Series 7 Practice Exam 8 Q&A

A customer purchased on margin 100 shares of ABC stock at 120 and sold short 100 shares of XYZ stock at 100. The customer also wrote an ABC 120 call @ 3 and an XYZ 100 put @ 2. What is the margin requirement for the combined transactions?

$11,000 Explanation: The FRB margin requirement for the purchase or short sale of stock is 50%. Therefore, the margin requirement for the stock purchase is $6,000 (50% of $12,000) and for the short sale is $5,000 (50% of $10,000). The call is covered since the customer owns the underlying stock and the put is covered since the customer is short the underlying stock. Since there is no margin requirement for a covered call or put, the total margin requirement is $11,000. If the question had asked for the cash deposit, subtract the total premiums received ($500) from the margin requirement of $11,000.

An investor purchases $25,000 of a mutual fund when the price of the fund is $13.20. In the same year, the investor receives a $400 dividend distribution and a capital gain distribution of $700. Both distributions are reinvested in additional shares at a price of $12.80. If the fund has a current value of $14.50, what is the investor's cost basis using the average cost method?

$13.18 Explanation: To calculate the cost basis using the average cost method, divide the total sum of all investments by the shares owned by the investor. The investor purchased $25,000 of the fund at a price of $13.20. The total number of shares purchased was 1,893.94. He also received a total of $1,100 in distributions, all reinvested in additional shares when the price was $12.80. The number of shares purchased is 85.94. The total amount invested is $26,100. The total number of shares owned is 1,979.88. Therefore, the average cost is $13.18. The current value of the fund is not relevant.

A GNMA pass-through is quoted 98.10 to 98.18. This quote represents a spread per $1,000 face value of:

$2.50 Explanation: GNMA pass-through certificates (as with T-notes and T-bonds) are quoted in 32nds. The spread of .08 represents 8/32 or 1/4 (.25) and has a value of $2.50 per $1,000.

An investor writes an uncovered ABC March 50 call for a premium of 4. At expiration, ABC is at $56 per share and the call option is exercised. If the stock is purchased by the writer at the current market price for delivery, what is the writer's profit or loss?

$200 loss Explanation: When the stock is called away from the writer, he is obligated to sell the stock at the strike price of 50, receiving $5,000. The writer also received the premium of $400. Since the stock cost $5,600 to buy in the market, the writer incurs a loss of $200 ($5,600 cost - $5,400 received).

A customer buys an IBM call option and pays a 2.50 point premium. The aggregate dollar amount paid is:

$250.00 Explanation: Each option contract is based on 100 shares of common stock. The dollar amount paid is $250 ($2.50 x 100 shares).

XYZ Corporation is selling 10,000,000 shares of common stock through an underwriter, at $15 per share. The underwriting spread is as follows. The manager's fee is 20 cents, the underwriting risk 20 cents, and the selling concession 60 cents. Selling group members have been allocated 500,000 shares. If the selling group members sell their entire allocation, their compensation will be:

$300,000 Explanation: Selling group members are broker-dealers who participate in the sale of the issue on a best-efforts basis (i.e., assuming no risk). They receive a selling concession (compensation) that is less than that received by syndicate members, who do assume risk. The selling concession is $.60. This is part of the $1.00 underwriting spread. If the selling group members sell their entire allocation, they will receive $300,000 (500,000 shares x $0.60 per share). Syndicate members receive the selling concession and the underwriting risk per share sold, or $.80.

With no other securities position, a customer sells short 100 shares of ABC at $40 and sells 1 ABC October 40 put for $500. The customer will break even when the price of the stock is at:

$45 Explanation: An individual who sells short risks a loss if the price of the stock rises. If the price rises to $50 and the stock is bought in the open market to cover, the loss will be $1,000 minus the premium, for a net loss of $500. If the market price rises to 45, the loss of $500 is exactly matched by the premium income of $500 and the investor breaks even. The breakeven point for a short seller who writes a put is the market price of the short sale plus the premium.

An investor buys 100 shares of XYZ at $50 per share and, at the same time, writes an XYZ May 50 call option for a $5 premium. Excluding commissions and dividends, at what price would XYZ need to be selling for the writer to break even?

$45 Explanation: The breakeven point for the writer of a covered call is the original cost of the stock minus the premium received on the option (50 - 5 = 45). If the market price were at 45 at expiration, the call would expire and the writer would keep the $500 premium. However, the stock purchased at $50 would be worth only $45, which is equal to the investor's cost.

A municipality is issuing 40,000 bonds at a public offering price of $1,000. The manager of the underwriting syndicate receives $1.50 per bond. The total takedown is $6.50 per bond and the selling concession is $4.00 per bond. When the issue is completely sold, the managing underwriter's fee will total:

$60,000 Explanation: The syndicate manager receives $1.50 for every bond. The manager will receive, in total, $60,000 (40,000 bonds x $1.50 per bond).

An investor buys a 5% municipal bond at 102 1/2. The bond has a yield to maturity of 4 1/2%. If the investor holds the bond to maturity, he will have a loss for tax purposes of:

0 Explanation: The IRS requires that a premium paid for a municipal bond be amortized over the life of the bond. At maturity, the investor will have an adjusted cost (after amortization) of par ($1,000). Since this is the amount received at maturity, there is no loss for tax purposes.

A customer sells 100 shares of GM short. GM pays a 5% stock dividend. When the customer covers the short position, the customer will need to deliver:

105 shares of GM Explanation: When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends paid are the responsibility of the customer who sold the stock short. In this example, GM paid a 5% stock dividend. Therefore, a customer who sold 100 shares of GM short would need to deliver 105 shares (100 shares x 5% = 5 additional shares) to cover the short sale.

An individual in the 28% tax bracket can purchase an 8 1/2% municipal bond at par. What taxable yield would be required to equal the yield on the municipal bond?

11.8% Explanation: The taxable equivalent yield of a municipal bond equals the municipal yield divided by the complement of the tax bracket (100% minus the tax bracket). In this example, the municipal yield (8 1/2%) divided by the complement of the tax bracket (72% or 0.72) equals 11.8%.

Use the following quote to answer this question. ABC 25.13 + .25 B 25 A 25.25 Excluding any markups, what price will a customer pay to purchase the security?

25.25 Explanation: When purchasing stock, a customer will pay the ask (offer) price. A customer selling stock will receive the bid price.

XYZ Corporation has $20 million of convertible bonds outstanding. Each bond is convertible into 20 shares of common stock. If all the bonds were converted into common stock, how many additional shares of common stock would be outstanding?

400,000 Explanation: $20 million par value ($1,000) bonds, which equals 20,000 bonds ($20,000,000 divided by $1,000 equals 20,000), multiplied by the 20-to-1 conversion ratio results in 400,000 shares of additional common stock outstanding (20,000 bonds x 20 = 400,000).

Public orders on a designated market maker's book show an inside market comprised of Broker A bidding for 100 shares of ABC Corporation at 42.25. Broker B is offering to sell 300 shares of ABC at 42.63. If the designated market maker wanted to offer stock, what is the highest price at which he may offer the stock?

42.62 Explanation: On the offer side, the DMM must be willing to sell for at least one cent lower than the offer on his book. There is an offer of 42.63 on his book. He must offer at least one cent lower, which is 42.62.

Listed equity options cease trading at:

4:00 p.m. Eastern Time on the expiration date Explanation: Listed equity options cease trading at 4:00 p.m. Eastern Time on the expiration date. Beginning February 1, 2015, the expiration date for listed equity options is the third Friday of the expiration month, at 11:59 p.m. Eastern Time.

If a municipal bond has a basis of 4.35 and a coupon rate of 4.95%, 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 4.35 basis. This means the bond has a yield to maturity of 4.35%. If the nominal yield (coupon rate) is 4.95%, this means that the bond is selling at a premium, above the par value ($1,000). If the yield to maturity (4.35%) is less than the nominal yield (4.95%), the bond is selling at a premium.

A municipal bond issued at par is purchased at a discount and later sold at par or above. This transaction will result in:

A taxable gain Explanation: If a municipal bond is purchased at a discount in the secondary market (not an original issue discount), there will be a taxable gain at maturity. A taxable gain will also result if the bond is sold prior to maturity, above the original cost.

Which of the following securities is NOT suitable for an investor with $80,000 who will need the funds in three months to purchase a house? a. A 13-week Treasury bill b. An auction rate preferred stock that resets its rate every three months c. A three-month CD that is yielding 20 basis points above the prime rate d. A money-market fund

An auction rate preferred stock that resets its rate every three months Explanation: An auction rate security is a long-term security that resets its interest rate periodically through an auction process. Since the client will need the funds in three months, any investment should be free from potential loss of principal. There is no guarantee he will be able to sell this security at the price at which it was purchased. The other three investments will offer this client very little or no principal risk.

A limited partner lends money to the partnership. The limited partner will:

Become a general creditor of the partnership Explanation: A limited partner is permitted to lend money to the partnership. He will be considered a general creditor since he was a lender.

Municipal term bond quotes are based on:

Dollar price Explanation: Municipal term bonds (bond issues that have one maturity date) are quoted based on a dollar price. Term bonds are also known as dollar bonds. Municipal serial bonds (that have several maturity dates) are quoted on a yield-to-maturity basis.

A married couple both have full-time jobs and are covered by their employers' pension plans. If they file a joint tax return and each wanted to open an IRA:

Each may do so in separate accounts and may contribute up to $5,500 in each account Explanation: Since they both have earned income, they may each establish an IRA and contribute $5,500 to each account. Joint accounts are not permitted for IRAs. A person who is covered by a corporate pension plan may continue to make contributions to an IRA.

Closing spot prices for foreign currencies are disseminated daily by the:

FRB Explanation: The Federal Reserve Board disseminates closing spot prices of foreign currencies daily.

The custodian bank of a mutual fund:

Holds the fund's cash and securities and performs essential clerical functions but does not manage the fund Explanation: The custodian bank of a mutual fund only holds the fund's cash and securities and performs important clerical functions. It does not manage the fund, which is the responsibility of the investment adviser. The custodian bank does not distribute the fund or guarantee investors against any loss that may be incurred if the fund should decline in value.

Which TWO of the following actions must be completed at or prior to an options trade? I. Send the customer a current copy of the risk disclosure document II. Have the ROP approve the account for options trading III. Deposit the customer's money in the account IV. Have the customer sign an options agreement

I and II Explanation: At or prior to the approval of an options account, a registered representative must send the customer a copy of a current risk disclosure document. Also, trades will not be executed until the account is approved for options trading by a registered options principal (ROP). Customers must sign and return the options agreement within 15 days of account approval.

Regulation T applies to: I. Cash accounts II. Margin accounts III. Commodity accounts IV. Municipal bond margin accounts

I and II only Explanation: Regulation T of the Federal Reserve Board applies to cash accounts and margin accounts. Regulation T does not apply to commodity accounts or municipal bond margin accounts. For municipal bond accounts, industry rules require a margin deposit of 7% of the market value of the bond. Margin requirements for commodity accounts are set by the individual commodity exchanges.

The Bond Buyer's 30-day visible supply includes: I. Competitive municipal bond issues II. Negotiated municipal bond issues III. Treasury bill issues IV. Corporate bond issues

I and II only Explanation: The Bond Buyer's 30-day visible supply is an indication used to reflect the amount of new offerings coming to the marketplace in the next 30 days. It carries figures for both competitive and negotiated municipal bond issues and notes maturing in 13 months or more.

Which TWO of the following statements are TRUE concerning the auction process of Treasury bills? I. The 4-week bill is offered every week II. The 13-week and 26-week bills are auctioned every month III. The 4-week-bill is auctioned on a Tuesday IV. The 13-week and 26-week bills are auctioned on a Thursday

I and III Explanation: The 4-week Treasury bill is auctioned each week on Tuesday and is issued Thursday of that same week.13-week and 26-week T-bills are auctioned weekly on Monday and are issued on Thursday of that same week. All T-bills are issued (and traded) at a discount. Noncompetitive tenders are awarded first, but the price they will pay (the lowest accepted price of the competitive tenders) cannot be determined until after the competitive tenders are awarded.

A customer has purchased a new municipal issue during the underwriting period. According to MSRB rules, the customer must receive which TWO of the following documents? I. The final confirmation showing the aggregate price II. A copy of the notice of sale III. A copy of the official statement, if prepared IV. A list of syndicate members

I and III Explanation: MSRB rules require that a copy of the official statement be sent to each purchaser of a new issue. A confirmation must be sent on every transaction, whether a new issue or a secondary market trade. A copy of the indenture and a list of the syndicate members do not need to be sent.

The term fast market is characterized by which TWO of the following descriptions? I. An imbalance of orders II. A very low number of trades III. Highly volatile prices IV. The quotes of market makers being updated very quickly

I and III Explanation: The term fast market is characterized by very heavy trading, fast moving prices, and high volatility. There also may be an imbalance in the number or shares clients are willing to buy or sell. For example, there are 500,000 shares to buy and only 100,000 shares to sell. Quotes may take a long time to update since prices and trades are moving so quickly. A client's order may take a longer time to execute, and if a market order is entered by a client, the price received may be significantly higher or lower then the quoted price.

A convertible debenture is convertible at $25. It has a nondilutive feature in its indenture. If a stock dividend is distributed, which TWO of the following statements are TRUE? I. The conversion price will be reduced II. The conversion price will be increased III. The conversion ratio will be reduced IV. The conversion ratio will be increased

I and IV Explanation: A nondilutive feature means that if there is a stock split or stock dividend, the bond's conversion features must be adjusted. The bondholder would receive more shares upon conversion because the conversion ratio would be increased. The conversion price would be reduced to permit this increase in the conversion ratio.

A customer has purchased 10 ABC January 50 calls, paying a $2 premium, and 10 ABC January 50 puts, paying a $2 premium. The market price of ABC stock is $50 per share. The buyer's breakeven points are: I. $46 II. $48 III. $52 IV. $54

I and IV Explanation: The customer has the right to call the stock at $50. He has paid a $400 premium per straddle. The breakeven point on the call is determined by adding the 50 strike price to the premium of 4. This equals a breakeven of $54. The customer also has the right to put or sell the stock to the writer at $50, but has paid a $400 premium. The breakeven point on the put is four points below the strike price of $50, which equals $46. The buyer's breakeven points will, therefore, be $46 and $54.

Which TWO of the following statements are TRUE regarding the buyer and writer of a straddle? I. The buyer of a straddle expects the market to fluctuate II. The writer of a straddle expects the market to fluctuate III. The buyer of a straddle expects the market to remain stable IV. The writer of a straddle expects the market to remain stable

I and IV Explanation: The writer (seller) of a straddle (call and put) believes the stock's price will remain stable. The buyer of a straddle expects that the market price of the underlying stock will be volatile.

Variable annuities sold by insurance companies must be registered with: I. The SEC II. The FRB III. FINRA IV. The State Insurance Commission

I and IV only Explanation: Variable annuities are generally sold by agents of insurance companies. In recent years, more and more brokerage firms and banks have begun selling variable annuities. Variable annuities are considered securities by the SEC and, therefore, must be registered with the SEC. Variable annuities must also be registered with the State Insurance Commission. The agents that sell variable annuities must be registered representatives with a Series 6 or Series 7 registration and must be licensed insurance agents.

Briana Corporation, an existing public company, is offering 500,000 shares of common stock to the public through an underwriting syndicate. The prospectus states that 250,000 shares are being offered by selling stockholders and 250,000 shares are being offered by Briana Corporation. The effect of this offering will be: I. A dilution in the earnings per share II. An increase in the earnings per share II. The number of shares outstanding will increase by 500,000 IV. The number of shares outstanding will increase by 250,000

I and IV only Explanation: After the offering is completed, there will be 250,000 new shares outstanding (The shares sold by the selling stockholders were already outstanding.) This will result in the earnings per share being diluted because the earnings will now be divided by a greater amount (250,000 shares) of new outstanding stock.

The market price of XYZ Company's stock is $60. The price-earnings ratio is 10 and earnings per share is $6.00. If the stock were to split 2-for-1, which of the following statements are TRUE? I. The price-earnings ratio will be reduced to 5 II. The price-earnings ratio will remain at 10 III. The earnings per share will be reduced to $3.00 IV. The earnings per share will remain at $6.00

II and III Explanation: A stock split will increase the number of shares outstanding while decreasing the market price of the stock. The split will also have the effect of reducing earnings per share since the number of shares outstanding will increase. The 2-for-1 split will reduce the market price to $30 ($60 x 1/2) and the earnings per share to $3.00 ($6.00 EPS x 1/2). However, the price-earnings ratio (market price/EPS), which was 10 before the split, will remain the same since both the market price and the earnings per share are reduced by the same percentage ($30/$3.00 EPS = 10).

An insider of XYZ Corp. buys company stock in the open market at $63/share. Ten months later, the insider wishes to sell the stock at the current market price of $68/share. Which TWO of the following statements are TRUE regarding this transaction? I. The sale is subject to the six-month holding period under Rule 144 II. This sale is not subject to the six-month holding period under Rule 144 III. The sale is subject to the volume limitations under Rule 144 IV. The sale is not subject to the volume limitations under Rule 144

II and III Explanation: Rule 144 requires that restricted (unregistered) stock be held for six months before it may be resold. Control stock (registered stock purchased by insiders) is not subject to a holding period requirement under Rule 144. Both restricted and control stock are subject to the volume limitations under the rule.

When an investor purchases a municipal fund security, she will pay a sales load that is stated in the official statement. Which TWO of the following statements are TRUE regarding an advertisement for this municipal fund security? I. The minimum sales load should be stated in the ad II. The maximum sales load should be stated in the ad III. Sales charges may not be reflected in performance data IV. Sales charges may be reflected in performance data

II and IV Explanation: A 529 College Savings Plan is a type of municipal fund security. If sales loads are depicted in municipal fund securities advertising, the maximum amount of the sales charge should be stated. Additionally, sales charges may be reflected in the performance data of the investment and, if they are not, a statement to that effect should be made.

Which TWO of the following securities will enable an investor to both receive interest income and have a maturity date allowing their principal to be returned in one lump sum? I. A municipal bond fund containing mostly revenue bonds II. Municipal bonds that are subject to the alternative minimum tax III. A closed-end fund containing municipal bonds of one state IV. A portfolio of municipal bonds, some which have call provisions

II and IV Explanation: All of the securities listed will pay interest income to investors. The municipal bond fund and the closed-end fund invest in municipal bonds that pay interest. The funds will then pass through these payments to the holders of these securities, either monthly, quarterly, or semiannually. Only by investing in actual bonds will an investor be able to have her principal returned in one lump sum when the bonds mature. The type of municipal bonds, whether they are callable, or whether they are subject to the AMT, is irrelevant. One of the major differences between investing in actual bonds versus bond funds is that bonds will have a maturity date and bond funds will not mature. If a 20-year bond is purchased, 19 years later it will mature in one year. A 20-year bond fund will always have in its portfolio bonds that mature in approximately 20 years. In order for an investor to receive her principal with a bond fund, the investor is required to sell or redeem her shares of the fund.

Which TWO off the following sources of income would MOST likely be used by a school district to meet its debt service for general obligation bonds that it issued? I. Income tax II. Real estate tax III. Sales tax IV. Traffic fines

II and IV Explanation: General obligation bonds are backed by the full faith, credit, and taxing power of the municipality that issues the bonds. The income to pay debt service on these bonds is derived from taxes and other general revenues. For smaller local governments, such as school districts, it would include primarily real estate taxes (also called property or ad valorem tax). In addition, traffic and other types of local fines may also be used. Income taxes and sales taxes would most likely be used to meet the debt service of larger issuers, such as states and large cities.

A customer is most interested in safety of principal and wishes to avoid risk. List the securities you would recommend to the customer from those with the LEAST risk to those with the MOST risk. I. General obligation bonds II. Treasury notes III. Treasury bills IV. Revenue bonds

III, II, I, and IV Explanation: The safest security with the shortest maturity is Treasury bills, followed by the longer-term Treasury notes, followed by general obligation bonds, and then revenue bonds.

An application to purchase a variable annuity need NOT be approved by a principal:

If the application is not submitted through a broker-dealer Explanation: An application for the purchase of a variable annuity that is received directly from the customer need not be approved by a principal. If the application is submitted through a broker-dealer, it must be approved by a principal or rejected.

During the first year, an investment in an oil and gas drilling program will generate the largest deduction from:

Intangible drilling costs Explanation: Intangible drilling costs may be taken as an expense item. Therefore, these costs provide a large deduction in the first year. Depletion and depreciation provide deductions that are spread out over a period of years. Production is an income item, not a deduction.

If the FOMC enters into a repurchase agreement, what is the immediate effect on the amount of money in the banking system?

It increases the amount Explanation: In a repurchase agreement (Repo), the Federal Open Market Committee first buys the government securities. This action adds money to the banking system. A short time later the dealer repurchases the securities from the Fed. Whether the transaction is a repo or reverse repo is determined by considering the dealers point of view.

Rosewood Securities LLC has been accused of buying and selling securities for the purpose of creating artificial trading activity. Which of the following choices BEST describes this activity? a. Churning b. Matched orders c. Capping d. Stabilization

Matched orders Explanation: A matched order is also known as painting the Tape. It is an illegal activity based on a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity. The intention of this activity is to lure unsuspecting investors into trading the stock because of the appearance of unusual trading volume. The manipulators have already taken a position in the stock, and hope to influence the market (illegally) to make their position profitable through this fake heavy trading volume. Churning is a violation in which a salesperson effects a series of transactions in a customer's account that are excessive in size and/or frequency in relation to the size and investment objectives of the account. A salesperson churning an account is normally seeking to maximize her income (in commissions, sales credits or markups) derived from the account. Capping is a situation where a manipulator is attempting to stop a securities price from rising. Stabilization is a practice used in connection with certain public offerings in which an underwriter posts an open bid for securities at a stated price. Stabilization is intended to maintain an orderly market for the securities during the underwriting and to prevent sharp fluctuations in the market for the securities due simply to supply factors. Properly disclosed, this is an acceptable practice.

A customer entered a market order to purchase 100 shares of XYZ Corporation. The brokerage firm confirms to the customer the purchase of 100 shares of XYZ Corporation at 28.25. The firm later finds that the purchase was actually executed at 28.75. The customer:

Must pay 28.75 Explanation: The customer must pay 28.75, which was the actual purchase price, even though the brokerage firm confirmed (erroneously) to the customer that the purchase was made at 28.25.

Pickette Financial Services is participating in the IPO of Swank Tanks, Inc., as the managing underwriter. If a research analyst at Pickette wants to initiate coverage on Swank Tanks, she:

Must wait 40 calendar days after the offering date Explanation: A research analyst of Pickette Financial Services must wait 40 days after the date of the offering to publish a research report, or make a public appearance. This quiet period is applied to members that have agreed to participate as a manager or comanager of the IPO. Other participants, such as syndicate and selling group members, must wait 25 days to publish a research report or make a public appearance after the IPO date.

In an effort to secure more trading activity with a high net worth customer, a registered representative agrees to return part of the commission on trades to reduce the cost of the transactions. This practice is:

Not permitted Explanation: This practice is known as rebating and is prohibited.

An individual sells investment company products after passing the General Securities Representative Examination (Series 7). According to MSRB rules, if this individual will be selling municipal securities:

Nothing more is required Explanation: Passing the General Securities Representative Examination (Series 7) satisfies the MSRB examination requirement for municipal securities sales limited representatives. This registration allows a person to engage in sales to, or purchases from, customers in municipal securities. In this case, the individual need not complete an apprenticeship period due to prior experience. Experience as a general securities representative, mutual fund salesperson, or government securities representative would fulfill the apprenticeship requirement.

The major provisions of ERISA provide protection for:

Private sector employees against improper investments by their employer Explanation: ERISA provides private sector employers with guidelines for proper investments in employee pension plans. This provides protection for employees against improper investments by their employer. ERISA does not apply to public sector (government) plans.

A term bond has a mandatory sinking fund call feature. What method will be used to determine which specific bonds will be called?

Random selection Explanation: Random selection is the method used to call term bonds

A stop order will NOT be used to: a. Protect a gain when a long stock position appreciates b. Limit a loss if the market price of a short position increases c. Receive a specific price when buying or selling d. Limit a loss if the market price of a long stock position decreases

Receive a specific price when buying or selling Explanation: A knowledgeable investor will use a sell stop order to protect a profit (or limit a loss) in a long position and a buy stop order to limit a loss in a short position. A sell stop order is entered below the current market and becomes a market order when the stop price is reached or penetrated on the downside. A buy stop order is entered above the current market and becomes a market order when the stop price is reached or penetrated on the upside. Since it becomes a market order when the stop price is hit or penetrated, there is no guarantee as to execution price.

The Federal Reserve Board was given the authority to set margin requirements according to the provisions of the:

Securities Exchange Act of 1934 Explanation: The Securities Exchange Act of 1934 gave the Federal Reserve Board the power to set margin requirements. This is done through Regulation T (for broker-dealers) and Regulation U (for banks and lenders other than broker-dealers).

A client wants to purchase 10 RSR July 45 calls and 10 RSR July 45 puts. This transaction:

Should be executed on one order ticket Explanation: This type of option transaction is a long straddle. Advanced option strategies such as spreads and straddles should be executed on one order ticket. They do not need to be approved in advance by a registered options principal (ROP).

To whom may a registered representative appeal a finding by a Hearing Panel?

The National Adjudicatory Council Explanation: The first appeal of the finding of a Hearing Panel must be made within 25 days after service of a decision, to FINRA's National Adjudicatory Council (NAC). The NAC findings may then be appealed to the SEC, whose findings may be appealed to the federal court system.

Rockland County has issued industrial development revenue bonds for the benefit of the Hudson Nail and Screw Co. In evaluating the credit quality of these bonds, an investor should look primarily at:

The revenue stream of Hudson Nail and Screw that will be committed to meet the lease payment obligation to Rockland County Explanation: The security backing the industrial development revenue bond is the lease payment made by the corporation. An investor must assess whether Hudson Nail and Screw can meet this obligation by generating sufficient revenues from its primary business

Under what circumstances may a husband and wife both be custodians in one minor's account?

Under no circumstances Explanation: There may be only one custodian for a minor's account. Either the husband or the wife may be the custodian. However, they may not both be custodians for the minor's account.

The fluctuations in the value of a variable annuity will correspond with the fluctuations in the:

Value of the securities held in the separate account of the annuity Explanation: The fluctuations in the value of a variable annuity will correspond with the fluctuations in the value of the securities held in the separate account of the annuity. This is the securities portion of the annuity.

Which of the following bonds results in the highest real interest rate? a. A bond yields 8% when inflation is at 3% b. A bond yields 12% when inflation is at 8% c. A bond yields 10% when inflation is at 7% d. A bond yields 6% when inflation is at 4%

a. A bond yields 8% when inflation is at 3% Explanation: The real interest rate, also called the real rate of return, refers to yields adjusted for inflation (yield minus inflation rate). Choice (a) provides the highest real interest rate (8% bond yield minus 3% inflation rate equals 5% real interest rate).

A REIT is NOT used for a tax shelter because it does NOT: a. Allow flow-through of losses b. Allow flow-through of income c. Provide limited liability d. Offer income potential

a. Allow flow-through of losses Explanation: A REIT allows the flow-through of income, but not losses. Shareholders have limited liability. While a REIT is similar in structure to a mutual fund, it is not defined as an investment company. Also, while it may invest in real estate properties, it is not considered to be a limited partnership. Partnerships can pass through losses.

Which of the following choices is NOT present in an equipment leasing program? a. Depletion b. Depreciation c. Interest expense d. Possibility of recapture

a. Depletion Explanation: Depletion relates to natural resources only (oil and gas, for example).

A customer in his late twenties wants capital appreciation and is willing to take a moderate degree of risk in his initial investment. The customer is also concerned about the inflationary risk to his portfolio. Which of the following investments is MOST suitable? a. Equities b. Corporate debt c. Municipal debt d. Variable annuities

a. Equities Explanation: Since the investor is concerned about inflationary risk, and is willing to accept a moderate degree of risk to his initial investment, equities would be the most appropriate investment. If the investor wanted a tax-deferred investment with the same investment objectives, variable annuities would be the most suitable choice.

Which of the following descriptions regarding the Capital Asset Pricing Model (CAPM) is NOT TRUE? a. It predicts future values for the stock b. It was developed to explain the behavior of security prices c. It provides a mechanism to assess risk and return d. It is based on the efficient market theory and assumes investors act rationally

a. It predicts future values for the stock Explanation: CAPM does not establish a price objective for the stock. All of the other descriptions listed are correct.

Which of the following choices is Moody's BEST rating for a municipal note? a. MIG 1 b. MIG 3 c. Aaa d. AAA

a. MIG 1 Explanation: MIG stands for Moody's Investment Grade and is used to rate municipal notes. There are three MIG ratings, with the best rating being MIG 1 and the lowest rating being MIG 3. Aaa is Moody's best rating for bonds.

Listed below are a group of mutual funds. Net Asset Value Offer Price Net Change Dreyfus 11.55 12.67 -.05 Wellington 12.70 13.85 +.07 Lenox 5.14 5.14 +.09 Sentry 13.42 14.63 -.08 Lenox fund is most likely a: a. No-load fund b. Closed-end fund c. Balanced fund d. Growth fund

a. No-load fund Explanation: The Lenox fund is a no-load fund. The net asset value (bid price) and offering price (asked price) of a no-load fund are the same. There is no sales charge.

Which of the following risks for an agency-backed CMO is LEAST important to an investor in a rising interest-rate environment? a. Prepayment risk b. Credit risk c. Interest-rate risk d. Extension risk

a. Prepayment risk Explanation: Prepayment risk is associated with a falling interest-rate environment in which mortgage holders refinance or repay their mortgages at a faster rate. The holder of a CMO, therefore, receives a larger portion of the principal earlier than anticipated and is forced to reinvest at lower rates. Many CMOs are created from government agency mortgage-backed securities (MBS), which have a minimal amount of credit risk. Some CMOs are constructed without this backing and, therefore, credit risk is a greater concern. CMOs, as with most fixed-income securities, carry interest-rate risk. Extension risk is the opposite of prepayment risk, where interest rates are rising and the CMO holder receives a smaller portion of her principal back.

An investor would purchase an inverse exchange-traded note if: a. She anticipates a decrease in the benchmark that is being tracked b. She anticipates an increase in the benchmark that is being tracked c. She is interested in obtaining a long-term capital gain d. She is interested in obtaining income on a regular basis

a. She anticipates a decrease in the benchmark that is being tracked 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. These securities are not like traditional fixed-income securities since they typically do not make interest payments to investors. The returns are linked to the performance of an index, currency, or commodity and would be suitable for investors who want to speculate on the value of an index. An inverse ETN would pay the opposite of the benchmark that is being tracked and would be suitable for a person interested in short-term trading. Most ETNs are traded on a national exchange (NYSE) and, therefore, an investor can quickly sell the security to earn a short-term gain.

An investor with an investment objective of speculation wants to purchase a security that will increase three times as much the Russell 2000 Index. Which of the following securities would you recommend? a. An inverse exchange-traded fund (ETF) b. A leveraged exchange-traded fund (ETF) c. A leveraged inverse exchange-traded fund (ETF) d. An exchange-traded fund (ETF)

b. A leveraged exchange-traded fund (ETF) Explanation: A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. For example, a 3X leveraged ETF based on the Russell 2000 Index seeks to deliver three times the performance of that index. So, if the Russell 2000 Index rises by 1%, a leveraged ETF would increase by 3% before fees and expenses. Choice (a) would be suitable if the customer anticipated a decrease in the Russell 2000, choice (c) would be suitable if the customer wanted a return that was a multiple or higher return and anticipated a decrease in the Russell 2000, and choice (d) would be suitable if the customer only wanted to track the return of the Russell 2000.

According to MSRB rules, which of the following documents need not be approved by a principal prior to being sent to a customer? a. An abstract of an official statement b. A preliminary official statement c. An advertisement regarding the firm's products and services d. A research report

b. A preliminary official statement Explanation: A preliminary official statement is prepared by or for the issuer. Since the MSRB does not have the power to regulate issuers, a preliminary official statement cannot be considered advertising under MSRB rules. However, an abstract (summary) of the official statement is prepared by a dealer and is, therefore, considered advertising. A final official statement and a firm's offering list are also not considered advertising.

A registered representative has a 33-year-old client with a stable income with no foreseeable need to access money. The client is looking for a long-term investment that will offer a guaranteed rate of return, that can also share in the performance of the stock market, and offers some form of death benefit. Which of the following investments is MOST suitable for this client? a. A fixed annuity b. An equity-indexed annuity c. A variable annuity d. A varialble life insurance policy

b. An equity-indexed annuity Explanation: An equity-indexed annuity will satisfy the objectives of this client. It is a hybrid investment which offers the benefits of a fixed annuity -- guaranteed rate of growth -- as well as those of a variable annuity -- growth potential in the market. These, like most annuities, are not designed as short-term investments. The variable life insurance policy is designed to provide death benefits that can increase because of growth in the market.

Which of the following statements is TRUE concerning a customer who purchases an original issue discount (OID) U.S. government security? 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 maturity

b. Each year the customer will pay only federal income tax Explanation: The upward adjustment in the purchase price of an original issue discount bond is called accretion. The amounted accreted each year is considered interest income, which may or may not be taxable depending on the type of security. The interest on U.S. government securities is subject to federal income tax, but exempt from state and local income taxes.

A company has chosen accelerated depreciation instead of straight-line depreciation. Which of the following statements is TRUE? a. Earnings are overstated in the early years and understated in later years b. Earnings are understated in the early years and overstated in later years c. Earnings are understated in both early and later years d. Earnings are not impacted by the method of depreciation

b. Earnings are understated in the early years and overstated in later years Explanation: Accelerated depreciation allows a company to take a larger amount of the cost of an asset as a deduction in the early years and less in the later years. Since large deductions are taken, earnings will be understated (reduced) in the early years. Small deductions in later years will overstate earnings.

According to CAPM, all of the following choices are examples of diversifiable, nonsystematic risk, EXCEPT: a. Credit risk b. Interest-rate risk c. Business risk d. Industry risk

b. Interest-rate risk Explanation: Interest-rate risk is the systematic risk for bonds just as beta measures the systematic risk for stocks. Systematic risk is market risk, which persists despite diversification.

Which of the following statements is TRUE about treasury stock? a. It receives dividends b. It is treated as a deduction from outstanding shares c. It has voting power d. It is part of unauthorized stock

b. It is treated as a deduction from outstanding shares Explanation: Treasury stock is issued stock that has been repurchased by the corporation and is retired. It is treated as a deduction from the outstanding shares of a corporation and is no longer part of the capitalization of the corporation. It has no voting rights and does not receive dividends.

JULY 20XX S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Use the calendar to answer this question. If an investor bought a stock in a cash account on July 2, when will the settlement date be in a regular-way transaction? a. July 5 b. July 8 c. July 9 d. July 12

b. July 8 Explanation: July 8 is the settlement date. This is three business days after the trade date in a regular-way transaction in a cash or margin account. Thursday, July 4 is not a business day. It is a legal holiday and is not counted. The third business day after the trade date of July 2 is July 8.

Which of the following option orders may be accepted by an order book official? a. Discretionary b. Limit c. Spread d. Not-held

b. Limit Explanation: An order book official on the floor of an options exchange is permitted to accept limit orders only.

Which of the following securities would be LEAST suitable for an investor interested in preservation of capital? a. Long-term CDs b. Reverse convertible bonds c. A corporate bond fund d. A floating rate bond maturing in five years

b. Reverse convertible bonds Explanation: Reverse convertible securities would not be suitable for an investor interested in preservation of capital. Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal (the most beneficial option). If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.

According to MSRB rules, a municipal securities representative is NOT permitted to: a. Trade securities b. Supervise a branch office c. Structure new issues of revenue bonds d. Work in the syndicate department

b. Supervise a branch office Explanation: Under MSRB rules, any person in a supervisory position must qualify as a principal.

Which of the following situations requires a DK (don't know) notice? a. The firms do not have a clearing agreement b. The firms disagree on the amount of shares in the trade c. One of the firms is not a market maker d. The trade is executed on an ECN

b. The firms disagree on the amount of shares in the trade Explanation: A DK notice is used for a don't know trade. This occurs when one side does not recognize the trade or the firms disagree on the details. Choice (b) is the only situation that would require a DK notice.

Which of the following factors would be LEAST useful when analyzing the credit risk of an issuer of revenue bonds? a. Engineering reports b. The ratio of the amount of net overall debt to assessed valuation c. Debt service coverage ratio d. Special taxes

b. The ratio of the amount of net overall debt to assessed valuation Explanation: The ratio of the amount of net overall debt (both direct and overlapping) to assessed value is useful in analyzing the credit risk of an issuer of general obligation bonds. A special tax bond is a type of revenue bond and, therefore, the amount of special taxes may be useful in analyzing the credit risk of an issuer of a revenue bond.

Which of the following statements is TRUE concerning the sale of restricted securities? a. If the company is listed on Nasdaq, there is no holding period b. The sale must conform to the provisions of SEC Rule 144 c. A brokerage firm may act only in an agency capacity d. The sale must be at the bid price as determined by the current quote of the outstanding securities

b. The sale must conform to the provisions of SEC Rule 144 Explanation: The sale of restricted securities must conform to the provisions of SEC Rule 144. There is a six-month holding period even if the securities are listed on Nasdaq or the NYSE. A brokerage firm may act in an agency or principal capacity. The sale does not need to be at the bid price as determined by the current quote of the outstanding securities. The sale can be made at whatever price is agreed upon between the buyer and seller.

Gross Domestic Product (GDP) has declined for two consecutive quarters in the U.S. Which of the following industries will most likely be negatively affected by this downturn in the economy? a. Cosmetics b. Transportation c. Food d. Medical

b. Transportation Explanation: Two consecutive quarters of declining GDP figures would be considered recessionary by most economists. Transportation stocks (e.g., railroads, trucking, airlines) are cyclical and the performance of these companies will be affected directly by this event.

Which of the following would increase a partner's basis in a limited partnership? a. Cash distributions b. Losses c. A pro-rata portion of a recourse loan d. Assessments not met by the partner

c. A pro-rata portion of a recourse loan Explanation: A partner's basis in a limited partnership represents the maximum loss that the limited partner may sustain in the program. It is increased by income, additional contributions made by the partner, and the portion of a recourse loan for which the partner is responsible. The basis is reduced by cash distributions and losses. Assessments not met by the partner normally result in a dilution of the partner's ownership interest.

A put option may be written in a cash account if the investor: a. Is long the underlying security in the account b. Is short the underlying security in the account c. Has cash in the account equal to the exercise price d. Is long a call option on the same underlying security

c. Has cash in the account equal to the exercise price Explanation: To write a put in a cash account, the customer must have cash in the account equal to the exercise price. If the writer is short the underlying stock, the put is considered covered for margin purposes, but this transaction may not be written in a cash account, only in a margin account.

Mrs. Smith is short 100 shares of DEF stock. She is concerned that the stock is going to increase in price temporarily, but does not want to cover the short position. Which option position gives Mrs. Smith the BEST protection? a. Long 1 DEF put b. Short 1 DEF put c. Long 1 DEF call d. Short 1 DEF call

c. Long 1 DEF call Explanation: The best possible upside protection can be accomplished with the purchase of 1 DEF call. If Mrs. Smith is long a call, this allows her to buy the stock from the writer if the stock goes up, thus protecting the short position.

A registered representative finds that most of his customers are reluctant to buy stocks due to extreme market volatility. Until the volatility subsides, which of the following actions is NOT a suitable strategy to recommend to these nervous clients? a. Invest in money-market funds b. Invest in Treasury securities c. Offer to reimburse customers who lose money in stocks d. Invest in CDs

c. Offer to reimburse customers who lose money in stocks Explanation: Industry rules prohibit registered representatives from guaranteeing customers against loss. During times of uncertainty and extreme volatility, high quality and short-term investments are normally good recommendations for investors who are reluctant to buy stocks.

All of the following documents must be accompanied or preceded by an OCC risk disclosure document, EXCEPT: a. Options research reports b. A standardized options worksheet discussing straddles c. Options advertising that appears in the newspaper d. Options sales materials discussing projections

c. Options advertising that appears in the newspaper Explanation: Options advertising is a type of retail communication, which must make the offer to send the OCC risk disclosure document upon the customer's request. Options retail communications must be approved by a registered options principal (ROP) prior to use. Options-related retail communications that discuss projections, must be approved by a ROP prior to use and preceded or accompanied by a risk disclosure document.

Which of the following activities does NOT take place during the cooling-off period? a. The due diligence meeting b. Issuing a red herring c. Stabilizing the issue d. Blue-Skying the issue

c. Stabilizing the issue Explanation: When a new stock issue is going to be offered, a registration statement must be filed with the SEC. After the filing, there is a period when the SEC reviews the information to ensure full disclosure. During the cooling-off period, a preliminary prospectus (red herring) is prepared to be used to receive indications of interest from the public. The issue must be registered in each state in which it will be sold according to state (Blue-Sky) laws. Prior to the completion of the final prospectus, a due diligence meeting is held where all concerned parties (issuer and underwriter) meet to insure that everything has been done properly. Stabilization of the issue takes place after the new security is selling in the market.

Fred Brick recently requested annuitization after contributing to a variable annuity for 12 years. The actuary applied an assumed interest rate of 3% and determined his first payment. The performance of the separate account on an annualized basis for the three months following annuitization is: 5%, 3%, and 4%, respectively. Which of the following statements can be made about Mr. Brick's payments? a. Payments rose in each of the three months b. Payments remained the same in each month c. The third payment was higher than the previous month's payment d. His total payments have increased by 12%

c. The third payment was higher than the previous month's payment Explanation: If the performance in the separate account is greater than the assumed interest rate (AIR), payments will increase. If performance is less than the AIR, payments will decline, and if performance equals the AIR, payments will remain the same. Comparisons are made to the previous month and not to the original month. In the third month, the performance of 4% was higher than the AIR, resulting in a payment that was greater than the previous month's payment.

The security with the longest expiration date would normally be a: a. Put b. Call c. Warrant d. Right

c. Warrant Explanation: A warrant generally has an expiration date longer than a put, call, or right. There are some warrants which never expire.

An investor who is in his late 80s wants tax-free income and the ability to provide funds for his children after his death. Which of the following choices should an RR recommend? a. An asset allocation mutual fund b. A portfolio of long-term municipal bonds c. A laddered corporate bond portfolio d. A laddered municipal bond portfolio

d. A laddered municipal bond portfolio Explanation: Through municipal bond purchases, investors receive tax-free income. A laddered portfolio is one that invests in the same type of bonds with different maturity dates. When the first bond matures, the proceeds are then reinvested in the long side (i.e., longest maturity) of the ladder. By laddering the portfolio, investors will have greater access to money if the need arises. For instance, if short-term funds are needed (e.g., a person wants to provide funds for his children), the investor may use the amount that is maturing rather than being forced to sell the longer term bonds in the secondary market.

A type of money-market security usually collateralized by U.S. Treasury securities, in which an investor agrees to lend funds to a broker-dealer for a specified time and rate, is called: a. Federal funds b. A reverse repurchase agreement c. LIBOR d. A repurchase agreement

d. A repurchase agreement Explanation: In a repurchase agreement (repo), a dealer sells securities (usually T-bills) to an investor and agrees to repurchase them at a specific time, at a specified price. In effect, the dealer is borrowing funds from an investor and securing the loan with securities (a collateralized loan). The investor (the lender) receives the difference between the purchase price and the resale price of the securities in return for making the loan. If a dealer purchases securities and agrees to sell them back to an investor at a specific date and price, this is known as a reverse repo or matched sale. In this situation, the dealer lends funds (with securities as collateral) to the investor and earns the difference in sales prices. Many corporations and financial institutions, as well as dealers, engage in repos and reverse repos. Repos and reverse repos are typically short-term, with most being overnight transactions. In most cases the transaction is determined from the dealer's point of view. In other words, if the dealer is borrowing funds and the customer is lending, it is a repo. If the customer is borrowing funds and the dealer is lending it is a reverse repo. If the transaction is between two dealers, determination of whether the transaction is a repo or reverse repo depends on which dealer initiates the transaction.

A customer's account is currently frozen. A registered representative is NOT permitted to accept: a. An order in a cash account if all the money is in the account before the order is entered b. An order in a margin account if the total dollar amount of the purchase is in the account before the order is entered c. A sell order for a security in a cash account if the security is in the cash account before the order is entered d. A sell order for a security in a cash account if the security is not in the account before the order is entered

d. A sell order for a security in a cash account if the security is not in the account before the order is entered Explanation: When an account is frozen, the customer must have in the account what is required to complete the trade before an order may be accepted. This means that the required monies or securities must be in the account prior to accepting any purchase or sale orders. Choice (d) is not permitted as the securities are not held in the account at the time of accepting the sell order.

Which of the following services does NOT rate fixed-income securities? a. Moody's b. Standard & Poor's c. Fitch d. AMBAC

d. AMBAC Explanation: AMBAC insures new municipal bond issues. Moody's, Standard & Poor's, and Fitch are credit rating services.

All of the following information should be obtained by a registered representative when opening a new account for a customer, EXCEPT the: a. Street address b. Tax identification number c. Occupation d. Education

d. Education

A high net worth investor seeking safety of principal would MOST likely invest in: a. Non-investment-grade municipal revenue bonds b. Non-investment-grade corporate bonds c. The maximum amount allowable in a 529 plan d. Investment-grade municipal revenue bonds

d. Investment-grade municipal revenue bonds Explanation: Safety of principal refers to a customer being able to preserve or retain the initial amount of the investment over its life. Many bonds will offer investors this feature. The higher the rating, the greater the likelihood the investor will achieve safety of principal. Investment- grade municipal revenue bonds will offer safety of principal and will also offer a high net worth investor tax-exempt income. A 529 plan would be beneficial if the investor's objective were tax- advantaged funding for a child's college education.

Which of the following statements is NOT TRUE concerning a structured product offered by an RR? a. They are usually registered with the SEC b. The principal that the investor would receive may be based on the value of a stock traded on an exchange c. The principal the investor would receive may be based on the value of a foreign currency d. Since this product is usually sold by a bank, the principal will be protected by the FDIC

d. Since this product is usually sold by a bank, the principal will be protected by the FDIC Explanation: Structured products may be linked to individual securities, commodities, foreign currencies, or indexes. These products are underwritten by most major financial services institutions and are usually registered as securities with the SEC. Structured products are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed by an RR when offering this product to clients.

Which of the following securities will MOST likely be subject to a withholding tax? a. An initial public offering (IPO) b. A real estate investment trust (REIT) c. A bond issued by a U.S. company that earns income overseas d. Stock issued by a foreign company that earns income in the U.S.

d. Stock issued by a foreign company that earns income in the U.S. Explanation: Choice (d) is an example of an ADR, representing stock issued by a foreign corporation that is traded in the U.S. Dividends paid to a U.S. investor on foreign securities, such as an ADR, may be subject to a withholding tax by the country from which they were paid. If the investor has securities that paid dividends that were subject to a foreign tax, the broker-dealer will send the investor a form that will report the gross amount of the dividends or interest and the amount of tax withheld by the foreign government. The fact that the company earns income in the U.S. is not relevant.

All of the following choices are characteristics of a Health Savings Account (HSA), EXCEPT: a. The amount a person may contribute each year is limited b. It is not open to individuals who are enrolled in their company's health insurance plan c. The funds may be invested in mutual funds d. The funds must be used each year and may not be carried over

d. The funds must be used each year and may not be carried over 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 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. The funds may be invested in mutual funds, although the types of funds may be limited by an HSA trustee (a financial institution). The funds do not need to be used each year and may be carried over to be used in the future. Once you reach age 65, your funds can be withdrawn at any time and are subject only to ordinary income tax. (You avoid the 20% IRS penalty.) However, you may avoid any tax by continuing to use the funds for qualified medical expenses.

Which of the following statements is NOT TRUE regarding the purchaser of a put option? a. The purchaser has a right to sell stock b. The purchaser limits the amount of money he could lose if the value of the underlying stock increases c. The purchaser benefits if the value of the underlying stock declines d. The only way to realize a profit is to exercise the option

d. The only way to realize a profit is to exercise the option Explanation: Choice (d) is not true. The investor could profit by either exercising or liquidating the put. The other choices are true statements. The purchaser of a put has a right to sell stock. The maximum loss that a purchaser of an option (put or call) can sustain is the amount of the premium paid. The purchaser of a put can profit if the underlying stock declines in value.