Series 7 Practice Final

The municipal "Placement Ratio," as computed weekly, is defined as: A. Bonds Sold by Underwriters divided by Total New Bonds Issued B. Bonds Sold by Underwriters divided by the Bond Buyer Index C. Total New Bonds Issued divided by Bonds Sold by Underwriters D. Bond Buyer Index divided by Bonds Sold by Underwriters

The best answer is A. The ratio is computed weekly. A high ratio shows most new issues are being absorbed by the investing public. A low ratio shows that the public is not buying and the bonds remain on dealers' shelves.

A bond counsel would render a qualified legal opinion in which of the following circumstances? I Liens on certain real properties prevent the issuer from obtaining clear title to those assets II Pending litigation against the issuer may affect future revenues from the project III Underwriters for the issue have not complied with MSRB disclosure requirements in connection with the sale of the issue A. I and II B. II and III C. I and III D. I, II, III

The best answer is A. A municipal bond counsel examines the legal and tax aspects of a proposed bond issue and renders an opinion as to whether the issue is valid and binding on the issuer and also gives an opinion on the tax status of the interest income. A qualified opinion is one where the bond counsel has some reservations about the issue, so instead of giving a "clean" opinion, the counsel renders one that has some "qualifications." If the issuer does not have clear title to project assets, say the land on which the project is to be built, then the counsel would qualify the opinion, stating the reason why. Thus, anyone buying the bonds who reads the opinion knows that this "problem" exists which has potential consequences (such as a person proving that he owns the land and wants the facility moved). Pending litigation is another reason for the bond counsel to qualify an opinion, since an adverse legal ruling can negatively impact the project. The bond counsel's relationship is with the issuer and not the underwriter. The bond counsel has no involvement with the underwriter and the actual sale of the bonds, making Choice III incorrect.

A communication sent to 10 prospective retail clients and 20 existing institutional clients is defined as (a(n)): A. Correspondence B. Retail Communication C. Public Appearance D. Institutional Communication

The best answer is A. FINRA has 2 basic definitions of communications with the public: Correspondence: A written or electronic communication made available to 25 or fewer existing or prospective clients Retail Communication: A written or electronic communication made available to more than 25 existing or prospective clients.

Distributions after age 59 ½ from tax qualified retirement plans are: A. 100% taxable B. partial tax free return of capital and partial taxable income C. 100% tax free D. 100% tax deferred

The best answer is A. Contributions to tax qualified plans such as Keogh Plans are tax deductible. They are made with "before-tax" dollars, hence those funds were never taxed. Earnings accrue tax deferred. When distributions commence, since no tax was paid on the entire amount, the distribution is 100% taxable.

If a customer does not give a broker his or her instructions, cost basis reporting on Form 1099-B for a stock holding where there have been multiple purchases at different times is done on a: A. FIFO basis B. LIFO basis C. Specific identification basis D. Random selection basis

The best answer is A. Cost basis reporting to the IRS is required on Form 1099-B. The Form includes the cost basis of the security, the sale proceeds, and whether the holding period is short term or long term. If there are multiple purchases of the stock position, absent customer instructions, FIFO is used to report cost basis. If the customer gives instructions to the broker, then specific identification can be used - which is beneficial if higher cost shares are selected to either reduce capital gains or increase reported capital losses.

A retired customer that has a portfolio of blue chip stocks is looking to supplement his retirement income. An appropriate recommendation would be to: A. sell covered calls B. sell naked calls C. sell covered puts D. sell naked puts

The best answer is A. Covered call writing is the most popular retail income strategy in a flat market, and is appropriate for conservative investors that are looking for extra income. The customer sells calls against stock that is already owned, getting premium income. If the stock stays flat, the calls expire and the customer keeps the premium. If the stock rises, the calls are exercised and the stock is called away at no loss to the customer. If the market falls, the calls expire and the customer loses on the stock (which he would have lost on anyway!).

What is the penalty imposed for excess contributions to an IRA? A. 6% of the excess contribution B. 8 1/2% of the excess contribution C. 10% of the excess contribution D. no penalties are imposed

The best answer is A. Excess contributions to an Individual Retirement Account are subject to a 6% penalty tax. Do not confuse this penalty with that imposed on a premature distributions from an IRA. Premature distributions (prior to age 59 1/2) are subject to a 10% penalty tax.

Intrastate offerings are exempt from: I Federal registration II State registration III FINRA regulation A. I only B. II only C. I and III only D. I, II, III

The best answer is A. Intrastate offerings are exempt from SEC registration, but are still subject to registration within the state where the offer is being made. In addition, the terms of the offering must be filed with FINRA and must comply with FINRA rules.

Municipal bond traders execute transactions in all of the following ways EXCEPT: A. on the floor of recognized exchanges B. with bank dealers in the over-the-counter market C. with brokerage wire houses in the over-the-counter market D. with municipal broker's brokers

The best answer is A. Municipal bonds are traded in the over-the-counter market - with bank dealers, other brokers, as well as with municipal broker's brokers. They are not traded on national stock exchanges.

Municipal dollar bonds are generally: A. term bonds B. series bonds C. serial bonds D. short term maturities

The best answer is A. Municipal dollar bonds (quoted on a percentage of par basis) are term bonds. Municipal bonds quoted in basis points (yield quotes) are serial bonds.

The minimum price at which an open end fund share can be purchased is: A. Net Asset Value B. Net Asset Value plus a commission C. Market Price D. Market Price plus a commission

The best answer is A. Mutual fund (open-end management company) shares are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a "sales load." For a "no load" fund, the customer would simply pay Net Asset Value - this is the minimum price for an open-end fund. This contrasts to a closed end fund, where the fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed-end fund share is purchased at the prevailing market price plus a commission.

Which of the following will increase the tax basis of a limited partnership interest? A. Distributive share of partnership income B. Distributive share of partnership loss C. Cash distribution from the partnership D. Principal repayment of recourse debt by the partnership

The best answer is A. The "basis" is the theoretical value of the investment in the partnership. The "basis" amount establishes the limit of tax deductions that may be taken by the partner - so the larger the basis, the better it is for the partner.

Of the choices offered, the most actively traded option contract is the: A. Standard and Poor's 100 Index option (OEX) B. Major Market Index option (XMI) C. Value Line Index option (VLE) D. NASDAQ Index option (NDX)

The best answer is A. The Standard and Poor's 100 option contract (OEX) trades on the Chicago Board Options Exchange (CBOE) and is the most actively traded contract of the choices given. This was the first broad based index option, introduced around 1983, and it quickly achieved "market dominance." It is used extensively by institutional portfolio managers for "portfolio insurance" (buy OEX puts) and to generate extra income in flat markets (sell OEX calls). Also note that the CBOE, later on, introduced the SPX (Standard and Poor's 500 index option), which has surpassed the trading volume of the OEX - but it is not given as a choice!

A customer has invested $20,000 in a variable annuity. In the first year, the NAV increases to $21,100. At what rate will the $1,100 gain be taxed? A. 0 B. 15% C. 20% D. 25%

The best answer is A. There is no tax deduction for contributions made to a variable annuity contract. The major advantage is the tax-deferred build-up of earnings in the separate account. When distributions are taken, they are taxable at ordinary income tax rates.

Which of the following statements are TRUE regarding options advertising that is not accompanied by the ODD (Options Disclosure Document)? I It must be approved prior to use by the designated Registered Options Principal II It must be approved by the Branch Office Manager III The use of recommendations, or of past or projected performance, is permitted IV The use of recommendations, or of past or projected performance, is prohibited A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Options advertising must always be approved by the designated Registered Options Principal (the main office compliance ROP) prior to first use. The BOM (Branch Office Manager) cannot approve options advertising. Any options communication that includes a recommendation; that shows past performance; or that makes a performance projection; must be accompanied or preceded by the ODD. Since this advertisement is not accompanied by the ODD, these are all prohibited. Finally, any options communication with the public that is NOT accompanied or preceded by the ODD must be filed with the Exchange at least 10 days in advance of use. This typically applies to options advertising, but not sales literature, since sales literature is delivered with, or preceded by delivery of, the ODD.

Issuers that wish to give "earnings guidance" to research analysts must conform with the provisions of SEC: A. Regulation SB B. Regulation FD C. Regulation SK D. Regulation SP

The best answer is B. Regulation FD (Fair Disclosure), passed in 2000, is basically an elaboration of the insider trading rules. It prohibits issuers from making selective disclosure of non-public information to research analysts, mutual fund managers, and other industry professionals, unless at the same time, the information is broadly disseminated to the public. Regulation SP requires financial institutions to provide customers with a copy of their privacy policies and procedures, including whether customer information is provided to third parties; and requires that customers be given the ability to "opt out" of any such disclosures. Regulation SK standardizes the reporting of financial and non-financial information by issuers to the SEC. Regulation SB (Small Business) streamlines registration of issues by small businesses with the SEC.

Rule 103 of Regulation M requires that a market maker in a stock that is also a syndicate member in an "add-on" offering of that issue, during the 20-day cooling off period: A. must effect all trades in that stock on an upbid B. must resign as a market maker C. cannot fill any orders for that security D. can only sell the stock "long" and cannot sell "short"

The best answer is B. Rule 103 of Regulation M covers the situation where a firm in the underwriting group for an add-on securities offering also happens to be a market maker in the stock. The worry of the SEC is that the market maker, during the 20-day cooling off period, would be tempted to aggressively buy the stock to push up the market price. This, in turn, would push up the POP when it is set just prior to the effective date, which would increase the underwriters' spread. To stop this, the SEC requires that either the market maker stop making a market until the effective date; or alternatively, the market maker must act as a "passive" market maker - meaning that it cannot buy the stock at a price higher than the current high bid.

A municipal bond dealer gives a quote on a new issue 20 year, 4% General Obligation bond. The quote includes a 20 basis point mark-up. Because of the mark-up, which statements are TRUE? I The dollar price of the bond will increase II The dollar price of the bond will decrease III The yield of the bond will increase IV The yield of the bond will decrease A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Any "mark-up" of a new issue purchased by a dealer at a net offering price less a concession, as defined by the MSRB as any remuneration in addition to the concession received by the dealer as a result of increasing the offering price on the securities. If the offering price of the bond is increased, the yield on the bond must decline.

Voting of the common stockholder is required for which of the following? I When a corporation wishes to issue convertible securities II When a shareholder decides to accept a tender offer for the company's shares III When a corporation declares a stock split IV When a corporation declares a cash dividend A. III and IV B. I, II, III C. I, II, IV D. I, II, III, IV

The best answer is B. Dividend decisions are made by the Board of Directors - no shareholder approval is required. This is true whether a cash or stock dividend is being declared. Changes in the equity capitalization of a company require shareholder approval. A stock split changes par value per share, which requires a shareholder vote. The issuance of convertible securities (which can be converted to equity) is potentially dilutive to the existing common shareholders. They must vote to permit this.

Which statement is TRUE regarding the exercise of World foreign currency option contracts? A. The contracts solely settle in the foreign currency B. The contracts settle in U.S. dollars C. The contracts can be exercised any time D. A variety of standard contract sizes is available for each currency

The best answer is B. Exercise settlement of foreign currency options requires the writer to pay the holder the "in the money" amount in U.S. Dollars the next business day. Only European style contracts are available for PHLX World Currency options. Remember, American style contracts can be exercised at any time up until expiration, while European contracts can only be exercised just prior to expiration. Only one contract size (10,000 units of currency except for Japanese Yen which covers 1,000,000 units of currency) is available for each foreign currency on the PHLX.

All of the following terms apply to fixed unit investment trusts EXCEPT: A. regulated B. managed C. redeemable D. registered

The best answer is B. Fixed unit investment trusts are not managed; the portfolio is fixed and does not change. These are typically bond trusts, where a diversified portfolio of bonds is assembled and placed into trust; with units of the trust sold to investors. These are non-exempt securities that must be registered with the SEC and sold with a prospectus. They are regulated under the Investment Company Act of 1940 and are redeemable with the sponsor, who makes a market in trust units.

Growth in the separate account of a variable annuity offering a GMIB is: I guaranteed as to minimum rate II not guaranteed as to minimum rate III capped as to maximum rate IV not capped as to maximum rate A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. GMIB - Guaranteed Minimum Income Benefit will give a minimum guaranteed growth rate for an additional cost. This guarantee only occurs at annuitization and covers the accumulation phase. The maximum rate that can be earned in the separate account during the accumulation phase is not capped by the GMIB rider.

State registration (Blue Sky) requirements apply to: I registration of government and municipal securities II registration of corporate securities III registration of state chartered bank issues A. I only B. II only C. III only D. I, II, III

The best answer is B. Generally speaking, if a security is exempt from Federal law, it will be exempt under Blue Sky laws (though there are some exceptions). Governments, municipals, and state chartered bank issues are exempt under both Federal and State law; corporate issues are non-exempt.

A Municipal Finance Professional (MFP) and her spouse draw a $500 check from their joint checking account and submit it to a local mayoral campaign. Which statement is TRUE? A. The contribution can be made without subjecting the member firm to a 2-year ban only if the MFP can prove that she and her husband wanted to equally contribute $250 each to the candidate B. The contribution can be made without subjecting the member firm to a 2-year ban if both the MFP and spouse sign the check C. The contribution can be made without subjecting the member firm to a 2-year ban regardless of whose signature is on the check D. The contribution will cause the member firm to be subject to a 2-year ban prohibiting the firm from engaging in municipal securities business with that issuer

The best answer is B. If a Municipal Finance Professional and any other person sign a check for a campaign contribution drawn on their joint account and submit it to an issuer official as a contribution, each person is deemed to have made ½ the contribution under an MSRB interpretation. Thus, ½ of the $500 contribution = $250 - the maximum that can be contributed without subjecting the member firm to a ban.

Which of the following are types of joint accounts? I Guardian for an incompetent II Custodian for a minor III Tenants in Common IV Joint Tenants with Rights of Survivorship A. I and II B. III and IV C. I, II, III D. II, III, IV

The best answer is B. In a joint account, each owner can trade the account and can draw checks in the account's name. The joint account ownership options are Tenants in Common - each person has a divided interest; and Joint Tenancy - each person has an undivided interest. Guardian accounts and custodian accounts are not joint accounts - the minor or incompetent is not authorized to trade the account nor can he or she draw checks from the account. Only the Guardian or Custodian can perform these actions.

For an investor who has a Keogh Plan, which of the following statements are TRUE? I The plan is a tax qualified II The plan is non-tax qualified III Once distributions commence at age 59 1/2 or later, only the tax deferred build-up is taxed IV Once distributions commence at age 59 1/2 or later, both the original investment and the build-up are taxed A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Keoghs are tax qualified retirement plans for self employed individuals. The investment in a Keogh plan is tax deductible; and the earnings in the plan "build-up" tax deferred. Since none of the dollars were ever taxed, 100% of all distributions from Keoghs are taxable.

A customer owns 1 XYZ Jul 30 Put. XYZ goes ex dividend $.50. As of the morning of the ex date, the contract will cover: A. 100 shares at $29.50 B. 100 shares at $30.00 C. 101 shares at $29.50 D. 101 shares at $30.00

The best answer is B. Listed option contracts are not adjusted for cash dividends. They are only adjusted for 2:1 and 4:1 stock splits. For other types of stock splits and stock dividends, there is no adjustment to the contract. However, if the contract is exercised, the "deliverable" is adjusted accordingly.

Which statements are TRUE? I NASDAQ Global Market stocks have more stringent listing standards II NASDAQ Global Market stocks have less stringent listing standards III NASDAQ Capital Market stocks have more stringent listing standards IV NASDAQ Capital Market stocks have less stringent listing standards A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. NASDAQ is divided into 2 tiers of stock listings. The larger NASDAQ listings such as Microsoft or Intel are included in the "Global Market." The lower tier of smaller stocks is called the NASDAQ Capital Market. NYSE listed issues generally do not trade on NASDAQ; and companies that do not meet NASDAQ listing standards, but which are current in their SEC reports, are quoted in the OTCBB (Over-The-Counter Bulletin Board) or the Pink OTC Markets.

Which of the following statements are TRUE about Rule 147? I The rule exempts intrastate issues from Federal registration II The rule exempts intrastate issues from State registration III Both the issuer and all purchasers must be state residents IV Resale is permitted to state residents only, for the 180 day period following the offering A. I and II only B. I, III, IV C. II, III, IV D. I, II, III, IV

The best answer is B. Rule 147 exempts "intrastate" issues from registration with the SEC. However, the issue is still subject to state (blue-sky) registration. To obtain the 147 exemption, both the issuer and the purchaser must be state residents. Resale is restricted to state residents for 6 months following the offering; thereafter, the issue can be sold interstate. Note, however, that because these securities were never registered with the SEC, they cannot be publicly traded. The only way to resell them is in a "private transaction."

Which of the following are synonymous terms for the "parties" to a brokerage account? A. First Party / Customer B. Second Party / Customer C. Second Party / Broker D. Third Party / Customer

The best answer is B. The "First Party" to a brokerage account is the brokerage firm; the "Second Party" to a brokerage account is the customer; the "Third Party" to a brokerage account is anyone other than the broker or customer.

A registered representative gives a speech to 30 retail clients about investing in mutual funds, and shows a chart that compares the growth of the fund to the Standard and Poor's 500 average. This action is: A. not appropriate, since comparisons between the growth of the fund and the return of the Standard and Poor's 500 average can't be made B. allowed as long as a copy of the visual is distributed to the audience C. allowed as long as the speech content is approved by the firm's compliance officer or principal D. not allowed

The best answer is C. FINRA defines communications with the public as either: Correspondence: A communication made available to 25 or fewer existing or prospective retail clients Retail Communication: A communication made available to more than 25 existing or prospective retail clients Retail communications must be approved by a principal prior to use and can be required to be filed with FINRA. In contrast, correspondence is only subject to "post use review and approval" (as long as the firm has appropriate supervisory procedures in place) and cannot be required to be filed with FINRA. A "Retail Communication" is a very broad definition that includes advertising (seen by the general public) and sales literature (seen by a specific audience). Advertising: TV, radio, newsprint, billboards, websites, internet bulletin boards Sales Literature: Research reports, market letters or form letters delivered to more than 25 existing or prospective retail clients, scripted speeches delivered to more than 25 existing or prospective retail clients, password-protected websites Because this speech is being given to 30 retail clients, it falls into the "Retail Communication" category that requires prior principal approval.

Speculators in foreign currencies would be subject to all of the following risks EXCEPT: A. political risk B. market risk C. reinvestment risk D. exchange rate risk

The best answer is C. Reinvestment risk only affects securities that pay an income stream. If interest rates fall over the time period that an investment is held; any dividends or interest payments received over this time period are reinvested at lower rates, lowering the overall rate of return. This risk would not affect foreign currencies, which do not give investors an income stream. Speculators in foreign currencies are simply placing bets on the future value of that currency. They assume political risk, exchange rate risk, and market risk. Market risk in this case is simply the risk of being on the wrong "side" of the market - e.g., being long the currency only to have its value fall; or short the currency only to have its value rise.

The main risk of investing in an ETN is: A. marketability risk B. liquidity risk C. credit risk D. market risk

The best answer is C. ETNs are "Exchange Traded Notes." They are an equity index linked structured product, that is listed and trades on an exchange. Because they trade, the liquidity risk aspect of structured products is eliminated. What is not eliminated, however, is credit risk. These products are only as good as the guarantee of the issuing bank. They typically have a 7 year life - and a lot can go wrong in 7 years (just ask anyone who purchased Lehman Brothers structured products or ETNs).

Which of the following securities are traded in the secondary market? I Preferred Stocks II American Depositary Receipts III Mutual Funds IV Municipal Bonds A. I and II only B. III and IV only C. I, II and IV D. I, II, III, IV

The best answer is C. Equities - common stock, preferred stock, and American Depositary Receipts trade on exchanges and are traded "over-the-counter." Municipal and U.S. Government bonds are traded "over-the-counter." There is no trading of mutual fund shares - these are redeemable securities that are redeemable with the sponsor.

A customer buys 1 ABC Jan 40 Put @ $1 and sells 1 ABC Jan 55 Put @ $7 when the market price of ABC is $57. The position will be profitable if: I both contracts are exercised II both contracts expire III the spread narrows IV the spread widens A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. If the market drops, both puts are exercised and the customer loses $900 (buy stock at $55; sell at $40; for a 15 point loss, net of $6 credit received). If the market rises above $55, both puts expire and the customer earns the $600 credit. Since this is a credit spread, it must be closed at a debit. To be profitable, the closing debit must be smaller, so the spread must narrow.

An "in whole call" is a(n): A. mandatory call B. extraordinary mandatory call C. optional call D. extraordinary optional call

The best answer is C. In the bond contract, the issuer may have the right to call in the entire issue at preset dates and prices (a normal call schedule, usually with at least 10 years of call protection given to the bondholder). The issuer has the option of calling in the bonds at those dates and prices; and will only do so if it is advantageous to the issuer (meaning that interest rates have dropped since the bonds were issued).

The Value Line Index fund consists of: A. all issues traded on the New York Stock Exchange B. only issues rated in the top 2 ratings by the Value Line Investment Survey C. all companies included in the Value Line Investment Survey D. small capitalization issues not listed on the New York Stock Exchange

The best answer is C. Index funds attempt to "shadow" the performance of a designated index, such as the Standard and Poor's 500 index; or the Value Line Index. Such funds match their composition and weighting every day to match the designated index - thus, the Value Line Index Fund would include all stocks included in the Value Line Investment Survey, which is the basis of the index.

Which of the following statements are TRUE about listed securities? I Under Regulation T, all listed securities are marginable II Listed securities are subject to Regulation SHO III Listed securities trade in the Second Market IV Listed companies must be registered with, and report their results to, the SEC A. I and II only B. II and III only C. I, II, IV D. I, II, III, IV

The best answer is C. Listed securities (those listed on an exchange) are marginable under Regulation T. Under the Exchange Act of 1934, Regulation SHO requires that before any equity security (either listed or unlisted) can be sold short, the member firm must affirmatively determine that the security can be borrowed and delivered on settlement. This is called the "locate" requirement. Listed securities trade in the first (exchanges), third (OTC trading of exchange listed securities) and fourth (direct trades between institutions via ECNs) markets. The second market is trading of unlisted securities over-the-counter. These are OTCBB and Pink Sheet issues. Listed companies must register with, and report their results to, the SEC.

Monetarist Theory states that: A. increased government spending will stimulate the economy B. tax rate reductions and lower government spending will stimulate the economy C. the actions of the Federal Reserve control the level of economic output D. tax rate increases and increased transfer payments will stimulate the economy

The best answer is C. Monetarist Theory states that economic growth is controlled by the Federal Reserve's actions. If the Federal Reserve allows the money supply to grow at a pace consistent with real economic growth, there is balance. The theory holds that if the Federal Reserve allows the money supply to grow more rapidly than real economic growth, interest rates will fall, stimulating borrowing and investment. Conversely, if the Federal Reserve allows the money supply to grow more slowly than real economic growth, interest rates will rise, reducing borrowing and investment.

Under SEC rules, the purchaser of a Regulation D private placement must complete and sign a(n): I A. subscription agreement B. hypothecation agreement C. accredited investor questionnaire D. arbitration agreement

The best answer is C. Private placements are typically only offered to "accredited investors." These are wealthy individuals and institutional investors. To document that the purchasers are, indeed, accredited, an "accredited investor questionnaire" must be completed and signed by the potential purchaser. This is retained by the broker-dealer or issuer selling the securities and is proof that the purchasers were accredited.

The Dow Jones Industrial Average consists of: A. 15 stocks B. 20 stocks C. 30 stocks D. 65 stocks

The best answer is C. The Dow Jones Industrial Average includes 30 stocks. The Dow Jones Averages have 65 stocks - 30 industrials, 20 transportations and 15 utilities.

When analyzing municipal general obligation bonds of different issuers, it is difficult to use the ratio of Overall Debt / Assessed Valuation because: A. the ratio does not consider a municipality's ability to collect the taxes levied on all real property B. municipalities differ in their method of computing overall debt C. municipalities differ in their method of computing assessed value of properties D. the ratio does not consider the management capabilities of municipal government

The best answer is C. The ratio of Overall Debt to Assessed Value of Property is a more difficult measure to use when comparing municipal issuers for safety because municipalities have differing methods of computing assessed values of properties, and such assessments tend to be quite subjective. The computation of Overall Debt is consistent across municipalities, so this is not a problem. The other choices do not address the characteristics of the components of the ratio.

Which of the following statements are TRUE for both mutual funds and variable annuities that are in the accumulation phase? I Distributions are taxable to the holder in the year the distribution is made II The underlying portfolios are managed III The Investment Company Act of 1940 is the regulating legislation IV The return to investors is dependent on the performance of the securities in the underlying portfolio A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

The best answer is C. The underlying portfolios of mutual funds and variable annuities are both "managed," since separate accounts buy the shares of management companies. Both are regulated by the Investment Company Act of 1940, and have investors carry "investment risk" and corresponding gain potential. Dividends and capital gains in variable annuity separate accounts build tax deferred; mutual funds distributions are taxable. When a mutual fund distribution is made, tax liability arises. This is not the case with separate account distributions which must be reinvested.

Which of the following does not trade "flat" ? A. Treasury Bills B. Treasury STRIPS C. Treasury Bonds D. Treasury Receipts

The best answer is C. Treasury Bills are short term original issue discount obligations, with the discount earned being the "interest". Treasury Receipts and Treasury STRIPS are essentially zero-coupon obligations. Because all of these obligations do not make periodic interest payments, they trade "flat" - that is, without accrued interest. Treasury Bonds pay interest semi-annually, so they trade with accrued interest.

An agency cross transaction performed in the over-the-counter market occurs when a broker-dealer: A. buys stock on one exchange and sells it on another for an immediate profit B. receives an unsolicited order to buy stock C. receives a sell order from a customer and the customer instructs that the proceeds be used to buy another stock D. receives a buy order from one customer and a sell order from another customer on the same stock and matches the orders

The best answer is D. An agency cross transaction, as performed in the "over-the-counter" market occurs when, at the same time, a broker-dealer receives an order to buy a stock from one customer; and receives another order to sell the same amount of that stock from another customer. The firm is permitted to "cross" those orders at the current market price. Under FINRA rules, such transactions must comply with the 5% Policy. In this transaction, the firm is acting as an agent (since it is not buying or selling the securities from its inventory) and may only charge a commission on each side of the trade. These commissions must be "fair and reasonable" under the 5% Policy. Remember, 5% commissions (in agency trades) or mark-ups (in principal trades) are only "guidelines" - not rules. Each commission or mark-up must be "fair and reasonable," taking into consideration all relevant factors surrounding that transaction.

Series EE bonds: I are negotiable II are non-negotiable III pay interest semi-annually IV pay interest at redemption A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Series EE bonds are "savings bonds" issued by the U.S. Government with a minimum purchase amount of $25 (or more). The interest rate is set at the date of issuance. Interest is "earned" monthly and credited to the principal amount every 6 months. The bonds have no stated maturity - the holder can redeem at any time, however interest is only credited to the bonds for 30 years. Savings bonds do not trade - they are issued by the Treasury and are redeemed with the Treasury (a bank can act as agent for the Treasury issuing and redeeming Series EE bonds). No physical certificates are issued - the bonds are issued in electronic form.

All of the following securities are sold through auction EXCEPT: A. Treasury Bills B. Treasury TIPS C. General Obligation Bonds D. Government National Mortgage Association Bonds

The best answer is D. All agency securities, including GNMA issues, are sold through selling syndicates in a negotiated offering. T-Bills and TIPS - Treasury Inflation Protection Securities - are sold through yield auctions conducted by the Federal Reserve for the Treasury. General Obligation municipal bonds are sold through competitive bid as well.

All of the following are reasons for a revenue bond issuer to make an extraordinary call EXCEPT: A. the proceeds of the issue were never expended to build the proposed facility B. homeowners have prepaid their mortgages at a faster than expected rate on a housing bond issue C. the facility built with the proceeds of the issue has been destroyed by fire D. interest rates have dropped and the issuer can refund the bonds at lower current rates

The best answer is D. An extraordinary mandatory call is made if the proceeds of the issue were never expended to build the proposed facility, returning the money to the bondholders. An extraordinary optional call is made if homeowners prepay their mortgages faster than expected, so the issuer of housing bonds can retire outstanding debt with the extra payments received. An extraordinary mandatory call is made if a calamity occurs, destroying the facility built with the bond proceeds. If interest rates drop, then the issuer normally has the option of calling in the bonds at pre-set dates and prices. This is an optional call, and is not due to extraordinary events.

An existing customer must be notified about SIPC and where SIPC can be contacted: A. if the customer makes a written complaint to the broker-dealer B. on each trade confirmation C. on each statement D. annually by the member firm

The best answer is D. At, or prior to, account opening, the customer must be provided with the telephone number and web site address of SIPC (Securities Investor Protection Corp., which insures customer accounts against broker-dealer failure), through which the customer can obtain a copy of the SIPC brochure. In addition, this information must be provided to the customer annually thereafter.

Which of the following statements are TRUE regarding defined benefit plans? I Actuarial tables are used to determine contribution rates for each employee II Distributions upon retirement are 100% taxable III Employees with the highest salaries and the fewest years to retirement benefit the most IV Contributions made to the plan can vary from year to year A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV

The best answer is D. Defined benefit plans calculate annual contributions based on expected future benefits to be paid. The largest benefits will be paid to high salaried employees nearing retirement so these are the largest contributions. The smallest benefits are owed to low salary employees far away from retirement, so these are the smallest contributions. Actuarial tables are used to determine contribution rates for each employee. Since a defined benefit plan is a "tax qualified" retirement plan, contributions are tax deductible and earnings build up is tax deferred. When distributions commence, since none of the funds were ever taxed, the distribution amounts are 100% taxable. The contributions made to the plan can vary from year to year, based on actuarial methods.

The depletion deduction is allowed for all of the following EXCEPT: A. oil B. minerals C. timber D. farm crops

The best answer is D. Depletion deductions are not allowed for "readily renewable" resources. Thus, no depletion is allowed for farm crops (which grow and are harvested annually). Depletion is allowed for oil and gas reserves (which take millions of years to form); minerals (which also form over millions of years); and for timber (which can take hundreds of years to grow).

Which statements are TRUE about over-the-counter transactions? I In a principal transaction, the customer is charged a mark-up or mark-down II In an agency transaction, the customer is charged a commission III In a principal transaction, the firm trades from its inventory account IV In an agency transaction, the firm trades with other market makers A. I and II only B. III and IV only C. I and IV only D. I, II, III, IV

The best answer is D. In a principal transaction, a firm trades into, or out of, its inventory account, charging the customer a mark-up or mark-down that is fair and reasonable. In an agency transaction, the firm trades with another market marker, charging the customer a fair and reasonable commission for finding the best market.

Which of the following must be disclosed, or made available, on agency trade confirmations? I Name, address, and telephone number of broker II Name, address and telephone number of contra-broker III Amount of commission charged IV Time of trade A. I and III only B. II and IV only C. I, II, III D. I, II, III, IV

The best answer is D. In an agency trade confirmation, the name, address and phone number of the broker must be on the confirmation. The amount of the commission must be on the confirmation. Also, the name of the contra broker and time of the trade must be made available to the customer upon written request (the fact that this information is available is in the fine print on the back of the confirmation).

Which of the following is the shortest term money market instrument? A. Commercial Paper B. Banker's Acceptance C. Negotiable Certificate of Deposit D. Federal Funds

The best answer is D. Loans of Fed Funds are made "overnight," so the duration of the loan is 1 day. This, along with an overnight repurchase agreement, is the shortest term money market instrument.

Which statements are TRUE regarding mutual fund offerings? I Selling group members are allowed to discount mutual fund shares on their own II Selling group members cannot discount mutual fund shares on their own III Selling group members are allowed to sell mutual fund shares for more than the Public Offering Price IV Selling group members cannot sell mutual fund shares for more than the Public Offering Price A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Mutual fund shares are offered under a prospectus. The price to be charged in a prospectus offering is the P.O.P. as stated in the prospectus - which is stated as the "Next computed Net Asset Value + the Sales Charge." The prospectus will also detail breakpoints where sales charges are reduced. Discounts to customers that are not stated in the prospectus are prohibited. Selling the fund for more than the Public Offering Price as stated in the prospectus is similarly prohibited.

Listed REITs offer all of the following benefits to purchasers EXCEPT: A. diversification of investments B. ready marketability of shares C. capital gains potential D. preferential taxation of dividends received

The best answer is D. REITs offer diversification of investments similar to investment companies, except that the investments are being made in various types of real estate. REIT shares are listed and trade on an exchange (like a closed-end fund), so they are readily marketable. If real estate does well as an investment, the shares will appreciate, giving the investor a capital gain. Finally, REIT dividend taxation is truly "not that great." While dividends received from common stock investments, including mutual funds, qualify for the lower 15% or 20% tax rate, the tax law specifically denies this benefit to REIT dividend distributions. These are taxed at ordinary income tax rates of up to 37%.

Reinvestment risk is the risk that: I interest rates will rise subsequent to bond issuance II interest rates will drop subsequent to bond issuance III interest payments will be reinvested at higher rates IV interest payments will be reinvested at lower rates A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Reinvestment risk is the risk that interest rates will drop and that the interest payments received over the life of the bond will be reinvested at lower rates.

If an individual, aged 65, wishes to withdraw money from her variable annuity, which of the following statements are TRUE regarding the taxation of her withdrawal? I All of the withdrawal is subject to income tax II Part of the withdrawal is subject to income tax III The amount is subject to a 10% penalty tax for early withdrawal IV The amount is not subject to a 10% penalty tax for early withdrawal A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Since this person is above age 59 1/2, any withdrawals from the retirement plan are not subject to the 10% penalty tax for a premature distribution. Since the contribution amount in the non-tax qualified plan was not tax deductible (meaning the amount contributed was already taxed), this portion of the investment is returned without any tax consequence. Thus, only part of the monthly payment is taxable (the portion that represents the tax deferred build up). The portion that represents the original after-tax contribution of capital is not taxed.

All of the following statements are true about the NYSE Super Display Book System EXCEPT: A. orders placed in the system are subject to size limitations B. orders are routed directly to the Specialist/DMM for execution C. reports of executed orders are routed directly back to the originating broker-dealer D. commissions charged to retail customers for Display Book executions are lower than for manual executions

The best answer is D. The NYSE Super Display Book system accepts orders electronically from member firms to be executed immediately, or to be placed on the Display Book electronically. Execution reports are routed electronically to the firm that placed the order. No floor brokers are involved in the transactions. Super Display Book trades are less expensive for member firms to execute than manual trades handled by floor brokers (who earn a commission on each trade). However, this cost differential is not reflected in commission rates charged to customers. The customer pays the same commission no matter how the trade is handled by the firm. Super Display Book cannot handle any size trade. Larger trades (over 1,000,000 shares for market orders and over 3,000,000 shares for limit orders) must still be handled manually on the floor by a floor broker.

The Securities Exchange Act of 1934 is MOST concerned with: A. registration of new issues B. registration of market participants C. prevention of fraud in the primary market D. prevention of fraud in the secondary market

The best answer is D. The primary purpose of the Securities Acts was to curb speculation and fraud in the markets. The Act of 1933 regulates the primary (new issue) market; while the Act of 1934 regulates the secondary (trading market). It is also a true statement that the Act of 1934 requires the registration of broker-dealers, but this is not the primary purpose of the Act.

In a new issue underwriting, which of the following is typically the smallest? A. Underwriter's Concession B. Selling Concession C. Spread D. Management Fee

The best answer is D. The spread is the gross compensation earned by the syndicate. Out of this gross amount, portions can be earned by the members of the underwriting group. The syndicate manager earns the management fee - typically the smallest portion of the spread. Once the management fee is deducted from the spread, this leaves the underwriter's concession. This is the amount earned by a syndicate member who sells the issue to the public. Out of the underwriter's concession, the syndicate member can give up a selling concession to a selling group member for helping find a customer for the issue.

All of the following are types of preferred stock EXCEPT: A. Performance B. Participating C. Cumulative D. Refundable

The best answer is D. There is no such thing as refundable preferred stock. Participating preferred (also known as performance preferred) allows the holder to receive additional dividend distributions from the issuer if the issuer is having a good year. Cumulative preferred "accumulates" any unpaid dividends. Before a common dividend may be paid, all accumulated dividends must be paid to cumulative preferred shareholders.

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

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

Under NYSE rules, every "responsible broker or dealer" who communicates bids and offers on the exchange floor (also known as "addressing the crowd") must comply with all of the following rules EXCEPT: A. any bid or offer must be for at least the normal trading unit in that security B. the highest bid and the lowest offer have precedence in all cases C. bids and offers must be publicly announced D. if two bids (or offers) are made at the same time and price, the smaller order has precedence

The best answer is D. Under NYSE trading rules, bids and offers must be for the minimum 100 share size trading unit; the highest bid and lowest offer have priority (the same as NASDAQ's "inside market" - now renamed the NBBO - National Best Bid and Offer); and all bids and offers must be publicly announced (no secret bids and offers, or side deals allowed). If 2 equivalent price bids (or offers) are made at the same time, the larger order has precedence and will be filled first.

A customer redeems 1,000 shares of ABC Fund on Wednesday, June 14th. Under the provisions of the Investment Company Act of 1940, the customer must be paid the money no later than: A. Thursday, June 15 B. Friday, June 16 C. Monday, June 19th D. Wednesday, June 21st

The best answer is D. Under the Investment Company Act of 1940, customers who redeem must be paid within 7 calendar days (1 business week) of the redemption date. Note that most funds process redemptions much more quickly than this.

When the investment performance of each asset class varies from the anticipated rate of return, the: A. selection of the type and number of asset classes used for the portfolio must be changed B. target allocation percentages assigned to each asset class must be changed C. tactical limits on target allocation percentages for each asset class must be changed D. portfolio must be rebalanced by liquidating portions of overperforming classes and investing the proceeds in underperforming classes

The best answer is D. When investment performance varies over time from one asset class to another, the target percentage allocations will shift from their optimal setting. To bring the portfolio back to these targets, it must be rebalanced - that is, a portion of the overperforming class(es) must be sold off and the proceeds reinvested in the underperforming class(es).