Series 7
An investor buys a nonqualified deferred variable annuity and contributes $25,000. Ten years later, he surrenders it for $40,000. For federal income tax purposes, he should report
$15,000 ordinary income - The difference between the amount invested and the cash surrender value is considered interest and is taxed as ordinary income for federal income tax purposes.
Under NYSE and FINRA regulations, a customer with a long margin account will get a minimum maintenance call when the customer's portion of equity in the account drops below
25% - Customers with long margin accounts are required to maintain a minimum equity level of 25% at all times. Short margin accounts have a 30% minimum maintenance requirement. Regulation T is 50% and applies to initial margin purchase deposit requirements.
Under FINRA regulations on minimum maintenance, customers are required to maintain a minimum equity of:
25% in the long margin accounts and 30% in short margin accounts. - FINRA and NYSE rules set minimum maintenance requirements related to equity at 25% for long margin accounts and 30% for short margin accounts. Regulation T deposit requirements specify 50% of all new purchases and short sales outside of exceptions for smaller accounts and the short sale of low-priced stock.
Which of the following most accurately describes the figure that results from subtracting a mutual fund portfolio's cost from its current market value?
Appreciation - Appreciation is the increase in value of an asset. Amortization is an accounting procedure such as the depreciation of the value of an asset over its useful life. Net asset value is the market value (bid price) of mutual fund shares. The offering price is the NAV of a fund plus its sales charge.
An RR's elderly client took ill last week and was admitted to the hospital. The client's adult child notifies the RR today that the client passed away last night. Of the following actions, which should the RR do immediately?
Ensure any open orders in the account are cancelled. - Keyword: Immediately
A sharp drop in stock prices accompanied by increasing volume after a lengthy period of market decline as a
Climax - A selling climax normally occurs at the end of a bear market. It is a sharp drop in stock prices accompanied by increasing volume after a lengthy market decline.
Of the following statements regarding Government National Mortgage Association (GNMA) securities, which is correct?
GNMA securities are issued by a federal agency of the U.S. - The Government National Mortgage Association is a U.S. federal agency. These bonds are backed by the full faith and credit of the U.S. government (not FINRA, which is an SRO). GNMAs pass through principal and interest payments on a monthly basis, and the interest portion is subject to federal, state, and local taxes.
In an IRA, which investment is not allowed?
IRAs may not invest in equity options - Term life insurance is not a security and provides no cash values available at retirement. An IRA is intended to provide retirement benefits.
Which of the following actions may a SRO not impose on a registered representative for violation of its rules?
Imprisonment - An SRO does not have authority to imprison RRs who have violated their rules. The SROs can impose any of the other options listed.
Your customer asks you how income from investments and capital gains realized in a variable annuity separate account are handled. What should you tell the client?
The income and gains are reinvested in the annuity to purchase additional securities. - Investment income and capital gains on variable annuities are reinvested income and gains are tax-deferred to the investor. Therefore, the investor is not fully liable for taxes on the income and gains in the year realized in the separate account.
An investor with a large portfolio of blue-chip stocks has written call options on the stock to increase income in their account. If this investor offsets the options, which of the following is TRUE?
The investor has made a closing purchase - In this questions, the first thing the investor did was an "Opening Sale" because they sold calls against their portfolio for the additional income and now they are going to eliminate those calls by buying them back in the market and making "Closing Purchase" transactions.
One of your clients currently owns 100 common shares of XYZ at $100 per share. XYZ declares a 15% stock dividend for common shareholders. Which best describes this investor's holdings AFTER the stock dividend is paid?
The investor will own 115 shares valued at $86.96 per share. - Larger number of shares reduces the cost basis per share for the stockholder.
Which of the following statements about Roth IRA plans is TRUE?
The qualified distributions of a Roth IRA plan are not taxable - Qualified distributions from a Roth IRA are not taxable
A corporation declares a 2:1 split when their stock price is $50 per share. Prior to the split, the company's P/E ratio was 20:1. The earnings for the company are $2.50 per share and the company paid out a $1.00 per share dividend at the old stock price. After the split, how will the company's P/E ratio be affected?
There will be no effect on the P/E ratio (remains at 20:1). - Remember that a split merely changes the number of outstanding shares and the price of those shares. The company's overall capitalization and earnings will not be affected by a stock split. So here, the price to earnings ratio will not be affected by the 2:1 stock split.
A customer at a broker-dealer wishes to sell a security short. Prior to allowing the customer to sell the security short, the broker-dealer must
locate the securities to ensure that the firm has adequate inventory to lend for short selling - Regulation SHO requires a broker-dealer to have reasonable grounds to believe that the security can be borrowed so that it can be delivered on the date that delivery is due before effecting the short sale. There is no requirement to ensure that no margin call has occurred in the customer's account. A registered representative does not have to recommend the short sale as the short sale could be unsolicited. Suitability would be a consideration. There is not need for a FINRA approval to allow a short sale in a customer's account.
In the course of reviewing a number of investment choices, an investor feels strongly that the technology sector will be going up significantly in the short-term. Within the sector, he really likes LMNO Corporation at $25 per share, but sees that there is not always a high volume of stock changing hands in that company. His second choice is PQRS Corporation, which is also within the sector but has a large amount of trade volume. The investor wants to enter an order for a block of LMNO at $25, but wants PQRS to be purchased as a back-up if he can't get a hold of the LMNO shares. If the investor's agent at his broker-dealer firm has suggested an IOC (immediate-or-cancel) order for the purchase, what would be the result?
This type of order will result in the purchase of all LMNO shares that are priced at or below the limit, followed by the cancellation of the remainder of the order for shares that were not immediately available. - An IOC (Immediate or Cancel) order is good for one stock. It will result in the purchase of all shares available at or below the limit price up to the specified amount in the order that are immediately available, followed by the cancellation of the remainder of the order. The order for PQRS would have to be entered contingently or after the cancellation of the IOC on LMNO.
A CMO has 4 tranches. Interest rates have dropped significantly recently and mortgage holders are starting to prepay their loans because they are refinancing at lower rates. Which of the following tranches would be most affected by these prepayments?
Tranche 1 - Principal payments and pre-payments from the mortgage loans in the CMO pool pay off one tranche at a time in order of maturity.
Which of the following is FALSE according to Federal Gift Tax Laws?
When a wife gives a gift of money to her husband, both of whom are U.S. citizens, it is a taxable event. - A gift between spouses is not a taxable event. All of the other statements are true regarding current tax law.
All of the following are true about federal tax rules except
a gift between spouses is taxable - Inter-spousal gifts are exempt from the federal gift tax. The federal gift tax annual exclusion has been set at $15,000.
If a customer believes that interest rates will decline substantially, she should invest in
a long term Corporate Bond with a coupon rate at 10% at a 12% basis, non-callable - Bonds have an inverse reaction to interest rate movements, when interest rates go down the prices of outstanding bonds go up. In addition, long term bonds react the greatest to interest rate changes compared with bonds with shorter maturities. The non callable feature started in the correct answer is also appealing because it gives the investor some protection against her bonds being called by the issuer when interest rates fall.
The price at which a mutual fund's shares will be redeemed
cannot be determined before the order is entered - The value of a mutual fund's shares are calculated at close of the market each day; therefore, there is no way to know in advance what the exact value of the share price will be.
A new issue of municipal securities is coming to market. The bond counsel used for this issue will normally review all of the following EXCEPT
the approval of the issue by the legislature - Legislature approval of the bond is not required. If the issue was a general obligation bond then voter approval would be required. Although bond council does not always review the feasibility study, it could review that document for a revenue bond issue.
Which of the following is not a characteristic of Traditional Investment Retirement Account (IRA)?
Individuals over 72 may not make tax-deductible contributions - According to the Secure Act of 2019, there is no age limit on making contributions to an IRA as long as the working individual has sufficient earned income. For this reason, the statement about a 72 year old being unable to make tax-deductible contributions is NOT a characteristic of a Traditional IRA.