Series 7 Top Off Practice Questions

A municipal firm that is participating in a secondary market joint account can do all of the following EXCEPT? A. effect a transaction for an accumulation account from the joint account B. effect a transaction for a customer account from the joint account C. disseminate a quote separately for the securities held by the account D. effect a transaction for a related portfolio from the joint account

C. disseminate a quote separately for the securities held by the account (If a municipal firm is participating in a "joint account" to sell a block of bonds, only one quote is permitted for the account as a whole - there cannot be separate quotes. Thus, it cannot appear that there are multiple markets for this security when there really is only one - the secondary market joint account. Selling responsibility and liability are shared among account members in a similar fashion to an underwriting agreement. Any transaction can be effected out of the account - selling to an individual, another firm, a related portfolio, or an accumulation account.)

A customer who is short stock will buy a call to: A. hedge the short stock position in a falling market B. protect the short stock position from a falling market C. protect the short stock position from a rising market D. generate additional income in a stable market

C. protect the short stock position from a rising market (A customer who has shorted stock is bearish on the market. However, the potential loss for a short seller of stock is unlimited if the market should rise, forcing the customer to replace the borrowed shares at a much higher price. To limit this risk, the purchase of a call allows the stock position to be bought at a fixed price (by exercising the call), if needed, in a rising market.)

Long the stock and short the call is an appropriate strategy in a: A. declining market B. rising market C. stable market D. fluctuating market

C. stable market (Whenever a customer has a stock position, and the customer wishes to generate extra income by selling an option against that position, the market sentiment is neutral. This is a covered call writer - a call writer who owns the underlying stock position. The customer sells the call contract to generate extra income from the stock during periods when the market is expected to be stable. If the customer expects the market to rise, he or she would not write the call against the stock position because the stock will be "called away" in a rising market. If the customer expects the market to fall, he or she would sell the stock or buy a put as a hedge.)

A customer sells short 1,000 shares of ABC stock at $3.00 per share in an existing margin account. The customer must deposit: A. $1,500 B. $2,000 C. $2,500 D. $3,000

D. $3,000 (Under the "cheap stock rule," if a customer sells a stock short under $5.00 per share, he or she must put up the greater of 100% or $2.50 margin per share. 100% of $3 per share x 1,000 shares = $3,000. $2.50 x 1,000 shares = $2,500. The greater amount is $3,000.)

CLOSED END BOND FUNDSFundNet AssetValue StockCloseNAVChange Acco $8.32 8.13 -.08 Acme $9.90 10.25 +.10 Adap $7.45 7.50 -.01 A customer who places an order to sell 100 shares of Adap Fund will receive: A. $745 B. $745 less a commission C. $750 D. $750 less a commission

D. $750 less a commission (If closed-end fund shares are sold, the investor gets the current market price less a commission paid for executing the trade. The last price for Adap Fund is $7.50. An investor selling 100 shares receives $750 less a commission.)

A $100,000 municipal bond is purchased by a financial institution in the secondary market at 95. For tax purposes, the institution opts to not accrete the bond. The bond has 10 years to maturity. The bond is sold after 4 years at 98. The tax consequence is: A. no gain or loss B. a 1 point capital gain C. a 2 point capital gain D. 2 points of interest income and a 1 point capital gain

D. 2 points of interest income and a 1 point capital gain (Since these discount bonds are purchased in the secondary market, the market discount that is earned over the life of the bonds is treated as taxable interest income. This is nothing more than a "tax grab" by the Federal government - the idea being that wealthy people buy municipal bonds, so if there is a way that they can be taxed without jeopardizing their basic Federal income tax-free status, why not? The holder has the option of either accreting the discount annually, and paying tax on the portion of the market discount earned; or of waiting until the bonds are sold or redeemed to pay the tax (the better option). Since the bonds are valued at cost, there was no annual accretion of the discount. Thus, when the 10 year bonds are sold after 4 years, 4/10ths of the 5 point market discount, or 2 points, has been "earned" and will be taxable as interest income at that point. The bonds were bought at 95, and sold for 98, for a 3 point gain. Of the 3 point gain, 2 points are taxable as interest income; with the remaining 1 point being a long term capital gain.)

A trader liquidates an exchange listed stock position and invests the proceeds in an exchange listed stock index fund. The trader has reduced which risk? A. Call risk B. Inflation risk C. Liquidity risk D. Capital risk

D. Capital risk (Capital risk is simply the risk of losing money. By increasing the number of stocks in a portfolio, this risk is reduced through diversification. This is a major advantage of investing in stock index funds. Call risk does not apply to stocks (because common stocks are non-callable). Stocks, whether held individually or in an index fund, are not as susceptible to inflation (purchasing power) risk as bonds. In times of inflation, corporations can raise prices and maintain profitability. Liquidity risk is the risk that a security can only be sold by incurring large transaction costs and is essentially not applicable to exchange listed securities because the market is so active.)

In a period of rising interest rates, a bond dealer would engage in which of the following activities? I Lower prices in interdealer quote publications such as Bloomberg for municipal bonds II Place "request for bids" in services such as Bloomberg on depreciated positions where the dealer has no current interest III Bid for bonds to cover previously established short positions IV Buy put options on debt instruments to hedge existing long positions A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

D. I, II, III, IV (In a period of rising interest rates, bond prices will be falling. Therefore, a dealer would lower his quoted prices in Bloomberg. If the dealer has depreciated bonds that he wishes to sell, he can place "Requests for Bids" for those bonds in Bloomberg. The dealer may bid (buy) bonds that he has previously sold short to take gains due to falling prices. To hedge existing long positions against falling prices, the dealer would buy put options. If prices fall, the dealer can "put" the bond at the contract price. Put options are used to hedge existing long positions from falling prices.)

If the U.S. dollar appreciates against foreign currencies, which statements are TRUE? I U.S. exports should increase II U.S. exports should decrease III Any trade deficit should narrow IV Any trade deficit should widen A. I and III B. I and IV C. II and III D. II and IV

D. II and IV (If the U.S. dollar appreciates against foreign currencies, then U.S. goods become more expensive to foreigners, while foreign goods become cheaper in the U.S. This should cause exports to decrease, and imports to increase. If the U.S. is running a trade deficit, the increase in net imports will widen the deficit.)

Arrange the following CMO tranches from lowest to highest yield: I Plain vanilla II Targeted amortization class III Planned amortization class IV Companion A. I, II, III, IV B. IV, III, II, I C. IV, I, II, III D. III, II, I, IV

D. III, II, I, IV (Companion tranches are the "shock absorber" tranches, that absorb prepayment risk out of a TAC (Targeted Amortization Class) tranche; or both prepayment risk and extension risk out of a PAC (Planned Amortization Class) tranche. Because the companion absorbs both of these risks, it has the greatest risk and trades at the highest yield. The PAC, because it is relieved of both of these risks, has the lowest risk and trades and the lowest yield. A Plain Vanilla tranche is not relieved of either extension risk or prepayment risk, so it will offer a yield that is higher than a PAC or a TAC, but lower than the yield on a companion. A TAC is only relieved of prepayment risk, so its yield will be lower than a Plain Vanilla tranche. However, the TAC yield will be higher than the yield on a PAC, which is relieved of both extension and prepayment risk, while the TAC is only relieved of prepayment risk.)

All of the following terms apply to index ETFs EXCEPT: A. benchmarked B. passively managed C. marginable D. redeemable

D. redeemable (Almost all ETFs are based on a benchmark index. They mirror the composition of the index, so they are "passively" managed and have low management fees. An actively managed fund is one where the investment adviser chooses which securities to buy and sell. Active management comes with higher management fees. There are only a very few actively managed ETFs - almost all are passively managed. They trade like any other stock and are not redeemable. They can be purchased on margin and they can be sold short, like any other stock.)

Which of the following option positions is used to generate additional income against a short stock position? A. long call B. short call C. long put D. short put

D. short put (When one has a short stock position, borrowed shares have been sold with the agreement that the customer will buy back the position at a later date. If the customer thinks that the market will remain flat, he can sell a covered put against his stock position to earn extra income during that time period. If the stock is sold short and a put is sold with the same strike price, then if the market stays the same, the put expires "at the money" and the premium collected is retained. If the stock falls, the short put is exercised, obligating the customer to buy the stock at the same price at which it was sold. In this case, only the premium is earned. If the put had not been sold, then the customer would have had an increasing gain on the short stock position as the market fell - so he does not make as much in a falling market. On the other hand, if the market rises, the short put expires "out the money" and the customer is exposed to unlimited upside risk on the short stock position that remains.)

A customer buys 1 ABC Apr 30 Call @ $6 and 1 ABC Jan 40 Put @ $8 when the market price of ABC is at $34. ABC goes to 36 and the customer closes the positions at intrinsic value. The customer has a: A. $400 loss B. $400 gain C. $1,400 loss D. $1,400 gain

A. $400 loss (The customer has bought a combination. Buy 1 ABC Apr 30 Call@ $ 6Buy 1 ABC Jan 40 Put@ $ 8$14Debit If the market is at $36, the 40 Put is 4 points "in the money" while the 30 Call is 6 points "in the money." Closing the contracts at these premiums results in: Sell 1 ABC Apr 30 Call@ $ 6Sell 1 ABC Jan 40 Put@ $ 4$10Credit The net loss is: $10 Credit - $14 Debit = $4 or $400 on the positions.)

A customer has an existing margin account with the following positions: Long: 1,000 XYZ Cmn Mkt Value: $20,000 Long: 10 PDQ Jan 50 Calls Mkt Value: $5,000 Debit Bal: $15,000 SMA: $1,000 How much cash can the customer withdraw (borrow) from the account? A. 0 B. $500 C. $1,000 D. $2,000

A. 0 (For purposes of computing equity in a margin account, long option positions should be excluded since they must be fully paid. Think of long options as being purchased in a cash account with no loan value. Long Market Value - Debit=Equity% Stock$20,000 $15,000 $5,000 25% This account is at minimum maintenance margin. If the SMA of $1,000 were borrowed from the account, the margin would fall below minimum maintenance. Therefore, no borrowing is permitted. SMA can only be borrowed if the account is above minimum maintenance margin - and it can only be borrowed in an amount that brings the account to maintenance - not below maintenance.)

A customer has an existing short margin account and wants to write five covered puts against 500 shares of stock that are short in the account. The margin requirement to write the puts is: A. 0 B. 5% of the market value of the stock plus the premium minus any out the money amount C. 10% of the market value of the stock plus the premium minus any out the money amount D. 20% of the market value of the stock plus the premium minus any out the money amount

A. 0 (The sale of the puts is covered by the short stock position. The margin requirement to sell the puts is "0" since there is no risk on the short puts (if the short puts are exercised, the writer has the money in the account to pay for buying the stock from the short sale credits previously received).)

A customer buys 1 OEX Jan 530 Call @ $3. The overall market falls and the index closes at 528.27, while OEX 530 Call contracts close at $.50. Which is the best action? A. Close the position B. Exercise the position C. Let the position expire D. Roll-up the position

A. Close the position (If the position is closed, the customer loses 2.50 points (Bought at $3; Sold at $.50) = $250 loss. The position cannot be exercised because it is "out of the money." If the position expires, the holder loses the $300 premium paid. It is better to lose less, so closing the position is the best strategy. The last choice, "rolling-up the position" is an advanced strategy that is not tested.)

If a couple that is not covered by another qualified retirement plan makes over $123,000 in year 2019, IRA contributions are: I permitted II not permitted III tax deductible IV not tax deductible A. I and III B. I and IV C. II and III D. II and IV

A. I and III (Anyone can contribute to an IRA, whether covered by a pension plan or not. If a couple is not covered by a qualified plan, the contribution is tax deductible and the maximum that can be contributed is $6,000 each ($12,000 total). However, the contribution is not tax deductible for couples, where both are covered by qualified plans, who earn over $123,000 in year 2019 (the deduction phases out between $103,000 - $123,000 of income).)

An importer has bought woolen goods from Great Britain, payable upon delivery in the U.S., in British Pounds. To hedge the position, the importer would: I buy British Pound Calls II buy British Pound Puts III buy British Pound Forward Contracts IV sell British Pound Forward Contracts A. I and III B. I and IV C. II and III D. II and IV

A. I and III (If the British Pound rises, it will be worth more dollars. To protect against the rise, the importer can buy British Pound Calls. If the British Pound rises, the extra cost of buying the Pounds will be offset by a gain on the calls. The other method of hedging against a higher Pound is to buy forward contracts. When a forward contract is bought, the importer agrees to buy (receive) the Pounds for a pre-set price at a future date. This is similar to buying a call except this is done in the commodities markets, not the securities markets.)

The use of index funds as investment vehicles for asset classes increases: A. diversification B. expected rate of return C. standard deviation of return D. market risk

A. diversification (Index funds are broadly diversified, since they hold all of the securities in the designated index. This reduces market risk or the standard deviation of returns. The impact of diversification on rate of return should be one of lowering the rate of return compared to the market average, along with lowering the risk associated with that rate of return.)

A company that has been growing rapidly announces that it is splitting its stock 3:2 and increasing its cash dividend by 10%. Prior to the announcement, the stock was trading at $60 and the dividend yield was 8%. What will be the next dividend paid per share? A. $.80 B. $.88 C. $1.20 D. $1.32

B. $.88 (Another question that is more annoying than difficult. When the stock was trading at $60, it was paying an annual cash dividend of 8% of $60 = $4.80 per share. After the 3:2 split, for every 2 shares held, there will now be 3 shares. This is the same as 1.5:1. The new share price will be $60 / 1.5 = $40. The new annual dividend amount per share before the increase will be $4.80 / 1.5 = $3.20. If this dividend is increased by 10%, the new annual rate will be $3.52, and the new quarterly dividend payment per share will be $3.52 / 4 = $.88.)

A customer buys 100 shares of XYZ at 87 and buys 1 XYZ Jan 90 Put @ $8. Just prior to expiration, the stock is trading at $87. The customer closes the option position at a premium of $3. One week later, the stock moves to $93 and the customer sells the stock position in the market. The net gain or loss on all transactions is: A. $100 loss B. $100 gain C. $600 loss D. $600 gain

B. $100 gain (The put contract was purchased at $8 and closed (sold) at $3 for a net loss of $5. The stock was purchased at $87 and sold at $93 for a net gain of $6. The net of all transactions is a 1 point or $100 gain.)

A customer buys 100 shares of ABC stock in a margin account at $62 and sells 1 ABC Jan 60 Call @ $7 on the same day. The customer must deposit: A. $2,300 B. $2,400 C. $2,750 D. $5,500

B. $2,400 (To buy the stock, the customer must deposit 50% of the purchase price of $6,200 or $3,100 in a margin account. There is no margin requirement on the short call because it is covered by the stock position. Since $700 of premiums is credited to the account from selling the call, the customer must deposit $2,400 ($3,100 - $700).)

A customer buys 1 ABC Jan 30 Call @ $5 and buys 1 ABC Jan 30 Put @ $4 on the same day when the market price of ABC stock is $31. Assume that the market price rises to $38 and the call premium rises to $12, while the put premium falls to $1. The customer closes the positions. The customer has a: A. $400 loss B. $400 gain C. $900 gain D. $1,300 loss

B. $400 gain (The customer established two positions with a debit of $9 x 1 contract = $900 debit. When the market is at $38, the customer closes the call at $12 and closes the put at $1. Thus, the positions are closed at: Short 1 ABC Jan 30 Call@ $12 Short 1 ABC Jan 30 Put@ $ 1 $13 credit = $1,300 credit The customer closed for a credit of $1,300. Since the initial positions cost $900, the customer has a $400 gain.)

A 10 year 8% municipal bond, quoted on a 6.00 basis, is priced at 105. A 10 year 7% municipal bond, quoted on a 6.00 basis, is priced at 101. What is the price of a 10 year, 7.2% municipal bond, quoted on a 6.00 basis? A. 101.25 B. 101.80 C. 102.05 D. 102.20

B. 101.80 This question is asking for the following: 8% Coupon 6.00 Basis 105 7.2% Coupon 6.00 Basis? 7% Coupon 6.00 Basis 101 The difference in price between the 7% and 8% bonds is 4 points. The 7.20% bond is 20% of the way from 7%. 20% x 4 points = .80 point price increment from the 7% price. 101 + .80 = 101.80 price for the 7.20% bond.

A customer buys a $1,000 par reverse convertible note with a 1 year maturity and a 6% coupon rate. At the time of purchase, the reference stock is trading at $50 and the knock-in price is set at $40. If, at maturity, the reference stock is trading at $25, the customer will receive: A. $1,000 par B. 20 shares of the reference stock C. 25 shares of the reference stock D. 40 shares of the reference stock

B. 20 shares of the reference stock (Reverse convertible notes were created for customers looking for enhanced yield in a low interest rate environment. Of course, any enhanced yield comes with higher risk. The note is linked to the price movements of an underlying stock (or very rarely, an underlying index). At maturity, the holder will receive par value, as long as the price of the reference stock is above the "knock-in" price (typically 70-80% of the initial reference price). On the other hand, if at maturity, the reference stock falls below the "knock-in" price, then the holder will receive the shares of stock. In this example, the share price has fallen from $50 to $25, which is below the "$40 knock-in" price. Thus, at maturity, the holder of the note will get the stock - not par value. The original conversion ratio was based on the reference price of $50. $1,000 par / $50 conversion reference price = 20 shares per note. Thus, at maturity, the customer gets 20 shares, currently worth $25 each = $500 worth of stock. This customer has lost $500, partially offset by any interest income received.)

A client owns 500 shares of a company with 5,000,000 shares outstanding. The company will issue 1,000,000 shares through a rights offering. If the client subscribes to the offering, he or she will now own: A. 500 shares B. 600 shares C. 1,000 shares D. 1,500 shares

B. 600 shares (Because the company is issuing 20% additional shares (1,000,000 new shares/5,000,000 outstanding shares = 20%), a stockholder with 500 shares will be allowed to subscribe to 100 of the new shares, for a total holding of 600 shares.)

A wealthy customer has $2,000,000 to invest and wishes to create a bond portfolio that maximizes expected income, and is willing to assume a reasonable level of risk of default to achieve this objective. The registered representative recommends diversifying by investing $400,000 among 5 different corporate bond issues in different industries. Below are 4 possible portfolios for the customer: Expected AnnualRate of Return Default RiskOver 10 Years Portfolio A 10% 5% Portfolio B 11% 10% Portfolio C 12% 40% Portfolio D 14% 50% The best portfolio to meet the customer's investment objective and risk tolerance level is: A. Portfolio A B. Portfolio B C. Portfolio C D. Portfolio D

B. Portfolio B (This one is "interesting." The "default risk" represents the loss of return that is likely due to making higher risk investments. If Portfolio A has an expected annual rate of return of 10% over 10 years; but there is the probability that of the $2,000,000 invested, 5% of those bonds will default, so the net return will be 95% of 10% = 9.5%. If Portfolio B has an expected annual rate of return of 11% over 10 years; but there is the probability that of the $2,000,000 invested, 10% of those bonds will default, so the net return will be 90% of 11% = 9.9%. If Portfolio C has an expected annual rate of return of 12% over 10 years; but there is the probability that of the $2,000,000 invested, 40% of those bonds will default, so the net return will be 60% of 12% = 7.2%. If Portfolio D has an expected annual rate of return of 14% over 10 years; but there is the probability that of the $2,000,000 invested, 50% of those bonds will default, so the net return will be 50% of 14% = 7.0%.)

Employees of non-profit organizations are permitted to establish tax deferred retirement plans, similar to a Keogh, by making investments in a: A. 401(k) plan B. Tax sheltered annuity C. Profit Sharing Plan D. Defined Benefit Plan

B. Tax sheltered annuity (403(b) retirement plans allow employees of non-profit institutions such as hospitals and universities to establish their own retirement plans if none is provided by the employer. The monies contributed are excluded from taxable income, and must be used to purchase "tax sheltered" annuities or mutual funds; direct stock investments are prohibited.)

Private CMOs are: A. rated AAA because the underlying mortgages are government backed B. assigned credit ratings by independent credit agencies based on their structure, issuer, and collateral C. not rated by independent credit agencies because they are private placements that cannot be traded in the market D. not rated by independent credit agencies because of the uncertainty surrounding the quality of the mortgage loans collateralizing the issue

B. assigned credit ratings by independent credit agencies based on their structure, issuer, and collateral (Private CMOs (Collateralized Mortgage Obligations) are also called "private label" CMOs. Instead of being backed by mortgages guaranteed by Fannie, Freddie or Ginnie, they are backed by "private label" mortgages - meaning mortgages that do not qualify for sale to these agencies (either because the dollar amount of the mortgage is above their purchase limit or they do not meet Fannie, Freddie or Ginnie's underwriting standards). Whereas CMOs backed by Fannie, Freddie or Ginnie mortgage-backed securities are rated AAA, the rating of "private label" CMOs is dependent on the credit quality of the underlying mortgages.)

Additional security backing a general obligation bond is provided if the issuer has: A. a low ratio of Overall Net Debt to Assessed Value of Property B. escrowed the issue to the maturity date C. backed the issue by a pledge of unlimited ad valorem taxing power D. received an unqualified legal opinion on the issue

B. escrowed the issue to the maturity date The safest municipal issue is an "advance refunded" issue. (The backing for these bonds is escrowed government and agency securities (and sometimes bank CDs). They are rated AAA. While a normal general obligation bond is backed by tax collections and is a "non-self supporting debt" carried on the backs of the taxpayers, when a municipality "advance refunds" its G.O. bonds, it backs them with escrowed government and agency securities, making the debt self-supporting, so it no longer counts in that issuer's debt limit. Issuers will advance refund their debt when interest rates have dropped, under the terms of the "defeasance" covenant included in the bond contract. This frees up their debt limit to sell new bonds at lower current market rates. Also note that if the bonds are callable and will be called at a call date using escrowed government or agency securities, then these are called "pre-refunded" bonds.)

A corporation has issued $100 par, 8% cumulative convertible preferred stock, callable at par. The preferred is convertible into 1.4 shares of common stock. Currently, the preferred stock is trading at $102 while the common stock is trading at $75.50. The corporation calls the preferred stock at par plus accrued dividends of $2 per share. The corporation is making a(n): A. tender offer B. forced conversion C. advance refunding D. simultaneous transaction

B. forced conversion (If a preferred stockholder converts and sells the stock in the market, he realizes the equivalent of 1.4 (conversion ratio) x $75.50 current market price = $105.70 per share. If he or she tenders the preferred on the call, he or she receives $100 per share. He or she will not continue to hold the preferred since dividend payments will cease. The best choice for the preferred shareholder is to convert. In effect, the corporation is forcing the shareholders to convert to common.)

The bondholder of a municipal bond issue is the: A. borrower of the bond proceeds B. lender of the bond proceeds C. guarantor of the payment of debt service on the bond issue D. fiduciary acting for the benefit of the bondholders

B. lender of the bond proceeds (The "bondholder" of a bond issue is the party that is owed the debt service on the bonds. This is the "legal" name for the lender or creditor.)

A customer owns 100 shares of ABC stock and owns 1 ABC Put option. The customer wishes to sell the stock by exercising the put, but wishes to retain a recently declared cash dividend. The first date that the customer can exercise the put and still retain the dividend is: A. any date before the ex date B. the ex date C. any date before the record date D. the record date

B. the ex date (Because exercise settlement of listed stock options occurs 2 business days after trade date, in order to retain the cash dividend, the holder of the shares cannot sell them before the ex date (which is 1 business day prior to record date). If the put is exercised on the ex date or later, the trade will settle after the record date, and the customer will be on record to receive the cash dividend. On the other hand, if the long put were exercised before the ex date, the trade would settle on the record date or before, and the customer would be selling the stock, taking him- or herself off the record book on the record date or before, so that client would not receive the dividend.)

A municipal "broker's broker" does all of the following EXCEPT: A. obtain quotes from other dealers B. trade for its own account C. execute trades as agent for other dealers D. execute trades as agent for institutional clients

B. trade for its own account (A municipal broker's broker acts as agent handling large municipal orders, usually for institutions. These firms do not act as market makers and do not take inventory positions.)

A customer sells 1 ABC Jan 100 Call @ $8 and buys 1 ABC Jan 120 Call @ $3 when the market price of ABC is $105. The customer must deposit: A. $300 B. $500 C. $1,500 D. $2,000

C. $1,500 (The customer has created the following spread position: Sell 1 ABC Jan 100 Call@ $8Buy 1 ABC Jan 120 Call@ $3$5Credit This is a short call (credit) spread. In a credit spread, the difference between strike prices (120 - 100 = 20), minus the credit (5), is the maximum potential loss and is the amount that must be deposited. This loss happens when both the contracts are exercised.)

A customer executes the following transactions during the same year: May 1st:Aug. 1st:Aug. 20th: Buy 100 XYZ at $54 per shareBuy 100 XYZ at $40 per shareSell 100 XYZ at $41 per share After the transactions are effected, the customer's cost basis in XYZ stock is: A. $40 per share B. $41 per share C. $53 per share D. $54 per share

C. $53 per share (The "wash sale" rule states that if a customer liquidates a position at a loss, and then reestablishes that position within 30 days, the loss deduction is disallowed. The 30-day time period counts from 30 days prior to the sale date, until 30 days after the sale date. In this case, the stock was purchased at $54 per share on May 1st. The customer buys the stock again on August 1st at $40 before selling the stock at $41, twenty days later. From the IRS's standpoint, the stock was purchased at $54 and sold at $41 on August 20th for a $13 per share loss (the IRS requires FIFO accounting; specific identification is not permitted when there is a "wash sale"). The customer repurchased the stock at $40 within 20 days, so the loss is disallowed under the "wash sale rule." The disallowed loss is added to the customer's basis of $40 on the 2nd purchase of stock, for a new basis in the stock of $53. When the customer liquidates this position at a later date, any gain or loss is computed from the $53 adjusted basis. In essence, the loss is deferred by the "wash sale" rule.)

During periods when the yield curve is inverted, which statements are TRUE? I Debt defaults are probably at historically high levels II Issuers are likely to sell non-callable bonds III Debt investors expect that interest rates will fall in the future IV Debt investors expect that economic activity will decline A. II, III, IV B. I, II, III C. I, III, IV D. I, II, III, IV

C. I, III, IV (When the yield curve is inverted, short term rates are higher than long term rates. This typically occurs when the Federal Reserve pursues a "tight money" policy to slow the economy. The tightening of credit raises interest rates overall, slows economic activity, and thus business defaults increase. Long term rates remain lower than short term rates since investors do not expect the tightening to last far into the future. During periods when the yield curve is inverted, interest rates on all maturities tend to shift upwards, with short term rates rising the most. During these periods of high interest rates, issuers are likely to sell callable issues (not non-callable ones). If interest rates decrease in the future (as expected), the issuer can call in the old debt and refinance at lower current interest rates.)

Which statements are TRUE regarding a portfolio that has a "Beta" of -1? I The portfolio moves in the same direction of the market as a whole II The portfolio moves in the opposite direction of the market as a whole III The portfolio moves at the same velocity as the market as a whole IV The portfolio moves at a slower velocity than the market as a whole A. I and III B. I and IV C. II and III D. II and IV

C. II and III (Negative beta stocks move opposite to the general market - e.g., they are counter-cyclical stocks. A portfolio with a "beta" coefficient of -1 is one that moves at the same velocity as the market as a whole, but it moves in the opposite direction to the market. There are very few "negative" beta stocks - gold stocks being one of them. When the stock market "tanks," investors flee to safety - gold - so these stocks rise when the market falls, and vice-versa.)

Which of the following municipal issues would be exempt from taxation of interest by the Federal Government?I San Francisco, California - Convention Center Revenue Bond II Miami, Florida - Sewer and Water Revenue Bond III Nassau County, New York - Pollution Control Bond IV Des Moines, Iowa - Baseball Stadium Revenue Bond A. I only B. I and IV C. II and III D. I, II, III, IV

C. II and III (Non-essential use, private purpose municipal issues are subject to Federal Income tax, via the Alternative Minimum Tax computation (AMT). The building of a convention center constitutes such a use, as does the building of a baseball stadium. Sewers, water, pollution control, and schools are all essential public uses and these issues qualify for the Federal Income Tax exemption on interest.)

All of the following are necessary to calculate the total purchase price for a municipal bond traded on a yield basis in the secondary market EXCEPT: A. coupon rate B. yield to maturity C. dated date D. trade date

C. dated date (The dated date has no bearing on the calculation of the purchase price of a municipal bond. It is the date of issuance of the bonds, from which time interest will be paid. In order to calculate the bond's price, a bond calculator would be used. To do the calculation requires the coupon rate, yield to maturity, and years to maturity. The trade date is necessary to compute the amount of accrued interest that is due.)

A registered representative wishes to give a seminar about investing in CMOs as a way for older investors seeking an income-producing investment in a low-interest rate environment without assuming a high level of risk. Which statement is TRUE about giving this seminar? A. A registered principal must attend the seminar and such attendance must be documented B. Any materials given to participants must be filed with FINRA no later than 10 business days after first use C. The names of the attendees of the seminar must be recorded by the member firm and must be retained for at least 3 years D. FINRA prohibits registered representatives from giving seminars about CMOs

B. Any materials given to participants must be filed with FINRA no later than 10 business days after first use (FINRA's general rule on filing of retail communications is that for a member firm's first year of operations, all retail communications must be filed 10 business days in advance of use. Thereafter, no filing is required, but the member firm is subject to spot check. However, there are exceptions to the general rule. Retail communications that must ALWAYS be filed 10 business days in ADVANCE of first use are: Options retail communications; and Mutual fund retail communications with member-prepared performance rankings. (Evidently FINRA ran into problems with these, so it wants these pre-filed at all times.) Retail communications that must ALWAYS be filed 10 business days AFTER first use are: All other mutual fund retail communications; CMO retail communications; and DPP retail communications. (The Investment Company Act of 1940 requires an SRO to get copies of investment company advertising; and the FINRA department that gets these also handles CMO and DPP ads, so they all are grouped under the same rule.) There is no prohibition on giving seminars about CMOs; there is no requirement for a principal to attend; and there is no requirement to get the names of the attendees)

A customer, age 69, has never invested in securities. She is retired with no dependents, living on a fixed pension of $35,000 per year. She has a savings account with $160,000 and her home is fully paid. She desires to supplement her retirement income, assuming minimal risk. The BEST recommendation would be for the customer to invest $100,000 of her cash savings into a(n): A. variable annuity contract B. CMO planned amortization class tranche C. SPDR D. income (adjustment) bond

B. CMO planned amortization class tranche (CMO planned amortization classes give a good yield that is 50 or so basis points higher than equivalent maturity Treasuries and are extremely safe. These meet the customer's objective of additional income with low risk. Since this customer is only earning $35,000 per year, she is in a low tax bracket - making tax-deferred variable annuities unattractive. SPDRs - Standard and Poor's 500 Depository Receipts are an exchange traded fund that consists of equities - which don't provide much income. Income bonds only pay interest if the corporation has enough "income" - so these are not appropriate either.)

A corporation has issued $1,000 par, 8% convertible bonds, callable at par. The bonds are convertible into 14 shares of common stock. Currently, the bond is trading at 102 while the common stock is trading at $75.50. The corporation calls the bonds at par plus accrued interest of $20 per bond. Which of the following statements are TRUE? I This is a forced conversion II This is a tender offer III The bondholder should tender the bonds to realize the greatest profit IV The bondholder should convert the bonds to realize the greatest profit A. I and III B. I and IV C. II and III D. II and IV

B. I and IV (This is a forced conversion. If a bondholder converts and sells the converted shares in the market, he or she realizes the equivalent of 14 (conversion ratio) x $75.50 current market price = $1,057 per bond. If he or she tenders the bonds on the call, he receives $1,000 per bond. He or she will not continue to hold the bonds, since interest payments will cease. The best choice for the bondholder is to convert. In effect, the corporation is forcing the convertible bondholders to convert to common. Corporations will do this when interest rates have fallen. It allows the issuer to retire older, high interest rate debt. After the conversion occurs, the issuer will sell new debt at lower current market interest rates The investor will not continue to hold the bond, since interest payments will cease. In effect, the corporation is forcing the convertible bondholders to convert to common. Corporations will do this when interest rates have fallen. It allows the issuer to retire older, high interest rate debt. After the conversion occurs, the issuer will sell new debt at lower current market interest rates.)

Which of the following statements are TRUE regarding new issue U.S. Government and Agency securities? I U.S. Government securities are sold at auction conducted by the Federal Reserve II U.S. Government securities are sold through a selling group III Agency securities are sold at auction conducted by the Federal Reserve IV Agency securities are sold through a selling group A. I and III B. I and IV C. II and III D. II and IV

B. I and IV (U.S. Government securities are sold at auction conducted by the Federal Reserve; agency securities are sold to the public through a selling group of broker-dealers assembled by the agency.)

The Vice-President of ACME Corporation, an NYSE listed firm, places an order to buy 10,000 shares of ACME common at the market. 3 months later, ACME stock's price has increased by 20% and the officer places an order to sell. Which statements are TRUE? I The sale of the stock is subject to Rule 144 II The stock cannot be sold unless it has been held, fully paid, for 6 months III The sale is prohibited until a "waiver of liability" has been obtained from the issuer IV The officer must forfeit the profit on the sale A. I and II only B. I and IV only C. II and III only D. I, II, III, IV

B. I and IV only (Since the seller is an officer of that company, he is a control person under Rule 144, and any sales must conform with the Rule. Rule 144 requires that restricted shares be held for 6 months, fully paid, before being sold. Since these shares are registered, they are not "restricted" and the 6-month holding period requirement does not apply. There is no requirement for a "waiver of liability" from the issuer. Since the officer did not hold the appreciated securities for at least 6 months, he or she has a "short swing" profit that must be paid back to the issuer under the Securities Exchange Act of 1934 "Insider" rules.)

A short seller is prohibited from covering short sales with offered securities purchased from an underwriter participating in the offering if the short sale occurred how many days prior to the pricing of the offered securities? A. 1 B. 2 C. 5 D. 10

C. 5 (SEC Regulation M (Rules 101-105) covers secondary market activities related to registered public offerings, and addresses such items as prohibitions or limits on syndicate members buying the stock in the secondary market during the 20-day cooling off period (this is for add-on offerings); stabilization rules (because stabilizing bids are placed in the secondary market); and also, under Rule 105, addresses a rather nasty market manipulation that occurred in secondary offerings. Prior to the adoption of this rule, a common trading practice was for overly aggressive independent traders to short that stock in the market - pushing the price down during the 20-day cooling off period. The fall in the market price would force the underwriters to lower the Public Offering Price of the issue. Thus, when registration became effective, the independent trading firms could buy the issue from the underwriters at the lower P.O.P., cover their short positions, and have a nice profit. The problem was, however, that this activity was clearly manipulative. The SEC took a dim view of this activity, and under Rule 105, prohibits broker-dealers from purchasing shares of stock from the underwriters at the offering price to cover short positions established within 5 business days of the effective date.)

Which municipal bond is MOST likely to have a mandatory sinking fund provision in the Trust Indenture? A. Tax Anticipation Notes B. Water District Bonds C. Dormitory Revenue Bonds D. School District Bonds

C. Dormitory (Revenue Bonds A mandatory sinking fund requirement would be used for a risky bond issue, where a purchaser needs additional assurance that the funds will be available to service the debt. Of the issues listed, a Dormitory Revenue Bond is the most risky, since the revenue depends on students renting out the dorm. School district bonds are backed by ad valorem taxes and are therefore safer. Water district bonds are backed by water charges - we all drink water so this issue is safe. Tax Anticipation Notes are short term notes issued in advance of incoming tax collections (property taxes are typically collected twice a year) and are paid off by these collections - very safe securities.)

Which of the following securities are exempt from the Securities Act of 1933? I Benevolent Association issues II Small Business Investment Company issues III Common Carrier issues IV Industrial Company issues A. I and III B. II and IV C. I, II, III D. I, II, III, IV

C. I, II, III (Benevolent association, small business investment company, and common carrier issues are all exempt under the Securities Act of 1933. Industrial companies are not exempt - their securities must be registered and sold with a prospectus.)

Which sources of REIT income are counted towards the 75% test required by Subchapter M? I Net rental income II Interest income from mortgages III Real estate tax refunds IV Dividend income A. I only B. II and III only C. I, II, III D. I, II, III, IV

C. I, II, III (To qualify as a regulated investment company, 75% of REIT income must be real estate related. This income includes rents, mortgage interest earned, and real estate tax refunds received (as a source of income, an REIT can buy a property and attempt to get its tax assessment lowered - any resulting tax refund is income to the REIT).)

Which statements are TRUE about Eurodollar bonds? I The bonds are issued in bearer form II U.S. corporate issuers are not subject to foreign currency risk III Foreign corporate issuers are not subject to foreign currency risk IV Trading is centered in the European market A. I and II only B. II and III only C. I, II, IV D. I, II, III, IV

C. I, II, IV (Eurodollar bonds are issued in bearer form outside the U.S. Trading is centered in London. Because the bonds are payable only in dollars, U.S. based issuers do not run any foreign currency risk. If foreign currency values rise, it has no effect on the issuer who pays in dollars. On the other hand, foreign issuers of Eurodollar bonds are subject to foreign currency risk. For example, if a British corporation issues Eurodollar bonds, and the British Pound declines in value relative to the dollar, then it will cost the British company more (in Pounds) to pay the debt service on the bonds.)

FINRA rules prohibit an executive officer or director of a publicly held company from receiving a new issue IPO allocation in all of the following cases EXCEPT: A. the company is currently an investment banking client of the member B. the member has received compensation from the company for investment banking services in the past 12 months C. the member expects to be retained by the company to provide investment banking services in the upcoming 3 months D. the member's research department has followed the stock for the preceding 12 months and has rated the stock either a "buy" or "strong buy"

D. the member's research department has followed the stock for the preceding 12 months and has rated the stock either a "buy" or "strong buy" (FINRA prohibits the "spinning" of IPO shares. This is a "quid pro quo" arrangement where a member firm gives officers of public companies IPO allocations in return for receiving underwriting business from that company (since the officers are in a position to direct that business to the member firm). An executive officer or director of a publicly held company cannot receive a new issue allocation if the company is currently an investment banking client of the member; if the member has received investment banking compensation from the company in the past 12 months; or if the member expects to be retained by the company to provide investment banking services to the company in the upcoming 3 months. Whether the member firm has covered the company in its research reports in the past 12 months, or if it intends to cover the company in its research reports, is not considered a "quid pro quo" under this rule.)