Series 7 QBank Review Set 9
Your client writes 2 ABC Nov 220 calls at 5 and buys 200 shares of ABC common stock at $220 in his margin account. What is the breakeven point for the client's position? A) $215 B) $210 C) $230 D) $225
A) $215 The breakeven point for covered call writing is the cost of stock purchased less the premium (220 − 5). Breakeven is the same if it is one covered call or 1,000. The stock was purchased for $44,000 (200 × $220). The proceeds from the sale of the covered calls is $1,000 (2 × $500). That makes the investor's out-of-pocket cost $43,000 (the $44,000 purchase price minus the $1,000 received as premium on the sale of the calls). That net cost of $43,000 divided by the 200 shares equals $215 per share. Of course, it is much faster (and easier) to simply subtract the premium from the cost of the stock ($220 −- $5 = $215).
A customer is short 200 shares of ABC at 32 and simultaneously writes 2 ABC January 30 puts at 2.50. The customer will break even on this strategy if the underlying stock subsequently trades at A) $34.50. B) $37.00. C) $32.50. D) $29.50.
A) $34.50. The two sales (stock and put) generated proceeds of $34.50. This is the breakeven point for the position. Anywhere below $34.50, the customer is making a profit. Should the stock rise above that, the investor will begin to lose money. The number of contracts is always irrelevant when computing breakeven.
An investor is looking at a certain stock trading at $64 and paying $3.50 for a May 65 put on the stock. What would be the breakeven point for the position? A) $67.50 B) $68.50 C) $60.50 D) $61.50
A) $67.50 The breakeven point is the cost of stock plus the option premium ($64 + $3.5 = $67.50).
When the inside market (best bid and best offer) for XYZ stock was 89.90-90.35, a market maker sold 100 shares of XYZ to a customer at 90.83. At the time of the trade, the market maker's quote was 89.83-90.41. What was the percentage markup? A) 0.53% B) 1.11% C) 1.03% D) 0.46%
A) 0.53% Markup is always based on the inside ask quote. In this case, the inside ask is $90.35. The difference between that and the 90.83 selling price represents a $0.48 markup. To compute the percentage markup, divide the $0.48 by the inside ask of $90.35. The result is 0.53% (just a bit over half of a percentage point). Markdowns and markups are always computed from the inside market, not the market maker's quotes.
A customer contacted her registered representative requesting that her account be updated with her new residential address. The member firm must send a copy of the updated account record to the customer within A) 30 days. B) 15 days. C) 45 days. D) 60 days.
A) 30 days. Whenever a change is made to a customer record, a copy of that record must be sent to the customer within 30 days.
A) Has General Shoelaces' tender offer expired? B) Is Acme Shoelace in reasonable shape financially? C) Why didn't you call me? D) Is General Shoelaces, Inc., a good company?
A) Has General Shoelaces' tender offer expired? The tender offer must be in effect for at least 20 business days after it was placed. In this case, 20 business days have not yet passed. This would likely be the customer's main concern.
A) I and II B) II and III C) III and IV D) I and III
A) I and II Stock sold through a 144 sale is considered registered stock after the sale. When required to be filed by affiliates or insiders, Form 144 must be filed with the SEC on or before the date of sale. After holding the stock fully paid for six months, nonaffiliates may sell unrestricted, but affiliates are subject to the volume restrictions of Rule 144.
A) II and IV B) I and IV C) II and III D) I and III
A) II and IV U.S. government bonds are exempt securities under the Securities Act of 1933 and are not subject to the act's registration and prospectus delivery requirements. Fixed annuities are not considered securities, as the risk is borne by the insurance company issuer. Corporate bonds and variable annuities, however, are nonexempt securities and are subject to prospectus delivery requirements.
What is the following position? Buy 1 QRS May 40 call Sell 1 QRS May 50 call A) Price spread B) Combination C) Time spread D) Diagonal spread
A) Price spread A price spread is composed of a long and short option of the same type with the same expiration but different strike prices. A price spread is also termed a vertical spread.
For municipal bond transactions, data captured and made available to the market place is done by which of the following? A) Real-Time Transaction Reporting System (RTRS) B) SEC C) Nasdaq D) NYSE Super Display Book (SDBK)
A) Real-Time Transaction Reporting System (RTRS) The Municipal Securities Rulemaking Board RTRS captures transaction data for municipal bonds and makes it available to the market place via numerous third-party vendors available to the public.
When used on the exam, the term nonexempt security refers to a security that must register with the SEC. There are cases, however, when registration may be avoided. In most cases, that would be when the transaction involving that security is exempt. Each of the following is a transaction exemption found in the Securities Act of 1933 except A) Regulation M. B) Regulation A+. C) Regulation D. D) Regulation S.
A) Regulation M. This is a process of elimination question. There is a Regulation M under the act, but it has no relevance to your exam (which is why it is nowhere in your material). It sometimes happens that the correct answer choice is something you've never heard of. That happens most often when the question ends with the word except. Regulation A+ is the exemption for small and medium corporate offerings. Regulation D is the most significant private placement exemption. Regulation S is the exemption for offers and sales made outside the United States by both U.S. and foreign issuers.
A) She may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less. B) She may have an IRA but may not make a contribution for this year. C) She may invest any amount up to 100% of her earned income. D) She may not have an IRA.
A) She may contribute 100% of earned income or the maximum allowable IRA limit, whichever is less. Regardless of how much is invested in a SIMPLE IRA through work, an investor may still invest in an IRA if she has earned income. The maximum contribution to an IRA is 100% of earned income or the maximum allowable limit, whichever is less. In this individual's case, however, the contribution would probably be nondeductible. Please note this reflects the SECURE Act which removed any age restriction on contributions to a traditional IRA.
A double-barreled bond would be defined as A) a bond that has its principal and interest backed by revenues of a facility and the general taxing authority of a municipality. B) a bond that is exempt from both federal and state taxes. C) a bond of a foreign issuer that is backed by the U.S. government, with the interest payable either in dollars or in foreign currency. D) a corporate bond that pays interest from ordinary income and revenue received from operating a facility for a municipality.
A) a bond that has its principal and interest backed by revenues of a facility and the general taxing authority of a municipality. Double-barreled bonds have two sources of revenue to support them. They are municipal bonds.
Regulation T applies to A) both cash and margin accounts for nonexempt securities. B) margin accounts only for nonexempt securities. C) both cash and margin accounts for all unlisted securities. D) margin accounts only for listed securities.
A) both cash and margin accounts for nonexempt securities. Regulation T controls the credit that broker-dealers extend in all types of accounts and only applies to nonexempt securities.
Net overall debt of a municipality is A) net direct debt plus overlapping debt. B) net direct debt minus overlapping debt. C) funded debt minus overlapping debt. D) funded debt plus overlapping debt.
A) net direct debt plus overlapping debt. Net overall debt of a municipality is defined as net direct debt plus overlapping debt.
Many parents find that opening an UTMA account for their child is not only a good way to accumulate funds for the future but also a good way for the child to gain an appreciation for investing. The account custodian may use principal as well as income generated in the account to pay for all of the following for the child except A) new clothes. B) the latest model smartphone. C) summer camp. D) private school.
A) new clothes. The Uniform Transfer to Minors Act permits the custodian to use the funds for almost anything that is a benefit to the minor. The primary exceptions are those that most states consider to be the parental obligations of food, clothing, and shelter.
Expressed as a percentage of par, one basis point equals A) one-one hundredth of 1%. B) one-tenth of 1%. C) one-one thousandth of 1%. D) 10%.
A) one-one hundredth of 1%. One basis point equals one-one hundredth of 1% of par. One percent of par ($1,000) equals $10; therefore, 1 basis point equals one-one hundredth of $10, or $0.10 (10 cents).
A) $10,000 B) $0 C) $100,000 D) $32,000
B) $0 There is a lot more information in this question than necessary. Simply put, the deal went bankrupt—the asset was sold for less than the mortgage. That means the investor's $100,000 is totally lost.
An investor purchases $15,000 worth of stock in a margin account, depositing the Regulation T requirement. If the account is charged with interest amounting to $100, and no other activity has occurred in the account, the new debit balance is A) $7,500. B) $7,600. C) $7,400. D) $100.
B) $7,600. Because the Regulation T requirement is 50%, the investor deposits $7,500 and is loaned $7,500 (debit balance) for the $15,000 purchase. If the account is charged with $100 interest expense, the new debit balance is $7,600.
Under the de minimis exemption, an initial public offering of common stock may be sold to an account where restricted persons have a beneficial interest, as long as their interest in the account does not exceed A) 20%. B) 10%. C) 25%. D) 5%.
B) 10%. If the beneficial interests of restricted persons do not exceed 10% of an account, the account may purchase a new equity issue.
Which of the following investors would be exempt from filing Form 144 when selling securities they own? A) An affiliated person selling unregistered shares B) An employee of the company selling registered shares purchased in the open market C) An employee of the company selling unregistered shares D) An investor selling shares acquired in a Regulation D private placement
B) An employee of the company selling registered shares purchased in the open market Rule 144 regulates the sale of control or restricted securities. Securities bought in a registered public offering are not restricted and therefore an employee of the company selling registered shares need not file Form 144. Unregistered shares or securities purchased in a private placement are restricted and Rule 144 would apply.
A) III and IV B) I and II C) II and III D) I and IV
B) I and II The expiration dates and strike prices may be different or the same. However, the total number of contracts on the same side of the market is limited to 100,000 for this stock. Long calls and short puts are on the same side of the market (the bull side), and short calls and long puts are on the same side of the market (the bear side).
The purchaser of a general obligation (GO) municipal bond should be concerned with A) II and IV B) I and III C) I and IV D) II and III
B) I and III GO bonds are issued by municipalities and, like all debt instruments, are subject to interest rate changes (market risk). Ad valorem (property taxes) are the primary source of debt funding for municipal GO bonds and are based on property assessments. Feasibility studies and maintenance covenants are associated with municipal revenue bonds where user fees from municipal projects and facilities are used to fund the debt.
A) II and IV B) I and IV C) II and III D) I and III
B) I and IV In certain cases where the customer cannot make payment by the fourth business day following the trade date, the broker-dealer can request an extension from the self-regulatory organization (SRO) that is its designated examining authority (DEA), usually FINRA. Extensions are not automatic, may be denied, and are granted at the discretion of the SRO.
A) I and IV B) II and III C) I and III D) II and IV
B) II and III When a variable contract is annuitized (distributed in regular payments, not as a lump sum), the number of accumulation units is multiplied by the unit value to arrive at the account's current value. An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. This factor is used to establish the dollar amount of the first annuity payment. Future annuity payments will vary according to the separate account's performance.
A new issue of bonds is offered to the public at a price of 100¾. What is the most likely reason for the issue being priced at a premium? A) The issue's rating increased from A to Aa. B) Market interest rates have gone down since the underwriting commitment was signed. C) The issuer has increased the underwriter's compensation. D) The bonds are trading plus accrued interest.
B) Market interest rates have gone down since the underwriting commitment was signed. Bond prices and interest rates move inversely. It is likely that interest rates have fallen in the time lag between the syndicate's commitment being finalized and the issue actually taking place. That will benefit the syndicate rather than the issuer. If interest rates had increased during that time, the syndicate members would likely have had to price the issue at a discount. That would have had a negative effect on their earnings.
Which of the following insures general obligation bonds? A) Syndicate manager B) National Public Finance Guarantee Corp. and AMBAC C) Federal Deposit Insurance Corporation (FDIC) D) Securities Investors Protection Corporation (SIPC)
B) National Public Finance Guarantee Corp. and AMBAC Outstanding municipal general obligation bonds have been insured by the National Public Finance Guarantee Corp. and AMBAC. Insured bonds are typically AAA-implied rated. SIPC protects customer accounts against broker-dealer failure. The FDIC protects customer deposits against bank failure.
Which of the following orders on the order book will not be filled if the stock rises? A) Buy stop B) Sell stop C) Buy stop limit D) Sell limit
B) Sell stop Those orders on the book which are above the current market will be executed if the stock rises. Those open orders above the current market are buy stops (including buy stop limits) and sell limits.
Which index does the VIX track? A) The OEX B) The S&P 500 C) The Wilshire 5000 D) The Nasdaq 100
B) The S&P 500 As reported by the CBOE, "The VIX Index measures the level of expected volatility of the S&P 500 Index over the next 30 days that is implied in the bid/ask quotations of SPX options. Thus, the VIX Index is a forward looking measure, in contrast to realized (or actual) volatility, which measures the variability of historical (or known) prices."
A customer buys five municipal bonds maturing in 20 years for 104. If he sells the bonds after 10 years at 103, the customer has A) a $100 capital loss. B) a $50 capital gain. C) a $100 capital gain. D) a $50 capital loss.
B) a $50 capital gain. The premium on the municipal bonds must be amortized. The tax rules require that when you purchase a bond at a premium, you have to reduce the cost basis of the bond each year. Even though there are five bonds in the question, here's the math on one bond and then we'll multiply by five to get the total amount.
Reasonable-basis suitability, as used in FINRA Rule 2111 means the member or associated person making the recommendation should have a reasonable basis to believe that the recommendation A) has a reasonable basis for meeting the specific customer's needs. B) is suitable for at least some investors. C) has a reasonable basis for believing that the security will outperform others in its industry. D) will result in a lower cost to the investor than comparable issues.
B) is suitable for at least some investors. The reasonable-basis obligation requires a member or associated person to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.
A) filing a copy with FINRA is required. B) member alterations to the contents are only to make it consistent with applicable regulatory standards or to correct factual errors. C) approval by a principal is required within 10 days after first use. D) the name of the underwriter who commissioned the article must be prominently displayed.
B) member alterations to the contents are only to make it consistent with applicable regulatory standards or to correct factual errors. This is an example of an independently prepared reprint. It is a form of retail communications and can be used only if the preparer is independent of the member firm. In most cases, these are used "untouched." However, if there are factual errors or statements contrary to FINRA standards, they must be fixed. Preapproval by a principal is required and there is no filing necessary with FINRA. If the publisher is independent but received money from an issuer or underwriter for authoring the article, it may not be used.
During the cooling-off period, a registered representative (to highlight key points) marks a preliminary prospectus and sends it to a client. This action is A) permitted if the customer is an accredited investor. B) prohibited. C) permitted without restriction. D) permitted if approved by a principal.
B) prohibited. Under no circumstances may a registered representative mark a preliminary or final prospectus.
A corporate offering of 1 million additional shares to existing shareholders is a A) shelf offering. B) rights offering. C) tender offer. D) secondary offering.
B) rights offering. When new shares are being offered to existing shareholders before the general public, it is done under the terms of a rights offering.
For an oil and gas limited partnership (LP), allowances in the form of deductions are allowed by the IRS to be taken to compensate for a depleting resource. The allowance can be taken based on A) the amount of the natural resource extracted. B) the amount of the natural resource sold. C) the condition or grade of the natural resource. D) the cost of moving the natural resource to refiners and distributors.
B) the amount of the natural resource sold. Depletion allowances may be taken only once the oil or gas is sold and is based on the amount sold (depleted).
A customer buys an Oct 79.50 foreign currency call on the Australian dollar. The Australian dollar spot price is 89.73, and the option contract size is AUD$10,000. If the option contract is offered at 11, what was the customer's total premium paid for the contract? A) $8,973 B) $11,000 C) $1,100 D) $10,000
C) $1,100 Currency options are quoted in U.S. cents per dollar, and one point equals $100. A quote of 11.00 is equal to $1,100 per contract.
A convertible preferred stock with a par value of $100 is currently trading at $125 per share. The conversion ratio is 5:1. If the common stock is trading at $30 per share, what must the preferred stock's price be to be at parity? A) $70 B) $103 C) $150 D) $130
C) $150 The math is 5 × $30 = $150. The logic is, you can convert the preferred stock into five shares of the common. If the common is trading at $30 per share, to be equal, the preferred stock must be selling for five times that price.
A customer buys XYZ stock at $60 per share. The stock is currently trading at a 10:1 price-to-earnings (P/E) ratio. The firm declares a 3:1 stock split. What will the P/E ratio be after the split if earnings remain unchanged? A) 12:1 B) 5:1 C) 10:1 D) 3:1
C) 10:1 If earnings remain unchanged, the P/E ratio remains the same: 10:1. Earnings are currently $6 per share ($60 / 10). After a 3:1 split, each share will be valued at $20. If earnings are unchanged, the same $6 of earnings is now applicable to three shares, or $2 per share. Price divided by earnings equals P/E ratio ($20 / $2 = 10:1 P/E ratio).
One of your customers buys a new issue municipal revenue bond on March 19. The trade settles on March 21, and the bond pays interest on February 1 and August 1. If the dated date of the bond is March 1, how many days of accrued interest are due? A) 24 B) 19 C) 20 D) 55
C) 20 Interest started accruing from the dated date of the bond (March 1). Interest accrues up to, but not including, settlement. Therefore, 20 days of accrued interest are due. The customer's first interest payment the following August will represent interest that has accrued from the dated date.
Customer account information must be updated at least every A) 12 months. B) 24 months. C) 36 months. D) 48 months.
C) 36 months. Customer account information must be updated at least every 36 months. This ensures that up-to-date information for suitability requirements and potential red flags.
A customer is long 1 XYZ Jan 50 put. To create a bull put spread, the customer must sell a Jan A) 45 put. B) 50 call. C) 55 put. D) 50 put.
C) 55 put. In any spread, put or call, if the customer is buying the lower strike price, the spread is bullish. Therefore, to create a bull put spread, the customer (who is long the 50 put) must sell a put with a higher strike price. A bull put spread is also called a short put spread.
An investor has arranged to receive ½% of the value of her mutual fund account per month. This is an example of what type of plan? A) A fixed-dollar periodic withdrawal B) A fixed-share periodic withdrawal C) A fixed-percentage periodic withdrawal plan D) A periodic payment plan
C) A fixed-percentage periodic withdrawal plan If the investor receives ½% of the fund's value every month, the percentage of the withdrawal is fixed. That makes this a fixed-percentage periodic withdrawal plan. The advantage of this plan is that it is unlikely the client would ever run out of money. A periodic payment plan is putting money in, not taking it out.
A) II and III B) III and IV C) I and II D) I and IV
C) I and II Because an ETF is purchased and sold on an exchange, the rules generally applying to all exchange products, such as purchasing them on margin, would apply. Leveraged funds can use a number of different securities types, including derivative products, and trading techniques, such as trading on margin, as a means of attaining the leveraged returns they promise.
A taxable gain or loss on a long call option transaction would be recognized when i. the option is purchased. ii. the option expires. iii. the option is sold. iv. the option is exercised. A) I and IV B) I and II C) II and III D) III and IV
C) II and III Owners of call options have three choices. In addition to exercising the option, call options can either be sold or allowed to expire. If either of the latter two choices are made, the owner of the call determines her gain or loss (for tax purposes) at the time of expiration or sale. This would be calculated by comparing what she paid for the call (the premium) with the price at which she sold the call. If it expires, the entire amount of the premium originally paid is considered a loss. Gains or losses are not determined at the time that calls are exercised. Once exercised, there are no tax consequences until the underlying stock is sold. Then the owner of the call would calculate her profit or loss, taking into account the premium paid, what she paid for the stock (the strike price), and what she subsequently received on the sale of the security.
A customer interested in a collateralized mortgage obligation (CMO) might look to which of the following for historical data or projections regarding mortgage prepayments? A) DEA B) FINRA C) PSA D) Bond Buyer
C) PSA The Public Securities Association (PSA) is the source of historical data for prepayment projections on CMOs.
Once individuals have passed the Series 7 exam and are now registered as general securities registered representatives, compliance with Regulation BI would allow including which of these on their business card following their name? A) Financial advisor B) Investment adviser representative C) Registered representative D) Financial adviser
C) Registered representative Regulation BI limits the use of the words adviser or advisor to those who are registered as investment advisers or representatives of those who are. Passing the Series 7 exam allows one to use the term registered representative. Most of our Series 7 students go on to pass the Series 66 exam and become IARs. In that case, investment adviser representative is permitted.
Which of the following acts requires full and fair disclosure of all material information about nonexempt securities and debt securities offered to the public for the first time? A) Securities Exchange Act of 1934 B) Securities Investor Protection Act of 1970 C) Securities Act of 1933 D) Trust Indenture Act of 1939
C) Securities Act of 1933 The Securities Act of 1933 regulates new issues of nonexempt securities sold to the public.
At 2:15 pm ET, a customer gives his registered representative a market order to buy 100 shares of ABC at the close. What should the registered representative do with the order? A) Hold it at his desk until just before market close. B) Send in the order after the close to ensure he receives the closing price. C) Send the order to the floor immediately. D) Execute the order at the closing price first thing next morning.
C) Send the order to the floor immediately. The registered representative should mark the order ticket at close. His firm's floor broker will take on the responsibility for proper execution.
A bond was issued three years ago with a coupon of 8%. The bond matures in four years and is callable at 108. Current market interest rates are 6%. Which of the following is true? A) The bond is selling at a discount. B) The bond will be called. C) The bond is selling at a premium. D) The coupon will be adjusted.
C) The bond is selling at a premium. Simply, this is a bond where interest rates have gone down since it was issued. When interest rates go down, bond prices go up. Although the call feature can be beneficial when money is available to borrow at lower rates, the combination of the short term to maturity and the relatively high call price are unlikely to make it worth the underwriting expense. In any event, that is only a possibility, while the fact that the bond will be selling at a discount is a virtual certainty.
Which of the following is not an advantage of purchasing American depositary receipts (ADRs)? A) They allow U.S. investors to buy foreign country stock denominated in dollars. B) Foreign taxes withheld can be claimed as a credit to offset income taxes on dividends received. C) They eliminate exchange rate risk. D) Transactions are done on an organized exchange in the U.S.
C) They eliminate exchange rate risk. ADRs are priced in U.S. dollars and therefore have exchange rate risk. That is, if the value of the currency in the home country of the company underlying the ADR should decline in relationship to the U.S. dollar, the investor could actually lose money even if the stock's price rises. For example, the foreign company's stock is selling for $50 per share Canadian. At the time of purchase, the Canadian dollar is worth $0.80 U.S. That would make the ADR value approximately $40 per share U.S. If the client decides to sell that ADR when the company stock is selling for $52 per share on its domestic exchange, but the Canadian dollar is now worth $0.70 U.S., the ADR's value will be approximately $36.40. Therefore, we've seen the price of the stock go up while the value of the ADR to the U.S. investor has declined.
A calamity (catastrophe) call may be made by a municipal issuer if A) the issuer has accumulated excess money in its surplus account. B) the issuer must call outstanding bonds on a predetermined schedule as outlined in the bond contract. C) a building constructed with revenue bond financing has been condemned. D) interest rates have fallen.
C) a building constructed with revenue bond financing has been condemned. A calamity call is also known as a catastrophe call. If a facility built with revenue bond financing is destroyed or condemned, the issuer must call the bonds with the bulk of the funds provided by insurance proceeds.
Many investors diversify by adding foreign securities to their portfolios. Those who do so by purchasing foreign stock mutual funds are least likely to be concerned with A) currency risk. B) market risk. C) liquidity risk. D) political risk.
C) liquidity risk. Because federal law requires mutual funds to offer redemption at net asset value within seven days of the request (in the real world, it is much quicker), liquidity risk is not a concern to this investor. Although the fund trades in dollars and all distributions are in dollars, the income to the fund comes through the foreign currency. That makes investors in the fund subject to the same currency risk as if they bought the stock directly. The foreign securities in the portfolio of the fund are subject to market risk, and that directly affects the value of the fund shares. Political risk is always a concern when making foreign investments. Certainly, it is of less concern in the major developed countries, but we cannot compare that with the absence of liquidity risk.
A) the employer must be notified, in writing, of the opening of the account. B) the employer must grant prior written approval to open the account. C) the employer must approve each transaction before entry of the order. D) if the employer requests them, they must receive duplicate copies of all account transactions.
C) the employer must approve each transaction before entry of the order. FINRA rules do not require prior approval of individual transactions by either the broker-dealer at which the account has been opened or the employing broker-dealer. The rules do require that the employing broker-dealer be notified, in writing, and that they give prior written consent before the account can be opened. Duplicate copies of account statements and confirmations must be supplied only if the employing broker-dealer has requested them.
Better Bond Sales (BBS) is participating in a firm underwriting of some GO municipal bonds. Their role is that of a syndicate member with a 10% commitment. Should BBS sell some of the bonds, its earnings would be A) the spread. B) the takedown. C) the total takedown. D) the selling concession.
C) the total takedown. The syndicate manager is the only participant who earns the spread when it makes the sale. Syndicate members earn the total takedown (all the spread other than the manager's fee) when they sell the bonds. That includes the takedown plus the additional takedown. The selling group members earn the selling concession.
An investor redeems 300 shares in ACE Fund. When the investor bought the shares at $12, the net asset value (NAV) was $11.08. If the current public offering price is $12.50, and the NAV is $11.80, the investor receives A) $3,600. B) $3,324. C) $3,750. D) $3,540.
D) $3,540. The key to this question is recognizing that the Ace Fund is a mutual fund rather than a closed-end fund. There are two clues. The first is the third word in the question: redeems. It is the open-end investment company (mutual fund) that redeems shares; there is no redemption with closed-end funds. The second clue is that the public offering price is stated. Only new issues have a POP. As a mutual fund, shares are redeemed at NAV. If the investor redeems 300 shares at an NAV of $11.80, he receives $3,540 (300 × $11.80).
If an investor purchases 2 Dec 81.50 Swiss franc calls at 2.5 (each contract is 10,000 francs), how much does the investor pay for the position? A) $250 B) $2,500 C) $81,500 D) $500
D) $500 Remember that foreign currency options (except for the Japanese yen) are quoted in cents. That means a purchase at 2.5 means $0.025. One call offered at 2.5 is equal to $0.025 times 10,000 which equals $250. With two contracts, the total premium is $500.
A $50,000 20-year 7% municipal bond with semi-annual M/S coupon payments is issued on March 1, 2020. The full price for a trade of this bond, with a 7% yield to maturity to settle on June 30, 2020, is closest to A) $51,147.22. B) $52,313.89. C) $51,166.67. D) $51,156.94.
D) $51,156.94.
Customer account records (such as the new account form) must be maintained for not less than A) 3 years commencing from the date the account is opened. B) 6 years commencing from the date the account is opened. C) 3 years commencing from the date the account is closed. D) 6 years commencing from the date the account is closed.
D) 6 years commencing from the date the account is closed. Customer account records (such as the new account form) are 6-year records. The six years toll from when the account is closed. Think about this logically. A firm has a customer for 20 years. Were the account records discarded 14 years ago? As long as the account is open, the records must be on file. Similarly, do you throw away your income tax returns after you've filed?
An investor with a relatively low risk tolerance for loss of principal wishes to make a long-term investment that will meet his needs and provide some protection against inflation. Which of the following mutual funds is likely the most suitable for him? A) A municipal bond fund B) A U.S. government bond fund C) An S&P 500 index fund D) A balanced fund
D) A balanced fund Although suitability questions are rarely simple, we attempt to show you what the regulators are looking for. Balanced funds, with their mix of equities and fixed-income securities, offer some downside protection with the bonds and upside (inflation-beating) growth from the equities. Neither of the bond funds will protect against inflation. Furthermore, municipal bonds are never going to be a suitable choice unless something in the question refers to a high-tax-bracket investor. The index fund will surely provide the inflation protection, but as history demonstrated in 2008 and 2020, losses of 30% or more are possible.
Which of the following customer accounts requires the sending of monthly customer statements? A) An options account B) A margin account C) A discretionary account D) An account containing penny stocks
D) An account containing penny stocks It is the account containing penny stocks where the customer must receive a monthly statement. In all other cases, the required frequency is not less than quarterly.
What investment company, structured as a closed-end management company under the Investment Company Act of 1940, must have at least 70% of its assets invested in eligible securities? A) Venture capital funds B) Hedge funds C) Private equity funds D) Business development companies
D) Business development companies A business development company (BDC) is a closed-end investment company regulated under the Investment Company Act of 1940. It does not have the flexibility of regular closed-end funds because at least 70% of its assets must be invested eligible assets. It is highly unlikely that the exam will test on the specifics of eligible portfolio assets (some details are in the LEM). None of the other choices is a registered investment company under the Investment Company Act of 1940.
Corporations issue equity securities. One category of equity is preferred stock. A number of different adjectives can apply to preferred stock issues. Which of the following preferred stock issues would likely offer the greatest protection against interest rate risk? A) Participating B) Cumulative C) Callable D) Convertible
D) Convertible Owners of convertible preferred stock have the ability to convert the preferred into common stock. This offers growth potential not otherwise available to a preferred stockholder. This feature causes the stock's price to track that of the common. That results in convertible preferred stock having less interest rate risk than the others do.
i. Receiving cash distributions may reduce Customer A's proportional interest in the fund. ii. Customer A may use the cash distributions to purchase shares later at net asset value (NAV). iii. Customer B's reinvestments purchase additional shares at NAV rather than at the offering price. iv. Due to compounding, Customer B's principal will be at greater risk. A) II and IV B) II and III C) I and IV D) I and III
D) I and III If the customer elects to receive distributions in cash while other investors purchase shares through reinvestment, the customer's proportional interest in the fund will decline. The option to have distributions automatically reinvested allows those purchases to be made at NAV, but a purchase made later would be made at the public offering price like any other new purchase.
A) II and IV B) I and III C) I and IV D) II and III
D) II and III The broker-dealer must always disclose the capacity in which it acted (principal or agent). The confirmation must show the name of the person for whom the trade was executed (the customer). The name, address, and telephone number of the broker-dealer must be shown so the customer may easily contact the firm. The settlement date is also required. The broker-dealer is not required to disclose where it acquired the bonds or the price it paid.
Which of the following statements regarding Sallie Mae debentures are true? A) They are backed by the taxing power of the U.S. government. B) Sallie Mae securities finance building public schools across the country. C) Interest is paid monthly. D) Interest is tax exempt at the state and local levels.
D) Interest is tax exempt at the state and local levels. Interest on nonmortgage-backed government securities is taxable at the federal level and exempt from state and local taxation. As a general rule, debentures pay interest every six months. Sallie Mae is not backed by the taxing power of the U.S. government, and money is used for student loans for higher education.
C) No approval is required because both the youth athletic league and the church would be recognized as bona fide nonprofit organizations by the IRS. D) Preapproval by a principal of the broker-dealer is required.
D) Preapproval by a principal of the broker-dealer is required. Any piece promoting securities services and/or products intended to be received by more than 25 retail customers within any 30-calendar-day period must be preapproved by a principal before use. Given the intended placements of the piece, there is no way to determine the exact number of retail customers who will be exposed to it and within what time frames; therefore, it must be regulated as retail communication. It does not fit the definition of correspondence or institutional communication.
Last week, your customer's margin account showed SMA of $5,000. As of the close of business yesterday, the margin account client had a long market value of $50,000 and a debit balance of $45,000. This client now has A) SMA of $2,500 and buying power of $5,000. B) SMA of $5,000 and buying power of $0.00. C) SMA of $5,000 and buying power of $10,000. D) SMA of $0.00 and buying power of $0.00.
D) SMA of $0.00 and buying power of $0.00. Did you catch the trick here? During the past week, the long market value has dropped to the point where this client is subject to a maintenance call. With only $5,000 of equity ($50,000 minus $45,000) and LMV of $50,000, the equity is only 10% of the LMV, well below the 25% minimum. When a margin account goes below the minimum maintenance level, the SMA is wiped out. This is the only exception to the "use it or lose it" rule because once the account is at the point where the investor must contribute additional funds, there is nothing that can be borrowed; your "line of credit," so to speak, no longer exists.
Which of the following securities would have a Moody's MIG rating? A) GOs B) T-bills C) BAs D) TANs
D) TANs TANs are tax anticipation notes. These are short-term municipal securities and that is what Moody's MIG ratings represent. MIG stands for Municipal Investment Grade. GOs are rated with the normal letter ratings and BAs (bankers' acceptances) and T-bills are not municipal securities.
Who has the final responsibility for debt service on an industrial revenue bond? A) The MSRB B) The municipal authority established by the issuer C) The municipal issuer of the bonds D) The corporation leasing the facility
D) The corporation leasing the facility The issuer of industrial revenue bonds is a municipality or an authority established by a municipality. However, no municipal assets or general revenues are pledged to secure the issue. The net lease payments by the corporate user of the facility are the source of revenue for debt service. Therefore, the ultimate responsibility for the payment of the principal and interest on an industrial revenue bond rests with the corporate lessee.
XYZ Corporation has set Friday, January 23, as the record date for its next quarterly dividend distribution. To receive the dividend, a customer, long 1 XYZ Feb 40 call, must issue exercise instructions on or before A) Monday, January 19. B) Tuesday, January 20. C) Friday, January 23. D) Wednesday, January 21.
D) Wednesday, January 21. Dividends are paid to investors who are owners of record as of the close of business on the record date. When a call option is exercised, money and stock are exchanged (settlement) on the second business day after notice is given to the Options Clearing Corporation. Therefore, an investor who wishes to receive a dividend must exercise a call no later than the second business day before the record date (i.e., the day before the ex-date). This is no different from anyone else purchasing stock before the ex-date.
An investor purchase investment company shares paying an ask price that is a 5% premium to the company's net asset value (NAV). Two years later, the investor liquidated the position at a bid price that was 10% below the NAV. This investment was in A) an open-end investment company. B) a face amount certificate (FAC). C) a unit investment trust (UIT). D) a closed-end investment company.
D) a closed-end investment company. Pricing of closed-end investment company shares is based on supply and demand. That is because they trade in the secondary markets. Therefore, the investor's buying price and selling price could be a premium or discount to the net asset value per share (NAV). All the other investments here are redeemable at the NAV. As a consequence, the ask price would not be a discount to the NAV nor could the redemption price (the bid) be at a discount to the net asset value.
A taxpayer's most advantageous tax benefit is A) a tax deduction. B) a depletion allowance. C) straight-line depreciation. D) a tax credit.
D) a tax credit. A tax credit reduces a person's tax liability dollar for dollar. Deductions, depreciation, and depletion reduce taxable income.
All of the following are investment constraints except A) investor preferences. B) liquidity. C) time horizon. D) growth of capital.
D) growth of capital. Growth of capital is an investment objective. The other choices represent obstacles (constraints) that might keep the investor from fulfilling that objective.
The capitalization structure of an open-end investment company can include A) preferred and common stock with no bank borrowing allowed. B) only debt issues with no bank borrowing allowed. C) preferred stock, common stock, and bonds. D) one issue of common stock.
D) one issue of common stock. Open-end investment companies may only issue shares of common stock. Preferred stock, bonds, and other forms of senior securities are not allowed. It is the closed-end investment company that can have a preferred stock and bond offering. Don't confuse what a mutual fund uses to raise money (the common stock it issues) with what it does with that money. The capital raised from the sale of shares may be used to buy whatever securities meet the fund's objectives.
An offering of securities in compliance with Rule 144A is sold primarily to A) American individual investors. B) foreign individual investors. C) all of these. D) qualified institutional buyers (QIBs).
D) qualified institutional buyers (QIBs). Rule 144A allows securities to be sold to QIBs without having to meet the holding period or volume requirements of Rule 144.
All of the following are redeemable securities except A) mutual funds. B) unit investment trusts. C) variable annuities. D) real estate investment trusts (REITs).
D) real estate investment trusts (REITs). A redeemable security has no secondary market. To sell (redeem) a redeemable security, the investor must go back to the issuer or its agent. REITs trade in the secondary markets either on exchanges or over the counter.
If interest rates increase, the interest payable on outstanding corporate bonds will A) increase. B) decrease. C) change according to the inverse payout theory. D) remain unchanged.
D) remain unchanged. The interest payable is the nominal yield, which is stated on the face of the bond. It is the percentage of face value the bond will pay each year, regardless of the prevailing interest rates in the market. It is the market price of bonds—not the interest payable—that responds inversely to changes in interest rates.
Customers will have a potentially unlimited loss if they are A) short 1 ABC Jan 50 put and long 100 shares of ABC stock. B) long 100 shares of ABC stock and short 1 ABC 50 call. C) long 1 ABC Jan 50 put and long 100 shares of ABC stock. D) short 1 ABC Jan 50 call and short one ABC Jan 50 put.
D) short 1 ABC Jan 50 call and short one ABC Jan 50 put. When trading options, there is one way in which to have a potentially unlimited loss. That is the uncovered (naked) call. When a call option is written without a corresponding long position in the underlying, the writer loses when the price goes up. Because there is theoretically no limit as to how high a stock's price can go, the potential loss is unlimited. In this short straddle position, it is the short call that creates this possibility. With a short put, the lowest a stock's price can go is to zero. With a 50 put, that is a maximum loss of $50 less the premium received. The maximum loss on any long position, stock or option, is what the investor paid for it.
An economist is comparing the yields on 20-year U.S. Treasury bonds and AAA-rated corporate bonds with the same maturity. The economist is analyzing A) the risk spread. B) the value spread. C) the duration spread. D) the credit spread.
D) the credit spread. You should understand that the greater the risk, the higher the yield on the bond. Many analysts compare the difference between yields on bonds with the same maturity but different quality (rating) to get a sense of the market sentiment. One common measurement is the difference in yields between Treasuries and corporate bonds. This difference is called the yield or credit spread and tends to widen when economic conditions sour and narrow when they get better.
The derivative-based strategy known as portfolio insurance involves A) the purchase of a call on the underlying security position. B) the sale of a call on the underlying security position. C) the sale of a put on the underlying security position. D) the purchase of a put on the underlying security position.
D) the purchase of a put on the underlying security position. The purchase of a put option to hedge the downside risk of an underlying security holding is called a protective put position, one of many derivative-based strategies collectively known as portfolio insurance.
Government agency securities settle A) the next business day following the trade date. B) in three business days following the trade date. C) the seventh calendar day following the trade date. D) the second business day following the trade date.
D) the second business day following the trade date. Most government agencies are treated as a corporate issue. Trades of corporate securities settle regular way (in two business days).
If a customer buys bonds that have already been called, the confirmation must disclose all of the following except A) the yield to redemption. B) the redemption date. C) the redemption price. D) the yield to original maturity.
D) the yield to original maturity. A customer who has purchased a called bond has probably purchased one that has been prerefunded. The yield to original maturity is no longer a factor.
A 45-year-old employment counselor has a savings incentive match plan for employees (SIMPLE) plan for herself and three full-time employees who have been working for her for the past four years. If she earns $150,000 this year and contributes the maximum amount allowed to her SIMPLE plan, how much may she invest in a traditional IRA?
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A customer bought a 10% interest in a real estate limited partnership by investing $100,000. The partnership buys a $4 million property with the funds, making a down payment of $800,000 and financing the balance with a nonrecourse mortgage of $3.2 million. Subsequently, the partnership cannot meet the mortgage payment; the lender forecloses when the remaining mortgage balance is $3 million, auctioning off the property for $1 million. How much of the investment will the customer recover?
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A prospectus must be delivered to customers who purchase which of the following new issues? i. U.S. government bonds ii. Corporate bonds iii. Fixed annuities iv. Variable annuities
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A registered representative is reading an article in a popular magazine about the advantages of tax deferral in retirement planning. There is a note that reprints of the article are available. In order to send these reprints to existing and prospective customers,
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A registered representative wants to place advertisements in his daughter's youth athletic league quarterly sponsorship booklet and in the weekly bulletin at his church describing that he specializes in retirement planning and 529 plans. Which of the following statements regarding these advertisements is true?
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A retail customer purchases a municipal bond from your firm. According to Municipal Securities Rulemaking Board rules, the confirmation must disclose which of the following? i. Where your firm acquired the bonds ii. Whether your firm acted as agent or principal iii. Your firm's address iv. The price your firm paid for the bonds
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A) The advertisement is considered institutional communication because it is placed in literature being distributed by organizations such as the youth athletic league and the church organization, and therefore, no principal preapproval is required. B) The piece will be regulated as correspondence because it is only being forwarded to two organizations.
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An employee of another broker-dealer would like to open an account with your firm. Under FINRA rules, all of the following statements regarding the employee and the account are true except
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Customer A and Customer B both have an open account in a mutual fund that charges a front-end load. Customer A has decided to receive all distributions in cash, while Customer B automatically reinvests all distributions. How do their decisions affect their investments?
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If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are true? i. She will receive the annuity's entire value in a lump-sum payment. ii. She may choose to receive monthly payments for the rest of her life. iii. The accumulation unit's value is used to calculate the total value of the account. iv. The annuity unit's value represents a guaranteed return.
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One of your clients owns 400 shares of Acme Shoelace common stock. General Shoelaces, Inc., placed a tender offer for Acme shares on March 4 at $2 above the most recent trade. You know that your client would likely jump at this offer, but you were unable to contact him despite repeated attempts. He finally called you on March 24. He was on a safari in Africa, but he's home now and has a question for you. What might that question be?
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Which of the following positions violate the rules governing position limits? (Assume SSS stock is subject to a 100,000-option position limit.) i. Long 50,000 SSS Aug 40 calls, short 55,000 SSS Aug 40 puts ii. Long 50,000 SSS Aug 40 calls, short 55,000 SSS Jan 40 puts iii. Long 50,000 SSS Aug 40 calls, short 30,000 SSS Jan 40 calls iv. Long 50,000 SSS Sep 40 puts, short 45,000 SSS Sep 40 calls
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Which of the following statements regarding a Regulation T extension are true? i. It is granted by a self-regulatory organization. ii. It is granted by the transfer agent. iii. An extension is automatically granted once the extension request is made. iv. Extensions are not automatically granted and may be denied.
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Which of the following statements regarding a Rule 144 sale of restricted stock are true? i. Stock sold through a 144 sale is considered registered stock after the sale. ii. After holding the stock for six months, nonaffiliates may sell unrestricted. iii. After holding the stock for six months, there are no volume restrictions for affiliates. iv. Form 144 must be filed with the SEC at least 10 business days before a 144 sale made by an affiliate.
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Which of the following statements regarding a leveraged exchange-traded fund (ETF) are true? i. The leveraged ETF may be purchased on margin. ii. Securities within the leveraged fund portfolio may be purchased on margin. iii. The leveraged ETF may never be purchased on margin. iv. Securities within the leveraged fund portfolio may never be purchased on margin.
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(con't) A $50,000 20-year 7% municipal bond with semi-annual M/S coupon payments is issued on March 1, 2020. The full price for a trade of this bond, with a 7% yield to maturity to settle on June 30, 2020, is closest to A) $51,147.22. B) $52,313.89. C) $51,166.67. D) $51,156.94.
The full price of a bond includes the accrued interest. First, we calculate the number of days of accrued interest. Because this is a municipal bond, each month has 30 days. Accrued interest is always paid up to, but not including, the settlement date. That means 30 days each for March, April, and May (90 days). Because we do not pay accrued interest for June 30, (on settlement date, the new owner is entitled to the entire six months of interest), there are 29 more days, giving us a total of 119 days. You can set it up like this: 6/30 minus 3/01 = 3 months, 29 days = 119 days.
(con't) A customer buys five municipal bonds maturing in 20 years for 104. If he sells the bonds after 10 years at 103, the customer has A) a $100 capital loss. B) a $50 capital gain. C) a $100 capital gain. D) a $50 capital loss.
The investor buys the bond at 104 or $1,040 and the bond is due to mature in 20 years. Take the $40 premium divided by the 20 years to maturity and that will tell us the amount that we amortize/reduce the cost basis by each year ($40 ÷ 20 = $2). It then tells us that the bond is sold after 10 years. Ten years of amortization is $2 per year × 10 years = $20. That lowers the basis of the bond to $1,020 ( $1,040 − $20 = $1,020). The bonds are sold at 103 or $1,030, so the gain is $10 per bond times five bonds for a total gain of $50.
(con't II) A $50,000 20-year 7% municipal bond with semi-annual M/S coupon payments is issued on March 1, 2020. The full price for a trade of this bond, with a 7% yield to maturity to settle on June 30, 2020, is closest to A) $51,147.22. B) $52,313.89. C) $51,166.67. D) $51,156.94.
The next step is computing the amount of accrued interest in dollars and cents. With a coupon of 7% and semi-annual payments, each payment is 3.5% of the $50,000 par value. That is $1,750 each six months. We are going to solve for 119/180 days' worth of accrued interest. With the test center calculator, multiply $1,750 times 119 and divide the product by 180. The result is accrued interest of $1,156.94. Alternatively, you could find the interest for each day by dividing the semiannual interest of $1,750 by 180 days = $9.72222 per day. Multiply that times 119 days and the product is $1,156.94. Finally, when a bond with a 7% coupon has a yield to maturity of 7%, that tells us the bond is selling at par. All we need to do now is add the accrued interest to the $50,000 par value to arrive at $51,156.94.
