short position, the rule would not apply!) The $15 per share loss will be deducted from the sale proceeds of $48, for a new sale proceeds of $33. In essence, this defers the taking of the loss until this short position is covered.

A customer has an existing combined margin account that shows the following positions: Long: 2,000 ABC @ $5 Short: 2,000 XYZ @ $5 Debit Balance: $5,000 Credit Balance: $15,000 The minimum maintenance margin requirement for this account is: A. $4,000 B. $5,500 C. $12,500 D. $15,000

The best answer is C. Minimum maintenance margin in a long margin account is 25% of market value. The long market value is $10,000, so minimum maintenance is 25% of $10,000 = $2,500. For the short position, minimum maintenance is usually 30% of $10,000 = $3,000 minimum. However, in this case, the stock is too "cheap" and special minimums apply. To short a $5 stock, $5 minimum margin is required (greater of 30% or $5 per share for stocks worth $5 and up). 2,000 shares at $5 minimum = $10,000 minimum margin for the short position. The total minimum maintenance margin requirement is: $2,500 + $10,000 = $12,500.

Two years ago, an individual had invested $5,000 in a mutual fund. Over the two years, the fund has distributed $100, consisting of $75 of dividends and $25 of capital gains. The investor has reinvested these distributions in additional shares of the fund. The investor's aggregate current cost basis in the fund is: A. $5,025 B. $5,075 C. $5,100 D. $5,225

The best answer is C. This investor had a beginning basis of $5,000. Over the two years, the $100 of distributions received were all subject to tax on those years' tax returns. The reinvestment of these monies into new fund shares increases the basis from $5,000 to $5,100. The investor will have a capital gain if he or she sells all the shares for more than $5,100. He or she will have a capital loss if the sale proceeds are less than $5,100.

Which of the following can open a joint account without restriction? A. Parent and minor B. Guardian and custodian C. 3 limited partners D. Registered representative and client

The best answer is C. Minors cannot participate in a joint account - the only way to open an account for a minor is via a custodial, guardian, or trust account. A guardian and a custodian cannot open a joint account as such - the custodian opens an account for the benefit of the designated minor; the guardian opens the account for the benefit of the designated person whose assets need to be protected. A registered representative and a client cannot open a joint account unless the firm approves; and profit and loss is shared in proportion to capital contributed. As a practical matter, almost all firms prohibit such sharing outright. 3 limited partners could open a joint account (they could also open a partnership account).

Which of the following statements are TRUE about municipal dollar bonds? I Dollar bonds are traded in the secondary market II Dollar bonds are quoted on a yield to maturity basis III Dollar bonds are usually term issues IV Dollar bonds can be a component of a large combination serial and term municipal offering A. I and II only B. III and IV only C. I, III, IV D. I, II, III, IV

The best answer is C. Municipal dollar bonds are term issues that are quoted on a dollar basis. They are usually part of large combined serial and term bond offerings made by municipal issuers. These bonds are traded in the secondary market. Only serial bonds are quoted on a yield basis - dollar bonds, as their name implies, are quoted on a dollar price basis.

When a customer buys a new stock issue from a syndicate member, the customer pays: A. the public offering price as stated in the prospectus plus a commission B. the public offering price as stated in the prospectus plus a mark-up C. the public offering price as stated in the prospectus without any commission D. any price since this is a negotiated market offering

The best answer is C. New stock issues are sold under a prospectus that states the Public Offering Price which is inclusive of any compensation to the underwriter (the spread). Additional commissions or charges above the P.O.P. are not allowed.

Issuers of Federal tax exempt commercial paper include: I Corporations II Federal Government III Municipal Governments

The best answer is C. Only municipal issues are exempt from Federal income tax on interest income. Corporate and U.S. Government debt interest income is subject to Federal income tax.

A customer buys 100 shares of ABC at $90, depositing the Regulation T requirement. She holds the position for two months, during which $100 of interest is charged on the debit balance. What is the adjusted debit balance at the end of the two month period? A. $4,400 B. $4,500 C. $4,600 D. $8,900

The best answer is C. Since the customer bought $9,000 worth of stock, she deposited $4,500 with margin at 50% and borrowed $4,500 (the debit). Interest is charged on the debit, just as interest is charged on a Mastercard loan. The interest is added to the loan amount, reducing the equity in the account. Since $100 of interest was charged, the new debit balance is $4,600.

A variable annuity prospectus includes an AIR illustration using a 5% rate. This means that the: A. purchaser is guaranteed a minimum 5% annual return B. annuity payment is guaranteed to grow at a minimum of 5% per year C. return could be less than 5% D. sales charge will be no higher than 5%

The best answer is C. The AIR in a variable annuity prospectus is the "Assumed Interest Rate." It is a conservative illustration of how much the contract holder will receive in payments if the separate account grows at the AIR. If the account grows faster than the AIR, the payments increase. If the account grows slower than the AIR, the payments will decrease.

A customer sells 1 ABC Jan 85 Put @ $6 and buys 1 ABC Jan 75 Put @ $2 when the market price of ABC is $83. The customer must deposit: A. $200 B. $400 C. $600 D. $1,000

The best answer is C. The customer has created a credit spread:Sell 1 ABC Jan 85 Put@ $6Buy 1 ABC Jan 75 Put@ $2$4CreditThe customer receives $400 in premiums for exposing himself to a potential 10 point ($1,000) loss on the options (he is obligated to buy at $85 under the short put; and can sell at $75 with the long put). The potential loss must be deposited, which is $1,000 - $400 collected = $600.

A customer buys 10 OEX Feb 600 Calls with 24 months to expiration @ $6 in a margin account when the OEX is at 601. The customer must deposit: A. $450 B. $600 C. $4,500 D. $6,000

The best answer is C. The margin requirement to buy LEAP options with over 9 months to expiration is 75%. 75% of $600 premium per contract = $450 margin requirement per contract x 10 contracts = $4,500 deposit.

A "reallowance" is a discount given to a: A. syndicate member B. selling group member C. non-member of the underwriting "group" D. retail customer

The best answer is C. The reallowance is the discount from the public offering price given to a firm that is not in the syndicate or selling group. It is very small and many underwritings do not include it if the underwriting group is expected to sell out the issue without any problems.

Which of the following are TRUE statements regarding the activities of the registrar? I The registrar cancels old shares II The registrar transfers shares to new owners III The registrar accounts for the number of shares issued IV The registrar keeps the integrity of the shareholder record A. I and II B. II and IV C. III and IV D. I, II, III, IV

The best answer is C. The transfer agent cancels old shares and issues new shares, keeping a record of current shareholder names and addresses. The registrar ensures that all shares are properly accounted for and also verifies the integrity of the record of shareholders' names and addresses.

A customer purchases $100,000 of corporate bonds at 40% in a margin account. The customer must deposit: A. $2,000 B. $7,000 C. $8,000 D. $20,000

The best answer is C. There is no Regulation T. requirement for corporate bonds because the Federal Reserve is not "worried" about these. The only margins are the minimums set by the exchanges. The minimum maintenance requirement set by FINRA is the greater of 7% of face amount or 20% of market value. The bonds are purchased at 40% of $100,000 par = $40,000. 20% of $40,000 = $8,000. 7% of $100,000 face = $7,000. The greater amount is $8,000.

Monetary policy is set by: A. Supreme Court decisions B. Congressional action C. Presidential edict D. Federal Reserve action

The best answer is D. Monetary policy is set by the Federal Reserve Board. The Federal Reserve can either tighten; or loosen; credit by using any of its 4 tools, which can be memorized as "DORM." D is Discount rate; O is Open Market Operations; R is Reserve Requirements; and M is Margin on securities.

In an existing margin account with no SMA, a customer sells short 100 shares of ABC stock at $50 and sells 1 ABC Jul 50 Put @ $6. The customer must deposit: A. $400 B. $1,600 C. $1,900 D. $2,500

The best answer is C. To short the stock, Regulation T initial margin is 50% of $5,000 = $2,500. The short stock position covers the short put, so no margin is required to sell the put. Since $600 in premiums is received in the account from selling the put, the net deposit is $2,500 - $600 = $1,900. Because this is an existing account, the customer must already be meeting the minimum maintenance requirement and thus, his deposit can be less than $2,000.

A customer purchases a stock. Two years later, he sells his stock position at a loss. Under the "Wash Sale Rule," the loss will be disallowed if the customer, within 30 days of the sale: I buys a call option on that stock II sells a call option on that stock III buys a put option on that stock IV sells a "deep in the money" put option on that stock A. I or II B. III or IV C. I or IV D. II and III

The best answer is C. Under the wash sale rule, if a stock is sold at a loss and is then repurchased within 30 days of the sale date, the loss deduction is disallowed. It is disallowed if the customer buys an equivalent security, such as a convertible, call option, right or warrant. Furthermore, instead of buying the stock or an equivalent, if the customer sells a put that is "deep in the money," the contract is virtually guaranteed to be exercised prior to expiration - forcing the customer to buy the stock. Tax rules state that the sale of the "deep in the money" put is essentially the same as buying the stock, and the loss deduction is disallowed. Please note that if the put was sold "at the money," there would be no certainty of exercise forcing the customer to buy back the stock. In this case, the "Wash Sale Rule" does not apply.

Which of the following are determining factors when making a competitive bid for municipal issues? I Maturities of the bonds II Yields in the market III Type of bonds IV Amount of good faith check A. I and III B. II and IV C. I, II, III D. I, II, III, IV

The best answer is C. When making a bid for an issue, municipal underwriters would consider the maturities of the bonds; current yields in the market; and the type of bonds being offered. The amount of the good faith check has no bearing on the bid. (Remember that in a competitive bid underwriting, the underwriter bids in terms of interest rate, with the lowest interest rates winning the bid. This is the lowest net interest cost to the issuer.)

A customer opens a new margin account with the following position: Market Value: $100,000 Debit Balance: $50,000 If the market value goes up to $120,000, how much is there in SMA, if any? A. 0 B. $5,000 C. $10,000 D. $20,000

The best answer is C. For every $1 increase in market value in a long margin account, the SMA goes up by $.50. If the market value rises to $120,000, the account will show:

All of the following securities are redeemable EXCEPT: A. Common stock mutual funds B. Bond mutual funds C. Corporate debentures D. Series HH bonds

The best answer is C. Mutual funds - common stock and bond funds - are redeemable securities which do not trade. Savings bonds (Series EE and HH) sold by the U.S. Government are redeemable securities. There is no trading in these issues. To "cash out," they are redeemed with an agent for the Government - a bank or savings and loan. Corporate debentures are negotiable (tradeable) - they cannot be redeemed with the issuer. They trade OTC and on exchanges.

ABC corporation has 100,000,000 shares outstanding. An officer of ABC wishes to sell ABC stock on November 15th under Rule 144. The prior weeks' trading volumes are: Week Ending Volume Nov. 12th 1,500,000 shares Nov. 5th 1,200,000 shares Oct. 30th 800,000 shares Oct. 23rd 600,000 shares Oct. 16th 400,000 shares If the Form 144 had been filed the preceding week, the maximum permitted sale is: A. 500,000 shares B. 750,000 shares C. 1,000,000 shares D. 1,025,000 shares

The best answer is C. Rule 144 allows the sale of the greater of 1% of the outstanding shares or the weekly average of the preceding 4 weeks trading volume every 90 days. 1% of 100,000,000 shares = 1,000,000 shares. If the Form 144 was filed the preceding week, then the week ending November 12th would not yet have occurred. The 4 weeks' trading to be averaged are: Nov. 5th Oct. 30th Oct. 23rd Oct. 16th 1,200,000 shares 800,000 shares 600,000 shares 400,000 shares 3,000,000 shares/ 4 weeks = 750,000 share average The greater amount is 1% of outstanding shares, or 1,000,000 shares.

A customer establishes a combined margin account by purchasing $30,000 of ABC stock and selling short $40,000 of XYZ stock, depositing the Regulation T requirement. Subsequently, the market value of the ABC position increases to $45,000, while the market value of the XYZ position decreases to $25,000. If no other activity occurs in the account, the account will show a current SMA balance of? A. $7,500 B. $15,000 C. $30,000 D. $45,000

The best answer is C. The customer established the following long position: If the market value rises to $45,000, the account will now show: For every $1 increase in market value in a long account, the SMA increases by $.50. If the market value increases by $15,000, SMA goes up by 1/2 that or $7,500. The customer established the following short position: If the market value falls to $25,000, the account will now show: For every $1 decrease in market value in a short account, the SMA increases by $1.50. If the market value declines by $15,000, SMA goes up by 1.5 times that amount, or $22,500. The total SMA balance is: $7,500 + $22,500 = $30,000.

CLOSED END BOND FUNDS Fund Net Asset Value / Stock Close / NAV Change Acco $8.32 8.13 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 A customer who places an order to buy 100 shares of Acme Fund will pay approximately: A $990 B$1,025 C$990 plus a commission D$1,025 plus a commission

The best answer is D. Closed-end funds are listed on an exchange and trade like any other stock. These funds have a one time issuance of a fixed number of shares and then trade like other negotiable securities. A customer who buys will pay the current market price plus a commission. The last price for Acme Fund is $10.25, so 100 shares will cost $1,025 plus a commission.

Contributions to Keogh Plans must be made by: A. December 31st of the calendar year in which the contribution may be claimed on that person's tax return B. December 31st of the calendar year after which the contribution may be claimed on that person's tax return C. April 15th tax filing date of the calendar year after which the contribution may be claimed on that person's tax return D. August 15th tax filing date permitted under an automatic extension of the calendar year after which the contribution may be claimed on that person's tax return

The best answer is D. Contributions to qualified retirement plans (other than IRAs) must be made no later than the date the tax return is filed (even if it is filed with an extension). On the other hand, IRA contributions must be made no later than April 15th of the tax year after the year for which the deduction is claimed.

Which statement is TRUE about the taxation of dividends, interest and capital gains in the separate account during the accumulation phase? A. All dividends, interest and capital gains are taxable in the year received B. Dividends and interest are taxable in the year received; capital gains are tax deferred C. Dividends and interest are tax deferred; capital gains are taxable in the year received D. All dividends, interest and capital gains are tax deferred

The best answer is D. During the accumulation phase of a variable annuity contract, all dividends, interest and capital gains earned from the securities in the separate account must be reinvested and build tax deferred. The tax deferral of the build-up is the major benefit of buying a variable annuity.

All of the following are contrarian market theories EXCEPT: A. short interest theory B. put/call ratio theory C. odd lot theory D. efficient market theory

The best answer is D. Efficient market theory states that markets are "efficient" at pricing stocks and one cannot beat the market over the long term. It is the argument for investing in index funds and ETFs. The short interest theory, put/call ratio theory and odd lot theory are all contrarian theories. The short interest theory states that a very large short interest indicates an "oversold" market - so prices have been pushed too low and the market is ready for a rebound - so this is a bullish indicator. The put/call ratio is the same "idea" as the short interest theory, using the ratio of put contracts issued to call contracts issued. A very high ratio indicates that many more bearish contracts (puts) are being issued than bullish contracts (calls), so this also indicates an oversold market that is ready for a rebound - so it is bullish. The odd lot theory is quite amusing. It states that small investors trade odd lots and small investors are wrong! If there is a lot of odd lot buying, you would sell; and vice versa!

All of the following statements are true about Health Savings Accounts EXCEPT: A. HSAs are only appropriate for those individuals covered by high-deductible health insurance plans B. HSAs can be set up to include dependents of the covered individual C. HSA contributions are tax deductible D. HSA contributions are subject to phase-out when an individual's income exceeds $250,000

The best answer is D. Health Savings Accounts (HSAs) were first authorized by Congress starting in the beginning of 2004. They are a tax advantaged medical savings account that is owned by the individual. They are established by corporate employers as part of their health insurance plans, and only plans that have a high deductible can set up HSAs for employees. More employers are adopting these high-deductible plans coupled with HSAs as a way of reducing, or slowing the growth of, their health insurance expenses. The HSA permits the employer or employee to make a deductible contribution in 2020 of up to $3,550 for a single individual, or $7,100 for a family, to the account. The contribution amount is indexed for inflation annually. The account is invested in a similar manner to an IRA. It grows tax-deferred and withdrawals to pay for qualified medical expenses are tax-free. There are no income phase out rules for HSAs.

All of the following will affect the counting of the holding period of ABC stock, a position that has been held for 6 months, EXCEPT: A. selling ABC "short against the box" B. buying an "in the money" ABC put contract C. buying an "out the money" ABC put contract D. selling an "out the money" ABC put contract

The best answer is D. If a customer goes "short against the box" on a stock position that has been held short term, the holding period of the underlying stock stops counting as of the short sale date. The worry of the IRS is that once the long position has been hedged, the customer will simply wait out the extra time needed to enjoy a long term capital gains holding period, which would be taxed at a lower rate. IRS rules require that if one goes "short against the box," any gain is taxable at that point. Thus, a short term holding period cannot be stretched into a long term holding period. (Note that there is a 15% maximum long term capital gains tax rate if the position is held over 12 months (20% for very high earners); instead of a 37% maximum tax rate for short term capital gains.) If a put is purchased on a stock position that has been held short term, the holding period stops counting and reverts to "0," but no tax is due at that moment. If the stock's price falls, the put will be exercised, and tax is due at that point. If the stock's price rises, the put expires, and the stock is sold in the market. Tax on the resulting higher gain is due at this point. Selling a put has no effect on a long stock position's holding period, since an exercise requires that person to buy more shares (not sell them).

Which of the following actions are likely to cause the value of the U.S. Dollar to rise? I The Federal Reserve lowers the discount rate II The Federal Reserve raises the discount rate III United States investors purchase foreign securities IV Foreign investors purchase U.S. securities A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. If the Federal Reserve raises the discount rate, then interest rates would rise in the U.S. As interest rates rise, so does the U.S. Dollar's value, since dollar denominated investments are more attractive to foreign purchasers. If foreign investors make large purchases of U.S. securities, then they must sell their foreign currency to buy the U.S. dollars needed to pay for that security. As dollars are bought, the value will rise. Conversely, if U.S. investors make large purchases of foreign securities, then they must sell their dollars to buy the foreign currency needed to pay for that foreign security. As dollars are sold, the value will drop.

If the U.S. dollar appreciates against foreign currencies, which statements are TRUE? I U.S. exports should increase II U.S. exports should decrease III Any trade deficit should narrow IV Any trade deficit should widen A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. If the U.S. dollar appreciates against foreign currencies, then U.S. goods become more expensive to foreigners, while foreign goods become cheaper in the U.S. This should cause exports to decrease, and imports to increase. If the U.S. is running a trade deficit, the increase in net imports will widen the deficit.

The BEST investment during a period of high inflation is: A. Common Stock B. Preferred Stock C. 30-Year Bonds D. Money Market Instruments

The best answer is D. In an inflationary period, interest rates will rise dramatically, because the Fed will start tightening credit to get inflation under control. As interest rates rise, both preferred stock and long-term bond prices drop dramatically. Equity securities' prices drop as well, because companies are not able to increases their prices as fast as their costs are rising, so earnings suffer. Money market instruments, on the other hand, do well when short term rates are rising - because they give an increasing rate of return.

A customer, age 51, has a 20 year investment time horizon, a moderate risk tolerance, and is looking for investments that provide both income and growth. The best recommendation would be: A. money market instruments B. mutual funds C. bonds D. large capitalization growth stocks

The best answer is D. Money market instruments are very safe, but provide little income and no growth. These would be recommended to a customer seeking preservation of capital - not to a customer seeking income and growth. Choice B, mutual funds, is too generic to be a valid choice. There are all kinds of mutual funds out there, for all types of investment objectives. Choice C, bonds, is also too generic to be a valid choice. Also, while bonds provide income, they do not provide growth. Choice D, large capitalization growth stocks, is the best one offered. Large capitalization stocks pay dividends for income, and also offer long term growth potential, meeting both of the customer's objectives.

Which of the following options communications sent to more than 25 prospective customers must be approved by the designated Registered Options Principal prior to use? A. Advertising B. Sales literature C. Independently prepared reprints D. All of the above

The best answer is D. Options communications that are distributed to more than 25 existing or prospective clients must be approved in writing prior to use by the designated Registered Options Principal (main office compliance ROP). Retail communications include advertising, sales literature and independently prepared reprints distributed to more than 25 existing or prospective clients. Options institutional sales literature and public appearances are the 2 public communications that do not require designated ROP approval. However, they are subject to the firm's policies and procedures. Options correspondence is a communication to up to 25 existing or prospective clients. It is subject to "post use review and approval" by a branch manager or ROP.

To offer a private placement, which statement is TRUE? A. A registration statement must be filed with FINRA prior to sale B. A registration statement must be filed with the SEC prior to sale C. A registration statement must be approved by the principal of the firm prior to sale D. The offering is exempt, so no registration is required

The best answer is D. Private placements are exempt transactions under the Securities Act of 1933. No registration is required. The issuer must file a Form D with the SEC within 15 days of the offering to claim the exemption. The filing of Form D is not a registration. It simply notifies the SEC that the issue has been offered in compliance with the exemption.

ABC corporation has 18,000,000 shares outstanding. An officer of ABC wishes to sell ABC stock on November 15th under Rule 144. The prior weeks' trading volumes are: Week Ending Volume Nov. 12th 175,000 shares Nov. 5th 185,000 shares Oct. 30th 180,000 shares Oct 23rd 170,000 shares Oct. 16th 205,000 shares If the Form 144 had been filed the preceding week, how many shares could have been sold? A. 175,000 shares B. 177,500 shares C. 180,000 shares D. 185,000 shares

The best answer is D. Rule 144 limits public sales of restricted shares to the greater of 1% of the outstanding shares; or the weekly average of the prior 4 weeks' trading volume. If the Form 144 is filed 1 week earlier, the computation is: 1% of outstanding shares = 1% of 18,000,000 = 180,000 sharesor: 185,000 + 180,000 + 170,000 + 205,000 = 740,000 / 4 weeks = 185,000 shares The greater amount, 185,000 shares, can be sold during the next 90 days.

U.S. Corporations issuing Eurodollar bonds are: I subject to foreign currency exchange risk II not subject to foreign currency exchange risk III subject to filing with the SEC IV not subject to filing with the SEC A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Since these bonds are denominated in U.S. Dollars and payable in dollars and not the currency of the country in which they are sold, Eurodollar bonds are not subject to foreign currency exchange risk. Thus, if the foreign currency appreciates, it has no effect on the issuer, who is obligated to pay in dollars (not the more expensive foreign currency). Also, since these bonds are issued outside the U.S., the issue does not have to be registered with the SEC.

Which of the following technical indicators is considered to be bullish? A. Breakout through a support level B. Head and shoulders top formation C. Inverted Saucer formation D. Odd lot short sales

The best answer is D. The Odd Lot theory states that the small investor tends to trade odd lots and that the small investor is always wrong. Thus, the knowledgeable investor should do the opposite of what the small investor does. In this case, the small investor is selling, so, one should buy (a bullish indicator). A breakout through a support level is a downside breakout and is bearish. A head and shoulders top formation shows that the market has topped and is heading downward; an inverted saucer formation shows the same - that the market has topped and is heading downward.

The bond counsel will review which of the following to ascertain if a municipal issuer has the authority to sell bonds? I State constitution II Validity of the signatures of the issuer's representatives III Enabling legislation IV Local statutes and judicial opinions A. I and II B. III and IV C. I, III, IV D. I, II, III, IV

The best answer is D. The bond counsel will review all of the choices given to ascertain if a municipal issuer has the authority to sell bonds - the State constitution which gives those powers; any enabling legislation which affects the issuance of new bonds; any court opinions that are relevant; and the counsel will ascertain that the issuer's representatives are authorized to sell the bonds.

Which of the following are major tax benefits of real estate limited partnerships? I The real estate can be depreciated, even if its market value is increasing II Non-recourse financing is included in the basis III Interest on loans is fully deductible IV Long term capital gains may be achieved when the real estate is sold A. I and II only B. III and IV only C. I, III and IV D. I, II, III, IV

The best answer is D. The major tax benefits of real estate programs include all of the choices. Once property is ready for occupancy, it can be depreciated over a straight line basis over a 27 1/2 year life (for residential property). Each year, a depreciation deduction is allowed, even if the market value of the property is rising. Non-recourse mortgage financing is included in the basis (real estate is exempt from the "at risk" rule) and increases overall deductions available to the partner. Interest on the mortgage is fully deductible. Finally, when the property is sold, there is the possibility of having a long term capital gain.

A customer is short 1,000 shares of ABC stock, valued at $6 per share. The minimum maintenance margin requirement is? A. $1.50 per share B. $1.80 per share C. $2.50 per share D. $5.00 per share

The best answer is D. The minimum maintenance margin requirement for short stock positions worth $5 or more is the greater of $5 per share or 30%. Thus, a short stock position valued at $6 per share requires a minimum margin under FINRA rules of $5 per share (30% of $6 = $1.80 per share, which is not enough since $5 is the minimum). For stocks valued under $5, the minimum is the greater of 100% or $2.50 per share.

A customer takes the following marginable bond position: Long 100M AJAX Corp 8% Debentures - 20 year maturity, @ 120 Under FINRA rules, the minimum maintenance margin requirement for this position is: A. 7% of Face Value B. 7% of Market Value C. 20% of Face Value D. 20% of Market Value

The best answer is D. There is no Regulation T requirement for corporate bonds because the Federal Reserve is not "worried" about these. The only margins are the minimums set by FINRA. FINRA has set minimum maintenance margin requirements for corporate bonds at the greater of 7% of face value or 20% of market value for both long and short positions. 7% of $100,000 = $7,000. 20% of $120,000 = $24,000. The greater amount is $24,000.

A customer owns a long-term negotiable CD. If the customer wishes to tender the CD prior to maturity, the registered representative should inform the customer that: A. a prepayment penalty will be charged B. he or she will receive par value of the principal plus accrued interest C. the CD may not be redeemed prior to maturity D. the customer will receive the market value plus accrued interest

The best answer is D. There is no penalty for early withdrawal of funds on brokered CDs - however the amount of interest earned will be pro-rated over the shorter life of the deposit. If the customer redeems prior to maturity, the customer will receive the market value of the CD at that point in time. If market interest rates have risen, the CD value will be lower than par.

A customer asks her representative for a quote on XYZ stock, which the representative informs the customer is currently $31.00 Bid - $32.10 Ask. The customer tells the representative to buy 1,000 shares at $32.10. The representative places a marketable limit order to buy. When the trade is confirmed with the representative, it shows execution at $33.10. The representative contacts the firm's operations department about this, and after making an inquiry to the exchange, the operations department determines that the exchange quotation of $32.10 was erroneous. Which statement is TRUE? A. The customer must buy 1,000 shares at $33.10 for a total fill price of $33,100 B. The customer must buy 970 shares at $33.10 for a total fill price of $32,107, so the customer will not pay more than he originally intended C. The customer must buy 1,000 shares at $32.10 for a total fill price of $32,100 D. The transaction can be canceled at the discretion of the customer

The best answer is D. This story is basically an execution error. In this case, the execution error occurred not because the firm botched the trade, but because the exchange published an erroneous quote. The customer can either accept or cancel the trade, since there was no error on the customer's part. If the firm incurs any loss because the customer cancels the trade, the firm will be able to make a claim against the exchange, because it was the exchange that screwed things up.

The largest participants in the trading of U.S. Government debt include: I Domestic money center banks II Foreign money center banks III Domestic Broker-Dealers IV Foreign Broker-Dealers A. I and II only B. III and IV only C. I and III only D. I, II, III, IV

The best answer is D. Trading of government and agency securities takes place in the over-the-counter market. The participants include large commercial banks, foreign banks, U.S. Government securities dealers, full service broker firms, and the Federal Reserve.

Which of the following securities is NOT directly interest rate sensitive? A. Utility Stocks B. Corporate Bonds C. Preferred Stocks D. Growth Stocks

The best answer is D. Utility stocks are directly interest rate sensitive since utilities have an extremely large portion of their capitalization as debt. If interest rates rise, as the utilities refund maturing debt, their interest costs increase, depressing earnings and therefore the stock price. Preferred stocks and bonds are directly interest rate sensitive because they pay a fixed dividend or interest rate. If interest rates rise, their prices must fall to provide comparable market yields; and vice-versa. Common stocks and growth stocks are priced primarily on future expectations of earnings for these companies. They are not directly interest rate sensitive.

Municipal bond insurance covers: A. interest payments only B. principal payments only C. interest payments as due and ultimate repayment of principal D. interest and principal payments as due

The best answer is D. Municipal bond insurance can be purchased by issuers from private insurers to "improve" the credit rating on the issue. The insurer promises that if the issuer cannot pay interest and principal as due, it will make the payments.

A customer owns 100 shares of ABC stock in a margin account, valued at $38 per share. The customer sells 2 ABC Jul 40 Calls @ $4. The maximum potential loss is: A. $800 B. $7,200 C. $8,000 D. unlimited

The best answer is D. One of the short calls is covered by the long stock position, while the other short call is naked. The loss potential on a short naked call is unlimited.

A customer shorts 1,000 shares of ABC stock @ $5 per share in a margin account. The customer must deposit: A. $2,000 B. $2,500 C. $4,000 D. $5,000

The best answer is D. To short a stock priced from $10 down to $5, the minimum is $5 per share. Thus, to short 1,000 shares at $5, $5,000 must be deposited. Note that this minimum set by FINRA is greater than the Regulation T requirement of 50%. Also note that to short a stock under $5, the minimum rule changes to the greater of 100% or $2.50 per share.

A customer buys 100 shares of XYZ stock at $36 and buys 1 XYZ Jan 35 Put @ $6 on the same day. For tax purposes, what is the cost basis of the stock? A. $30 B. $36 C. $41 D. $42

The best answer is D. When a put is purchased on a stock on the same day that the stock is bought, the put is said to be "married" to the stock position. The only reason the option was purchased was to protect the customer against loss if the market for the stock fell. It was not purchased to speculate in the market. The IRS treats a "married" put as part of the cost basis of the stock. Notice that, therefore, the put premium cannot be deducted as a capital loss if the put expires worthless; instead, it has increased the stock's cost basis and will reduce any potential capital gain, when, and if, the stock is sold. As one would expect, this is the tax treatment that is most beneficial to the IRS and least beneficial to the investor. The cost of the stock is $36 + $6 premium = $42 per share. When the stock is sold the customer reports a capital gain or loss based on the sale price of the stock.

A corporation has previously declared a cash dividend. When the dividend is actually paid, all of the following choices are affected EXCEPT: A. Cash B. Current Assets C. Current Liabilities D. Net Working Capital

The best answer is D. When the dividend is paid, cash drops (a current asset) and dividends payable drop (a current liability). Because both current assets and current liabilities fall by the same amount, working capital is unchanged. This transaction has no effect on net worth.

A municipal dealer quotes a 7 year, 5% term revenue bond at 94. The yield to maturity is: A. 4.78% B. 5.00% C. 6.04% D. 6.78%

This bond has a coupon rate of 5% = 5% of $1,000 par = $50 of annual income. The bond is purchased at 94% of $1,000 par = $940; and will mature at $1,000 in 7 years, Thus, the $60 capital gain is earned over 7 years for an annual gain of $60 / 7 = $8.57 per year. The bond is purchased at $940 and matures at $1,000, for an average value of $940 + $1,000 / 2 = $970. The YTM is: $50 + $8.57 / $970 = 6.038% = 6.04%