Series 7 Practice Exam 12 Q&A

A customer in the highest tax bracket has $1,500 in long-term capital gains from stock transactions at the end of the year. The customer will need to pay taxes of:

$300 Explanation: Long-term capital gains are gains on securities held in excess of 12 months and are taxed at a maximum rate of 20%. Although the investor is in the highest tax bracket, the investor will be taxed at a rate of 20%. Therefore, the customer will need to pay taxes of $300 ($1,500 x 20% = $300).

A broker-dealer wishes to give a gift to a registered representative of another firm. Industry regulations consider the gift to be of material value if it exceeded a value of:

$100 Explanation: According to the industry regulations, a gift of more than $100 would be considered substantial or of material value.

A customer's margin account has a credit balance of $20,000 and a debit balance of $15,000. On what amount will the customer be charged interest?

$15,000 Explanation: Customers are charged interest on the average daily amount of the debit balance in their account. Generally, they are not charged interest in a short account.

Your firm is a syndicate member and an underwriter of an initial public offering (IPO). How many days must the firm's research analyst wait before issuing a research report in this IPO?

25 days Explanation: If a firm is involved in an underwriting of an initial public offering and is the manager or comanager, it must maintain a quiet period of 40 days following an IPO or 10 days following a secondary offering. During this time, the firm may not issue research reports on its investment banking clients' stock. If the firm was a syndicate member or selling group member, the firm would need to wait 25 days.

An investor purchases a British pound 160 put at 4 when the British pound is at 157. The intrinsic value of the option is:

3 Explanation: Intrinsic value is defined as the in-the-money amount of the contract. A foreign currency put option is in-the-money when the spot price is less than the strike price. Since the spot price (157) is less than the strike price (160), the contract is in-the-money by 3 points.

A customer sells short 400 shares and the company declares a 10% stock dividend. When the customer covers the short position, the customer will be required to deliver:

440 shares Explanation: When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends declared are the responsibility of the customer who sold the stock short. In this example, the company declares a 10% stock dividend. Therefore, a customer who sold short 400 shares will be required to deliver 440 shares (400 shares x 10% = 40 additional shares) when he covers the short sale.

On September 22, a customer purchases 2 listed XYZ May 70 calls and pays a $4 premium for each call. The current market price of XYZ Corporation is $69 per share. What is the customer's breakeven point?

74 Explanation: The strike price plus the premium equals the breakeven point for the buyer of a call. The breakeven point is $74 (the $70 strike price + the $4 premium = $74). The fact that the investor bought multiple contracts is not relevant since the breakeven point is a price per share.

If a municipal bond has a basis of 4.33 and a coupon rate of 5.77%, the bond is selling at:

A premium Explanation: Municipal bonds may be quoted on a yield to maturity basis, which in this example is a 4.33 basis. This means the bond has a yield to maturity of 4.33%. If the nominal yield (coupon rate) is 5.77%, this means that the bond is selling at a premium, above the par value ($1,000). If the yield to maturity (4.33%) is less than the nominal yield (5.77%), the bond is selling at a premium.

When an investor sells an interest in a limited partnership, her cost basis for tax purposes is the:

Adjusted basis Explanation: An investor's basis will be reduced by any claimed losses and any cash distributions. This reduced (adjusted) basis is the cost basis at the time of sale.

According to FINRA, the maximum sales charge on a variable annuity contract is:

An amount that is fair and reasonable Explanation: There is no statutory maximum sales charge on variable annuities or variable life insurance policies. The sales charges must be fair and reasonable.

Roundville Bank is considering an investment in Roundville County bonds. The bonds contain a provision that permits banks to deduct 80% of the interest cost being paid to depositors on the funds used to purchase the bonds. These securities are known as:

Bank-qualified bonds Explanation: Bank-qualified municipal bonds allow banks to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds. This is done to encourage banks to invest in municipal securities. To qualify, a municipality may only issue up to $10,000,000 annually.

When the underlying common stock sells ex-dividend, a GTC buy limit order will:

Be reduced Explanation: All GTC (good-until-cancelled) orders entered below the current market are automatically reduced by the amount of the dividend on the ex-dividend date (unless they are market DNR -- Do Not Reduce). A buy limit order is entered below the current market and is reduced.

A real estate limited partnership that does not specify the actual properties to be purchased is known as a:

Blind pool Explanation: If a real estate program's prospectus does not specify the actual properties to be purchased, it is known as a blind pool (or nonspecified property) program. An oil and gas program may also be considered a blind pool if the properties to be drilled are not specified in the prospectus.

Which TWO of the following statements are TRUE concerning a Health Savings Account? I. The contribution is made in pretax dollars II. The contribution is made in after-tax dollars III. The funds grow tax-free if used to pay qualified medical expenses IV. The funds grow tax-deferred if used to pay qualified medical expenses

I and III Explanation: A Health Savings Account (HSA) is a tax-advantaged account that can be used by individuals to pay for qualified medical expenses. An HSA is not open to all individuals. It is generally open only to those persons who are not enrolled in any type of health plan other than a qualified, high-deductible health plan. Contributions are made in pretax dollars (which are limited under IRS guidelines), grow tax-free, and withdrawals are tax-free if used to pay qualified medical expenses. All funds withdrawn that are used for nonqualified medical expenses are taxable and subject to a 20% IRS tax penalty.

Which TWO of the following statements are TRUE regarding Roth IRAs? I. Contributions are in pretax dollars II. Contributions are in after-tax dollars III. Qualifying distributions are taxable IV. Qualifying distributions are tax-free

II and IV Explanation: If an individual earns less than $116,000 (or $183,000 jointly), the full benefits of Roth IRAs can be realized. (For 2014, the limits were $114,000 and $181,000). This would allow the individual to contribute up to $5,500 (plus $1,000 for individuals age 50 and over) in after-tax dollars and receive qualifying distributions that are tax-free.

A registered representative is reviewing a corporation's financial statements. Which TWO of the following statements are TRUE concerning an issuer's bond interest expense? I. The annual interest payments are found on the balance sheet II. The annual interest payments are found on the income statement III. The interest payment is deducted from net income IV. The interest payment is deducted from EBIT

II and IV Explanation: The annual interest payment or bond interest expense may be found on a company's income statement. The amount of debt or bonds outstanding may be found on the balance sheet. The annual interest payment is deducted from the earnings before interest and tax (EBIT). Bond interest is paid in pretax dollars, whereas cash dividends are paid from net income or in after-tax dollars.

New Issue $50,000,000 City of Denver, Colorado Pollution Control Bonds Par Value $1,000 Amount Rate Maturity Date Price $50,000 5 1/2% July 1, 2027 101 $60,000 6 1/2% July 1, 2028 101 Based on the above information, which of the following statements may be made about the bonds maturing in 2027? I. The yield to maturity will be greater than 5.50% II. The yearly interest payment is $55 per bond III. The amount of principal the investor will receive at maturity will be greater than $1,000 IV. An investor holding the bond until maturity will have a yield of less than 5.50%

II and IV Explanation: The bonds maturing on July 1, 2027 have a nominal yield of 5 1/2% and have been issued at 101, which is 101% of their par value of $1,000, or $1,010. The yearly interest payment is 5 1/2% of par, or $55. The bonds are offered at a premium and an investor paying $1,010,will receive $1,000 at maturity. A bond offered at a premium and held to maturity will have a yield of less than the coupon (nominal yield) of 5.50%.

Retail communications regarding options: I. Must be submitted to the exchange 15 days prior to initial use II. Must be submitted to the exchange 10 days prior to initial use III. Must be kept on file by the member firm for six years IV. Must be kept on file by the member firm for three years

II and IV only Explanation: Retail communications regarding options must be submitted to the firms option regulator (an exchange or FINRA) for approval at least 10 days prior to initial use. All retail communications must be maintained on file by the member firm for three years.

The following dividend information for New York Stock Exchange listed common stocks is reported in The Wall Street Journal. Quarterly Company Dividend Record Date Payable Date Cummings Corp. 50 cents 4/10 5/15 Federal Corp. 85 cents 4/13 5/25 General Electric 95 cents 4/8 5/21 A buyer of Cummings Corporation on May 10:

Is not entitled to receive the 50-cent quarterly dividend Explanation: A buyer of Cummings Corporation is not entitled to receive the 50-cent quarterly dividend because the purchase was made on May 10. This was after the stock had already sold ex-dividend (without the dividend). The ex-dividend date is not given but the record date of April 10 is. Stocks sell without the dividend (ex-dividend), on the second business day preceding the record date. This would be two business days prior to April 10, which is more than one month before the customer bought the stock. Even if the purchase was made for cash, which requires a same-day payment, it is still one month too late for the buyer to receive the dividend.

A customer buys a 6 3/4% municipal bond at 101 3/4. The yield to maturity on the bond is:

Less than 6 3/4% Explanation: The customer bought the bond at 101 3/4, which is at a premium over the $1,000 par value of the bond. If she holds the bond to maturity, her yield will be less than 6 3/4%, since a bond bought at a premium will have a yield to maturity that is less than the coupon rate.

A reverse repurchase agreement is sometimes called a(n): a. Repo b. Arbitrage c. Matched sale d. Treasury sale

Matched sale Explanation: A reverse repurchase agreement (matched sale) occurs when the Federal Open Market Committee (FOMC) sells securities to dealers with the intention of buying the securities back at a future date. This has the short-term effect of absorbing (removing) funds from the money supply.

The Consumer Price Index:

Measures the average change in prices for specific goods and services purchased by consumers in certain cities Explanation: The Consumer Price Index (CPI) measures the average change in prices for selected goods and services purchased by consumers in certain cities. The CPI measures the change from a previous base period and is computed monthly.

The term all-or-none, in trading municipal bonds, applies to:

Sellers' offering terms Explanation: Offerings are sometimes made on an all-or-none basis (an AON offering), which is a situation where the offerer agrees to sell the bonds only if all that he has available will be bought.

An investor purchases a U.S. Treasury bond in the secondary market. When is settlement?

The next business day Explanation: Transactions for Treasury securities in the secondary market settle on the next business day.

An investment contract that offers life insurance benefits plus participation in a portfolio of securities is called a:

Variable life insurance contract Explanation: A variable life insurance contract offers life insurance benefits and participation in a separate portfolio of securities. A variable annuity offers a death benefit, but a death benefit is not considered life insurance.

A customer has a federal tax rate of 35% and a state tax rate of 7%. Which of the following investments would afford him the BEST after-tax yield? a. A 6.25% in-state municipal bond b. A 6.65% out-of-state municipal bond c. A 9.95% investment-grade corporate bond d. A 10.35% mortgage bond

a. A 6.25% in-state municipal bond Explanation: The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The mortgage bond is a type of corporate bond and both are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 42% for the in-state bond and the federal rate of 35% for the out-of-state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 42% combined tax rate. The municipal bond has a yield of 6.25%. 6.25% (Municipal Bond Yield) / 58% (100% - 42%) = 10.78% Equivalent Taxable Yield The out-of-state municipal bond has a yield of 6.65% and the equivalent taxable yield is 10.23% (6.65% / 65%). The in-state municipal bond has the best or highest after-tax yield.

Which of the following choices is LEAST important to an investor considering a bond swap? a. Accrued interest b. Annual income c. Capital loss d. Maturity dates

a. Accrued interest Explanation: A bond swap involves selling one bond and using the proceeds to buy another bond with either a different yield, interest rate, or maturity date. This is usually done to establish a capital loss for tax purposes. Of the choices given, the least important factor to consider in the swap or exchange is accrued interest since accrued interest paid will be included in the next interest payment and all accrued interest received has been earned prior to the bond being sold.

Which of the following statements is NOT TRUE concerning VIX options? a. An investor will buy VIX puts if he expects an increase in the volatility on the S&P 500 Index b. An investor will buy VIX calls if he expects the S&P 500 Index to fall c. An investor will buy VIX calls as a hedge if he expects the S&P 500 Index to fall d. VIX options can be used if an investor expects an increase or decrease in the volatility on the S&P 500 Index

a. An investor will buy VIX puts if he expects an increase in the volatility on the S&P 500 Index Explanation: The VIX (volatility index) is often referred to as a gauge of investors' fear. The index tends to move inversely with the S&P 500 Index. The VIX usually rises when the S&P 500 Index falls, and falls when the S&P 500 Index increases. An investor will buy calls when he expects the market to decline and volatility to increase. An investor will buy puts on the VIX if he expects the market to rise and volatility to decrease. Many investors will buy VIX call options as a hedge against a possible decline in the market. The VIX option can be used by investors who expect either an increase or a decrease in volatility.

What type of options will be used to hedge a portfolio of computer stocks? a. Interest-rate options b. Narrow-based index options c. Broad-based index options d. Yield-based options

b. Narrow-based index options Explanation: A portfolio containing only computer stocks represents just one segment of the market. A narrow-based index also contains stocks from only one segment of the market.

A customer has a federal tax rate of 35% and a state tax rate of 5%. Which of the following investments would afford him the BEST after-tax yield? a. A 6.40% in-state municipal bond b. A 7.05% out-of-state municipal bond c. A 10.85% investment-grade corporate bond d. A 11.45% real estate investment trust (REIT)

d. A 11.45% real estate investment trust (REIT) Explanation: The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The investment grade corporate bond and REIT are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 40% for the in-state bond and the federal rate of 35% for the out-of- state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 40% combined tax rate. The municipal bond has a yield of 6.40%. 6.40% (Municipal Bond Yield) / 60% (100% - 40%) = 10.67% Equivalent Taxable Yield The out-of-state municipal bond has a yield of 7.05% and the equivalent taxable yield is 10.85% (7.05% / 65%). The REIT has the best or highest after-tax yield.

Which of the following choices gives the best indication of current interest rates on revenue bonds? a. Visible supply b. Placement ratio c. List of 20 bonds d. List of bonds with 30-year maturities

d. List of bonds with 30-year maturities Explanation: The Bond Buyer computes the Revenue Bond Index which is the average yield of 25 revenue bonds with 30-year maturities.

A customer has a long margin account with the following securities in the account. (Assume a 50% FRB initial margin requirement.) Stock Market Price Market Value Debit Balance 100 A Co. $30 $3,000 $8,400 100 B Co. $25 $2,500 200 C Co. $15 $3,000 100 D Co. $35 $3,500 ----------- $12,000 How far could the market value of the securities in the account decline, before a maintenance call will be sent?

$11,200 Explanation: To determine how far the securities worth $12,000 in the account can decline before the customer receives a maintenance call, multiply the debit balance of $8,400 by 4/3. $8,400 x 4 = $33,600 divided by 3 = $11,200. Another method that can be used is to take 1/3 of the debit balance, which is $2,800, and add it to the debit balance of $8,400. The result would be 4/3rds of the debit balance and would equal $11,200. ($8,400 + $2,800 = $11,200.)

An individual purchases an Australian dollar June 65 put at 2.34 that was sold at 3.68. If the contract size is 10,000 Australian dollars, what is the individual's total profit?

$134 Explanation: Premiums for Australian dollar options are quoted in cents per unit. To express the premium in dollar terms, the decimal must be moved two places to the left. The total cost is the contract size (10,000) times the premium expressed in dollars (decimal moved two places to the left, $.0234), which equals $234. Since the contract was sold at 3.68 ($368), the profit is $134.

Mr. Green, a new client, decides to short 100 shares of JRF at $18 per share. What is the initial margin requirement for this trade?

$2,000 Explanation: If the initial transaction in a margin account is a short sale, industry rules require a minimum equity deposit of $2,000 or the required Reg. T deposit, whichever is greater. Since $2,000 is greater than $1,800, the required deposit is $2,000. For a purchase, the minimum equity requirement is the lesser of $2,000 or 100% of the purchase price.

A customer owns a total of 750 shares of a mutual fund and has invested $22,000 over the last three years. If the fund is currently valued at $31.20, what is the customer's cost basis using the average cost method?

$29.33 Explanation: To calculate the cost basis using the average cost method, divide the sum of all investments by the total shares owned by the investor. The investor owns 750 shares and the total amount invested is $22,000. Therefore, the average cost is $29.33. The current value of the fund is not relevant.

A customer's margin account has a market value of $750,000 and a debit balance of $400,000. She also has a commodities account that has equity of $150,000. If the firm goes bankrupt, SIPC will provide coverage to this customer for:

$350,000 in the margin account and nothing for the commodities account Explanation: SIPC will cover the customer's equity in the margin account ($350,000). SIPC does not provide coverage for commodities accounts.

Ms. Green buys 300 shares of RSW at 15. She then writes 3 RSW July 20 calls at 1 and writes 3 RSW July 10 puts at 50 cents. Ms. Green's maximum potential loss is:

$7,050 Explanation: Ms. Green has written 3 covered calls and 3 uncovered puts. In both cases, the maximum loss occurs if the underlying stock (RSW) becomes worthless. If the market price of RSW is zero, the 3 covered calls would result in a $4,200 loss (300 shares x $15 purchase price - $300 premium received). At zero, the 3 uncovered puts are exercised for a net loss of $2,850 (3 contracts x $10 strike price - the premium received of $150). Thus, the total loss is $7,050 ($4,200 + $2,850).

A bond purchased at 104 eight years ago has an adjusted cost basis of 102 1/2. If the bond was sold at 110, the tax consequence is a:

$75 gain per bond Explanation: When a bond is purchased at a premium, the premium must be amortized over the life of the bond. If the bond is sold prior to maturity, the loss or gain is determined from its adjusted cost basis. The adjusted cost basis is given as 102 1/2, so no calculation is necessary. There is a gain of $75 per bond ($1,100 sale price minus $1,025 adjusted cost basis).

A customer has a long margin account with a market value of $30,000 and a debit balance of $20,000. His short margin account has a $7,000 market value and a $10,000 credit balance. The FRB margin requirement is 50%. How much cash may the customer withdraw from the account?

0 Explanation: The long account is restricted because the equity of $10,000 is less than the initial FRB requirement ($30,000 market value times 50% FRB requirement equals $15,000 required equity). There is no excess equity in the short account since the equity of $3,000 ($10,000 credit balance minus $7,000 market value) is less than the FRB requirement of $3,500 (50% of $7,000 market value).

Company AZX has announced a partial tender offer for Company BHQ. A shareholder of Company BHQ is long 1,000 shares of stock and long 2 BHQ puts. For the purpose of tendering shares, the stockholder may tender:

1,000 shares Explanation: An investor who holds stock in a company that is the subject of a tender offer may tender only stock that he holds long. Short tendering is not permitted. The long puts do not affect the client's net long position. If a shareholder had written call options positions against the long stock, the options positions will reduce his net long holdings in the stock.

On Monday, June 15, an investor purchases for regular-way settlement, $20,000 face value of 8% municipal bonds that mature on November 1, 2035. How many days of accrued interest is the investor required to pay?

47 Explanation: Since the bonds mature on Nov. 1, we know the semiannual interest payments are made on Nov. 1 and May 1. The bonds were purchased in June, so accrued interest must be calculated from the last interest payment date, (May 1, up to but not including settlement.) Since the transaction will settle on June 18, we count 17 days in June. So the total number of days of accrued interest is 30 days for May (remember, in calculating accrued interest for municipal bonds, a 30-day month and 360-day year are used) and 17 days for June. Accrued interest of 47 days is owed to the seller.

An individual has an IRA account. He is 75 years old, but has not withdrawn funds from the plan. What is the penalty that the individual will be subject to for not withdrawing funds from the plan?

50% penalty on the actuarial amount Explanation: The individual will be subject to a penalty of 50% of the actuarial amount (the amount specified by the IRS that should have been withdrawn). This is the penalty for not making withdrawals from the plan. Distributions must start after the planholder reaches age 70 1/2.

If 70 Ford Motor option contracts were traded on a particular day, how many shares of Ford Motor Corporation common stock does this represent?

7,000 Explanation: The number of shares would be 7,000, as each contract represents 100 shares. There were 70 contracts traded (70 contracts x 100 shares = 7,000 shares).

An investor in the 28% tax bracket can buy a 5.10% tax-free municipal bond at par. What yield would the investor need in a taxable corporate bond to receive the same after-tax yield in the municipal bond?

7.08% Explanation: If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a corporate bond, it is necessary to find the equivalent taxable yield. The formula is: Municipal Bond Yield = Equivalent Taxable Yield divided by 100% - investor's tax bracket The customer is in the 28% tax bracket. The municipal bond has a 5.10% coupon rate and since it is purchased at par, the yield is also 5.10%. 5.10% (municipal bond yield) divided by 72% (100% - 28%) = 7.08% (Equivalent Taxable Yield). If the individual was to buy the 7.08% corporate bond, the tax liability for the interest received would be $19.82 ($70.80 interest income x 28% tax bracket = $19.82 tax liability). This would give the investor an after-tax return of $50.98 which is the same return he could receive if he purchased the 5.10% ($51.00) municipal bond.

An investor has a federal tax rate of 35% and a state tax rate of 6% and is offered a 4.90% in- state municipal bond. What yield would the investor need in a taxable bond to receive the same after-tax yield as the municipal bond?

8.31% Explanation: The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. Since the investor is purchasing an in-state bond, we use the combined rate of 41%. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 41% tax bracket. The municipal bond has a yield of 4.90%. 4.90% (Municipal Bond Yield) / 59% (100% - 41%) = 8.31% Equivalent Taxable Yield

Ms. Jones, a shareholder of XYZ Corporation, reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows: 1. 10 rights plus $10.50 are required to subscribe to one new share of stock 2. Fractional shares become whole shares 3. The record date is Friday, October 17 4. JPMorgan Chase and Bank of America are the transfer agents 5. Goldman Sachs and Morgan Stanley are the standby underwriters Ms. Jones owns 87 shares of the XYZ Corporation. How many shares can she subscribe to and how much will it cost her?

9 shares plus $94.50 Explanation: Ms. Jones can subscribe to nine shares at a cost of $94.50. The terms of the rights offering indicate that 10 rights plus $10.50 are needed to subscribe to one new share of stock. Fractional shares become whole shares. She will receive 87 rights. It takes 10 rights to get one new share of stock. 10 rights divided into 87 rights equals 8.7 shares. Since fractional shares become whole shares, Ms. Jones can subscribe to nine shares at a cost of $10.50 a share for a total of $94.50 (9 x $10.50 = $94.50)

A customer sells XYZ short at $40 and sells one XYZ October 40 put at 5. What will the customer's profit or loss per share be if the put is exercised when the market value of the stock is $35, and the stock received pursuant to that exercise is used to cover the short stock position?

A $5 profit Explanation: If the put is exercised when the market price is less than $40, the stock acquired by the writer will be used to close out the short position. There is no profit or loss on the short sale (sell short at $40 and cover at $40). The entire profit is the premium income of $5. The seller of a put who sells short can never profit by more than the premium when the short sale price and the strike price are the same.

A registered representative for ABC Brokerage has just been elected president of the Harper Valley School Board. The school district is going to float a new serial issue of general obligation bonds backed by ad valorem taxes. ABC Brokerage's relationship to the school district can be described as:

A control relationship Explanation: A control relationship exists when a brokerage firm or an employee of a firm is in a position to control or influence the issuance of securities by an issuer.

An open-end investment company has increased in value because of a rise in the market. This is best characterized as:

Appreciation Explanation: An increase in the market price of an open-end investment company or other security from the purchase price is appreciation. There is only a capital gain when the security is sold and the appreciation is realized.

Mr. Jones is a small business owner who has purchased Treasury bills and other short-term securities during times when he has excess funds available in the business. He likes the aspects of liquidity and safety. A friend has told him he can get higher rates from auction rate securities. He wants to know why you have not recommended this investment to him. Which TWO of the following explanations would you cite as your reasons? I. Auction rate securities are long-term investments II. Interest or dividend rates are reset at established intervals based on a Dutch auction III. If the auction fails, the client may not have immediate access to his funds IV. The interest or dividend rate is set as the lowest rate to match supply and demand at the auction

I and III Explanation: Although auction rate securities are usually sold as an alternative to other short-term securities, they are long-term securities. An RR must disclose to a client that, if the auction fails, the client may not have immediate access to his funds. The RR also has a duty to disclose to clients any material fact relating to the specific features of the auction rate securities and the customer's need for a liquid investment when recommending this type of product. The fact that the interest or dividend rate is reset at specified intervals is a material fact, but is not a reason to avoid recommending the investment. The same reasoning applies to the fact that the rate is set at the lowest rate that matches supply and demand. These investments may not be suitable for investors who have a need for liquidity.

Which TWO of the following statements concerning The Bond Buyer 20-Bond Index are TRUE? I. It is compiled weekly II. It consists of 20 GO and revenue bonds, with an average rating of AA III. It is used to show a trend in interest rates IV. It is used as an indication of the primary market in municipal securities

I and III Explanation: The Bond Buyer 20-Bond Index is compiled each week. It is calculated from the yields on 20 specific general obligation issues with an average rating of AA. There are no revenue bonds in the 20-Bond Index. The purpose of this index is to show trends in interest rates.

A corporation is planning to issue new stock to the public and has filed a registration statement with the SEC. As a registered representative of the firm that is expected to do the underwriting, you are permitted to: I. Obtain indications of interest from prospective purchasers II. Receive monies from customers who intend to purchase the issue III. Send a preliminary prospectus to retail investors IV. Guarantee a customer that he will be able to purchase 1,000 shares of the issue

I and III Explanation: A registered representative is permitted to send a preliminary prospectus to any type of investor and obtain nonbinding indications of interest. The RR cannot accept money nor guarantee a customer that he would receive a particular amount of the issue. If the corporation has not filed a registration statement with the SEC, none of the choices listed would be acceptable.

PSE & G Utility is offering $975,000,000 worth of 4.30% subordinated debentures at a price of 99.25% of par value. An investor purchasing these bonds is: I. Subject to state income tax II. Exempt from state income tax III. Subject to federal income tax IV. Exempt from federal income tax

I and III Explanation: An issuer of debt offering subordinated debentures is a corporation, not a municipality. Therefore, interest paid on its debt obligations is subject to federal and state income tax.

In May, a customer sells an STC July 40 listed call for a $6 premium and buys an STC July 30 listed call for $10. The customer has created a: I. Bullish spread II. Bearish spread III. Debit spread IV. Credit spread

I and III Explanation: The investor bought the more expensive call. Therefore, this is a debit spread. A call debit spread is a bullish strategy.

A corporation would choose to refinance its debt for which TWO of the following reasons? I. To reduce its overall interest costs II. To be able to borrow funds at a higher rate III. To be able to reduce the number of persons on the board of directors IV. To remove restrictive provisions from the indenture

I and IV Explanation: A corporation would most likely refinance its debt to reduce its overall interest cost. This is most likely to happen when interest rates have declined and/or the credit strength of the issuer increases. It may also refinance to remove a restrictive provision from a bond's indenture. This restriction may have been included when the issuer sold bonds and it was not easy for the issuer to borrow funds. Refinancing does not alter the number of persons on the board of directors.

Which TWO of the following statements are TRUE about SIPC? I. It was created by an Act of Congress and is considered a U.S. government agency II. It is a nonprofit organization that broker-dealers join III. It provides insurance for customer accounts in the event of bankruptcy by a broker-dealer IV. It provides insurance for customer accounts for fraud, embezzlement, and counterfeiting

II and III Explanation: SIPC can borrow from the U.S. government, but it is not an agency of the U.S. government. SIPC provides insurance coverage for customer accounts in the event of a brokerage firm's failure. Each brokerage firm must take out a separate insurance policy (known as a fidelity bond) to insure itself for fraud, embezzlement, and counterfeiting. This bonding is not provided by SIPC.

A registered representative has purchased two tickets to a football game for which he paid $85 per ticket. If the face value of the tickets is $45 per ticket, the RR may take which TWO of the following actions? I. Give one ticket to a customer II. Give two tickets to a customer III. Purchase two additional tickets and have two customers attend the game with their spouses IV. Give the two tickets to two different customers of the same firm

I and IV Explanation: Member firm personnel may not give, or permit to be given, a gift of material value exceeding $100 per recipient per year to personnel employed by another member firm. The gifts should be valued at the higher of the cost or market value. Since the tickets have a face value of $45 each, but the tickets were purchased at a value of $85 each, the higher value would be used. One ticket can be given to a customer, but two tickets exceed $100. If gifts are given to more than one customer, a prorated amount should be used, so the two tickets may be given to two different customers. If the RR attended the event with the customer, it would be a business expense and not a gift.

Which TWO of the following statements are TRUE concerning the characteristics of preferred stock? I. The securities do not have a fixed maturity date II. The price of these securities is more volatile than common stock III. The dividend will be paid annually IV. The price will fluctuate based primarily on changes in interest rates

I and IV Explanation: Most preferred stock does not have a maturity date and, therefore, one of the risks of purchasing this type of security is that there is no fixed date when you will receive your principal back. These securities are less volatile than common stock, and the prices of preferred stocks are inversely related to the movement of interest rates, as are bonds. The dividend usually is paid quarterly, not annually.

Which TWO of the following investment companies are NOT open-end? NAV Offered I. $8.00 $ 7.00 II. $9.20 $10.00 III. $7.00 $ 7.00 IV. $8.00 $10.00

I and IV Explanation: Open-end companies are not offered below their current net asset value. According to the Conduct Rules, the maximum sales charge permitted for an open-end company is 8 1/2%. Choices (I) and (IV) must be closed-end companies. Choice (I) is a closed-end company because it is offered below its net asset value. Choice (IV) must be a closed-end company because when doing the sales charge calculation (sales charge divided by offering price), the result is a 20% sales charge, which is above the allowable maximum. Therefore, choice (IV) is a closed-end fund trading at a 25% premium to NAV.

An individual is in the third year of accumulating an interest in a variable annuity with a deferred sales charge. A registered representative recommends a switch to a newly created variable annuity with a larger number of subaccount choices, also offered with a deferred sales charge. Which TWO of the following statements are TRUE of this switch? I. FINRA will probably consider the switch unsuitable II. FINRA will probably not consider the switch unsuitable, since both annuities are offered with a deferred sales charge III. The switch is taxable if it qualifies as a 1035 exchange IV. The switch is not taxable if it qualifies as a 1035 exchange

I and IV Explanation: Since the investor is in the third year of accumulation, there will be a deferred sales charge incurred. By switching to another variable annuity, the individual will now be subject to the highest deferred sales charge, thus making the switch unsuitable. If a registered representative recommends that a client switch from one annuity to another within a three-year period, the representative may be considered to be churning. An exchange of annuities that qualifies for IRS Section 1035 treatment is not a taxable event.

A customer buys 10 ABC January 50 calls paying a $3 premium and 10 ABC January 50 puts also paying a $3 premium when the market price of the stock is $49 per share. The buyer's TWO breakeven points are: I. $44 II. $47 III. $53 IV. $56

I and IV Explanation: The customer has the right to call the stock at $50. The customer paid a $600 premium per straddle. The breakeven point on the call is determined by adding the $50 strike price to the premium of $6. This equals a breakeven of $56. The customer also has the right to sell the stock to the writer at $50, but has paid a $600 premium. The breakeven point on the put would be six points below the strike price of $50, which equals $44. The buyer's breakeven points, therefore, will be $44 and $56.

The bond counsel for a new municipal revenue bond issue may render a qualified legal opinion in which TWO of the following situations? I. The issuer does not have clear title to the property II. Construction of a competing facility may cut projected revenue flow III. The underwriting syndicate has not provided information that the MSRB requires IV. The project potentially could impact a national historic site

I and IV Explanation: When situations exist that could create potential problems for a proposed facility, the bond counsel will render a qualified legal opinion. These situations include (I) and (IV) in that both subject the issuer to potential legal action, whereas (II) and (III) do not deal with the legality, validity, enforceability, or tax-exempt status of the issue.

A call is purchased in February and exercised in June. The following April, the stock is sold. Which TWO of the following statements are TRUE? I. The resulting gain or loss is short-term II. The resulting gain or loss is long-term III. The cost basis of the stock is the same as the strike price IV. The cost basis of the stock is the call premium plus the strike price

I and IV Explanation: When the buyer exercises the call option, the holding period for the stock begins. In this case, the period from February to June is ignored. The subsequent sale of the stock in April makes the holding period short-term (one year or less). The cost basis for the stock is the call premium plus the strike price.

An uncle is a custodian for his nephew's account. The account receives rights to subscribe to additional stock held in the account. As custodian, the uncle may: I. Sell the rights II. Subscribe to the stock III. Buy additional rights to subscribe if additional rights are needed IV. Do whatever he considers to be in the best interest of the minor

I, II, III, and IV Explanation: The uncle may sell the rights, subscribe to the stock, or buy additional rights to subscribe if additional rights are needed. The uncle may do whatever he considers to be in the best interest of the minor.

A registered representative wants to open a joint account for the dentists in his office building. Dr. White and Dr. Enamel will each contribute equally to the account but each dentist wants his portion of the account to pass to his own estate. Which TWO of the following statements are TRUE? I. The account should be established as Joint Tenants with Right of Survivorship II. The account should be established as Tenants in Common III. All dividends and capital gains in the account will be reported by the brokerage firm under one Social Security number IV. All dividends and capital gains in the account will be reported by the brokerage firm on a percentage-of-ownership basis

II and III Explanation: The dentists should open a Tenants in Common account. If a Joint Tenants with Right of Survivorship account is used, all assets pass to the surviving owner upon the death of one of the participants. All joint accounts use only one Social Security number for tax reporting purposes. The dentists must indicate the percentage of dividends, bond interest, and capital gains they are responsible for on their individual returns.

Which TWO of the following metrics may be calculated by examining the income statement of a company? I. The debt-to-equity ratio II. The operating profit margin III. The bond coverage ratio IV. The current ratio

II and III Explanation: The operating profit margin is found by dividing the sales by the operating income or profit. The bond coverage ratio is found by dividing the interest expense by EBIT. All of this information can be found in the income statement. The debt-to-equity ratio and current ratio can be calculated by examining a company's balance sheet.

Corporations repurchase their own stock in the open market to: I. Increase the number of voting shares that the corporation holds II. Increase earnings per share III. Have stock available for stock option plans for key employees IV. Make the stock more marketable

II and III only Explanation: Corporations repurchase their own stock in the open market to increase earnings per share and to have stock available for stock option plans for key employees. Stock repurchased becomes treasury stock, which does not have voting rights, and its marketability is very difficult to predict.

An investor buys a zero-coupon corporate bond at 37. After three years, the bond's basis has accreted for tax purposes to 40. If the bond is sold for its accreted value, the investor will recognize:

No gain or loss Explanation: If a zero-coupon security is sold for its accreted value, the investor will have no gain or loss. When selling a zero-coupon security, any amount above the accreted value is considered a capital gain and below, a capital loss. According to IRS rules, the accretion added each year to the cost basis for a zero-coupon security is treated as interest income for that year.

A customer owns a call on ABC Corporation that has a $60 strike price. ABC Corporation has announced a 5-for-4 split. After the split, the customer will own:

One call for 125 shares at a $48 strike price Explanation: The company has announced a 5-for-4 split. After the split, the customer will own one call contract representing 125 shares with a $48 strike price. In an odd split, the number of contracts remains the same. The number of shares per contract is increased by multiplying 100 times the split ratio (100 x 5/4 = 125). The strike price is reduced by multiplying it by the inverse of the split ratio (60 x 4/5 = 48).

If a customer wishes to open an account to trade options, the account must be approved:

Prior to the time an initial order is accepted Explanation: If a customer wishes to open an account to trade options, the account must be approved by an ROP prior to the time an initial order is accepted.

Which of the following money-market securities assists in financing importing and exporting operations? a. Bankers' acceptances b. Treasury bills c. Eurodollar CDs d. Revenue anticipation notes

a. Bankers' acceptances Explanation: Of the choices given, a banker's acceptance (BA) is the only instrument that is used as a means of financing foreign trade. Do not confuse a BA with an ADR (American Depositary Receipt) which facilitates the trading of foreign securities in U.S. markets. A Eurodollar certificate of deposit pays interest and principal in Eurodollars (U.S. dollars deposited in nondomestic banks) and is not used to finance importing and exporting operations. A revenue anticipation note is a short-term municipal security issued in anticipation of receiving revenues from the federal or state government.

A customer has a nondiscretionary account at a broker-dealer. The customer has received a research report and has indicated that she may want to purchase a stock on the recommended list. Which of the following actions is MOST appropriate for the registered representative to take? a. Contact the customer and ask her to place an order to buy the security b. Purchase a small amount of the stock and contact the customer no later than the same business day c. Purchase a small amount of the stock and have the customer sign a written authorization form no later than the same business day d. Purchase the stock on behalf of the customer and have the order approved promptly by a principal

a. Contact the customer and ask her to place an order to buy the security Explanation: This is a nondiscretionary account and, therefore, no shares may be purchased unless the customer gives the broker-dealer an order to purchase the security.

Which of the following statements is TRUE concerning a customer who purchases an original issue discount (OID) corporate bond? a. Each year the customer will pay both federal and state income tax b. Each year the customer will pay only federal income tax c. Each year the customer will not pay any tax d. The customer will only pay tax at bond maturity

a. Each year the customer will pay both federal and state income tax Explanation: The upward adjustment in the purchase price of an original issue discount bond is called accretion. The amount accreted each year is considered interest income, which may or may not be taxable depending on the type of security. The interest on corporate bonds is subject to both federal and state income tax.

The credit rating agencies have downgraded an issuer of an exchange-traded note. Which of the following statements is TRUE? a. It will have a negative impact on the security b. It will have a positive impact on the security c. It will have no impact on the security d. The issuer will be obligated to repay the investor his principal immediately

a. It will have a negative impact on the security Explanation: Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates and the credit rating agencies downgrade the issuer of the ETN, it would impact the value of the ETN negatively.

Which of the following factors is NOT used in determining the value of an annuity unit? a. The assumed interest rate b. The value of the separate account c. Income distributions from securities held in the separate account that are reinvested d. Capital gain distributions from securities held in the separate account that are reinvested

a. The assumed interest rate Explanation: The assumed interest rate (AIR) is used to determine the subsequent payments made to the annuitant. The value of the annuity unit is determined by the value of the separate account, including all reinvested distributions.

Kyle, a client at TLC brokerage firm, anticipates a decline in the earnings of LPOP. LPOP is a thinly traded issue. Which of the following statements BEST describes what the RR should disclose to Kyle? a. The stock may be difficult to sell short because the shares may not be available to borrow b. All securities may be sold short provided the client has a margin account c. As long as the order ticket is marked sell long, the stock could be sold short d. Exchange-traded put options are available on all securities and are a less risky method to profit

a. The stock may be difficult to sell short because the shares may not be available to borrow Explanation: A client may sell short or buy a put to profit from a decline if the value of a security is anticipated. In order to sell short, the broker-dealer is required to borrow the security. Although short sales may be executed only in a margin account, if an issue is thinly traded, it may be difficult or impossible to borrow the security. A put option may be an attractive alternative to selling short. However, put options are unlikely to be available on a thinly traded security.

An investor establishes a long margin account and buys 1,000 shares of TMP at $55. The value of the securities increases and SMA is created. All of the following actions affect SMA, EXCEPT: a. The value of the securities declines b. The value of the securities increases c. Cash is withdrawn from the account d. The buying power of the accounts used

a. The value of the securities declines Explanation: The SMA remains in the account until it is used. The SMA balance will never decrease because of market movements. A decrease in the market value of the securities does not affect the SMA in a long account since, once created, SMA is reduced only when used. An increase in the market value of the securities can increase SMA, since equity increases. Withdrawing cash and buying of additional securities for the account will reduce the SMA since the SMA is used.

Investors may receive disclosure and secondary market information concerning municipal securities: a. Through the EMMA system b. Through the TRACE system c. Directly from the issuer d. From the OATS system

a. Through the EMMA system Explanation: The MSRB has established the Electronic Municipal Market Access (EMMA) system as the primary market disclosure service for official statements, other related primary market documents, and information. The EMMA system also contains information related to the continuing disclosure requirements submitted by municipal issuers and secondary market transactions submitted by municipal securities dealers. EMMA receives transactional information from the MSRB's Real-Time Transaction Reporting System (RTRS).

Which of the following choices best describes the primary cause of inflation? a. Too much money compared to the goods that are available b. Too many goods compared to the money that is available c. Foreign investments appreciating faster than U.S. investments d. U.S. investments appreciating faster than foreign investments

a. Too much money compared to the goods that are available Explanation: Inflation is a general rise in the prices of goods and services. If there is too much money in the economy, the demand for goods and services will increase, pushing up prices. This is sometimes described as too much money chasing too few goods.

Which of the following securities have the most interest-rate risk? a. 2X short-term bond leveraged ETFs b. 2X long-term bond leveraged ETFs c. Long-term bond leveraged ETFs d. Short-term bond leveraged ETFs

b. 2X long-term bond leveraged ETFs Explanation: An essential bond concept is that long-term bonds have a higher degree of interest-rate risk than short-term bonds. A leveraged ETF seeks to deliver a multiple of the performance of an index or other benchmark. Therefore, a 2X long-term bond leveraged ETF will have the highest degree of interest-rate risk of the answer choices.

If a bank holds funds above the amount required by the Federal Reserve Board, this is called: a. The federal funds rate b. Excess reserves c. The repo rate d. Excess margin

b. Excess reserves Explanation: Banks are required to keep a portion of their deposits on reserve with the FRB. By adjusting the amount banks must keep on reserve at the FRB, the Fed can tighten or ease the money supply. If reserve requirements are lowered, the banks are able to extend more credit. Thus, the money supply increases. The opposite effect occurs with an increase in reserve requirements. After meeting its reserve requirement, a bank will look to lend the remaining funds to borrowers. The amount above the reserve requirement is called excess reserves.

Which of the following choices is NOT a factor in secondary-market municipal joint accounts? a. Members may not publish different offering prices b. They require a good faith deposit c. There may be an order period d. There may be a takedown

b. They require a good faith deposit Explanation: A good faith deposit is a sum of money given to the issuer of a new municipal bond issue along with a syndicate's bid and is not a factor in secondary-market transactions. A secondary-market joint account exists when two or more dealers form an account to jointly offer a block of bonds in the secondary market. As with a new issue, there may be an order period as well as a takedown (member's discount). MSRB rules prohibit members of the account from offering the bonds at different prices.

As a retirement vehicle, which of the following choices would probably provide the greatest protection of purchasing power? a. Fixed annuities b. Variable annuities c. Corporate bonds d. Mortgage-backed securities

b. Variable annuities Explanation: Variable annuities, theoretically, provide the greatest protection against loss of purchasing power. The payout is based on the securities (mostly equity securities) in the separate account, which historically have increased in inflationary periods. This provides for a larger cash payout to offset the effects of inflation. The other choices given have a fixed payout and do not offer protection against the loss of purchasing power in inflationary periods.

Dividends paid by a corporation to its shareholders are NOT: a. Determined by a corporation's board of directors b. Voted upon by a corporation's shareholders c. In the form of cash or the corporation's stock d. In the form of stock owned in another corporation

b. Voted upon by a corporation's shareholders Explanation: A corporation can pay a dividend to its stockholders in the form of its own stock, stock owned in another corporation, or in cash. The amount of dividend to be paid is determined by the board of directors. Shareholders do not vote on dividend payments.

Which of the following choices is NOT considered an established business relationship under the Telephone Consumer Protection Act? a. You have executed two trades for the person called b. You have contacted the person twice but have not yet executed a trade c. The person called has completed an account form to retain your services d. The person has requested information but not yet opened an account

b. You have contacted the person twice but have not yet executed a trade Explanation: According to the Telephone Consumer Protection Act, a business relationship exists if the consumer has made an inquiry, application, purchase, or transaction with respect to the products or services offered by your firm. Prior solicitations do not alone establish a business relationship.

A registered representative is discussing the investment merits of ABC stock with a customer. The registered representative may say: a. "Let's buy ABC stock because we expect it to go up 4 points in the next two weeks." b. "Our mergers department is working on a leveraged buyout for ABC Corporation, so let's buy it now before it is announced to the public" c. "One of our analysts just issued a favorable research report for public use on ABC stock, which estimates a 10% growth in earnings over the next three years and it appears to be a good situation for you." d. "Let's buy ABC stock because we are in a bull market and all stocks go up in a bull market."

c. "One of our analysts just issued a favorable research report for public use on ABC stock, which estimates a 10% growth in earnings over the next three years and it appears to be a good situation for you." Explanation: This is the only statement that would not be a violation since it is a statement of fact, coupled with an opinion or estimate of what should happen in the future. The other statements are violations because they definitely state an event (the stock will go up) will occur, which cannot be known in advance. Spreading rumors is also a violation.

A registered representative has sent a preliminary prospectus to various clients who have indicated an interest in a new issue his firm is underwriting. The registered representative is notified that he has been allocated 500 shares of the new issue. The registered representative should: a. Allocate the 500 shares to his most active client b. Allocate 100 shares each to his best clients c. Contact all clients who have received a prospectus asking them if they have made a decision to purchase the new issue that is now available d. Keep the 500 shares for himself

c. Contact all clients who have received a prospectus asking them if they have made a decision to purchase the new issue that is now available Explanation: The most appropriate action for the registered representative to take is to contact all clients who have received a prospectus and ask them if they have made a decision to purchase the new issue that is now available.

The number of times the earnings of a municipal facility exceeds the interest charges and principal payments of a revenue bond for a period is called the: a. Working capital ratio b. EBITDA ratio c. Debt service coverage ratio d. Price-earnings ratio

c. Debt service coverage ratio Explanation: The number of times the earnings of a revenue bond of a municipal facility exceeds the interest charges and principal payments (debt service) for a period is the debt service coverage. Earnings before interest, tax, depreciation, and amortization (EBITDA) is a term associated with corporate bond issuers, not municipal bond issuers.

On June 21, 2011, a municipal securities salesperson decided to leave his job and try his hand at real estate sales. Although able to earn a good living, he decided that he liked municipal sales and rejoined the municipal securities firm on July 15, 2013. Which of the following statements is TRUE? a. He may resume selling municipal securities immediately b. He must wait 90 calendar days before he may sell municipal securities c. He must wait until he passes the MSRB examination for municipal representatives before he may sell municipal securities d. He must pass the MSRB examination for municipal securities representative and must wait a minimum of 90 calendar days

c. He must wait until he passes the MSRB examination for municipal representatives before he may sell municipal securities Explanation: His registration expired two years after he left the municipal securities firm. To requalify as a municipal representative, he must pass the qualifying exam. He will not need to wait 90 days, because once the apprentice period has been served, it does not need to be repeated.

For tax purposes, which of the following is NOT deducted from rental income in a real estate program? a. Depreciation b. Maintenance c. Mortgage amortization d. Property tax

c. Mortgage amortization Explanation: Expenses that are deducted from rental income in a real estate program include maintenance, property tax, depreciation, and mortgage interest. Paying off (amortizing) the principal of a mortgage is not an expense and may not be deducted from rental income for tax purposes.

In a discussion with a client, a registered representative refers to a bond yield that has been reduced by the inflation rate. This yield is known as the: a. After-tax yield b. Discount rate c. Real interest rate d. LIBOR

c. Real interest rate Explanation: The real interest rate is the yield of a security reduced by the inflation rate. While it represents earnings remaining once inflation is taken into account, the real interest rate does not factor in the tax consequences. The discount rate is the rate of interest that the Federal Reserve charges member banks for loans. LIBOR (the London Interbank Offered Rate) is the rate of interest that banks in London charge each other for short-term loans.

Taxable income normally includes: a. The interest on municipal bonds issued in the state in which the taxpayer lives b. The taxpayer's annual 401(k) contributions c. Reinvested dividends paid on a mutual fund investment d. Any unrealized capital appreciation on stocks that the taxpayer owns

c. Reinvested dividends paid on a mutual fund investment Explanation: Taxable income includes income from all sources after all applicable deductions and adjustments are made. Reinvested dividends must be declared as income and are thus taxable. Interest on municipal bonds issued in the state in which the owner resides is usually exempt from both federal and state income taxes. 401(k) contributions are made on a pretax basis and are not included in taxable income until the taxpayer begins taking distributions. Unrealized capital gains on stocks are not included in taxable income.

When selling a security for a customer, all of the following items MUST be included on the sell ticket, EXCEPT: a. The number of shares or par value b. The location of the security c. The customer's Social Security number d. The customer's account number

c. The customer's Social Security number Explanation: An order ticket must include the customer's account number, number of shares or par value (for a bond), name of the security, limitations (limit, stop, etc.), and whether it is buy or sell. If it is a sell order, the location of the security (long or short) must be indicated. The customer's Social Security number is not needed on the order ticket.

Which of the following rates is set by the Federal Reserve Board? a. The broker loan rate b. The federal funds rate c. The discount rate d. The prime rate

c. The discount rate Explanation: Of the choices given, only the discount rate is set by the Federal Reserve Board. The prime rate is the rate of interest that commercial banks charge their best-rated customers and is established by each bank. The broker loan rate, which is the rate of interest charged to brokerage firms for margin loans, is set by each bank. The federal funds rate is the charge for overnight loans between banks and is set by each bank.

An article in The Bond Buyer states that the placement ratio rose to 91.5%, up from 78.7% a week ago. Based on this information, which of the following statements BEST describes the placement ratio? a. The ratio between deals that have been announced previously and those that have already come to market b. The ratio between deals that have come to market and those that still remain on the calendar c. The percentage of bonds brought to market and placed with clients as compared to the total amount that was available for sale d. The percentage of bonds awaiting sale to the public compared to those that will be underwritten in the next 30 days

c. The percentage of bonds brought to market and placed with clients as compared to the total amount that was available for sale Explanation: The placement ratio is a means of gauging the amount of bonds that have been underwritten recently on a new-issue basis that have moved into the hands of the ultimate investor. In other words, it is the percentage of new bonds that were sold compared to those that were originally available for sale. The higher the placement ratio, the more bonds there are moving into the hands of investors.

Supplemental documentation would NOT be required when opening which of the following types of accounts? a. Guardian b. Partnership c. Uniform Transfers to Minors d. Account for an estate

c. Uniform Transfers to Minors Explanation: A copy of the court appointment of the guardian is necessary for choice (a). To open a partnership account, a copy of the partnership articles should be obtained. In the case of an account for an estate, documentation should be obtained that shows the executor or administrator is properly authorized. Many new account forms contain UTMA/UGMA as one of the standard ownership choices, making additional documentation unnecessary.

In which of the following situations does an investor have unlimited risk? a. Sold a call and is long the stock b. Sold a put and is long the stock c. Bought a call and is short the stock d. Sold a put and is short the stock

d. Sold a put and is short the stock Explanation: Selling a put and being short stock would be the only choice given where an investor would have unlimited risk. The short position would be the unlimited risk situation if the stock were to increase in value. If the market value of the stock is increasing, the purchaser of the put will not exercise the option. The short seller will lose money on the increase of the stock price. In choice (c), the short seller is protected against a rise in the stock by owning a call. In choice (a), the investor will have a loss if the price of his stock declined. However, the potential loss is limited since the stock's price can only decline to zero, creating a loss equal to the stock's cost minus the premium received for selling the call. In choice (b), the loss will again be limited to the stock's value declining to zero.

Which of the following ratios would be used by an analyst examining the capital structure of an industrial corporation? a. The current ratio b. The dividend payout ratio c. The price/earnings ratio d. The debt-to-equity ratio

d. The debt-to-equity ratio Explanation: The capital structure of a corporation is the dollar amount of the corporation's capitalization (equity and debt securities). An analyst will, therefore, be interested in the debt-to-equity ratio. This is actually the ratio of those securities creating fixed charges (bonds plus preferred stock) to common stock.

listing of coincident economic indicators includes: a. Expenditures for capital goods b. The S&P Index c. Housing starts d. The industrial production index

d. The industrial production index Explanation: The industrial production index is a coincident indicator. Coincident indicators tend to move directly with the business cycle and show what is currently happening in the economy.

Which of the following BEST describes the term, payment for order flow? a. The concession paid to a member of a selling group b. The prohibited practice of mutual fund distributors paying kickbacks to registered representatives c. The portion of a mutual fund's 12b-1 fee that is paid to a third-party salesperson d. The payment to a broker-dealer by a market maker in return for routing orders to that market maker

d. The payment to a broker-dealer by a market maker in return for routing orders to that market maker Explanation: It is permissible for broker-dealers to receive payments from a market maker in return for executing orders through that market maker. Any payments for order flow must be disclosed to customers.