Series 7 wrong questions to study

U.S. exchange-listed foreign currency option premiums are quoted in which of the following?

U.S. dollars -- Foreign currency option premiums are quoted in U.S. dollars. Because one point equals $100, a premium quote of 1.70 equals $170.

Regarding premiums, they are

fixed in a variable life contract and flexible in a universal variable life contract. -- Premiums are fixed in a variable life contract and flexible in a universal variable life contract

A twenty-eight- year old individual with a high-risk tolerance seeking a strong return from an investment may wish to consider a

small cap stock fund. -- This individual would be best served by investing in a small cap stock fund.

An investor has created a bull call debit spread. This investor has

sold the contract with the higher strike price and purchased the contract with the lower strike price. -- In a bull call debit spread, the investor purchases a call option and writes a call option. The call option purchased has a lower strike price than the call option sold, thereby creating a bull call debit spread.

All of the following would affect a customer's equity balance except

stock dividends. -- Stock dividends do not affect total equity in an account, only the number of shares contained (but at a lower per-share price). Cash dividends increase equity, while withdrawal of SMA and interest charges assessed against the account decrease equity.

An order that is intended to be triggered at a particular price and executed at the next price is a

stop order. -- Orders that are triggered at a given price point and then executed at the very next price are stop orders. A stop order that specifies an execution at a particular price point is a stop limit order.

One of the factors used to determine whether a 1035 exchange may be appropriate for an investor is the timing of any previous such exchanges. It is typically considered inappropriate for an investor to effect a 1035 exchange when a prior such transaction was conducted

within the past 36 months. -- Industry rules indicate that investors should not effect 1035 exchanges more than once every 36 months. There are usually fees associated with this transaction, including surrender fees which can be substantial.

XYZ Technology Fund permits rights of accumulation. A shareholder has invested $9,000 and signed a letter of intent for a $15,000 investment. If his reinvested dividends during the 13 months total $720, how much money must he contribute to fulfill the letter of intent?

$6,000 -- The shareholder must contribute the full $15,000, so he owes an additional $6,000. Reinvested dividends and changes in the net asset value do not count toward a breakpoint during the period of a letter of intent

Records relating to terminated representatives must be retained for how many years?

3 years -- Records generated by and about terminated representatives are among those records retained for 3 years

Susan Jones buys one ABC Oct 50 call at 3. She exercises the option to buy 100 shares when the market is at 60. What is the cost basis of the 100 shares?

5300 --When exercising a call option, the cost basis for the shares equals the strike price at which the shares were purchased, plus the premium paid per share to buy the call option. Cost basis = 50 + 3 = 53 x 100 shares purchased = $5,300

Which of the following terms is used in connection with a municipal securities underwriting?

Agreement among underwriters -- The agreement among underwriters (or syndicate letter) details the participation and obligations of each syndicate member. Cooling-off period, registration period, and effective date are terms that apply to nonexempt issues that must be registered with the SEC in accordance with the Securities Act of 1933. Municipal issues are exempt from these registration requirements

A young first-time investor wants to put $10,000 of savings in an investment that she wants to see grow over many years. She intends to add to it in small amounts whenever able. A balanced mutual fund and an equity growth fund are chosen. What would be the most suitable share class for this initial investment?

B shares -- B class shares have a back-end load (sales charge) only payable when the shares are redeemed, and those sales charges dissipate typically over the first five to seven years. Until they disappear completely, the investment is help beyond that time. This is why B shares are generally most suitable for smaller investments (where taking advantage of breakpoints would not be a factor) made with a longer investment time horizon such as this one.

Which of the following statements regarding callable municipal bonds are true? Call premiums tend to increase over time. Call premiums tend to decrease over time. Call prices are stated as a percentage of the principal amount to be called. Call prices are stated as a percentage of the market value of the bonds to be called.

Call premiums tend to decrease over time & Call prices are stated as a percentage of the principal amount to be called -- Call premiums tend to decrease over time. The longer a customer has to hold the bond (and receive semiannual interest), the less of a premium an issuer will pay to take away the bond before maturity. Call prices are always stated as a percentage of the principal amount (par) to be called. For example, a call price of 103 means the issuer will pay $1,030 for each bond called

The amount paid in excess of par value on the sale of common shares by an issuer is reflected in which of the following accounts on the corporate financial records?

In the paid-in surplus -- Paid-in surplus, or capital surplus, is the excess over par value that investors pay for stock on its original issue. Generally, par value on common stock is a matter of record for accounting purposes

Ken has sold 1 EUR May 145 call and purchased 1 EUR May 135 call. Which of the following statements is correct?

Ken has executed a debit spread and is bullish on the EUR -- Ken has executed a debit spread on the EUR and thus is taking a bullish position on the EUR.

The sale of nonexempt securities may take place without an SEC registration if done in a manner that qualifies for a transactional exemption. An example of this would a sale complying with

Rule 506(b) -- If the transaction is exempt, a security that would otherwise have to be registered is exempt from registration. Rule 506(b) is part of the private placement exemption under Regulation D of the Securities Act of 1933. Rule 498 deals with a summary prospectus for a mutual fund and Rules 156 and 135A deal with advertising.

When comparing the performance of several portfolios, which would you be most likely to recommend to your clients?

The one with the highest alpha -- Alpha is a performance measure, while beta is a measure of a stock's volatility relative to the overall market. When a portfolio has a positive alpha, the manager has created excess returns. That is, the performance was better than would have been expected for the risk taken

If a credit spread widens,

a loss will be realized -- In option spreads, the investor wants a debit spread to widen and a credit spread to narrow. If the opposite happens, a loss may be realized

Penalties resulting from a Code of Procedure hearing may include all of the following except

a prison sentence -- Penalties under the Code of Procedure may include censure, expulsion, suspension, and/or fines but not a prison sentence

The Trust Indenture Act of 1939 covers all of the following securities transactions except

a sale of an issue of $5 billion worth of Treasury bonds maturing in 2025 -- The Trust Indenture Act of 1939 requires all corporate debt issues of $50 million or more sold interstate to have a trust indenture. U.S. governments are exempt

Upon the execution of the subscription agreement, an individual will be

accepted as a limited partner in a limited partnership -- The subscription agreement is the document an individual must sign and have approved in order to be granted status as a limited partner in a limited partnership.

Municipal bonds—known as dollar bonds—are generally quoted

as a percentage of par -- Although municipal bonds are usually quoted on a yield basis, actively traded bonds known as dollar bonds are often quoted as a percentage of par (price). The term dollar bond comes from the quote being made in dollars. Remember that a percentage of par value ($1,000) equals a dollar price

Fred has a significant net worth and a long history of making speculative investments. He now seems confused and disoriented and shows signs of dementia. When he places an order for a large quantity of penny stocks, you should

ask to meet with Fred and another family member -- in this situation, you should tell Fred that you'd like to meet with him in person and ask him to bring along an adult member of his family.

If the owner of a variable annuity dies during the accumulation period, any death benefit will

be paid to a designated beneficiary -- The accumulation period of a variable annuity may continue for many years. If the annuitant should die during that time, any death benefit would be paid to a beneficiary designated by the annuitant at the time the annuity was purchased

Mark has a diversified equity portfolio. In order to hedge his portfolio, you would suggest that Mark

buy a put on the SPX -- To protect his long portfolio, Mark should purchase put options. If the portfolio loses value, the put options would gain value. Buying puts is a better hedge than selling SPX calls, which only provides protection for the amount of the premiums earned

The main purpose of dividend reinvestment in a mutual fund accumulation plan is to

compound the growth of a mutual fund investment -- Reinvesting dividends compounds the growth of the fund with periodic purchases of new shares. Taxes are due on dividends whether or not they are reinvested. Capital gains or losses will occur whether or not dividends are reinvested. The purchase of additional shares with reinvested dividends may increase the capital gain or loss in proportion to the dividends reinvested. Avoiding commissions or sales charges is not the main rationale for reinvesting dividends, even though sales charges are not applied to reinvested dividends

A client's account shows no activity other than some dividends received. Based on this information, statements must be sent

quarterly -- All customer accounts, other than those containing penny stocks, receive account statements quarterly. For statement purposes, the term activity includes the receipt of dividends or interest, but that does not change the quarterly requirement

Regulation FD cover

the selective disclosure of material nonpublic information by issuers -- Regulation FD was enacted to curb the selective disclosure of material nonpublic information by issuers to financial analysts and institutional investors. The rule helps ensure that all investors receive equal access to a company's material disclosures at the same time

Two weeks ago, Ethan closed a short position in ABC Inc. common stock that he'd been carrying for a few months. He realized a five- point loss on the transaction. Today, Ethan tells you he is considering another short sale, this time of ABC Inc. convertible bonds. You should tell Ethan that

there may be an adverse tax consequence connected to the common stock position that he closed two weeks ago if he chooses to proceed with this trade -- If Ethan proceeds with his short sale, this may be considered a wash sale, which would disallow the loss Ethan realized when he covered his short position. A wash sale occurs when a securities position is closed for a loss and that same, or substantially similar, security position is re-established within 30 days.

A new client has opened an options account at a broker-dealer. She must sign and return the Options Agreement

within 15 days of account approval -- The Options Agreement must be signed and returned to the broker-dealer within 15 days of account approval. Note that a customer can actually trade in the account (for up to 15 days) before having signed and returned the Options Agreement

A customer buys $100,000 of newly issued municipal bonds at a price of 105. The bonds mature in five years at par. Two years later, the customer sells the bonds at 95. What is the customer's loss for tax purposes?

$8,000 -- These bonds were issued at an original issue premium, so the premium must be amortized on a straight-line basis over the number of years to maturity. 5-point premium / 5 years to maturity = 1 point amortized per year After two years the cost basis will be amortized from 105 to 103. Therefore, the customer's loss = 103 - 95 = 8 points per bond x $10/bond point x 100 (think of $100,000 in bonds as 100 bonds with par value of $1,000) = $8,000

A mutual fund has a net asset value (NAV) of $7.80 per share, and the fund pays its underwriter a concession of $0.12 per share. If the fund has a sales load of $0.50 per share and an administrative fee of $0.15 per share, how much does the investor pay per share to purchase a Class A share of this fund?

$8.30 -- The investor pays the public offering price (POP) when purchasing mutual fund shares. For a Class A share upon purchase, the POP is the NAV plus the sales charge. In this case, the NAV is $7.80 and we are told the sales load is $0.50. Adding the two numbers together equals the public offering price of $8.30. The underwriter's concession of $0.12 is part of the $0.50 as is the $0.15 administrative fee.

A fill-or-kill order (FOK) 1. must be executed in its entirety. 2. may be executed in part or in full. 3. must be executed in one attempt. 4. may be executed after several attempts

1 and 3 -- An FOK order is one where the firm handling the order can make one attempt to fill the order in its entirety. If unable to do so, the order is canceled.

If a company splits its stock 3 for 2, how many additional shares will be issued to an investor who owns 200 shares?

100 -- The investor will receive an additional 100 shares from a 3-for-2 stock split. To calculate the additional shares as a result of a split, multiply the existing number of shares by the split rates (200 shares × 3/2 = 300 shares). Because the investor owned 200 shares, she will be issued 100 additional shares, bringing ownership to 300 shares.

An investor wishes to invest $5,000 into the KAPCO Balanced Fund, an open-end investment company. How many shares will the investor receive if the next computed NAV per share after receipt of the order is $41.30 and the fund has a sales charge of 4%?

116.225 -- The investor will pay the POP (public offering price) of $43.02 per share. That price is computed by dividing the NAV of $41.30 by (100% ‒ 4%). Remember, the 4% sales charge is a percentage of the offering price, not the NAV. Dividing the $5,000 investment by the POP of $43.02 results in a purchase of 116.225 shares.

Which of the following best describes a research report?

A blog post containing an analysis of an equity security covered by the firm -- A research report is a communication that includes an analysis of equity securities of individual companies or industries and that provides information reasonably sufficient upon which to base an investment decision.

A municipal bond subject to a refunding call must be quoted at yield to call in which of the following instances?

A bond at a premium callable at par -- An investor's yield would be less on a premium bond if called at par rather than if allowed to mature. Thus, a registered representative must quote the lower potential yield scenario (in this case, yield to call).

In an effort to raise additional capital, which type of registered investment company may issue debt securities?

A closed-end investment company -- The capital structure of closed-end investment companies differs from other investment companies. Closed-end investment companies may issue debt securities, as well as preferred stock. Open-end companies and UITs can purchase debt securities for their portfolios but can only issue one class of equity.

Which of the following best describes a special tax bond?

A highway renovation bond backed by a fuel tax -- A special tax bond is generally backed by a tax on a complimentary product. A fuel or gas tax might be earmarked as the backing on a highway renovation bond

Preferential tax treatment does not apply in which of these instances?

Abagail received a distribution of $2,500 from her real estate investment trust which she has owned for three years -- Distributions from a Real Estate Investment Trust are subject to regular income tax, unlike ordinary cash dividends from common or preferred shares, which may be subject to regular tax liability depending on the length of time the shares were held surrounding the ex-dividend date. If the shares were held for at least 61 of the 121- day period surrounding the ex-dividend date, any dividends received would be taxable at a preferred rate. Distributions from a Section 529 plan are not taxed if used for qualified educational expenses. Dividends paid to a corporation are taxed at a preferred rate depending on the level of ownership the company has in the business.

ABC Corporation is planning an offering of $10 million of common stock. When would it be prohibited for the company to place a tombstone ad?

Before the registration statement is filed with the SEC -- A tombstone ad, listing the "bare bones" information about the offering cannot be published until the registration statement for the offering has been filed. That tombstone cannot include the effective date or the final offering price. On and after the effective date, the tombstone ad can include those two items.

An investor anticipating that the Federal Reserve Board is likely to increase its target fed funds rate would likely take which of the following actions?

Buy U.S. listed EUR put options -- When U.S. interest rates rise, the U.S. Dollar is likely to strengthen as investors chase the higher returns offered by U.S. Dollar-denominated investments. As a result, foreign currencies would be expected to weaken against the U.S. Dollar. In the U.S., USD options do not exist, so the only viable choice on this question is to buy EUR puts.

A client looking to invest in a mortgage-backed instrument and mitigate prepayment risk may wish to consider a(n)

CMO. -- CMOs are designed to help investors manage pre-payment risk. The cash flows from various mortgage backed securities (GNMA, FNMA, FHLMC) are restructured and serve as the collateral for a typical CMO.

Which of the following would not be considered a defensive industry?

Construction -- Construction would be considered cyclical rather than defensive. Defensive stocks tend do well regardless of prevailing economic conditions.

Which of the following is not a benefit gained by using a TOD account?

Estate taxes are reduced -- The TOD (transfer on death) designation offers many benefits, but reducing estate taxes is not one of them. The assets in the account are included in the decedent's estate. However, the hassles of probate are avoided, and without any legal impediments, the owner of the account can make changes at will.

Rank the following in the usual sequence of order allocation. 1. Syndicate 2. Member at the take down 3. Presale 4. Designated

III, I, IV, II -- The standard order priority for allocation of municipal bond issues is (as stated within the syndicate letter) as follows: presale, syndicate, designated, and member. Orders that benefit all syndicate members have the highest priority.

With respect to a margin account, which of the following statements is correct?

Interest charges and purchases using SMA will increase the debit balance -- Payments of cash dividends or interest will reduce the debit balance, while interest charges and additional purchases will increase the debit balance.

Which of the following best describes an intangible drilling cost?

Labor, fuel, or drilling rig rental -- Intangible drilling costs are the noncapital costs of putting in a well. They are currently deductible expenses such as fuel, wages, and rent. An intangible drilling cost is one that, after expenditure, has no salvage value.

An investor in which of the following products may not receive dividends?

Oil and gas limited partnership interests -- The structure of a limited partnership does not allow for the payment of dividends. If there is income, it flows through to the investor, but it is not considered a dividend. Common stock can pay dividends and preferred stock is purchased for its dividend payout. UITs pay dividends in a manner similar to mutual funds.

An investor, with a well-diversified portfolio oriented toward growth, has 60% invested in the stocks of 28 different companies. She would like to hedge the downside risk for the equities and is comfortable using options to do so. Which of the following is most suitable?

Purchase index option puts -- Selling options to hedge adds income to the account (premiums received), but the protection is limited. The best hedging protection is to purchase options, and to hedge long stocks, purchasing puts is the most suitable. With so many stocks to hedge, doing so individually would not be cost effective due to commissions. On the other hand, hedging the entire portfolio with index options allows the hedge to be done in fewer—if not a single—transaction.

Which of the following positions would create the most risk for an investor?

Sell short 100 shares of SSS and sell 1 SSS put -- A short sale of SSS stock has unlimited loss potential. Selling a put obligates the customer to buy the stock at the strike price in return for premium. A short sale, coupled with a sale of a put, is equivalent to selling an uncovered call and creates the most risk.

Which of the following would accelerate a decline in a bear market?

Sell stop -- Sell stops, placed below the current market, become market orders to sell when the stock trades at or through (below) the stop price. Market sell orders can accelerate declines in the price of the stock.

Market timing is normally associated with which of the following portfolio management styles?

Tactical asset allocation -- Tactical asset allocation, which attempts to capitalize on short-term market swings, is a market timing strategy

A day order is entered to buy 500 XYZ at 24 3/8. By the close, the firm has 100 shares at 24.25 and 200 at 24.37. The remainder is unfilled. What is the outcome?

The client must accept the execution for 300 shares, and the remainder of the order is canceled after the close. -- Day orders may be executed in parts, any remaining shares unfilled at the end of the day are cancelled.

Which of the following is NOT reasonable cause to believe that the seller can make delivery of securities?

The securities are not on a "hard-to-borrow" list -- If an investor sells stock short, Reg SHO requires the customer to locate the securities. The customer can locate by either borrowing the securities, or by relying on the available securities list. Absence from a "hard-to-borrow" list, is not sufficient to satisfy the locate requirement.

HighTechInc wants to raise $100 million in capital via a private placement. Assuming that they plan to publicly advertise the transaction, how many accredited and non-accredited investors can participate in the deal?

Unlimited number of accredited and zero non-accredited -- In a Regulation D 506 deal in which the securities are publicly advertised, there can be an unlimited number of accredited, but zero non-accredited investors. If there was no public advertising, then there could have also been 35 non-accredited investors.

A technical analyst notices that the short interest in a particular stock has been steadily rising. The analyst would take this as

a bullish signal. -- The short interest indicator monitors the number of outstanding shares that have been sold short. Although it seems counterintuitive, as that number increases, it is a bullish sign to the technicians. The key is that those shares will have to be bought at some time to cover the short positions. When that time comes, the demand for the shares will force the stock's price up.

An investor purchases a zero coupon bond at a price of 64. The bond matures in nine years. Five years later, the investor sells the bond at a price of 80. This would result in

a long-term capital loss of $40. -- This question deals with accretion of the discount. The discount here is $360 (the difference between the $640 paid and the $1,000 maturity value). With nine years until maturity, the annual accretion is $360 divided by nine, or $40 per year. After five years, the bond's basis has increased by $200 ($40 times 5 years) to $840. The sale at $800 represents a long-term loss of $40.

It is not uncommon for one company to attempt to take over another by acquiring a significant percentage of its voting shares. This is called

a tender offer. -- The SEC defines tender offer as "an active and widespread solicitation by a company or third party (often called the bidder or offeror) to purchase a substantial percentage of the company's securities. Bidders may conduct tender offers to acquire equity (common stock) in a particular company or debt issued by the company."

A registered representative marking a solicited order ticket as unsolicited is

a violation of FINRA rules. -- It would be a violation of FINRA rules.

Mr. Jones buys 1 ABC Nov 70 put and sells 1 ABC Nov 60 put when ABC is selling for 65. This position is a

bear spread. -- This is a spread because the investor is simultaneously buying and selling the same class of options (puts) with different series (Nov 70 and Nov 60). The dominant position is the put option with a higher strike price because it will be in the money first. For example, when the MV of ABC = 65, the Nov 70 put is in the money while the Nov 60 put will expire. Given that the dominant position is a long put, this is a bear spread.

A corporate client has an equity portfolio valued at $10,000,000. The portfolio has a beta of 1.4. There are SPX May 2000 options available. To adequately hedge this portfolio, the client should

buy 70 puts. -- To adequately hedge this portfolio, the client should buy 70 puts. We divide the value of the portfolio by the cash value of the strike price (2000 x 100 = $200,000). This gives us a quotient of 50. Since the portfolio has a beta of 1.4, we multiply 50 by the 1.4 beta to arrive at 70 contracts. Put differently, the investor needs $10,000,000 x 1.4 = $14,000,000 worth of protection. This requires 70 SPX 2000 puts.

Ratings or guarantees of variable annuity and variable life products are typically based on the

claims paying ability of the issuing insurance company. -- These ratings are based on the claims paying ability of the issuing insurance company.

A broker-dealer is preparing a communication that will be delivered to 15 retail clients and 25 institutional investors. This communication is considered a

correspondence and need not be approved by a principal of the firm prior to use -- Since there are fewer than 25 retail clients receiving this communication, this is considered correspondence by FINRA rules, and as such, it is not required to be approved by a principal prior to use. Correspondence must be spot-checked by the firm to ensure it is not misleading or makes incorrect statements.

Howard has provided his broker-dealer with information to open a new option account and is awaiting clearance to place his first trade. Howard may execute a trade in his account

following the approval of the account by a registered options principal (ROP). -- An option account must be approved by a registered options principal (ROP) before any trades may be placed.

An issuer recently conducted a primary offering and provided a prospectus to all investors. Subsequently, the issuer provides an additional item of information, supplementing material that was outlined in the original prospectus. This additional material is a

free-writing prospectus and must be filed with the SEC by the date of first use. -- This is an example of a free-writing prospectus (FWP), which must be filed with the SEC by the date of first use. An FWP allows an issuer to provide ongoing information to investors without having to refile its registration statement or prospectus.

Zach has sold an XYZ May 65 Put for 7 and an XYZ May 55 Call for 7. When XYZ is trading at 62, Zach closes out the position at its intrinsic value. Zach has a

gain of $400. -- Zach received $1,400 for selling the combination and pays $1,000 to close out the position ($300 to close the put position; $700 to close the call position). The net gain on the position is $400.

A market order to purchase 100 shares of XYZ common stock is

good for that day only -- A market order is executed at the best price in the market at the time the order is entered. Because these orders have guaranteed execution (there is always a "best" price), there would be no practical reason for the order to be carried over to another day. There is a market on close order, but that would have to be specified in the order. A stipulated price is a limit order.

If an investor who has owned FLB stock for two years buys 1 FLB Oct put, this will

have no effect on the holding period -- The investor already held the stock long term when the put was acquired, so there is no effect on the holding period

Your client Paul is considering purchasing a variable annuity through his company's 401(K) plan and seeks your advice. You should tell Paul that

he might consider purchasing the variable annuity in a regular brokerage account. -- It would generally not be advisable to purchase a variable annuity in a 401(K) plan, as there will be no additional tax benefits realized. The annuity should be purchased outside of a tax -deferred account, to gain the tax benefits offered by the variable annuity.

In a variable life contract, the minimum death benefit

is guaranteed and will not change. -- In a variable life contract, the minimum death benefit is guaranteed and does not change.

A customer of the firm has recently become married and now wishes to change the name on the account. This change will be accomplished when

it is authorized by the registered principal. -- Customer name changes, as well as other primary information relating to the account, must be authorized in writing by a registered principal.

All of the following statements regarding a mark to the market are true except

it requires the use of a due bill. -- A mark to the market occurs when one party to a contract becomes partially unsecured due to a change in the stock's market value covered by a contract. A mark to the market is a request for additional collateral.

If a customer does not pay for equity securities purchased within two business days of the regular way settlement date, the broker-dealer may request a time extension from

its designated examining authority. -- A time extension may be requested from the broker-dealer's designated examining authority, which could be FINRA or one of the exchanges.

A municipal bond issued to finance the construction of a new office complex will most likely be serviced and retired from

lease payments from pooled rentals. -- An office complex is a revenue producing facility, as tenants will pay rent to occupy the space. Therefore, the construction of the building would be financed with a revenue bond, and debt service would be paid with lease payments on the property.

Which of the following positions is referred to as a collar?

long stock, long puts, short out of the money calls on the same security -- A collar is commonly used to protect profits earned from a long stock position. It is established by going long the stock, long a put, and going short a call. Both options are usually out-of-the-money when the position is opened.

An individual has holdings in three different fund families. A purchase of shares in a fourth family may

may not be combined with the holdings of the three existing funds for breakpoint considerations. -- Investors may not use their holdings in different fund families to qualify for breakpoints in other funds.

Upon arriving for work on Monday morning, you hear a voicemail message left by Peter, one of your clients, over the weekend. The message asks that at the open on Monday, you sell his 2,500 shares of ABC Industries. He asks that you phone him upon completion of the order. You should

notify Peter that you are unable to complete this order based on the instructions he left for you. -- Your clients are usually told never to leave trading instructions or other time sensitive information in a voice message, as their instructions will not be honored.

A maximum of $3,000 of net capital losses may be used by an investor each year to

reduce ordinary income. -- An investor may use up to $3,000 per year of net capital losses to reduce ordinary income. Note that there is no limit to the amount of capital losses than can be used to offset capital gains.

If interest rates increase, the interest payable on outstanding corporate bonds will

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.

One member of a municipal syndicate is opposed to bidding on a particular issue because of some of the restrictions outlined in the official notice of sale. The other eight members of the syndicate have agreed on a price and vote to submit their bid. In this situation, the syndicate manager can do all of the following except

require the dissenting member to accept its prorated share of the offering -- The syndicate manager cannot force members to participate in the bid. The firm can ask members to reach a consensus, change the composition of the syndicate, or withdraw from the bidding process.

Your broker-dealer has prepared an advertising piece for general distribution to all of its retail customers regarding numerous option strategies. Filing the piece with FINRA is

required at least 10 business days before first use or publication. -- Filing with FINRA is required at least 10 business days before first use or publication for retail communications having to do with options.

An analysis of a revenue bond would include all of the following items except the

study of overlapping debt. -- Overlapping debt is a metric used in the evaluation of a general obligation (GO) bond, not a revenue bond. Note that this is an "except" question.

An over-the-counter (OTC) quote that must be reconfirmed with the OTC trading room before a broker-dealer takes action is

subject. -- Before a trade can take place, a subject quote always must be reconfirmed with the OTC trader or market maker that provided it. Subject quotes are typically used in conjunction with thinly traded securities or before filling large block orders.

A pension plan might invest in each of the following except

tax-free municipal bonds. -- It is inappropriate to place tax-free investments into a tax-deferred plan because there is no benefit to the deferral.

Broker-dealer K is publishing a research report which includes ratings of the 10 companies it is currently covering. This report must also include

the percentage of all securities placed into a particular rating category. -- When a research report includes ratings of individual companies, it must disclose the percentage of all securities rated by the firm in a particular category. Common ratings include "buy", "hold", and "sell".

Typically, general obligation bonds are not sold short because

thin markets may make it difficult to cover a short municipal position. -- Because the municipal trading market is thin, it is often difficult to cover (buy back) a municipal security that has been sold short. It is easy to short 100 shares of GM (borrow the stock), for example, because an equivalent 100 shares of GM can be purchased on the NYSE at any time.

All of the following can be advantages of buying an option contract except

time value dissipation. -- The purchase of an option allows an investor to speculate and fully participate in the price movement of the underlying security at a fraction of the cost of the shares involved, thus leveraging his investment. When used to position against a written option (a spread), the purchase of an option will reduce the risk of loss involved with a single written option. Used in conjunction with a securities position, the purchase of an option can act as an insurance policy to reduce the risk of loss (hedging); therefore, options offer all of these advantages but only for a limited time. As the contract gets nearer to expiration, its time value dissipates. Time decay may be the term used on the exam. This is not considered an advantage of owning options contracts.

A registered representative prepares a summary of the preliminary prospectus, which contains no unverified claims or statements. The registered representative can send the summary to customers

under no circumstances. -- Neither a preliminary prospectus nor a final prospectus can ever be modified, annotated, or summarized in any way.

One of your clients purchased shares of the Ajax Mutual Fund several months ago. At that time, the net asset value (NAV) of the fund was $17.20. Today, the NAV is $17.56, and your client wants to know what accounts for the difference. You should advise her that the difference likely represents

unrealized appreciation -- The NAV of mutual funds is marked to the market daily; the increase reflects higher market prices for the securities in the fund's portfolio.

In a cash account, if a customer buys 300 XYZ at 48 and simultaneously writes 3 XYZ Jan 50 calls at 1, the customer must deposit

$14,100 -- In a cash account, the customer must deposit 100% of the value of the stock purchased ($14,400). However, to determine the actual deposit, subtract the $300 in premium income received. By depositing $14,100, the customer will have $14,400 in the account—the difference being the premium income credited to the account on settlement date

After receiving a quote of 12 -- 12.50 on XYZ stock, a client placed an order to sell short 100 shares. One month later, while the stock was quoted 9.75 -- 10, the client placed an order to close the position. As the result, the client will have

$200 of capital gain. -- The client sold for 12, and repurchased for 10, resulting in a capital gain of $200

A client's margin account has $650,000 across 3 different securities positions, a debit balance of $275,000, and an SMA balance of $125,000. In the event of the bankruptcy of the broker-dealer, SIPC will cover this client for

$375,000.00 -- In a margin account, SIPC will cover the net equity in the account. In this example, we subtract the debit balance of $275,000 from the market value of $650,000, to arrive at the net equity position of $375,000. SMA is not covered by SIPC.

The real value of property within the city limits is $100 million. The city uses a 50% assessment rate. A 10 mill tax rate will provide tax revenues of

$500,000. -- 1 mill = $0.001. 10 mills = 0.01 (10 × 0.001). $100 million × 50% assessment rate = $50 million. $50,000,000 × 0.01 = $500,000.

An investor purchased 1000 shares of XYZ on Nov 1 at 18.50 per share and a few days later sold 5 call options on XYZ for a premium of 2.5. On December 15 XYZ is trading at 25.50 and the 5 call options are exercised. The cost basis of the investor's XYZ stock is

18.50. -- The cost basis of the investor's stock is 18.50, the actual price paid for the shares.

A Treasury bond is quoted 101.12 - 101.20. If a client asks her RR what the spread is, the RR would respond by saying

2.50. -- Treasury bonds are quoted in 32nds. 8/32nds is equal to ¼ of a point, and one point is equal to $10, so the spread here is 2.50.

A customer complaint has been resolved. A record of the complaint must be maintained in the files of the broker-dealer for

4 years. -- Customer complaints must be maintained for 4 years by FINRA member firms.

Mr. Jones is long 100 shares of ABC Corp. at 51. He establishes a short straddle on ABC Corp. with a strike price of 50. The premium on the call is 3.25 and the premium on the put is 2.25. What is Mr. Jones's maximum gain on the position if the call option is exercised?

4.5 -- If the call option is exercised, that means the MV is greater than the SP. This also implies that the put option expires. The writer earned 5.50 in premiums for writing both options. If the MV increases from 50 to 51 he will lose 1 on the call position. However, as it goes up beyond 51, he will gain $1 on the long stock position for every $1 he loses on the short call position. Therefore, his max gain is 5.50 1 (the dollar he loses between 50 & 51) = 4.50.

XYZ Corporation is currently paying an $.80 quarterly dividend. The stock is $10 par value and is selling in the market for $50 per share. What is its current yield?

6.40% -- Current yield is calculated as the annual dividend divided by market value of the stock. Remember, that if you are given a quarterly dividend to multiply by 4 to find the annual figure.

Sally Smith sells 1 XYZ Oct 60 call at 3 when the market value is 50. Assuming the market value increases to 75 and the option is exercised, what are her proceeds from the sale for tax purposes?

6300 -- For an investor who sells a call option, the proceeds is the strike price plus the premium. Therefore, her cost basis is $63 per share x 100 shares.

A public purpose municipal bond is purchased at a discount in the secondary market at 90. The face amount is $10,000 and the bond has ten years to maturity. The bond is sold for 97 after five years. For tax purposes the investor uses cost. What is the taxable gain?

700 -- This bond was purchased in the secondary market and the investor uses cost accounting. Therefore, the discount is not accreted. The cost basis for a secondary market purchase is the purchase price of 90. Therefore, upon sale there is a taxable gain of 7 points, or $700.

You have a couple who are approaching retirement in the next couple of years and they are asking you what a good mix of assets for them would be now. They have substantial savings and are debt free. What would you recommend to them?

75% bonds, 15% stocks, 10% money market securities -- This portfolio should be primarily income driven. A heavier concentration toward income producing assets with some equity exposure and cash equivalents may be a good portfolio blend for them now.

An investor purchasing 1,000 shares of a certain mutual fund that has a maximum sales charge of 8½ % and a NAV of $10.30 at the time of purchase will pay a total sales charge of (rounding to the nearest dollar)

957 -- POP = (NAV/ 100% - SC%) = $10.30/.915 = $11.26 SC = POP - NAV = .957 Total Sales Charge = .957 x 1000 shares = $957

Which of the following individuals could most likely open an account at a FINRA member firm without notifying or receiving permission from her employer?

A bank employee selling fixed annuities only -- Whenever an employee of a FINRA member wants to open a securities account with another FINRA member firm or financial institution, the employee must give prior written notice to her employer and receive prior written consent from her employer before the account can be opened. Someone selling fixed annuities only (not a security like variable annuities) is most likely not associated with a member.

Sally considers herself a buy- and-hold investor with an intermediate term time horizon. Which of the following securities would be least suitable for Sally?

A leveraged ETF -- An individual with these goals would not be interested in a leveraged ETF, which has very short-term trading objectives.

Which of the following projects is most likely to be financed by a general obligation rather than a revenue bond?

A new high school -- Hospitals, airports, and golf courses all generate revenue and can be financed with revenue bond issues. Schools are financed through general obligation bond sales.

Which of the following is not a source of revenue for a municipal revenue bond issue?

Ad valorem taxes -- Fund generators, such as tolls, assessments, and fees, subsidize revenue bonds. Ad valorem taxes support general obligation bonds.

Who of the following is not permitted to open an IRA?

An individual whose sole income consists of dividends and capital gains -- An IRA contribution can be made only from earned income. Dividends and interest are investment income, but alimony received as part of a divorce settlement entered into before January 1, 2019 is considered compensation for purposes of an IRA by the IRS. Individuals can contribute to an IRA even if they are already covered by a corporate pension plan or Keogh plan. Although a contribution can be made, it may or may not be deductible, depending on the individual's income.

Which of the following transactions would have to be reported on a Currency Transaction Report?

An investor purchases $12,000 worth of securities with twelve $1,000 postal money orders -- A currency transaction totaling more than $10,000 on a single business day must be reported on a Currency Transaction Report. Included as currency are cash, postal money orders, and traveler's checks.

A customer with a moderate income from a secure job is in the 28% tax bracket. She has a small diversified portfolio and has $10,000 she would like to invest in a limited partnership. If she is willing to accept only a moderate amount of risk, which of the following limited partnerships would be the most appropriate recommendation?

An oil and gas income program -- The customer is not in a high tax bracket and would not be able to take full advantage of the tax benefits produced by an exploratory oil and gas program or by new-construction real estate limited partnerships. A raw land real estate partnership is usually speculative. Of the answers listed, the income and moderate risk from an oil and gas income program would be of greatest benefit to this investor.

Which of the following would be of least concern to a registered representative recommending a municipal security to a customer?

Availability of the security -- The customer's state of residence and tax status are essential when determining suitability of a municipal security. The security's rating is also important because it measures the bond's safety and quality and should align with the customer's risk tolerance. While the availability may pose a challenge for the broker-dealer and could potentially add to the cost of the transaction, it would be of the least concern regarding suitability unless the cost was in some way prohibitive.

Which of the following brokerage records must be kept for six years?

Blotters and general ledgers -- Five main brokerage records must be retained for six years: blotters, general ledgers, customer ledgers, stock records, and customer account records. Articles of incorporation are lifetime and the other two choices have a 3-year retention requirement.

Badentown is planning to raise money in three months to build a new city hall. The mayor wishes to start ground preparation immediately. How could money be raised to fund the work?

Bond anticipation note (BAN) -- The new city hall will be funded with a bond three months from now. A three-month BAN will raise money now for ground preparation. The note's maturity will be set so that it can be paid off with proceeds from the bond sale.

Using yield-based options, which of the following hedging strategies offers a bond portfolio manager the greatest protection against rising long-term interest rates?

Buy 30-year T-bond yield-based calls -- In this example, the options would increase in value, as the actual yield on the 30-year Treasury bonds rose above the yield value represented by the strike price of the option.

If an investor sells 1 TCB Jul 40 put and buys 1 TCB Jul 50 put, and subsequently sells the Jul 50 put, what is the consequence?

Capital gain or loss -- The investor opens with a vertical (price) spread. If she closes out one of the legs of the spread, she has a capital gain or loss for tax purposes as of the closing trade date.

Which of the following statements regarding IRAs is NOT true?

Cash-value life insurance is a permissible IRA investment, but term insurance is not. -- No life insurance products are permissible IRA investments according to the IRS. Note that the Secure Act, which went into effect on January 1st, 2020, raised the required minimum distribution date from 70.5 to 72 and allows investors of any age to contribute to an IRA as long as they have earned income.

Which of the following is typically the largest component of a corporate underwriting spread and is received by members of the selling group?

Concession -- The concession tends to be the largest component of a corporate underwriting spread. That is paid to the members of the selling group. The manager's fee is generally the smallest component.

Minority stockholders are more likely to be able to elect directors through which form of voting?

Cumulative -- Minority stockholders are more likely to be able to elect representatives to the board of directors through cumulative voting. Small stockholders may cast all of their votes on one position rather than spread them out, and thus dilute them over two or three positions.

A new municipal bond offering was priced one month ago, and a printed advertisement showing the initial price and yield was published at the time and continues to circulate. What additional information should be included in the advertisement?

Date of original issuance -- This advertisement should include the date of the original issuance of the bond offering. As the price and yield will likely have changed, it is very important that investors have the relevant information from the time of the original offering.

Which of the following is the narrowest measure of the market?

Dow Jones industrial average -- The Dow Jones Industrial Average is the narrowest measure of the market. The DJIA consists of 30 industrial stocks. The Wilshire 5000 is the broadest measure of the market. It measures the performance of all U.S. headquartered companies with available price data.

You are in the process of collecting information to open an options account for a client. Which of the following items is unnecessary for this purpose?

Employment history -- You do not need the client's employment history to open this account. Their current employment status and financial information will be necessary, along with their current investment objectives.

Registered representatives may engage in which of the following activities?

Entering a client order based on their verbal instructions -- A registered representative may accept a verbal instruction from a client to place a trade. The other choices are not appropriate actions.

Interest income from all of the following are exempt from state and local taxation except

FNMA mortgage-backed issues -- As a general rule, the interest income from U.S. government and agency securities is subject to federal taxation only; it is generally exempt from state and local taxation. However, the interest income from mortgage-backed securities is fully taxable

In order to form a limited partnership, the tax ID and signature of which of the following parties is required?

General partners -- In order to form a limited partnership, the tax ID numbers and signatures of all general partners will be required

For which of the following would the net revenue-to-debt service ratio be applicable?

Hospital bonds -- This is the coverage ratio. Because revenue bonds are only backed by funds generated by a specific source, it is important that net revenues exceed debt service requirements. Hospitals are often built with the proceeds of revenue bond issues.

A working interest in an oil and gas partnership entitles the holder to 1. a portion of the revenue. 2. responsibility for part of the expense of extraction. 3. royalty interest in the revenue. 4. royalty interest in revenue after deducting certain expenses.

I and II -- A working interest is a right to revenues from production, but it also carries the responsibility for extraction costs. A royalty interest carries no responsibility for extraction costs.

Which of the following factors is considered when determining whether underwriting compensation is fair and reasonable? 1. The size of the offering 2. The type of underwriting commitment 3. The market conditions 4. The profitability of the underwriter

I and II -- Relevant factors considered by FINRA in determining the fairness of underwriting compensation include the size of the offering (total dollar amount), the type of commitment (firm commitment or best efforts), the type of securities (i.e., stocks or bonds), the form of compensation (i.e., cash or stock), the total value of all forms of compensation, the underwriter's relationship to the issuer, and any form of potential conflicts of interest.

Which of the following statements regarding fixed municipal unit trusts are true? 1. The trust is managed. 2. The trust is not managed. 3. The portfolio can be traded. 4. The portfolio cannot be traded.

II and IV -- Fixed unit trusts are not managed; the portfolio of securities does not change. As bonds mature or are called, the proceeds are distributed pro rata to the unit holders. These units are redeemable by the issuer or its agent.

Holders of variable annuities receive the largest monthly payments under which of the following payout options?

Life annuity -- The life annuity provides distributions for the shortest period of time and therefore offers the greatest monthly cash flow.

An investor who is bearish might place which of the following trades?

Long 15 Feb 40 puts, short 15 Feb 35 puts -- A put debit spread is bearish, created by purchasing the put with the higher strike price and selling the put with the lower strike price. Choices A & B are bullish, and choice C is a long straddle, which is a volatility play.

Where must the SEC's no-approval clause appear in a prospectus?

On the cover -- The SEC wants investors to know that it does not approve or disapprove new issues. The disclaimer statement must appear on the cover of all prospectuses.

A municipal bond issued by the state of New York would not use which of the following items to secure the debt service on the bond?

Property tax -- State GO bonds are secured by income, excise, and sales taxes. Local GO bonds, such as those issued by cities and counties, are backed by property taxes and license fees.

Which of the following increases the special memorandum account (SMA)?

Receipt of a cash dividend -- Cash dividends are credited to SMA dollar for dollar.

All of the following statements about the special memorandum account (SMA) are true except

SMA in a long margin account decreases when the market value decreases. -- The amount of SMA in a long account decreases only when it is used, and is unaffected by market value decreases.

Various types of call features may exist in the indenture of a bond. Which of the following is not a type of call feature?

Statutory call -- There is no specific call provision known as a statutory call.

All of the following people could open a joint account except

a father and 10-year-old son -- Joint accounts can only be opened between adults

An unmanaged portfolio is a characteristic of

a unit investment trust. -- The most significant distinguishing characteristic of a UIT compared with other investment companies is the lack of ongoing portfolio management. Once the initial portfolio is assembled, it remains fixed until the termination date. Closed-end and open-end companies are classified as management companies because of the ongoing portfolio management responsibilities. Unless something indicates to the contrary, when the exam refers to a fund, it is a mutual fund (open-end investment company).

If a 42-year-old customer has been depositing money in a variable annuity for five years, and he plans to stop investing but has no intention of withdrawing any funds for at least 20 years, he is holding

accumulation units. -- The customer, in the accumulation stage of the annuity, is holding accumulation units. The value of the customer's account is converted into annuity units if and when the customer decides to annuitize the contract.

According to MSRB rules, all of the following are required customer account information EXCEPT the

age and birth date. -- MSRB rules do not require the age or birth date for a new customer account. However, FINRA rules do require this information.

According to the MSRB, a control relationship would exist between a municipal broker-dealer and an issuer when

an officer of the underwriter is in position of authority over the issuer of the municipal bonds. -- A control relationship exists when an employee of the underwriter is in a position of influence with the municipality, such as the mayor, or a member of the city council.

The OCC Options disclosure document must be received by a customer

at or prior to account approval -- The OCC Options disclosure document must be received by the customer at or prior to the approval of the account to trade options

The IRS will generally consider a direct participation program to be an abusive tax shelter unless the program can show a profit motive. A popular method of measuring the economic viability of a DPP is

cash flow analysis -- On the exam, there are two accepted measures of the economic viability of a DPP. Those are cash flow analysis and internal rate of return (IRR). Cash flow analysis compares the income to the expenses, not the debt

A customer purchases a public purpose municipal bond as an OID, at $900 in the primary market. The bond matures in ten years. All of the following statements regarding the purchase are true EXCEPT that the

customer will realize a capital gain of $100. -- This is an original issue discount bond so the discount is accreted each year by the amount of the discount/number of years to maturity = 100/10 = $10/year. At maturity, the cost basis of the bond is $1,000, so the customer will not realize any capital gain when the principal is repaid.

A client with income as an investment objective may be interested in all of the following investments except a

direct participation program. -- Investors seeking income would be unlikely to purchase a direct participation program, owing to the large capital commitment and uncertain investment returns.

The terms of municipal general obligation (GO) and revenue bond offerings may be set by the issuer as

either competitive bid or negotiated underwritings -- Municipal bond underwriting terms may be set by the issuer as either competitive bid or negotiated for both GO and revenue bond issues

The terms of municipal general obligation (GO) and revenue bond offerings may be set by the issuer as

either competitive bid or negotiated underwritings. --Municipal bond underwriting terms may be set by the issuer as either competitive bid or negotiated for both GO and revenue bond issues.

In a custodial account, taxes are the responsibilities of the

minor. -- In a custodial account, taxes are the responsibilities of the minor

An investor owns 500 shares of ABC Corporation and has received a 2% stock dividend. This investor

now owns 510 shares with no income tax liability on the 10 new shares. -- New shares received as the result of a stock split or stock dividend are not taxable events. Investors are required to adjust their cost basis on all shares now held as the result of the split or stock dividend.

The date on which the interest on a new municipal issue begins accruing is

the dated date. -- New issues of municipal bonds begin accruing interest on the dated date

An investor believes that bond prices will fall. This investor should sell

yield based puts. -- If an investor believes bond prices will fall, he should also believe interest rates will rise. The appropriate strategy in this case is to buy yield-based calls or sell yield based puts both of which are profitable when rates rise. Here, the question asks which option to sell, and the puts will expire worthless when rates increase, and the writer will keep the premium.

A client recently opened a new account with you and provided all the requested information. One month later, they receive a copy of the new account form in the mail and then call you to ask why you sent it. You will tell them that

you are required to send this information to them for information verification purposes. -- Security industry regulations require that a copy of the new account form be provided to a customer within 30 days of account opening.

BAKE-ALL, a U.S. manufacturing corporation, has purchased shares of stock in RE-FORM, a U.S. corporation that refines raw materials. RE-FORM pays a dividend to its shareholders. For BAKE-ALL corporation, taxes will be due on what percentage of the dividends received from RE-FORM?

50% -- When a U.S. corporation receives dividends from another U.S. corporation it has invested in, 50% of the dividends received are excluded from taxation (tax free). Therefore, 50% of the remaining dividends received are taxable.

When a customer transfers the proceeds of a sale from one fund to another within the same family of funds, what are the tax consequences?

All gains and losses are recognized on the transfer date. -- Although a transfer within a family of funds is generally not subject to a sales charge, the customer is liable for any taxes due. The IRS considers this transaction a sale and a purchase. Any losses or gains must be declared on that year's tax form.

The syndicate manager in a firm commitment underwriting takes which of the following actions in a divided municipal syndicate account that does not sell out?

Confirms the bonds to the member that did not sell its share -- Because this offer is a divided, or Western, syndicate, each member is responsible for selling a specific number of securities. If a member does not sell its share, it receives the bonds for its inventory.

All of the following risks are considered diversifiable except

inflation risk -- Purchasing power risk, also known as inflation risk, is a systematic risk and, as such, is one that cannot generally be lessened through diversification. The other choices are forms of unsystematic (nonsystematic) risk and can be reduced through diversification.

Which of the following would not be a valid use of the partnership democracy?

Deciding which partnership assets should be liquidated to pay creditors -- Deciding which partnership assets should be liquidated to pay creditors involves limited partners in the active management of partnership affairs. This would result in being treated as general partners with respect to liability and possible loss of limited partner status.

If a customer writes 1 ABC Jan 35 call at 13.50 and 1 ABC Jan 55 put at 12.50 when ABC is trading at 45, excluding commissions, this position will be profitable if ABC is 1. above $29. 2. below $29. 3. above $61. 4. below $61.

I and IV -- This is a short in-the-money combination. To compute the breakeven points, add the combined premiums (26) to the strike price of the call and subtract the combined premiums from the strike price of the put. The breakeven points are 61 (35 + 26) and 29 (55 − 26). With a short combination like a short straddle, the customer makes money if the stock stays inside the breakeven points.

Which items would change if a company buys equipment for cash? 1. The working capital 2. The total assets 3. The total liabilities 4. The shareholders' equity

I only -- The general balance sheet formula is assets equals liabilities plus shareholders' equity. A purchase of equipment for cash would affect working capital by reducing current assets. However, it would not affect total assets because it is an exchange of one asset (cash) for another asset of equal value (equipment). Because no loan was needed, it affects neither total liabilities nor equity.

A married couple has had an account with your FINRA member firm for many years. The account is registered in both names, JTWROS. Upon the advice of their estate-planning attorney, they wish to move the assets in equal proportion to individual accounts. This would require all of the following except

a statement from the couple's attorney explaining the reason for the change. -- There is no FINRA requirement to receive any information from the couple's lawyer. All the other statements are correct.

A mutual fund, frequently used as the default option in employer-sponsored retirement plans, that adjusts its portfolio growth orientation to principal conservation as a specified date approaches is

a target date fund -- This is exactly what target date funds are designed for. As the investor gets closer to the target retirement age, the portfolio managers shift the concentration from equities to fixed income. That is why a high percentage of corporate retirement plans use those as the investment option when the employee does not make a selection. A balanced fund does adjust between equity and fixed income, but does so based on market conditions, not a specified future date. Investments in Section 529 plans do follow a similar strategy as college nears, but these are never available in retirement plans

Alpha Corporation has a capital structure consisting of common & preferred shares, as well as debt. When the dividends on the preferred shares are subtracted from Alpha's net income and that figure is divided by the outstanding shares, the result is Alpha's

earnings per share. -- Earnings per share is found by subtracting the preferred dividend from the net income and dividing this result by the outstanding shares.

A client invests $100,000 in a tax shelter as a limited partner, giving him a 10% interest in the program. However, the general partners cannot meet the program's expenses. A mortgage balance of $3 million remains, and the property of the program is liquidated for $1 million. How much does the investor get back from his original investment?

$0 -- The limited partner will not receive any return of his investment. In a failed program, the partnership's creditors are paid first with any sale proceeds—before the limited partners receive any money. Because the limited partners had not signed a recourse agreement, even though the partnership still owes $2 million on the mortgage, the limited partners are not liable for any money beyond their original investments.

One of your customers, age 52, wishes to open an IRA. His annual income is more than $200,000 and consists entirely of income from rental real estate and income from a trust fund. What amount may your customer contribute to his IRA this year?

$0 -- To open an IRA, a person needs earned income. Income from rental real estate is passive income, while income from a trust fund is portfolio income. This customer has no earned income.

In an existing margin account with special memorandum account (SMA) of $2,000, if a customer wishes to buy 300 shares of ABC at $20 per share, how much must the customer deposit?

$1,000 -- The customer wishes to purchase $6,000 worth of stock, and the Regulation T requirement is $3,000. The SMA has buying power of 2:1 when Regulation T is 50%, so $2,000 of SMA will purchase $4,000 of stock. Of the remaining $2,000 balance, the broker will lend 50%, so the customer must deposit $1,000.

ABC Company currently has earnings of $4 and pays a $.50 quarterly dividend. The market price of ABC is $40. What is the current yield?

5% -- Current yield = annual dividend/current market price. The annual dividend of ABC is $.50 quarterly dividend x 4 = $2.00. Current yield = $2.00/$40.00 = 5%

A corporate bond makes semi-annual interest payments of $25 and is currently trading at 960. What is the current yield of the bond?

5.20% -- The current yield of a bond is calculated as the annual interest payment divided by the current market price of the bond. The coupon of this bond is 5%, based on the two $25 interest payments the bond makes. $50 divided by the market price of $960 is equal to 5.2%.

Which of the following best represents the total takedown in a municipal underwriting?

Additional takedown plus selling concession -- In a municipal underwriting, the total takedown is the additional takedown plus the selling concession.

One of your customers has made periodic purchases of shares of the Castel Growth Fund over the past several years. The customer has decided to take a profit and sell some of those shares. When the investor's tax return is prepared for the year in which the sale of those shares occurs, it is necessary to establish a cost basis of the shares sold. Which of the following methods is available for mutual funds, that is not available for determining the cost basis of stock?

Average cost basis -- The Internal Revenue Service allows using the average cost basis to determine the cost basis of redeemed mutual fund shares. Investors cannot use this method when selling shares of any security other than a mutual fund. The other methods of determining cost basis are FIFO and share identification. FIFO is the default method used by the IRS if an investor fails to choose. Share identification can frequently result in a lower tax bill, especially if the security was purchased at different intervals at varying prices.

A U.S. company that sells stereo equipment places an order for Japanese stereo components for its inventory. Payment must be made in Japanese yen in three months. The U.S. company thinks that the U.S. dollar may weaken against the yen. Which of the following foreign currency option transactions would best protect the U.S. company from a weakening of the U.S. dollar against the yen?

Buy calls on Japanese yen -- The U.S. company is concerned that the value of the Japanese yen will rise. Therefore, the company should buy calls on the yen to lock in the lowest possible price to buy yen for payment of the contract. Importers buy calls to hedge.

An investor owns 100 shares of IBM. Which of the following would make a long hedge?

Buying a put on IBM -- If you own the stock, you want the market value to rise. To hedge the position against a decrease in value, you would buy a put option.

Which of the following activities would have a dilutive effect on an investor's position?

Conversion of convertible bonds into common stocks -- When an investor converts bonds into common stock, there are more outstanding shares, so existing shareholders suffer a dilution of equity. When a stock dividend or stock split occurs, current shareholders maintain the same proportionate ownership in the corporation.

Kelsey owns 100 shares of two different stocks and believes that stock prices will be trending lower over the next few months and would like to deploy a trading strategy that will generate income for her. What would you recommend for Kelsey?

Covered calls -- A trading strategy that will generate income during a bearish market is a covered call. The other choices involve the payment of cash to create the position.

Toby recently opened a new account at your firm, and based on the information provided, Toby is a risk -averse individual who prefers investments that can be converted into cash easily. Which of the following products is least suitable for Toby?

Exchange traded note (ETN) -- Given Toby's desire for less risky investments and ready access to cash, Toby should not invest in an exchange traded note, given the limited liquidity this product will offer. An ETN is an unsecured debt obligation of an issuer, and the credit quality of the note depends on the ability of the issuer to repay.

Which of the following statements regarding the Bond Buyer 20 bond index are true? 1. It includes only GO bonds. 2. It includes both GO bonds and revenue bonds. 3. It is computed weekly. 4. It is computed monthly.

I and III -- The Bond Buyer 20 bond index measures secondary market yields of GO bonds. It consists of 20 GO bonds, A-rated or better, and each with approximately 20 years to maturity. The index is updated each week.

Which of the following procedures are required to open and maintain an options account? 1. The registered representative must document that the client has received a current Options Clearing Corporation (OCC) disclosure document. 2. The client must verify and return his background and financial information within 15 days. 3. If there is a material change in the client's financial status, amendment of the options agreement is required. 4. Any recommendations made must consider the financial needs and situation of the client.

I, II, III, and IV -- The client must have a current OCC disclosure document. An understanding of the client's financial situation is required to make any recommendations. Changes in the client's status must be updated as soon as possible, and the option agreement form must be returned within 15 days of account approval.

Tax preference items are used for the purpose of computing the alternative minimum tax. They include 1. excess intangible drilling costs (wages, fuel, repairs). 2. accelerated depreciation. 3. percentage depletion in excess of basis.

I, II, and III -- All of these are tax preference items. Note that straight-line depreciation is not a tax preference item.

One of your clients enters a sell stop order at $42.40, limit $42.15. Assume that the trades occur in the following sequence: 42.45, 42.40, 42.75, 42.27, and 41.91. At which of the following prices could this order be executed? 1. $41.91 2. $42.27 3. $42.40 4. $42.75

II and IV -- As a sell stop order with a limit of $42.15, no order may be executed below the limit price of $42.15. This order will be triggered at the price of $42.40. The only remaining prices that will meet the limit requirement after it is triggered are $42.27 and $42.75. Remember, it takes two trades for any stop order: one to trigger the order, the other for execution.

Which of the following are characteristics of commercial paper? 1. It is registered with the SEC. 2. It is a short-term debt instrument. 3. It is issued by commercial banks. 4. It is unsecured debt.

II and IV -- Commercial paper represents the unsecured debt obligations of corporations needing short-term financing. Because commercial paper is issued with maturities of less than 270 days, it is exempt from SEC registration under the Securities Act of 1933.

Under the Penny Stock Rules, what is required for an investor to be considered an established customer?

Trading at least three penny stocks on three different days with the same firm -- An investor is considered an establish customer if he has traded three different penny stocks on three different days within the past year.

Which of the following covers a customer who sold 1 Jul 50 put at 4?

Short the underlying stock -- For an investor to cover a short put, the investor must either be short the stock or be long a put option that is in the money first (has a higher strike price).

The computation for accrued interest on corporate and municipal debt obligations is based on

a 30-day month and a 360-day year. -- Accrued interest on corporate and municipal bonds is computed on a 30-day month and a 360-day year.

According to investment company rules, open-end investment companies may not distribute long-term capital gains to their shareholders more frequently than

annually. -- Under the Investment Company Act of 1940, investment companies may not distribute long-term capital gains more frequently than once per year.

Broker-dealer X is preparing a retail communication consisting of a comparison of two different mutual funds illustrating their differing performance rankings over a six-month period. This ranking data has been created by an affiliate of the broker-dealer. This information must be

filed with FINRA at least 10 business days prior to first use. -- Retail communication concerning investment companies that include or incorporate performance rankings or comparisons where the data is created by the investment company itself or one of its underwriters or affiliates must be filed with FINRA at least 10 business days prior to first use.

Sam currently owns one DEF May 50 Call and one DEF May 50 Put. Sam believes the market

will be volatile in the near term. -- Sam is long a straddle. He believes the market will be volatile in the near term

An investor sold ABC stock for a loss two weeks ago and today has purchased a convertible bond on ABC. The purchase of the bond

will likely trigger the wash sale rule and prevent the investor from using the loss for tax purpose -- The wash sale rule provides that if an investor closes a position for a loss, and within the ensuing 30 days makes a purchase of the same, or substantially similar security, the loss on the closing position will be disallowed for tax purposes.

When an investor establishes a debit spread, he has

written and purchased a call, the one purchased having a lower strike price than the one written. -- This is the definition of a debit spread.

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?

$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.

The common stock of Porcine Meat Products, Inc., is currently selling at $60 per share. It has a P/E ratio of 12:1 and pays an annual dividend of $3 per share. That would make Porcine's EPS equal to

$5. -- The P/E ratio measures the relationship between a stock's market price and the earnings per share (EPS). The ratio for this company is 12 times the earnings. If the market price is $60, then the earnings must be 1/12th of that or $5 per share. The annual dividend is irrelevant to the question. It is one of those extra numbers that FINRA likes to include in a question.

DERF Corporation has a significant amount of cash on hand. The chief financial officer (CFO) has suggested to the chief executive officer (CEO) that it might be wise to pay off $10 million of the company's outstanding debt. There are four bond issues outstanding, and your broker-dealer is approached for advice on determining which issue to repay. Which of these four issues would the firm recommend?

$15 million @8% due in 10 years, callable at 101 -- Anytime we have extra cash, it can make sense to pay off debt. Corporations feel the same way. When it comes to deciding which debt to repay, the wisest move is to pay down the debt with the highest interest cost. In this case, that would be the 12% bond. However, that bond is non-callable. Based on the inverse relationship between interest rates and bond prices, the 12% bond is going to be selling at a higher price than any of the others. Any savings in interest payments would be more than offset by the price the company would have to pay to buy the bond in the open market. The next highest interest rate is 8% and that bond will cost us a slight premium of $10 per bond to call. Although the 6% bond is callable at par, the company would be far better off removing an 8% debt than one at 6%. In fact, the 1 point call premium is saved after the first semiannual interest payment. A partial call, calling in $10 million of the 8% bond, should be the recommendation.

Horace purchased 2,500 shares of MNO Inc. in March at $18.50 per share. In June he gave half of his position away as a graduation gift to his niece Jill while MNO was trading at $21.75. Jill sold these shares at $24.25 in November. For tax purposes, Jill sold these shares using a cost basis of

$18.5. -- The cost basis of shares given as a gift is generally the donor's original purchase price, so in this case Jill would be using a cost basis of $18.50.

A customer is long 200 shares of MTN at 30 and 400 shares of DWQ at 20 in a margin account. If the debit balance in the account is $8,000, and the customer sells 200 DWQ shares for $4,000, the credit to special memorandum account (SMA) is

$2,000. -- Because this account is below 50% margin, the account is restricted ($6,000 equity divided by $14,000 market value equals 42.8% equity). When securities are sold in a restricted account, 50% of the proceeds are released to SMA. Because $4,000 worth of securities were sold, $2,000 (50%) is credited to SMA.

Your customer has made a margin purchase of 100 shares of DMF at 50. Two days later, before the customer has met his call, the current market value of DMF is 60. How much must your customer now deposit? (Regulation T is 50%.)

$2,500 -- The investor must come up with the initial call of $2,500. The amount of margin required for a new purchase is based on the current market value of the security at the time of purchase.

A corporation has $12,000,000 net income after taxes, 5,000,000 common shares outstanding and $10,000,000 of 6% preferred stock ($100 par). What is the corporation's earnings per share?

$2.28 -- Earnings per share is calculated as (net income - preferred dividends) dividend by the number of common shares outstanding.

The KAPCO Growth mutual fund's annual report shows receipt of $10,000,000 of interest income from corporate bonds, $15,000,000 in cash dividends, and $5,000,000 of operating expenses. According to the conduit theory, how much must the fund distribute to investors if it wishes to avoid paying any taxes?

$20,000,000 -- According to Subchapter M of the Internal Revenue Code, the conduit theory requires that an investment company pay out a minimum of 90% of its net investment income (NII) to investors. In that case, the fund pays taxes on the remaining 10%. However, distributing 100% of the NII leaves no taxable income remaining. A fund's net investment income is the gross investment income minus the expenses. The NII for this fund is the interest ($10 million) plus the dividends ($15 million) minus the expenses ($5 million). That is $10 million + $15 million = $25 million minus $5 million = $20 million.

On April 15, 2016, your client purchased a variable life insurance policy with a death benefit of $450,000. The November 2019 statement showed a cash value of $28,000. If the client wanted to borrow as much as possible, the insurance company would have to allow a loan of at least

$21,000. -- Once a variable life policy is in force for a minimum of three years (this one is a bit longer than that), there is a requirement to make the loan provision available. At the three-year mark, that minimum becomes 75% of the computed cash value. Seventy-five percent of cash value of $28,000 is $21,000.

Taylor opened a margin account with your firm today. She requested a quote for IBDH Inc., a Nasdaq stock and was told "14.25 -- 14.45". She then placed an order before the close to sell short 100 shares and the trade was verbally confirmed. When Taylor satisfies her margin requirement on this trade, her credit balance will stand at

$3,425.00 -- The credit balance in a short margin account is the short sale proceeds plus the margin deposit made by the client. As the value of the short sale is less than $2,000 and this is the first trade Taylor is affecting in her account, Taylor must deposit $2,000. The credit balance will now stand at $3,425. Important to note here that the sale will be affected at the bid price in the market. This applies whether Taylor is selling long or selling short.

A client enters a buy stop order for 100 shares of XYZ at 40. Trades then occur at 38, 39, 39.90, 40.05, 40.10, and 39.78. At what price is the order triggered?

$40.05 -- The order is triggered as soon as the price gets to 40 or higher. That would be the trade at 40.05. A typical use of a buy stop order is to protect a short stock position. Because the short stock position has unlimited potential loss, the short seller can gain protection by entering a buy stop order. That order is entered at a price above the current market (the short seller is hoping the price will fall), but if the price reaches or exceeds the stop price, the stop will be triggered. At that time, a market order is entered and the client pays the next price (which could be more or less than 40). In this case, the next price is 40.10, and although not the answer to our question, that is the likely price per share paid by the client.

In September, an investor writes 2 ABC Jan 60 puts at 3. If the 2 ABC Jan 60 puts expire in January, what are the tax consequences for the writer?

$600 gain realized in January -- The tax consequences of the premium for an option are realized when the option is exercised or expires, not when the position is opened. This investor wrote the option, and is therefore earning $600 for the premiums, recognized when the options expire in January.

An investor buys a yield-based Sep 70 call on a 30-year T-bond for a premium of 2.50. At expiration, if the yield on the most recently issued T-bond is 7.95%, what is the investor's gain or loss?

$700 gain -- A Sep 70 call means that the holder is buying a 7% yield. The investor can close the option at its intrinsic value (7.95 − 7.00 = 0.95; 0.95 × 10 × $100 = $950 received upon close). Subtract the $250 premium paid for a total profit of $700.

FINRA Rule 2310 defines a direct participation program as "a program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution including, but not limited to, oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, Subchapter S corporate offerings and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof." The rule places limits on the overall expenses and amount of broker-dealer compensation considered fair and reasonable. That limit is

15% of the gross proceeds. -- If the organization and offering expenses exceed 15% of the gross proceeds, FINRA considers that too high. The 10% limitation is on the amount of compensation received by a member firm for selling interests in the DPP. The 2% is the maximum charge in a DPP rollup if the firm wishes to solicit votes from the limited partners. The 5% is the FINRA markup policy and that does not apply to DPPs.

Which of the following ratios is normally considered adequate coverage of interest and principal charges for a municipal revenue bond?

2:1 -- Generally, a sound debt service (interest and principal) coverage ratio for municipal revenue bonds is 2:1. In other words, $2 of revenue is collected for every $1 of debt service.

Trading in expiring options series concludes the same day as expiration at

4:00 pm ET. -- The official close is 4:00 pm ET on the third Friday of the expiration month. Expiring options may be exercised until 5:30 pm ET on the same day.

An elderly married couple approaching retirement currently has enough cash to meet their needs for the foreseeable future. As such, they would like to invest so that their portfolio continues to appreciate while offering some income. In this scenario, which of the following portfolios would be most appropriate?

50% equities / 50% fixed income -- Generally, the most appropriate recommendation for a retired couple is a portfolio consisting largely of fixed income, with little market risk. However, this couple is indicating they have sufficient cash and would like to continue with a growth strategy. Hence, 50% equities would be the best recommendation of the choices.

A customer is considering adding a real estate investment trust (REIT) to her portfolio. She lists all of the following as advantages. You correct your customer and point out that one of them is not an advantage of investing in REITs. Which of the following is not an advantage of investing in REITs?

Dividend treatment -- Of those listed, only dividend treatment can be identified as not being an advantage. While the expectation of receiving dividends is inherently good, dividends paid by REITs to their shareholders are not recognized as qualified and are therefore taxable to the investor at their full ordinary income tax rate. The shares are traded on exchanges or over the counter and are considered liquid, and having professionally managed assets should be a plus. While real estate valuation and price movements are subject to many forces, historically, real estate has provided some hedge against the movements of other equity securities.

If one wanted information on municipal fund securities, it would be found on

EMMA -- EMMA, the electronic municipal market access, carries information about municipal fund securities (Section 529 plans). Why not RTRS? That is the Real Time Reporting System and it provides real time trading information. Section 529 plans do not trade in the secondary markets

Your client will be making a down payment on a new home in the next few months. Which of these investment alternatives would be least appropriate for them today?

Exchange traded note -- The least liquid of these options is the exchange traded note. This is an unsecured debt instrument of an investment bank with returns tied to an underlying benchmark. These products may not be easily converted to cash as needed.

Gentry is the chief operating officer (CFO) of RMBM, a NYSE-listed corporation. Gentry has an account at your firm, and five months ago, Gentry purchased 1,000 shares of RMBM common stock at $50 per share. The RMBM shares are now $125 per share, and Gentry exits the position at that price. Which of the following statements presents the view of the SEC?

Gentry has violated the short-swing profits rule. -- Section 16 of the Securities Exchange Act of 1934 contains the short-swing profits rule. This rule states that any insider of a publicly traded corporation (the CFO would certainly be included in the definition of insider or affiliate) is prohibited from profiting from any purchase or sale (or sale and purchase) of the company's equity securities within a period of less than six months. This rule authorizes the corporation to recover from such statutory insider any so-called "short swing" profits. The term used in industry circles is that the profit must be disgorged (given back). There is nothing illegal here—no fines or penalties. However, we investors might consider returning a $75,000 profit to be a penalty. This stock was purchased in the secondary market, so the Rule 144 holding period does not apply. Rule 144 permits affiliates (like Gentry) to sell up to 1% of the outstanding shares over a 90-day period. RMBM is listed on the NYSE, and 1,000 shares is certainly much less than 1% of the shares outstanding. You do not need to know the listing requirements, but listing on the NYSE requires a minimum of 1.1 million shares outstanding.

Upon review of a client portfolio, you recognize the fact that the concentration of holdings is in U.S. equities, and the portfolio needs more international exposure. Which of the following products would not help achieve this goal?

High grade corporate bond fund -- Adding additional domestic assets may not be the best strategy as this point, even though the corporate bond fund would offer additional income.

Which of the following will halt trading in listed options when there is a trading halt in the underlying stock?

The options exchange on which the option is listed -- If trading is halted in any stock on which options trade, trading in those options is also halted by the Chicago Board Options Exchange.

An investor in a limited partnership generating passive losses can offset these against 1. passive income from other partnerships. 2. rental income from direct investments in real estate. 3. dividends received from listed securities. 4. capital gains from the sale of unlisted securities.

I and II -- Passive losses can be deducted from passive income and income from certain real estate investments; it cannot be deducted from active or portfolio (investment) income.

Regulation BI contains four key component obligations. Which two of them apply to registered representatives? 1. Disclosure Obligation 2. Care Obligation 3. Conflict of Interest Obligation 4. Compliance Obligation

I and II -- The obligation to disclose all material information and to exercise reasonable diligence, care, and skill in making any recommendation apply to both the member firm and the registered representative. The Conflict of Interest Obligation and the Compliance Obligation belong to the firm. That does not mean you do not have an obligation to disclose any conflicts of interest. That is part of the disclosure obligation. The specified Conflict of Interest Obligation includes the written supervisory procedures and training the firm must provide. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

An underwriting bid for a municipal general obligation issue would include which of the following? 1. The dollar amount 2. The coupon rate 3. The yield to maturity 4. The underwriting spread

I and II -- The only information the underwriter must furnish to the issuer is the dollar amount of the bid (the amount the issuer will receive) and the coupon rate (the amount of interest the issuer will pay). From this, the issuer can determine the lowest net interest cost and award the bonds on that basis.

The initial confirmation of a when-issued municipal bond contains which of the following? 1. Number of bonds involved in the transaction 2. Settlement date 3. Yield to maturity 4. Total dollar amount due

I and III -- On a new municipal bond offering, where the customer receives a when-, as-, and if-issued confirmation, the final settlement date is not known; therefore, the amount of accrued interest is unknown (because it is payable up to, but not including, settlement). Thus, the total dollar amount is unknown because it includes accrued interest. The number of bonds purchased and the yield to maturity (price) are known and must be included on the confirmation.

A registered representative mentions a particular 6% municipal bond quoted on a 6.5% basis. Which of the following is correct? 1. Six percent is the bond's coupon. 2. Six percent is the bond's current yield. 3. Six-and-a-half percent% is the bond's yield to maturity. 4. Six-and-a-half percent% is the bond's current yield.

I and III -- When a bond is referred to by a yield percentage, it is the coupon (nominal or stated) yield being referenced. Basis yield refers to yield to maturity (YTM). Hence, a 6% bond currently trading with a 6.5% YTM is correct.

When stock held in a margin account appreciates, which of the following increase(s)? I. Current market value II. Debit balance III. Equity

I and III only -- When stock held in a margin account appreciates in value, the current market value in the account increases as the market value reflects the value of the stock. Additionally, the equity, or ownership in the account increases. The debit balance represents the total loan from the broker dealer and only changes by customer action. A change in the value of securities in the account does not change the debit balance.

Which of the following statements regarding a municipal variable-rate demand obligation are true? 1. Interest payments are tied to the movements of another specified interest rate. 2. Interest payments are tied to the movements of an underlying stock or index. 3. The coupon rate stays the same for the life of the demand obligation, and the price fluctuates. 4. The coupon rate of the bond changes, and the price remains stable.

I and IV -- A municipal variable rate demand obligation has interest payments tied to the movements of a specified interest rate. Because the coupon rate of the bond changes with the market, the price of the demand obligation tends to remain stable.

Some limited partnership programs provide potential tax credits to partners. Which of the following typically provide potential tax credits? 1. Rehabilitation of historic properties 2. Equipment leasing 3. Developmental oil and gas programs 4. Government-assisted housing programs

I and IV -- Historic rehabilitation and government-assisted housing are two programs that offer potential tax credits. Tax credits are no longer available for equipment leasing, and while developmental oil and gas programs offer high intangible drilling costs, these are not investment tax credits.

In a bull call spread, an investor 1. buys the lower exercise price and sells the higher exercise price. 2. buys the higher exercise price and sells the lower exercise price. 3. anticipates the spread will narrow. 4. anticipates the spread will widen.

I and IV -- In a bull call spread (debit spread), a call with a lower strike price is purchased and a call with a higher strike price is sold. Because the long call has a lower strike price than the short call, it is more expensive, resulting in a net debit. In a bull call spread, the investor hopes the market prices rise. Maximum profit occurs if both calls are exercised, and because this is a debit spread, the spread is profitable if it widens.

Potential investment company clients should be advised to investigate a fund by looking at which of the following? 1. Investment policy 2. Number of shares outstanding 3. Custodian bank. 4. Portfolio

I and IV -- Investment policy, track record, portfolio, and sales load should all be researched when assessing a fund. The identity of the custodian bank for the fund or the number of shares outstanding does not bear on its performance or suitability.

One of your customers does not want the risk of taking physical possession of their stock certificates. At the same time, the customer does not want them in street name. Which of the following two options would work for your customer? 1. Give the broker-dealer transfer and hold instructions 2. Give the broker-dealer transfer and ship instructions 3. Offer the client certificate loss insurance 4. Use the direct registration system

I and IV -- One option is to have the securities registered into the customer's name but have the broker-dealer hold them in safekeeping. Some firms make a charge for custody, but often waive it for larger accounts. Another option is the Direct Registration System (DRS), where the ownership is recorded electronically (book-entry) in the name of the investor on the issuer's records. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

A bond analyst checking a general obligation municipal bond will examine the I. Past performance of the payment of interest II. Per capita income of the citizens III. Population growth of the area IV. Industrial development of the area

I, II III and IV -- A bond analyst would look at all the listed factors with regard to a general obligation bond, the interest payment history, the per capita income, industrial development and the population growth in the area to determine the credit of the bond and how likely it would be that the municipality would repay the interest and principal on time.

In the time before a registration statement becomes effective, which of the following statement is (are) true? I. No sales may be solicited II. Sales literature may not be used III. Unsolicited inquiries may be answered

I, II and III -- During the cooling off period an underwriter may not solicit any sales, nor can the underwriter issue any sales literature or advertisements other than a tombstone ad. An underwriter may answer any unsolicited indications of interest expressed by potential investors.

The Code of Arbitration Procedure would be mandatory to settle disputes between which of these? 1. A member and a registered clearing corporation 2. A member and one of its associated persons 3. An associated person with a statutory discrimination claim against a member 4. A member and a client who has signed a predispute arbitration clause

I, II, and IV -- Disputes between anyone in the industry, including registered clearing corporations, must go to arbitration, with the exception of statutory discrimination claims, which are claims alleging sexual harassment or discrimination on the basis of, among other things, age, sex, or ethnicity. Such claims may be taken to court instead of arbitration. When a client has signed a predispute arbitration agreement, arbitration is mandatory.

To fund debt services on a general obligation bond, a municipality may use I. Direct taxes. II. Special assessments. III. Fines. IV. Collection of delinquent funds.

I, III and IV only -- Debt service on GO bonds is an obligation of the municipality and is paid with taxes, fines and other collection of funds. This is in contrast to a revenue bond which is paid with revenues from the facility constructed as a result of the bond. A special assessment is a type of tax used to redeem a special assessment bond, in which the beneficiaries from the proceeds of the bond pay the debt service.

The taxing power of an issuer of a limited-tax bond is limited to a specified I. minimum rate. II. maximum rate. III. tax source. IV. method of taxation.

II and III -- A limited-tax bond can refer to either the maximum tax rate that the municipality can charge its constituents or the sources from which the municipality can draw revenues to redeem the debt.

Which of the following taxes are considered sources of debt service for special tax bonds? 1. Ad valorem tax 2. License taxes paid by businesses 3. Special liquor and tobacco taxes 4. Real estate taxes

II and III -- As described by the Municipal Securities Rulemaking Board, a special tax bond is "a bond secured by revenues derived from one or more designated taxes, other than ad valorem taxes." For example, bonds for a particular purpose might be supported by sales, cigarette, fuel, or business license taxes. General obligation bonds are backed by the full faith and credit (taxing power) of the issuer for payment of principal and interest. Their main source of debt service funding is ad valorem (real estate) taxes.

If a customer buys 5 ABC Jan 40 puts and writes 5 ABC Jan 45 puts, which of the following statements are true? 1. The customer profits if the spread widens. 2. The customer profits if the spread narrows. 3. The customer is a bull. 4. The customer is a bear.

II and III -- Because a put is a right to sell, the premium on the 45 puts is higher than that of the 40 puts. The customer is writing the put with the higher premium, so this is a credit spread, and the bullish investor will profit at expiration if the difference between the two premiums narrows as the contracts lose value.

To determine the winning bid on an net interest cost (NIC) basis, an issuer will do which of the following? 1. Add any premium to total interest cost 2. Subtract any premium from total interest cost 3. Add any discount to total interest cost 4. Subtract any discount from total interest cost

II and III -- Interest cost to the issuer is reduced by any premiums received by the issuer when the bonds are initially sold or is increased by any discounts the issuer must accept when the bonds are initially sold. Reducing interest cost by the amount of any premium received or increasing interest cost by the amount of the discount the bonds are sold at is how the issuer will arrive at the NIC.

A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer gifts the securities to his son. Which of the following statements are true? 1. For gift-tax purposes, the value of the gift is $3,000. 2. For gift-tax purposes, the value of the gift is $7,000. 3. The son's cost basis on the stock is $3,000. 4. The son's cost basis on the stock is $7,000.

II and III -- When making a noncharitable gift of securities, the donor's cost basis is passed to the recipient.

An investor enters a day order to buy 200 shares of GGZ at 63. Three hours later, with GGZ trading above that price, he calls his registered representative wanting to change the order to a good-til-canceled order. The registered representative should 1. immediately cancel the existing order. 2. leave the existing order on the order book. 3. immediately enter a new limit order to buy 200 shares of GGZ at 63 good til canceled (GTC). 4. enter a new limit order to buy 200 shares of GGZ at 63 GTC before the next day's opening if the day order was unexecuted.

II and IV -- The representative should not cancel the existing order because it would lose priority on the order book. However, the representative should not enter a good-til-canceled order that day because it could be filled twice. Instead, the representative should let the order stay for the day, when it would be canceled automatically if not executed. Then, the representative could enter a good-til-canceled order the next morning.

Many life insurance companies offer variable products. Determining benefits usually depends on the actual performance of the selected separate account subaccount(s) compare to an assumed interest rate (AIR). Which of the following statements reflects that determination? 1. Actual performance compared to the AIR affects the cash value of a variable life insurance policy 2. Actual performance compared to the AIR affects the death benefit of a variable life insurance policy 3. Actual performance compared to the AIR affects the value of an accumulation unit of a variable annuity 4. Actual performance compared to the AIR affects the value of an annuity unit of a variable annuity

II and IV -- When the actual performance of the separate account exceeds the AIR, the death benefit of a variable life insurance policy will increase. When the performance is less than the AIR, the death benefit reduces, but never below the guaranteed minimum. There is no assumed interest rate for the cash value. That is, the insurance company makes no projections as to its growth. With variable annuities, it is the annuity unit where the performance versus the AIR is important. In order to set up lifetime payments, the insurance company makes certain assumptions about returns. If the returns are higher, the value of the annuity (payout) unit increases and vice-versa. During the accumulation period, there are no assumptions; the insurance company never projects how much the money will grow.

Which of the following statements regarding an official statement are true? 1. It is required by the SEC for all new issues. 2. It is required by the Municipal Securities Rulemaking Board (MSRB) for all new issues. 3. It must be delivered to purchasers at or before settlement. 4. It is generally used by underwriters to help sell the issue.

III and IV -- An official statement is a document similar to a prospectus and is furnished, in most cases, to buyers of new issue municipal bonds. SEC rules require that an official statement be prepared for most—but not all—new municipal issues. The MSRB has no such requirement, as it does not regulate issuers.

Which agency has the ultimate authority for determining the amount of the discount on original issue discount municipal bonds?

IRS -- The IRS determines the amount of the discount on OID bonds as they set the guidelines for OID's, and because it relates to taxes, OID's are under their jurisdiction.

An investor has a significant position in various money market instruments, comprising a substantial portion of his overall portfolio. Amongst the various risks that investors generally face, which of the following risks may be the most prominent in this investor's portfolio?

Inflation risk -- Money market securities will offer very low returns, compared to other investment alternatives. These returns may not be able to keep pace with any inflationary pressure that may exist.

Which of the following statements is true?

Institutional communications do not require prior principal review if associated persons receive training in the firm's procedures governing institutional communications. -- Member firms have a choice of procedures to follow when it comes to institutional communications. Review prior to use is the preferred option for many firms. The alternative is proper training of associated persons as to the firm's procedures governing institutional communications, documentation of such education and training, and surveillance and follow-up to ensure that such procedures are implemented and adhered to. Evidence that these supervisory procedures have been implemented and carried out must be maintained and made available to FINRA upon request. Not all retail communications must be filed with FINRA and not all retail communications must have prior principal approval. For example, any retail communication that does not make any financial or investment recommendation or otherwise promote a product or service of the member does not require prior principal approval or filing with FINRA

Your client Ted, age 38, has been investing for several years, and today is seeking your advice on where to deploy some capital given his recent promotion. He has cash in two 529 college savings plans for his children, and is willing to take some risk, given his comfortable salary. Which of the following investment strategies will you recommend to Ted?

International equity fund -- Given Ted's current situation, an investment in an international equity fund may be the most appropriate direction to take, amongst these choices. The two bond choices are too conservative, while the emerging market fund may be too risky given the statement that Ted is willing to take 'some' risk, but not excessive risk.

If MCS is trading at 43 and the MCS Apr 40 call is trading at 4.50, what is the intrinsic value and the time value of the call premium?

Intrinsic value 3, time value 1.50 -- The option is in the money by three points (the strike price on the call is 40 and the market price is 43). Because the actual premium is 4.50, the balance of 1.50 represents time value. Remember P - I = T (Premium minus intrinsic value equals the time value).

Which of the following best describes the Alternative Minimum Tax (AMT)?

It is a process that determines tax liability by including certain tax preference items into adjusted gross income. -- The AMT recalculates income tax after including certain tax preference items into adjusted gross income. The main purpose of AMT is to ensure that all taxpayers pay a minimum amount of taxes every year.

A customer calls the brokerage firm and turns in an order to buy 400 shares of Oscillate Pharmaceuticals, Inc. The instructions are for the firm to use its best judgement as to the right time to place the order. Which of the following are true about this order?

It is good only for the day entered. -- This is a time or price order and is excluded from the definition of discretion. One of the characteristics of this type of order is that, unless written instructions to the contrary have been received, it is effective only the day entered.

If trading is halted in a listed stock, what happens to the trading in the stock's listed options?

It is halted. -- Options trading is always halted when the trading of the underlying security is halted. Options rely primarily on the underlying market value for premium determination.

Which of the following best describes the bond equivalent yield?

It is the annual percentage yield for a bond which does not make annual payments. -- The bond equivalent yield allows bonds which do not make annual payments to be compared to securities with annual yields. This allows for better comparison amongst bonds with different payout structures.

Which of the following statements best describes a business development company?

It is usually organized as a closed-end investment company that takes positions in small and mid-sized companies. -- A business development company is typically organized as a closed-end investment company, with shares that are publicly traded. They invest in small and mid-sized businesses, by either taking equity positions or providing loans. Like traditional investment companies, they must pay out at least 90% of taxable income to investors to avoid taxation, and they usually pay dividends to shareholders either monthly or quarterly.

Total equity in a margin account is

Long market value + credit balance - debit balance - short market value. -- Total equity in a margin account is the long market value plus the credit balance, minus the debit balance less the short market value.

On which of the following positions does the potential loss equal the premium?

Long puts -- The premium paid to acquire the option represents the most an investor stands to lose on a long option position. Covered and uncovered are terms that relate to short option positions.

If an investor buys a LEAPS contract on issuance and allows it to expire unexercised, what is the investor's tax consequence at expiration?

Long-term capital loss -- A LEAPS contract has an expiration of more than one year. Upon expiration, the buyer incurs a long-term capital loss equal to the amount of the premium paid.

Which of the following is always affected by a change in the market value of securities in a long margin account?

Maintenance requirement -- SMA is only affected if the current market value (CMV) increases. In terms of dollars, the maintenance requirement will continuously fluctuate with the market value because it is a percentage of the CMV.

A customer opens the following positions: Buy 100 shares of CDL @$40; sell 1 CDL Apr 40 call @2. What is the customer's maximum gain, maximum loss, and breakeven point?

Maximum gain is $200; maximum loss is $3,800, breakeven point is $38. -- The first step is to identify the position. This long stock with a short call (i.e., a covered call position). Breakeven is the customer's net cost. The price of the stock ($40) minus the premium ($2) received equals the $38 per share breakeven point. The strategy is to generate some income with a little protection against a decline in the price of the CDL stock. The premium income is the most this client can make. If the stock should rise well above the cost of $40 per share, the short call will be exercised and the customer will deliver the stock purchased at $40 and receive $40. Regardless of how high the stock price rises, this customer can never make more than the $2 premium. If the stock's price should decline, the call will expire unexercised. That 2-point premium protects the long stock, but only for those 2 points. Once the market price falls below $38 (the breakeven point), it is all a loss for the customer, down to a maximum $3,800 if the price drops to zero. Why doesn't the breakeven follow the "call-up" rule? That rule applies when the only positions are options. Once there is a long or short stock position along with an option position, it is the stock controlling the breakeven.

Which of the following assets would be least likely used to back a collateralized debt obligation (CDO)?

Mortgages -- Unlike CMOs, which are backed by mortgages (as the M indicates), CDOs are invariably backed by some other form of asset. Remember that what someone owes is their debt, while it is an asset to the creditor.

In terms of the number of issues traded, the largest secondary market for securities is the over-the-counter market (OTC). Which of the following securities cannot be traded OTC?

Mutual funds -- Any security that trades in the secondary markets may be traded in the OTC market. That includes securities listed on the stock exchanges. Mutual funds (and variable annuities) are securities for which there is no secondary market trading. Shares (or units) in these securities are bought and redeemed through the issuer

Before making any recommendations to a client, basic client suitability information must be gathered. Many suggest beginning with a family balance sheet. Which of the following would be found on that document?

Net worth -- The balance sheet includes the client's assets and liabilities. From these, the net worth is determined. It is the income statement that contains the salary and expenses. Goals are a nonfinancial consideration.

When an officer or director acquires control stock when a company goes public and then wants to sell the securities to a retail investor, what is the mandatory holding period?

None -- Because the securities were received in a public offering, they are registered securities (not restricted), and therefore, there is no holding period. However, the sale is subject to Rule 144 volume limits. Control stock that is received in something other than a public offering is restricted and would have a six-month holding period in addition to volume limitations.

Which of the following would exclude a bond from being covered under the Trust Indenture Act of 1939?

Offering with a maturity of less than nine months -- The Trust Indenture Act of 1939 is applicable to corporate debt issues that are nonexempt, are over $50 million to be issued within 12 months, are offered interstate, and have maturities of nine months or more. An offering made that would mature in less than nine months would be excluded from coverage under the act.

Which of these investors is not demonstrating a bullish attitude?

One who shorts a stock and covers the position within 10 days. -- An investor who sells stock short is bearish, not bullish. The other investors are all demonstrating bullish attitudes.

Which of the following statements best describes a breakpoint sale?

Sale of investment company shares in dollar amounts slightly below the point at which the sales charge is reduced on quantity transactions, to make a higher commission -- A breakpoint sale is a violation of the Conduct Rules. It occurs when a broker permits a client to purchase shares in an amount immediately below the amount that would qualify the client for a discounted sales charge, without informing him of the breakpoint.

Three family members each hold sizable call option positions with the same underlying equity security in their individual accounts. Over the course of three days (Monday through Wednesday), each of the customers calls your broker-dealer and gives instructions to exercise all of their call options in that security. You recognize this as a potential violation of

Options Clearing Corporation (OCC) exercise limit rules. -- OCC exercise rules limit the maximum number of contracts in the same underlying security that can be exercised within a five-business-day period. Three customers—all related and all giving instructions to exercise their long calls in the same underlying security within three business days—should, at a minimum, raise the question of whether or not they are acting in concert to circumvent the OCC exercise limit rules.

Which of the following statements regarding a unit investment trust is not true?

Overall responsibility for the fund rests with the board of directors. -- A unit investment trust (UIT) has no board of directors; rather, it has a board of trustees. A UIT must follow a stated investment objective (as must any investment company) and does not charge a management fee because it is not a managed portfolio.

When determining whether a tax swap of municipal bonds will result in a wash sale, which of the following is not considered?

Principal amount -- In judging whether bonds purchased are substantially identical to bonds sold for a loss, the tax code considers maturity, issuer, and coupon rate. If at least two of the three are different, a wash sale will generally not result.

Which of the following is not a liquidity measurement?

Put call ratio -- The put call ratio is a technical indicator generally used to assess the sentiments of investors. It observes the volume of call option trading to put option trading, which investors can use to analyze the mood of the market at a given time. Technical traders use the put-call ratio as an indicator of performance and as a guideline of overall market sentiment.

Which of the following is not a benefit to an investor in a direct participation program?

Recapture -- Recapture is not a benefit to an investor in a direct participation program. This occurs when an item that was previously claimed as a deduction now needs to be added back to taxable income, thereby eliminating any benefit previously received.

An issuer can raise up to $75 million within a 12-month period utilizing

Regulation A+ Tier 2. -- There are two levels, or tiers of offerings available under Regulation A+. Tier 1 allows an issuer to raise up to $20 million during a 12 month period, while Tier 2 allows for the issuance of up $75 million over a 12-month period. Note that the Tier 2 threshold was raised from $50 million to $75 million in March 2021.

Following issuance, the least amount of after-market activity would likely be observed with a

Regulation D offering. -- A private placement, or Regulation D offering, would likely have the least amount of after-market trading activity, when compared to public offerings.

All of the following might be used to measure the marketability of a new municipal general obligation issue except

Revdex. -- Revdex is an index of yields on 25 revenue bonds with 30-year maturities that are traded in the secondary market

Which of the following is not exempt from SEC registration requirements?

Shelf offerings -- Beware the double negative as an English teacher would tell you, a double negative makes a positive. In reality the question asks, "Which of these must be registered"? As the term indicates, a shelf registration registers with the SEC. It is sometimes referred to as a delayed or continuous offering because the issuer can "take the shares off the shelf" to sell them anytime within the SEC's specified time limits. Private placements are not public and do not have to register. Intrastate offerings do not involve interstate commerce and are out of the SEC's jurisdiction (they register with the state). At this point in your studies, we don't think we have to remind you that U.S. government and municipal securities are exempt from SEC registration.

Which of the following competitive bids on a new municipal issue is most likely to be awarded the bid?

Six percent coupon with premiums over par -- In a competitive bid bond sale, the winning bid is the one that provides the issuer with the lowest net interest cost. If the syndicate pays the issuer more than par for the bonds, the issuer is taking in more money than it must pay out at maturity. Therefore, its net interest cost is lower than the six percent coupon on the bonds.

A new client asks for your advice in investing an inheritance of $50,000. The client is 35 years old, has an annual salary of $40,000, and is married with two children. Which of the following would be the least likely suitable recommendation?

Splitting $25,000 into two different AAA-rated GO municipal bonds -- We do not know a lot about this client, but, with an annual income of $40,000 and two children, the tax bracket is in the lower end. Certainly for exam purposes, municipal bonds are never the suitable recommendation unless something in the question indicates that the client is in a high tax bracket. As far as all $50,000 into one mutual fund, the nature of a balanced fund is that its assets are broadly allocated between equity and debt securities so that it accomplishes the diversification shown in the other choices.

Which of the following registers the securities and packages the program for a limited partnership?

Syndicator -- A syndicator handles the registration of the limited partnership units.

A portfolio manager using index options is trying to reduce which of the following types of risks?

Systematic -- Systematic risk refers to the impact the overall market has on an equity portfolio's value. Index options help insure portfolios against systematic risk. The purchase of index puts to protect a portfolio is called portfolio insurance.

When a broker-dealer specializing in new issue municipal bonds needs current information, the usual choice is to consult

The Bond Buyer. -- The Bond Buyer, sometimes called the Daily Bond Buyer because it is published daily, is generally considered the "go to" source for information on the primary market for municipal issues. The Thomson Municipal Market Monitor (TM3) offers greater coverage of the secondary market and general news. EMMA contains information for retail, nonprofessional investors, not broker-dealers. The MSRB does contain information on its website, but it does not include the information on new issues that a broker-dealer will find in The Bond Buyer.

The cost basis of an investment would be impacted by which of the following events?

The amortization of the premium of a municipal bond -- When a municipal bond is purchased at a premium, the investor is required to adjust the cost basis of the bond each year downwards towards par, using a process known as amortization.

The Investment Company Act of 1940 has two types of management investment companies—the closed-end and the open-end. Which of the following is a significant difference between the two?

The closed-end company generally has a one-time offer of shares, while the open-end company's offer of shares is continuous. -- Most of the differences between closed-end and open-end companies revolve around the different method of capitalization. That is, the one-time offer of shares on the part of the closed-end company is why the shares trade in the secondary markets, often at a discount to the NAV. Because closed-end funds trade in the secondary markets, there are buying and selling commissions. That is usually a disadvantage when making small investments. Do not confuse the limited capital structure of an open-end company (only issuing common stock) with the contents of the portfolio. Open-end companies can never sell below NAV, while closed-ends frequently do.

Under the Uniform Transfer to Minors Act (UTMA), how can stock subscription rights be handled in a custodial account?

The custodian can exercise or sell the rights as he deems prudent. -- One thing that is never considered prudent is to let the rights expire. Even if the custodian does not believe adding more of the stock to the account is proper, there is a value to the rights, and the best interest of the minor is served by turning those rights into cash. Custodians in these accounts are able to sell or exercise the right, regardless of any relationship existing between them and the donor.

Regarding interval funds, which of the following statements is most accurate?

The fee structure for these funds is relatively high compared to other fund products, making them a riskier asset category. -- Interval funds are typically organized as closed-end investment companies and offer to repurchase investor shares at pre-determined time periods, or 'intervals' during the year. The price paid on these redemptions is the NAV (not POP) as of a specified date.

Electronic communications networks are most likely to be categorized as being part of which type of market?

The fourth market -- Electronic communication systems are considered part of the fourth market because they are primarily used for transactions between institutional investors. Yes, the fourth market is a secondary market, (trading in outstanding issues), but always choose the most specific answer. The primary market is the trading of a new issue.

Rodney borrows the funds to purchase municipal bonds. Which of the following regarding the interest on the loan is true?

The interest is a nondeductible expense -- Interest on funds borrowed to purchase municipal bonds is not tax deductible.

A municipality is seeking an underwriter for a bond offering. What is the common step taken to engage the services of an underwriter?

The municipality will place an official notice of sale in The Bond Buyer and accept bids from underwriters interested in the offering. -- Municipalities seek the best deal for those that live in the municipality, and therefore, will place an official notice of sale in The Bond Buyer to attract an underwriter that submits a bid for the offering

In a margin account, which of the following would be affected by a stock dividend?

The number of shares held in the account -- Stock dividends merely give an investor more shares of stock valued at less per share. The total value of the position does not change. Therefore, the balances in the account remain unchanged as well.

A customer has his broker enter an order to buy GHI stock at the opening. Though transmitted promptly, the order does not reach GHI's trading post in time to be filled at the opening. How is the order handled?

The order is canceled -- An at-the-open order is to be filled at the opening price or not at all. An at-the-open order arriving later must be canceled.

An investor purchased a corporate bond with a 6% coupon at a net price of 101. The bond had accrued interest for 45 days. Which of the following statements regarding the confirmation of this trade is correct?

The total amount due on the purchaser's confirmation will appear as $1,017.50. -- Accrued interest is always added to the price of a bond. When you buy the bond, you pay that accrued interest, and when you sell a bond, you receive that accrued interest. The principal value is 101, or $1,010. Forty-five days of accrued interest is ⅛ of a 360-day year, or ¼ of a 180-day semiannual interest payment. With a 6% coupon, the bond pays $30 every 6 months. One quarter of that is $7.50 so the total cost to the purchaser is the $1,010 plus the $7.50, or $1,017.50.

Which of the following statements is correct regarding ETNs?

Their value is based, in part, on the credit rating of the issuer -- The value of an ETN is based, in part, on the credit rating of the issuer, typically an investment banking firm. It represents a debt instrument, not equity. Many events can occur which will prevent the investor from receiving the full value of their initial investment returned to them, such as the insolvency of the investment bank that issued the note. Returns on ETNs are usually stated after fees are considered, not before.

Which of the following regarding yield-based (interest rate) debt options is true?

They are European-style exercise. -- Yield-based debt options are European-style contracts, meaning that they can only be exercised on the last day of trading. All yield-based contracts, when exercised, are settled in cash. There is no delivery of debt instruments when these contracts are exercised. All strike prices reflect yield. (35 strike price represents 3.5% yield.) Yield-based options are a bet on future interest rates, not prices. Calls are bought by those who believe rates are going up (prices down) and puts by those who believe rates are going down (prices up).

Which of the following statements about SEP-IRAs is (are) true?

They are used primarily by small corporations -- SEP-IRAs are set up by small corporations to allow employers to make contributions towards an employee's retirement. Small businesses prefer them because they are very easy to set-up and maintain

Which of the following is an automated system of delivering information relating to the market for municipal securities?

Thomson's Muni News or Muni Market Monitor -- Thomson's Muni News or Muni Market Monitor (formerly Munifacts) supplies up-to-the-minute information to its subscribers.

Which of the following is the largest component of a municipal underwriting spread?

Total takedown -- The underwriting spread is the entire amount. Total takedown is made up of the additional takedown and the concession, which makes it the largest component. The management fee is the smallest.

Which of the following is not a factor when a communication to be distributed to the public is either being reviewed or approved within the broker-dealer?

Whether the piece will be distributed in written form or via electronic media -- FINRA holds broker-dealers to certain general standards regarding all member firm communications. Consideration must be given to whether all statements in a communication are clear and not misleading, are balanced regarding the representation of risk and reward, do not omit material facts or make exaggerated claims, and do not imply that past performance can be projected to future outcomes. These standards would apply and be the same, whether the communication was distributed in written or electronic form.

Which of the following strategies is considered most risky in a strong bull market?

Writing naked calls -- Writing naked calls gives unlimited risk. If the market rises, naked puts expire. In the latter case, the writer profits from the premiums

A municipal bond is offered at a discount. It has a 30-year maturity and is callable in 20 years at par. It is callable in five years at a premium and is puttable in 10 years at par. Which of the following yields would be quoted on this basis?

Yield to the 30-year maturity -- Bonds that sell at a discount are always quoted as yield to maturity. This is the lowest possible net yield that the investor would make by holding the bonds until the issuer redeems them.

A customer writes 1 XYZ Sep 45 put at 6 and 1 XYZ Sep 35 call at 6 when XYZ is at 40. Before expiration, if XYZ is at 43, and the customer closes her positions at intrinsic value, the customer has

a $200 gain. -- We first identify the position. This is a short combination. The investor has sold a put and sold a call on the same stock, but at different strike prices. If the prices and expiration dates were the same, it would be a straddle. When the customer begins the position by selling options, the action is an opening sale. That is, the position was opened by selling an option (in this case, two options). The customer collects $1,200 in premiums for writing the options (6 + 6). The question says the positions were closed at the intrinsic value. You close an opening sale with a closing purchase. That is, the customer buys back the option(s) that were sold. In this case, the price is $200 (45 − 43) to close out the put and $800 to close out the call (43 − 35). Determining gain or loss is simply comparing the $1,200 received to the $1,000 paid and that results in a gain of $200.

If an investor writes 2 DWQ Jan 60 puts at 3 in September, and the investor buys back the 2 puts at 4.50 two months later, the result for tax purposes is

a $300 short-term capital loss. -- A $900 closing cost minus $600 opening proceeds equals a $300 short-term loss. Here's the math. Writing (selling) 2 puts at a premium of 3 each brings in $600 (2 times $300). Buying back those 2 puts at 4.50 costs $900 (2 times $450). The difference is the loss of $300.

The City of Columbus issued a 20-year general obligation bond at a price of 50. An original purchaser sold the bond at 75 after holding it for 7 years. For tax purposes, that sale generated

a $75 capital gain. -- The customer has realized a capital gain of $75. Original issue discount bonds must accrete the discount over the life of the bond. In this example, the amount of the discount (par value minus purchase price) is $500 ($1,000 − $500 = $500). The discount divided by the number of years to maturity determines the annual accretion added to the cost basis. In this question, the annual accretion is $25 ($500 divided by 20 = $25). The adjusted cost basis would be the original purchase price ($500) plus seven years of accretion (7 times $25 = $175) for a total of $675. Because the proceeds of the sale were $750, the customer has realized a capital gain of $75 ($750 − $675 = $75).

Moody's Investment-Grade (MIG) rating would be applicable to

a New York state revenue anticipation note. -- A MIG rating is provided for short-term municipal debt commonly referred to as notes (revenue anticipation notes).

Firm XYZ publishes an advertisement that is sent to 10 institutional clients and 15 retail investors. This advertisement is classified as

a correspondence. -- By definition, if an advertisement goes to at least one retail customer, it cannot be classified as an institutional customer. Because this communication was sent to no more than 25 retail investors it is considered a correspondence.

The financial statements of the Acme Manufacturing Corporation contain the following information: Current assets: $20 million Fixed assets: $52 million (of which $8 million represents the book value of a mechanical lathe) Current liabilities: $6 million Long-term debt: $19 million of 5% debentures due 2049, callable at 102 Common stock: $18 million (1.8 million shares of $10 par) Paid-in capital: $7 million Retained earnings: $22 million Acme decides to call in $5 million of the debentures. This will result in all of the following except

a decrease to current liabilities. -- The key fact is that the call price is 102, a premium over the par value. That means for each $1,000 of long-term debt taken off the books, Acme has to spend $1,020. This has no effect on the current liabilities. However, the current assets (cash) decrease leading to a decrease in working capital, as well as net worth. When $5 million of debt is called in, the remaining long-term debt is reduced to $14 million.

The manager will credit each syndicate member based on sales of that particular maturity allotted to the member, and such credits shall extinguish liability based only on such securities that are sold by the member. This statement describes an agreement among underwriters that is

a divided account. -- This is part of an agreement for a Western (divided) syndicate.

The issuer of an American depositary receipt (ADR) is

a domestic bank. -- The ADR is issued by a domestic bank. Everything is in English and in U.S. dollars. The foreign certificates are usually held on deposit at a foreign branch of the domestic bank, and the ADRs are issued domestically.

A person legally responsible for the handling of the financial assets of another, such as an executor or guardian, is usually called

a fiduciary. -- Fiduciary is the term that describes the legal position of trustees, custodians, and most investment advisers. This is a case where you choose the most complete response.

A customer tells a broker to buy 1,500 shares of ABC at 33.60 immediately for the full 1,500 shares. This is

a fill-or-kill (FOK) order. -- In an FOK order, the instruction is to fill the entire order immediately at the limit price or better. If this cannot be done, the order will be canceled (killed). An IOC order is similar, except that partial execution is acceptable. An AON order must be filled in its entirety. However, it can be filled over time; it does not require immediate execution.

For the underwriting of a municipal bond issue, competitive bids are submitted by underwriters as

a firm commitment. -- For new municipal bond issues, underwriters must submit bids for the entire bond offering—a firm commitment. Standby commitments are used only for corporate stock rights offerings. Best efforts commitments are used for corporate securities, and an all-or-none commitment is a type of best efforts commitment.

An investor purchases a newly issued convertible bond at par. The bond is convertible at $40. Three years later, the underlying common stock is trading at $50 per share. If the investor sells the bond at a $50 premium over the parity price, there is

a long-term capital gain of $300. -- This question involves several steps. The first is to determine the conversion ratio in shares. A bond convertible at $40 per share has a share conversion rate of 25 shares ($1,000 ÷ $40). The second step is to compute the parity price. That is, what are those 25 shares worth? Multiply 25 shares times $50 per share and that equals $1,250. When the bondholder sells the bonds at parity plus a $50 premium, $1,300 is received. The $300 profit over the $1,000 initial cost is a long-term capital gain. An alternative that might be easier for some is to look at the appreciation of the stock. It is $10 per share higher than the conversion price of $40. That represents an increase of 25% (10 ÷ 40). If the bond is at parity with the stock, its price must be 25% higher and that brings us again to the $1,250 parity price. Add the $50 premium to get to $1,300, $300 above the initial cost.

A New York Stock Exchange designated market maker is employed by

a member of the exchange. -- Designated market makers are employed by firms which must be exchange members.

A financial institution sends a communication to its clients indicating an action the institution plans to change. The communication states that this change will take place in 45 days and any client wishing to opt-out must notify the institution before the end of that period. This is known as

a negative response letter. -- A negative response letter is a communication where, unless the recipient responds negatively, the proposed action is accepted. The letter must contain certain disclosures such as different costs or features.

The over-the-counter (OTC) market is

a negotiated market. -- The OTC market is a negotiated market. Registered market makers compete among themselves to post the best bid and ask prices.

If your client has a certificate registered in his own name, to be a good delivery, the certificate must be accompanied by

a properly executed assignment to the brokerage firm on the reverse side of the certificate -- If the certificate is registered in your client's name, a stock power or a properly executed assignment to the brokerage firm must appear on the reverse side of the certificate.

Your customer has purchased 100 shares of Synovial Lubrication Products (SLP) at $95 per share. The date of the purchase was April 22, 2021. Three months later, the customer purchased one SLP Dec 90 put for 3. At the expiration date of the option, SLP's market price is $101 and the option expires unexercised. The customer sells the 100 shares of SLP stock on June 1, 2022 at $104 per share. This sale results in

a short-term capital gain of $900. -- Purchasing a put option on an existing long position is a protective put. It does not offer the same tax benefits as a married put (the option and long security position are purchased on the same day). That is, if the long position is not more than 12 months old when the put is purchased, the holding period is erased and does not begin again until disposition of the put. In addition, if the option expires or is sold, the transaction is a loss or a gain and does not affect the cost basis of the long position. This is why the cost basis of the SLP stock is the original $95 per share. Furthermore, the option expired in December 2021. That means the loss is taken that year. Selling the stock at $104 creates a capital gain of $900. As described above, the purchase of the put option severed the holding period and restarted it at the put's expiration date. From December to June is not longer than 12 months, so the gain is short term.

All of the following will affect special memorandum account (SMA) in a short account except

appreciation of CMV. -- In a short account, the customer benefits if the current market value (CMV) falls. If the CMV is falling, the equity is increasing, thus increasing SMA. If the CMV is rising, the equity is falling, with no effect on SMA.

The "XYZ tax-exempt bond fund" will have a portfolio where

at least 80% of the assets in the fund are tax-free municipal bonds. -- An investment company that has a specific name suggesting a concentration of securities in a particular security/sector (such as a "tax-exempt" bond fund), must have at least 80% of its assets invested in that security or sector.

A registered representative might recommend a bond ladder to a client who is

attempting to minimize the impact of interest rate risk on his portfolio. -- A bond ladder is appropriate for someone looking to minimize interest rate risk and increase liquidity in their portfolio. The scenario involves purchasing bonds with different maturity dates, so that each bond matures at a different time (perhaps every year). Typically, the maturities are evenly spaced so that the bonds are maturing at regular intervals, and the proceeds are being reinvested at regular intervals. The more liquidity an investor needs, the tighter the maturity structure of the portfolio should be.

Fred has placed an order to buy 100 shares of LEG at 33. The current quote for LEG is 31.75-32.15. Fred's order will

be filled at 32.15. -- This is an example of 'marketable limit order'. Since Fred's desired price is higher than the market offer, Fred would receive the best offer in the market, which is now 32.15.

Under SEC rules, soft dollars may be used to pay for all of the following except

computer hardware. -- Soft dollars is a term used to describe payments made by broker-dealers to investment advisers in return for research and other eligible services. The difference between soft dollars and hard dollars (cash) is that instead of paying a broker-dealer with cash, the fund will pay with brokerage business. Soft dollars may be used to pay for research, software, services for the benefit of clients, and seminar registration fees. Not permitted by the SEC are computer hardware, office equipment, and reimbursement of travel expenses to attend seminars.

Tim has expressed concerns to you regarding issuer credit quality, liquidity, and interest rate fluctuations. In attempting to address Tim's concerns, you might suggest that he

consider creating a bond ladder. -- Tim's concerns can be addressed by creating a bond ladder. A laddered portfolio is one containing a group of bonds having different maturity dates, thereby providing a continuous stream of funds from maturing bonds. The cash received from these maturing bonds can then be reinvested in a new bond on the back end of the ladder, at the current interest rate level. This structure also alleviates Tim's concerns regarding credit risk, as only a portion of the overall portfolio is exposed to the risk of default of an issuer.

All the following information must be contained on an order ticket except

customer's name. -- The customer's name is not required on order tickets. The customer's account number, the type of account (e.g., cash or margin), and time stamps, however, are required.

An investor's portfolio contains a number of different securities. Included are equity and debt positions in several business development companies (BDCs). It would be correct to state that

distributions from the equity BDC positions are treated as dividends while those from the debt positions are interest. -- A BDC (business development company) is a specialized type of closed-end investment company. As such, it can issue debt securities as well as equity. Most operate as regulated investment companies (RICs) under the Internal Revenue Code. Being a RIC requires distributing at least 90% of the company's net investment income. This, just as with other investment company distributions, is treated as a dividend. When the BDC issues a debt security, just as with other debt securities, interest is paid to the lenders. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

All of the following statements regarding dollar cost averaging are true EXCEPT that

dollar cost averaging is not available to large investors. -- Dollar cost averaging is a practice by which the same amount of dollars are invested at regular intervals. It will yield a lower average cost per share, and is available to any investor, large or small.

A qualitative analysis of a general obligation bond that is to be issued would take into consideration all of the following factors EXCEPT the

dollar denominations of the bonds to be issued. -- The dollar denominations of bonds to be issued is never a factor when analyzing the credit rating or investment quality of the issue.

In analyzing the ability of a company to meet its debt obligations, but not wanting to chance that certain accounting decisions or practices will cloud the picture, one measure that you might look at is the firm's

earnings before interest and taxes (EBIT) as calculated from the firm's income statement. -- EBIT, calculated from the firm's income statement, is a metric that measures the ability of a company to meet scheduled interest payments. Cash flow from financing activities reflects money raised by the company by issuing debt and equity securities. Net worth is useful for determining payback of principal but not semiannual interest.

All of the following are minimum requirements for listing on the NYSE except

earnings per share. -- While the numerical values are not tested, it is important to know that there is no minimum earnings per share requirement. However, there is a minimum earnings requirement.

A municipal syndicate account letter includes all of the following EXCEPT the

final reoffering scale. -- The principal syndicate account letter, which is the agreement between the syndicate members, does not include the final reoffering scale because the syndicate has not yet won the deal.

Government agency securities settle

he 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).

One of your customers with a JTWROS account contacts you to remove the other tenant and put the account into the customer's own name. This can be done only

if the change has been authorized by a qualified and registered principal designated by the member. -- Under FINRA rules, no change in any account name(s) can be made unless the change has been authorized by a qualified and registered principal designated by the member. This principal must, before giving her approval of the account designation change, be personally informed of the essential facts relative thereto and indicate her approval of such change in writing. The essential facts relied upon by the person approving the change must be documented in writing and preserved with the customer account records. One of those facts is approval of the other tenant, but that approval goes to the principal, not to you, the registered representative. Even in the case of death of the other tenant, the principal needs to see the proper documentation, such as a death certificate.

The money contributed to a SEP vests

immediately. -- Money contributed to an SEP-IRA vests immediately and becomes the property of the employee.

Under Rule 144A, unregistered securities can be resold to qualified institutional buyers

immediately. -- Rule 144A allows qualified institutional buyers (QIBs) to freely trade private placements. A QIB is an institution with at least $100 million in assets.

A client interested in capital preservation would be least likely to purchase a(n)

income bond. -- An investor with a goal of capital preservation would not be interested in purchasing an Income Bond. These bonds are issued by companies experiencing challenging financial conditions; these funds may be needed to avoid bankruptcy or to otherwise stay in business.

Quantitative measures for evaluating the credit quality of corporate bonds include all of the following EXCEPT

industry stability. --Quantitative measures, by definition, are based on numerical values. Industry stability is opinionated information regarding the state of the industry and does not involve numerical values. Hence, it is a qualitative measure.

Dennis owns $100,000 par value Treasury Bills. When these securities mature, Dennis will have

interest income taxable at the federal level only. -- The discount on a Treasury Bill is considered interest income and is taxed at the federal level only. This interest income is exempt from state and local taxes.

A type of investment company product that is typically organized as a closed-end fund but does not trade on a national exchange and offers investors access to alternative investments that are usually only available to institutional investors is a(n)

interval fund. -- These are interval funds, which are organized as closed-end funds, and provide investors with access to asset classes that are typically only accessible to institutional investors such as hedge funds. The payouts on these funds can be higher than that of traditional mutual funds.

One of the goals of target date funds is to help manage

investment risk. -- Although not always successful, target date funds adjust the asset allocation as the investor gets closer to retirement age (or whatever date is selected). In so doing, the goal is to reduce the overall investment risk. As mutual funds, liquidity risk is not a concern. In practice, they actually do not do a great job of managing inflation risk because the portfolio becomes heavily invested in fixed income as the target date approaches. This leaves the investor with little in the way of equities to protect against inflation. Retirement risk is not a term used in the industry.

The capital asset pricing model (CAPM) assumes

investors are averse to risk and expect to be rewarded for taking risk. -- CAPM takes into account unsystematic risk—the type of risk that investors use diversification to lessen. It assumes that investors are averse to risk, and, if taking on risk, expect to be rewarded for it, and therefore, the pricing of an asset must reflect that.

A broker-dealer is preparing a communication that will be sent to 20 retail clients and 40 institutional clients. This communication

is considered to be a correspondence and must be reviewed by the firm for content accuracy. -- By definition, a correspondence is any written or electronic communication distributed, or made available, to 25 or fewer retail clients within a 30 calendar-day period. Correspondences require spot checks, but do not require principal pre-approval.

An individual has received a death benefit from the life insurance policy of his father. The payment of this benefit to the beneficiary

is not a taxable event to the recipient. -- A life insurance benefit paid to a beneficiary is not a taxable event to that individual. However, if the benefit is paid to the estate of the deceased party, it then becomes a taxable event.

An individual has experienced cash value growth in her life insurance contract. This growth is

is not currently taxable. -- Cash value growth in a life insurance contract is not taxable. If the policy is surrendered for its cash value, any growth over the premiums paid is taxable.

A registered representative would like to participate in a Q & A session that will be hosted on one of the firm's social media platforms. The individual's participation in this event

is not required to be approved by a principal of the firm, as the event would qualify as a public appearance. -- These types of unscripted events are considered by FINRA to be "public appearances" and do not require principal approval.

An individual has received a death benefit from the life insurance policy of her mother. This death benefit

is not taxable when paid to the named beneficiary. -- The death benefit of a life insurance policy is not taxable when paid to a named beneficiary.

An investor might expect to receive the greatest gain on an investment in a corporate bond by purchasing

long-term bonds when interest rates are high. -- If an investor purchases bonds when market interest rates are high, a drop in interest rates will lead to a corresponding increase in bond value. Long-term debt instruments will fluctuate to a greater degree than those with short-term interest rates. Thus, long-term debt offers the greater chance of gain.

When a mutual fund computes its net investment income, all of the following are included except

long-term capital gains. -- When calculating NII, capital gains are not included. It is solely income from dividends and interest that make up the gross investment income. NII is the gross investment income minus the expenses. A regulated investment company is required to distribute a minimum of 90% of its NII to shareholders if it wishes the special tax treatment offered by the IRS. This requirement is also true when it comes to distributing long-term capital gains. The treatment of short-term gains is beyond the scope of the exam.

A hypothecation agreement is necessary when opening a

margin account. -- A hypothecation agreement is necessary when opening a margin account, whether for an individual or a corporation. It states that the customer is pledging their securities as collateral for a loan from the broker-dealer.

In performing the role required on the NYSE, a designated market maker (DMM)

may act as a broker or a dealer to facilitate trading on the floor. -- DMMs facilitate trading in specific stocks on the floor of the NYSE. Their chief function is to maintain a fair and orderly market in those stocks. In fulfilling this function, they act as both brokers and dealers. They act as dealers when they execute trades for their own accounts and as brokers when they execute orders other members leave with them. Floor brokers work for member firms. They are the people who bring to the DMM the orders their firm's clients have placed.

An individual holding a variable life insurance policy is considering taking a loan against the policy. This loan

may be taken against the cash value of the policy. -- Loans may be taken against the cash value of a variable life insurance policy.

If a registered rep volunteers advice to her clients about how to vote in a proxy contest, she

may have to file under SEC proxy contest rules as a participant. -- If a registered rep volunteers advice regarding a proxy contest, the rep may be required to register as a participant as the rep is potentially influencing the outcome of the vote.

A client wishes to place an order to sell an ABC May 60 call and buy an ABC May 50 call, for a net price of 4. This order

must be entered as one trade at a limit price. -- This is a limit order for an option spread, with a limit price of $4 indicated. These types of orders must be entered as a single trade (not as two separate orders) at the limit price indicated.

Short-term municipal notes generally have all of the following characteristics EXCEPT that they

pay interest every six months. -- Short-term municipal notes trade as zeroes. They are issued at a deep discount and mature at par, they have maturities of less than one year.

Mr. Jones buys 200 shares of ABC at 34.50. Later the same day his broker tells him that the report he received was in error and, in fact, the shares were bought for 34.75. Mr. Jones

must pay 34.75 per share -- When a registered rep quotes a client the incorrect price at which a transaction is made, the client is still responsible for the actual price where the trade was executed

Regulation SHO prohibits

naked short selling. -- Regulation SHO mandates a locate requirement with regard to short sales. Before entering a short sale order, members are required to locate the security to be ensured that delivery can be made on settlement date. The locate requirement applies to short sales in all equity securities. Failure to positively locate the stock before making the short sale is the prohibited practice of naked short selling. Although one can sell short only in a margin account, the prohibition against doing so in a cash account is part of Regulation T, not SHO. Short selling, just as with any activity in customer's accounts, must be suitable. That is part of the suitability requirements, not Regulation SHO. Short sales can be made on any tick: up, down, or the same.

All of the following are Trade Reporting and Compliance Engine (TRACE)-eligible and require reporting, except

new issue primary market securities. -- TRACE is the FINRA-approved trade reporting system for corporate bonds, ABS, collateralized mortgage obligations and Treasury securities trading in the over-the-counter secondary market. Money market securities and new issues (primary market), among others, are specifically excluded from the TRACE reporting requirements.

Regular way settlement for U.S. government bonds is

next business day. -- Regular way settlement of government bonds occurs on the next business day.

An investor purchased 100 shares of Wilmont Auto Supply Holdings (WASH) on June 1, 2018, at $55 per share. On July 5, 2019, WASH is trading at $40 per share and the investor sells at the market price. On August 1, 2019, the investor purchases a WASH Jan 40 call @4. If there are no other transactions during 2019, the investor's tax consequences are

no taxable loss for 2019 because of the wash sale rule. -- The investor in WASH has violated the wash sale rule. Anytime a security is sold at a loss and then repurchased within 30 days of the sale (before or after), the loss cannot be taken at that time. The rule includes the purchase of substantially identical securities, such as call options, warrants, and convertibles, when determining if a violation has taken place. Because the question asks for the 2019 tax consequences, the disposition of the option expiring in Jan 2020 is irrelevant.

Your customer, who still works, informs you that she will be funding a variable annuity (VA) you have recommended from two sources: a refinancing of her primary home where she will be able to draw out equity that has built up since it was purchased 15 years ago, and cashing out another VA she recently purchased within the past two years without a lifetime income rider like the one you have recommended. Based only on these facts, the VA recommendation is

not suitable. -- Based on the information given in the question, the VA recommendation would not be suitable. Refinancing a home to draw out equity has been identified by FINRA as an abusive sales tactic regarding the sales of VAs. Cashing out life insurance policies or VAs where steep surrender charges are likely to exist, particularly in the earlier years of those contracts, is also considered abusive. Life income riders are best suited for those who anticipate a lengthy retirement and are generally not yet retired when making the VA purchase.

When a municipality is allocating funds from a revenue-producing facility under a net revenue pledge, the first priority is to

pay operations and maintenance. -- Under a net revenue pledge, operations and maintenance are paid before debt service. Under a gross revenue pledge, debt service is paid first.

The result of dollar cost averaging is to

obtain a lower average cost per share than average price per share. -- The result of dollar cost averaging is to obtain a lower average cost per share than the average price per share. This is accomplished by making regular investments of a fixed amount when prices are fluctuating.

A member firm receives an order from an investment adviser to purchase shares in a common stock IPO. Regarding restricted persons, the member must

obtain a representation from the investment adviser that the purchaser is not a restricted person. -- When receiving an order to buy a new equity issue from a bank, investment adviser, or other conduit, a member must obtain a representation from the conduit that all purchasers are in compliance with rules regarding sales of new issues to restricted persons (i.e., they are not restricted persons).

Prior to purchasing a new municipal offering, a client is inquiring as to the best resource available to help evaluate the credit quality of the issuer. The RR should direct this client to the

official statement. -- The official statement is the offering document used in conjunction with a new issue of municipal securities. It discusses the purpose of the issue, how the issue will be repaid, as well as financial and economic information about the issuer.

A transaction made for regular way settlement occurs on Thursday. The following Monday is President's Day, when the stock markets are closed. The buying broker-dealer is domestic, while the selling broker-dealer is foreign based. The trade took place on the Nasdaq Stock Market. Settlement between the broker-dealers would take place

on Tuesday, the next business day following the holiday. -- The transaction would settle on Tuesdaythe business day following the holiday. This question includes distracting information. The key elements describe a transaction that uses regular way settlement (T+2). The first day is Friday and the next business day is Tuesday. The description of the selling broker-dealer as foreign based has no bearing on regular way settlement provisions. Had a seller's option been specified at the time of the trade between the broker-dealers, the Uniform Practice Code permits delivery at an agreed date after T+2.

Leveraged and inverse ETFs are designed to achieve their stated objectives

on a daily basis. -- Inverse and leveraged exchange funds are designed to achieve their stated investment objectives on a daily basis, making them suitable for investors who have very short- term trading objectives. These products would not be appropriate for a buy- and -hold investor.

For a customer who has purchased stock and wants to write a call option, the option ticket would be marked

opening sale. -- An opening transaction is used when establishing a new option position. It is an opening purchase if your client is buying the option. It is an opening sale if your client is writing the option. Closing is the term used when the client eliminates an existing option position through a trade of the contract.

An investor purchases $10,000 worth of Treasury bills on November 27 and holds them until they mature on March 30 of the following year. For purposes of taxation, the interest from those Treasury bills is treated as

ordinary income subject to federal income tax. -- Interest on Treasury bills, notes, and bonds is taxable as ordinary income at the federal level. It is exempt from state and local taxation.

Kelsey's stock portfolio has a beta of .5. Kelsey's portfolio should

outperform a bear market. -- Beta is a measure of the volatility of an individual stock or an entire portfolio compared to the market in general. A portfolio with a beta greater than 1 would be considered more volatile than the market, whereas a portfolio with a beta of less than 1 would be considered less volatile than the market. In the case of Kelsey's portfolio, having a beta of less than 1 would suggest that her portfolio would underperform a bull market (e.g. market is up 10%, Kelsey's portfolio will be up only 5%) and outperform a bear market (e.g. market is down 10%, Kelsey's portfolio will be down only 5%).

Tranche A of a CMO offering has an average life of 2.5 years, Tranche B has an average life of 6 years, while Tranche C has an average life of 11 years. This type of CMO structure is characterized as

plain vanilla. -- The CMO structure that contains tranches that pay off in a defined sequence is known as a "plain vanilla" offering. Each tranche receives regular interest payments, while principal payments received are made to the first tranche only. As this first tranche is retired, principal payments are then applied to the second tranche until it is retired. This process continues until the last tranche is retired.

One of your customers owns a limited partnership interest in an oil and gas drilling program. The program was successful in finding oil and is expected to operate at a loss for the next year. The loss flowing through to the limited partner is generated by all of these except

principal repayment on partnership debt. -- Losses occur when expenses exceed revenues. Principal repayments are not an expense. Interest on debt is a deductible expense. Natural resources deplete and the depletion allowance is an expense similar in concept to depreciation, another expense. From a personal standpoint, compare this to your home mortgage−the interest is a deductible expense, but the portion representing payment of principal is not.

All of the following would flow through as a loss to limited partners except

principal repayment on recourse debt. -- Principal repayments are not deductible for tax purposes. The interest is deductible.

State governments receive the least amount of revenue from

property taxes. -- State governments would receive the least amount of their revenue from property, or ad valorem, taxes. Cities and other localities get most of their funding from property taxes.

An institutional investor is making a tender offer for the common stock of ABC. During the period of this offer, this investor may not

purchase a convertible bond of ABC in the secondary market. -- When a tender offer is being made, the party making the offer may not purchase the same or substantially same security in the secondary market, as this would be considered manipulative activity. If the tender offer is for common stock, the party would not be able to purchase the common stock or convertible bond of the same issuer while the tender offer is in progress.

A synthetic long stock position may be created by

purchasing calls and writing puts on the same underlying security -- A synthetic long stock position may be created through the purchase of a call option and simultaneously selling put options on the same underlying security.

Regulation NMS is intended to assure that investors

receive the best price executions for their orders by encouraging market competition -- This is the primary objective of Regulation NMS. NMS means National Market System. It was established in 2005 to foster competition among markets and among individual client orders

An investor takes a short position in one XYZ Nov 140 call @7. Disregarding any commissions, if the option is exercised, on settlement date, the investor

receives $14,000. -- When an investor takes a short position in an option, it means the investor has sold, or written the option. When a call option is exercised, the seller is obligated to deliver the stock at the exercise (strike) price. A strike price of $140 for 100 shares results in the seller receiving $14,000 on settlement date.

The FINRA rule on communications would consider communications that are posted on an online interactive electronic forum (i.e., a chat room) to be

retail communications -- This type of communication is included in the definition of retail communications. FINRA Rule 2210 treats interactive electronic forum posts, such as social media status updates, as retail communications rather than public appearances. However, unlike most retail communications (and similar to public appearances), the rule specifically excludes these posts from both the principal pre-use approval requirements and the filing requirements. That does not mean member firms should not monitor the activities of their associated persons, but that is a real world situation and we're sticking with what the test covers.

A customer has requested that her market order to buy ABC stock be routed to an exchange which is not currently publishing the best national price. The firm receiving this instruction must

route the order to the exchange specified by the customer -- In general, broker-dealers are required to route customer orders to the market center providing the best price, but a customer may specify that they want their order routed to a particular exchange. The firm must honor such a request.

Steve has written 20 JKL June 25 puts. To complete the combination, Steve should also

sell 20 JKL July 25 calls -- To create a combination, Steve must sell both puts and calls on the same security. Options of a different series must be used, thus either the strike price and/ or expiration month of the two contracts must be different

Dennis owns shares of five computer companies. To enhance the return of his portfolio, you might suggest that Dennis

sell a call on a narrow-based index. -- An investor can increase the return of his portfolio by selling (writing) call options against an underlying asset that he owns. The goal here is to retain the premiums received from writing the call options.

Mr. Smith sells an XYZ Mar 35 call. To establish a straddle, he would

sell an XYZ Mar 35 put. -- To establish a straddle a customer simultaneously buys or sells two options of different classes with the same series. Therefore, to establish a short straddle, Mr. Smith also needs to sell 1 XYZ Mar 35 put.

Covered put writing is a strategy where an investor

sells a put on a stock he has sold short. -- The customer sells the put to generate income. The short stock position provides the necessary cash should his short put be exercised, forcing him to buy the stock.

Responding to the student loan crisis, the SECURE Act now permits qualified withdrawals from Section 529 plans to include payments of

student loan interest up to a lifetime maximum of $10,000 per child. -- The lifetime limit is $10,000 of interest or principal per child. If the child who is the beneficiary of the plan does not use all the money by graduation, the remaining funds can be used to pay the interest or principal (subject to the standard limits) for other siblings.

Cash dividends from real estate investment trusts (REITs) are

taxed as ordinary income -- Cash dividends from REITs are taxed as ordinary income. A maximum rate for qualified dividends, which applies to qualified common stock dividends, does not apply to dividends from REITs

All of the following would be considered a proper way for a client to file a complaint with a FINRA member firm except

telephone. -- Complaints must be filed in writing. Telephone generically means an oral conversation (i.e., a telephone call). If that phone is used to send an email, text, or instant message, that is considered in writing.

One of your clients wants to withdraw $30,000 from his traditional IRA. The client is 35 years old and needs the cash for a medical emergency. You should advise your client

that they may be able to do this penalty free but should verify with their tax adviser. -- There are various exemptions available for early withdrawal (prior to age 59 ½) from an IRA. One such exception is available for excessive unreimbursed medical expenses and disability expenses without an early withdrawal penalty, but withdrawals will be subject to ordinary income taxes. Other exceptions include eligible education expenses, and the first-time purchase of a home.

You receive an email from a client who recently purchased a security based on a recommendation you made and is very dissatisfied with its recent performance. If he were to sell that investment today he would lose a significant amount of money, which is not an option for him at this time. You would respond by saying

that you understand how he feels, and he should hold on for now, as you are very optimistic, based on the firm's analysis, about the long-term prospects of this security. -- The primary goal in this situation would be to acknowledge the client's concerns and to emphasize your views that you believe the client will do well with this investment.

The first step in transferring a customer's asset from one member firm to another is the submission of

the Form TIF. -- The receiving member sends the transfer initiation form (TIF) to ACATS, and that starts the account transfer process. Form 112 is the currency transaction reporting form used when more than $10,000 in currency is deposited. The Form 144 is used by control persons and also used by those with restricted stock. Form D is used to report sales of a private placement under Regulation D of the Securities Act of 1933.

An investor purchased a $10,000 ABC 3% corporate bond, due 20XX. The bond was purchased at 98 and is callable beginning two years from issue date. The investors confirmation for this trade will show

the YTM. -- The lower of the YTM or YTC will be shown on the confirmation. In this case the bond was purchased at a discount so the YTM would be reflected as it would be the lower of the two yields.

Investors looking for preservation of capital will find money market mutual funds and bank-insured CDs to be appropriate vehicles. When comparing the two, it is important for a registered representative to point out that

the bank CDs are insured by the FDIC while there is no assurance that the value of the money market fund will not lose money. -- One of the key points that must be made when comparing a money market mutual fund investment to an insured bank CD is the FDIC insurance that applies only to the CD. Other than in very unusual (and not tested) circumstances would there be a redemption charge for a money market mutual fund; there generally is a penalty for early withdrawal from a CD. Many broker-dealers sell brokered CDs. These may or may not be FDIC insured and have other differences from those purchased directly from banks. They are issued by banks, with the broker-dealer serving as an intermediary. Both of these are eligible IRA investments.

One of your customers exercises a put option. The stock is in the customer's account and your firm makes timely delivery. The proceeds from the sale of the stock will be paid to your firm by

the broker-dealer to whom the exercise notice was assigned. -- Look at this as a regular buy and sell. When the customer exercises the put, it is a sale of stock. When customers of member firms sell stock, those firms collect the sales proceeds from the contra party (the other member firm representing the buyer). The OCC assigns the exercise to a member firm that is then responsible for paying the broker-dealer representing the seller of the stock.

One of your customers has a JTWROS account and an individual account. The individual account is the one approved for options trading. The customer wishes to make a large options trade and asks you to transfer a substantial sum from the cash balance in the joint account to the individual account. To do this,

the check would have to be made payable in the name of all the owners of the JTWROS account. -- Look at this question as if the client making the request asked for a check in their name only to be sent from the joint account. We know that any certificates or checks issued must be in the names of all the joint account holders.

A client has a restricted margin account. To place additional trades in this account,

the client would need to satisfy the appropriate margin requirement for any trades. -- When trading in a restricted account, the client would be required to satisfy the appropriate margin requirement for any trades that are affected in the account.

All of the following Municipal Securities Rulemaking Board (MSRB) Rules of Uniform Practice requirements may be altered by mutual agreement between dealers except

the content of confirmations. -- The MSRB regulates the contents of confirmations to standardize information. There must be an original record of the agreement, even though dealers may mutually agree to change the terms.

All of the following statements regarding industrial revenue bonds (IRBs) are true except

the credit rating of the bonds is dependent on the credit rating of the municipality. -- The debt service for IRBs is derived from the lease payments made by the leasing corporation to the issuing municipality. Therefore, the credit rating of the bonds is dependent on the credit worthiness of the leasing corporation, not the issuing municipality.

All of the following information must be disclosed on a municipal bond confirmation of sale except

the dated date on a municipal bond that has been outstanding for two years. -- On the dated date, new issue interest starts to accrue. Once the issue makes its first interest payment to bond holders, the dated date is no longer used to compute accrued interest because there is a prior interest payment date.

A city has issued bonds to construct a new sewage treatment facility. If the bonds are not backed by the full taxing authority of the city, all of the following statements about the bond issue are true except

the disbursement of principal and interest payments must be approved semiannually by the state public service commission. -- As an exclusion question, we are looking for the false statement. The public service commission would have no approval power over revenue bond interest and principal payments. Because the bond is not backed by the taxing authority of the city, it is a revenue bond rather than a general obligation bond. The funds for payment of interest and repayment of principal are generated through the fees paid by those using the city's water and sewage facilities. Being a public, rather than private, facility, these would not be alternative minimum tax bonds.

Covenants in the trust indenture of a municipal revenue bond are promises made by the issuer to the bondholders. All of the following are potential covenants except...

the interest rate covenant. -- There is no such thing as an interest rate covenant in a trust indenture. The interest rate will be stated, but not in the form of a covenant. In the maintenance covenant, the bond issuer promises to perform proper maintenance on the facility the bonds are financing. The insurance covenant requires the issuer to maintain property insurance on the facility to repair or replace the facility. The rate covenant requires the issuer to maintain the user fee for a revenue bond at a level sufficient to service the debt.

The bond resolution includes all covenants between

the issuer and the trustee acting for the bondholders. -- The bond resolution describes not only the characteristics of the proposed offering, but also the obligations the issuer has to its bondholders.

All open orders must be confirmed to the order book

the last business days of April and October. -- All open orders must be confirmed the last business day of April and the last business day of October.

A purchase or redemption order for investment company shares must be executed at a price based on

the net asset value next computed after the fund receives the order. -- Purchase or redemption of mutual fund shares occurs at the first net asset value calculated after the fund receives the order. This is known as forward pricing.

In the partnership agreement of a limited partnership, all of the following would be disclosed except

the procedures for the annual election of general partners. -- Limited partners have limited liability. General partners have unlimited liability. Only in specific situations can the limited partners elect a new general partner. Such situations would include the resignation, death, incapacity, or removal of the general partner.

The derivative-based strategy known as portfolio insurance involves

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.

All of the following would increase the SMA in a customer's long margin account except

the receipt of a stock dividend. -- SMA changes when there is a monetary change to the account. Receiving a stock dividend (or a stock split) does not involve any money or market value change to the account. A cash dividend adds equity to the account. An increase to the market value increases the equity, as does a decrease to the debit balance.

Joe buys 1 XYZ May 30 Call and sells I XYZ May 40 Call. This trade will be profitable to Joe if

the spread widens. -- This is a debit spread, as the 30 call will have a higher premium than the 40 call and Joe is purchasing the 30 call. For a debit spread to be profitable, the investor wants the spread to widen. That is, the difference in the value of the premiums should expand, which can be expected to occur in a bullish market.

All of the following might affect the credit rating of a municipal revenue issue except

the tax rates of nearby municipalities. -- The credit rating of a revenue issue would not be affected by tax rates in surrounding municipalities.

All of the following statements describe stock rights except

they are most commonly offered with debentures to make the offering more attractive. -- A corporation issues rights to existing shareholders to allow them to purchase enough stock—within a short period and at less-than-current market price—to maintain their proportionate interest in the company. Rights need not be exercised but may be traded in the secondary market. Warrants, not rights, are often issued with debentures to sweeten the offering.

An investor has purchased a municipal certificate of participation (COP). COPs can be characterized by all of the following except

they would require voter approval before a municipality could issue them. -- COPs are considered revenue issues and, therefore, do not require voter approval. They are a form of lease revenue bond that allow the holders of the certificates to participate in some revenue stream (lease or loan payments) associated with land, equipment, or facilities purchased or built by the municipality. They are unique in that in the case of default, the holders of the COPs could foreclose on the asset associated with the certificate.

A client of yours notifies you that she has recently won a substantial lottery prize and now wants to start trading options. Your most likely response to her would be

to ask her if her investment objectives have changed. -- When an unexpected positive financial event occurs, it is always prudent to discuss this with your client and to determine if there has been any change in her overall investment goals. Options may have a place in her financial plan, but only a conversation with the client will determine the direction to move.

It would be correct to state that hedge funds typically have

unrestricted share concentration limits. -- Hedge funds are unregistered and have no restrictions on concentration of their assets. Mutual funds, but not hedge funds, register with the SEC. Registration involves making detailed disclosures as required in both the Securities Act of 1933 and the Investment Company Act of 1940. Furthermore, investment strategies that are generally forbidden to mutual funds, such as selling short and trading on margin, are found in most hedge funds. Because of the complexity of hedge funds, the initial investment minimums are typically well over $100,000.

A customer maintains a non-discretionary account at a broker-dealer and leaves a voicemail message for his registered rep to execute a trade, specifics of the order left in the message. The rep may execute this order

upon receiving confirmation from the customer that this order should be executed. -- A registered rep may not act strictly upon instructions left in a voicemail message. The order must be reconfirmed over the phone with the customer.

Nancy has $100,000 to invest and is seeking your advice on how best to utilize these funds to achieve her short-term goals. You would tell Nancy not to use these funds to purchase a

variable annuity. -- Variable annuities are not appropriate for meeting short- term trading goals. The other products provide greater liquidity and would be more suitable for meeting short- term goals

One of the first steps in applying for registration as a representative with a FINRA member firm is completing the Form U4. All of the following information is included in the representative's application except

whether the individual graduated from a degree-granting institution. -- The only mention of education on the Form U4 is when completing employment for the previous 10 years. If, during part of that period, the individual was a student, that information is required. However, there is nothing asking about graduation or degrees earned. A dual registration means registered with two nonaffiliated broker-dealers. Some states permit dual registration, while others prohibit it. When describing the previous employment, the Form U4 has a box to check if the business was investment-related. With the exception of charitable work, any concurrent employment must be listed on the Form U4.

The private placement rule states that the person to whom the offer of securities is made must be an informed person

who either has access to the same type of information contained in a registration statement or is furnished such information. -- For private placement transactions, any potential investor must have access to, or must be furnished with, the information about the issuer that would normally be available in a registration statement

A registered representative receives an order from a retail customer to purchase a security that is not currently on the firm's recommended list. The registered representative

will accept and execute the order, marking the order memorandum "unsolicited". -- A registered representative may accept this order and must mark the order "unsolicited".

An attorney friend of a registered representative offers to introduce one of her legal clients to the RR for participation in an upcoming equity offering the RR's firm will be engaged in. The attorney is requesting a fee to introduce her client, as well as a portion of the commission that the RR would earn if the deal is successful. Payment of fees to the attorney

would be acceptable provided they are not transaction- based if the attorney is not a FINRA registered individual -- Payments of finders' fees to parties who are not FINRA registered is acceptable if made in the form of a flat or hourly cash fee, and not tied to the success of the deal

One of your customers had a sideline business that was just sold for $100,000. The customer is 47 and wants to put that money into an investment that can be left alone for the next 20 years until expected retirement. Which of the following is likely the most suitable choice for this customer?

A target date fund with a date 20 years from today -- This is exactly what target date funds are designed for. As the investor gets closer to the target retirement age, the portfolio managers shift the concentration from equities to fixed income. Why doesn't the 70/30 shifting to 50/50 portfolio work here? Because the question states that the customer wants a "hands off" approach, something the target date fund does automatically. The small-cap growth fund might be too aggressive and a bond fund is not aggressive enough when the time horizon is 20 years

Which of the following options positions is not a bullish strategy

Short RST Oct 30 Call, Long RST Oct 40 Call -- Since the lower strike price is being sold and the higher strike price is being purchased, this is an example of a bear call credit spread. The other positions will benefit when the market rises

An investor holds an equity position that outperforms the market when the overall market advances but underperforms the market when the overall market declines. Which of the following statements are true?

The equity position has a beta greater than 1 -- A security, or portfolio with a beta greater than 1 will likely experience higher highs (outperform the market) and lower lows (underperform the market). Beta is a measurement of the volatility of an asset relative to the general market

Jenny has purchased an XYZ June 30 call and sold an XYZ June 35 call. Jenny has created a

bull call debit spread -- This is how a bull call debit spread can be structured

A successful chain of retail stores in the maximum corporate tax bracket may exclude from taxation 50% of income earned on investments in

domestic corporate common and preferred stock -- Corporate ownership of another company's stock allows the investor to exclude 50% of the dividends from taxation

A municipal revenue issue's flow of funds statement is contained in

the bond contract -- The bond contract describes the nature of the contract and the issuers' duties to bondholders. The bond contract is a more expansive document than a bond resolution. The contract is comprised of the bond resolution (or trust indenture) and other security agreements and laws in force at the time of bond issuance

When ABC is trading at 43, Adam purchases 10 ABC May 45 calls for 2.5. If Adam exercises his calls when ABC is trading at 49.50, the cost basis per share would be

$47.5 -- When a call option is exercised, the cost basis per share is the strike price of the call option plus the premium of the call option

Mrs. Jones purchases 2 XYZ Jul 30 calls at 2 and 2 XYZ Jul 30 puts at 2.50. She will break even when the price of the underlying stock is

25.50 & 34.50 -- Ms. Jones has purchased a straddle by simultaneously buying a call and put. Long straddles have two breakevens, the strike price plus total premium and strike price minus total premium, so the breakevens are 34.50 and 25.50

Miss Jones is bullish on the market. In December she buys 1 Jul 490 call on the XMI. Which of the following options might she write to create a debit spread?

Jan 490 call or July 500 call or July 505 call -- To create a debit spread the long call must be the dominant position, meaning it will have the higher premium. The Jul 490 call would have a higher premium than the Jan 490 call because there is more time value, and it would have a higher premium than both the July 500 and the July 505 because of the lower strike price. It will have a lower premium than the Jan 485 call because the Jan 485 call would come into the money first due to the lower strike price.

Which of the following statements regarding the Code of Arbitration Procedure is true?

Simplified arbitration is available for claims of $50,000 or less, and the statute of limitations is six years from the triggering event -- Simplified arbitration is available for claims of $50,000 or less. The statute of limitations for filing a claim is six years from the event giving rise to the claim

In July a customer creates a horizontal spread by purchasing 10 XYZ OCT 50 calls and by selling 10 XYZ August 50 calls. Which of the following statements is true concerning this strategy?

This is a calendar spread -- This is a calendar spread because the strike prices are the same and only the expiration dates are different.

A registered representative has a client who is a CPA, and this client is offering, for a fee, to direct some of her accounting clients to the registered representative for potential participation in an upcoming IPO the firm will be a managing underwriter on. May the broker-dealer compensate the CPA for these leads?

Yes, but any compensation must be in the form of cash (not securities), and it should only be a flat or hourly fee, and not tied to the success of any deals. -- These types of compensation arrangements are known as "finders fees", and are permitted, even if the individual (the CPA in this case) is not FINRA registered. Any fees paid should be in cash only, and represent a flat or hourly fee, and not tied to the success of any deals or transactions. If the individual is FINRA registered, the fees may be commission based.

An investor wants to invest $20,000 but anticipates needing those funds in five years for a business investment. Currently, with inflation rising, the government is expected to take action to push interest rates up to reduce the money supply. Given these conditions, which of the following securities would be the least suitable for this investor who needs a specific amount of money in five years?

Zero-tranche collateralized mortgage obligation (CMO) with an estimated five years of life -- A zero-tranche CMO is subject to interest rate risk as well as extension risk when interest rates rise, and therefore, it would not be suitable for a customer that needs her investment back at a specific point in the future. By contrast, a four-year zero coupon bond will mature within the anticipated time frame for needing the funds and would be the most suitable choice of the answers given

The term municipal fund security refers to

a Section 529 savings plan -- Section 529 plans, used primary for saving for college, are legally considered municipal fund securities

If a customer buys 1 XYZ Jan 40 call and 1 XYZ Jan 40 put, paying total premiums of $650, and XYZ becomes worthless, the result is

a gain of $3,350 --This is a long straddle in which breakeven points are established by adding and subtracting the combined premiums (6½ points) from strike (breakeven points are 46½ and 33½). The customer makes money if the stock moves above 46½ or below 33½. As the stock becomes worthless, the customer earns a 33½ point gain on 100 shares, or $3,350

An investor purchasing long-term AAA-rated bonds should be concerned most with

inflation risk -- The major risk assumed by any investor in long-term high-quality bonds is inflation or purchasing power risk. AAA-rated debt securities are likely to earn a lower rate of return, which over a longer period, might not keep up with the rate of inflation

Whether funds should be allocated to support the debt service on a moral obligation bond in default is usually determined by

the state legislature -- Legislation authorizing the issuance of moral obligation securities usually grants the state legislature the authority to apportion money to support debt service payments on such securities but does not legally require the legislature to do so. This is called legislative apportionment.

Sales materials for options distributed by a broker-dealer must include which of the following disclosures?

"Options may not be suitable for all investors" -- All options sales material must include the disclosure "Options may not be suitable for all investors"

A corporation plans to issue stock to the public at $10 per share. If the manager's fee is $0.10 per share, the underwriting fee is $0.25 per share, the concession is $0.45 per share, and the reallowance is $0.20 per share, the spread is

$0.80 -- n a corporate offering, the spread has three components: the manager's fee, the underwriting fee, and the concession. The math here is $0.10 plus $0.25 plus $0.45 = $0.80. The reallowance is not a separate item; rather, it is part of the $0.45 concession and represents a give-up if a member of the selling group sells to a FINRA member firm that is not a member of the selling group

On January 18, your customer sold 500 shares of MNO for a loss of $5 per share. If on March 1 she bought 3 MNO calls, how much of the loss could she declare for tax purposes?

$2,500 -- Because the purchase of the calls took place more than 30 days after the sale, the transaction is not a wash sale. She may therefore declare the entire $2,500 as a loss

XYZ Corporation has outstanding a 7% convertible bond currently trading at 102. The bond, which has a conversion price of $50, was issued with an antidilution covenant. If XYZ declares a 10% stock dividend, the new conversion price, as of the ex-date, will be

$45.45 -- To compute a new conversion price, divide the current conversion price by 100% plus the percent increase in shares. $50 / 110% = $45.45

Betty has a margin account with the following: XYZ long position: $175,000 ABC short position: 65,000 Debit balance: 70,000 Credit balance: 90,000 The total equity balance in Betty's account is

130000 -- The total equity position in Betty's account is $130,000. This is found by taking the long market value ($175,000) and adding the credit balance ($90,000), then subtracting the short market value ($65,000) and the debit balance ($70,000).

A company has annual sales of $15,000,000, operating expenses of $9,000,000, interest expense of $2,000,000 and principal payments on bonds totaling $1,000,000. What is the company's debt service ratio?

2 to 1 -- Debt service ratio = [Earnings before Interest & Taxes (aka EBIT)]/(Principal + Interest due). Net income = $15,000,000 in sales -$9,000,000 in expenses = $6,000,000. Total debt due = $2,000,000 + $1,000,000 = $3,000,000. Debt service ratio = $6.0mm/$3.0mm = 2 to 1

A branch manager of a retail location is reviewing a registered rep's suggested portfolio consisting of 60% AA+ Debentures, 25% AAA municipals, and 15% CMOs. This portfolio allocation is most suitable for which of these investors?

55-year-old school teacher -- This portfolio is most appropriate for an investor looking for income without a substantial amount of risk. A middle age professional in a stable career considering retirement in the next few years might find a good balance with this allocation. The tech entrepreneur will be interested in stocks, as will the growth investor. The accredited investor may look for something more speculative.

One of your customers is in the highest income tax bracket. The customer is looking to invest $250,000 into mutual funds with an objective of receiving income with relative safety. Which of the following funds should you recommend to meet that objective?

A municipal bond fund -- At least for purposes of selecting the correct answer on the exam, whenever you see high tax bracket, the choice is going to be municipal bonds. Because those bonds pay tax-free interest, they are highly attractive to those in high tax brackets. Even though the mutual fund is paying a dividend, the IRS treats the dividends from a bond fund the same as the interest paid by the individual bonds in the portfolio. Therefore, the dividends paid by a municipal bond fund carry tax-free treatment. Dividends paid by all the others are taxable. If the question had said the highest safety, then it would have been the U.S. Treasury bonds, but that would never be the question when a high tax bracket is in the question

In the underwriting of a new municipal GO bond issue, who would earn the selling concession?

A selling group member -- When a selling group member is part of the underwriting, their compensation is the selling concession. The manager earns the management fee. The syndicate members earn the takedown

If a customer wishes to buy 1 XYZ option and sell another XYZ option, but he is not willing to spend more than $300, which of the following orders should be entered?

A spread order -- A spread involves the simultaneous purchase and sale of different option contracts of the same type. A spread incurs a gain or loss depending on what happens to the difference in the premiums between the two contracts. Because this investor wants to limit his risk to $300, he would buy the spread at a net debit of $300 or less. (This is one order, not two.)

Which of the following would be the most likely unsuitable recommendation for a client whose objective is steady income?

An income bond -- Income (or adjustment) bonds carry the unique characteristic of requiring payment of interest only when the issuer's income is sufficient. They are used primarily for companies undergoing a financial restructuring, usually after a bankruptcy filing. Don't be fooled by the subordinated debenture. Although it stands last in line of the creditors in the event of a liquidation, that does not mean the investor is not going to get regular interest payments, especially when the debenture is investment grade. Bank CDs typically pay interest quarterly

An investor holding an equity linked CD may be least concerned with which of the following risks?

Inflation risk -- Equity linked CDs typically carry liquidity risk, which is the risk that the investor may not be able to liquidate the investment prior to maturity. There may be a very limited secondary market for these products. Additionally, if the CD is sold prior to maturity, it may be worth less than its purchase amount or face value. These products may also be called by the financial institution that issued them

If a stock undergoes a 1-for-5 reverse split, which of the following increases? Market price per share Number of shares outstanding Earnings per share Market capitalization of the company

Market price per share & Earnings per share -- After a reverse split, there will be fewer shares outstanding. As a result, market price and earnings per share will increase. Overall, the market capitalization of the company will not change

An investor goes long an XYZ May 30 put for 4¼ points. What is the investor's maximum gain, maximum loss, and breakeven point?

Maximum loss = $425; maximum profit = $2,575; breakeven point = $25.75 per share -- The initial action is a $425 purchase. That debit is the most the investor can lose. To figure maximum profit, you must think! What kind of strategy is buying a put option—bearish! The investor anticipates a falling market. The maximum profit will be realized when the market price of the stock falls as low as it can, which is zero. If the market price does fall to zero, the investor can sell the put for its intrinsic value. In this case, the 30 put would be in the money by 30 points, or $3,000. Therefore, the maximum profit to the put buyer is the entire difference between the strike price and zero, offset (reduced) by the premium paid (strike price minus premium). Breakeven uses the put-down rule. You subtract the premium from the strike price and that is $30 minus $4.25, which = $25.75

You have a customer who has been following the common stock of the PQR Corporation. The stock is now selling at $57 per share, which is slightly above its all-time high. The customer is of the opinion that the stock should decline somewhat over the next few months. If the customer wishes to buy 100 shares if the stock should it decline to 50 or lower, which of the following strategies would you suggest? Buy a PQR 50 put. Sell a PQR 50 put. Enter a buy stop order for PQR at 50. Enter a buy limit order for PQR at 50.

Sell a PQR 50 put & Enter a buy limit order for PQR at 50 -- Buy limit orders are always placed below the current market. This customer want to buy the PQR stock, but only if it can be purchased at a price no higher than 50. A put option will be exercised only when the strike price is above the current market. In this case, writing a 50 put results in the seller being exercised (and buying the PQR stock), but only if the market price is below 50. Cushioning the fact that the stock's market price might be lower than the purchase price of 50 is the fact that the sale of the put-generated premium

If a customer buys $10,000 worth of stock in a cash account, then sells the shares for $12,000 without first paying for the buy side, and then requests the $2,000 profit, which of the following statements are true? The $2,000 profit cannot be sent to the customer until she pays for the buy side in full. The $2,000 can be sent to the customer, but the account will be frozen for 90 days. If the customer pays for the buy side in full on or before the fourth business day following trade date, status as a frozen account is lifted. Both trades must be switched to the customer's margin account, where buying and selling in this manner are acceptable practices.

The $2,000 can be sent to the customer, but the account will be frozen for 90 days & If the customer pays for the buy side in full on or before the fourth business day following trade date, status as a frozen account is lifted -- Selling before paying is called freeriding and is prohibited. The penalty for freeriding in a cash account is that the account will be frozen for 90 days, and orders will not be accepted without cash or securities on deposit in advance. Transactions in margin accounts are subject to the same basic rule.

Index options differ from stock options in which of the following ways?

The exercise settlement is in cash -- When an index option is exercised, cash is paid to the option holder for the amount in the money. In contrast, exercising a stock option involves delivering the underlying stock. Both index options and stock options have the same expiration date and the same trade settlement date. Closing transactions can be purchases or sales for any option, regardless of the underlying asset

An investor purchases zero-coupon bonds issued by the U.S. Treasury due to mature in 18 years at $100,000. Which of the following might describe the primary reason for selecting that investment vehicle? The investor is 65 years old and needs the reliability of current income. The investor is 45 years old and has purchased these in an IRA rollover account and wants the assurance of funds for retirement. The investor is 30 years old and has a newborn child and wishes to assure funds for a college education. The investor is 20 years old, has just received an inheritance, and wishes to shelter income for as long as possible.

The investor is 45 years old and has purchased these in an IRA rollover account and wants the assurance of funds for retirement & The investor is 30 years old and has a newborn child and wishes to assure funds for a college education -- Zero-coupon bonds maturing in 18 years would assure the 45-year-old of the face value at age 63. Being in an IRA, there would be no current taxation, and upon maturity, if desired, the funds could be distributed without the 10% penalty. Zero-coupon bonds are one way to guarantee funds for college education. However, with no current income, they would not be suitable for the 65-year-old and would not offer any tax shelter to the 20-year-old

Purchasers of municipal revenue bonds are interested in knowing the priority of their claim on the revenues generated by the project. In general, the most senior position is held by

a gross revenue pledge -- The simplest way to think about this question is to look at our paycheck. What is the higher number - your gross pay or your net (take-home) pay? You could also say, "Who has the first claim on my earnings?" The government and that is why the taxes come out of your gross paycheck rather than your net check. The concept is the same here. In a gross revenue pledge, interest to the bondholders is paid out of the gross revenues before any other deductions. In a net revenue pledge, certain expenses are paid first, and then, from what remains, the bondholders receive their due.

One of your customers has recently celebrated a 58th birthday. The investor began a regular investment program into shares of the KAPCO Growth Fund over twenty years ago. The account is showing a substantial gain. Because retirement is getting closer, you suggest using the exchange privilege offered by the KAPCO fund group. Your recommendation is to place half of the holdings into the KAPCO Balanced Fund. Following this recommendation would result in

a taxable transaction for those shares exchanged -- The exchange or conversion privilege allows the investor to exchange shares of one fund in a family of funds for another at net asset value. The benefit is the saving of sales charge. The IRS treats this exchange as the sale of one security and the purchase of another. Therefore, any gains will be subject to tax. There is no 10% tax penalty. That applies only when there has been deferral of earnings, such as in an IRA

The main objective of Regulation SHO is to ensure that

broker-dealers will be able to borrow the security that a client wishes to sell short -- Regulation SHO is an SEC rule requiring broker-dealers to make sure they can borrow a security and be able to make a timely delivery of that security, prior to a client effecting a short sale in that security

A registered representative holds limited power of attorney on a client's account. The registered representative is permitted to take any of the following actions except

effecting a wire transfer of funds between the client's brokerage account and money market account, for which the client provided the registered representative with his pin number -- A limited power of attorney does not permit the registered representative to withdraw any funds from the client's account. A full power of attorney would be necessary to withdraw funds from the account. Note that this is an except question.

An investor who is bearish on the outlook for Fernweh Travel Services (FTS) sells 100 shares short at $52 per share. Three months later, the market price of FTS shares is $58. Under FINRA rules, a maintenance call will be issued when the per share price of FTS

increases by more than $2 -- A short margin account reaches the maintenance level when the equity in the account reaches 30% of the market value of the short stock. To find that level, divide the credit balance by 130% (or 1.3). The credit balance is the sum of the sale proceeds plus the Regulation T initial margin requirement. In our question, sale proceeds are $5,200 ($100 shares times $52 per share). To that we add the 50% Regulation T requirement ($2,600) resulting in a credit balance of $7,800. Dividing that $7,800 by 1.3 = $6,000. That tells us that the highest the price of FTS shares can be is $60 per share. Anything above that will trigger the maintenance call. With the current market price of $58, anything in excess of a $2 per share increase will result in a maintenance call. Remember, when an investor sells short, losses occur as the market price rises

In a municipal underwriting, the order period is the time in which the syndicate

manager accepts and allocates orders without considering time of submission -- The order period is a short time following the award of a municipal issue to the winning syndicate. During the order period, orders for an issue of municipal bonds are allocated in accordance with the priority defined in the syndicate letter, not on a first-come, first-served basis

A corporation has an IPO of its $5 par common stock. The public offering price (POP) is $15 per share. The difference between the par value and the POP represents

paid-in surplus -- When a corporation issues new stock at a price in excess of the par value, the excess is listed on the balance sheet as paid-in or capital surplus

The official statement for a new revenue bond indicates that the flow of funds is based on a net revenue pledge. This means the first payments go to

pay current operating and maintenance expenses -- When the flow of funds is described as a net revenue pledge, it means the operating and maintenance expenses are paid first. Following that is the debt service (interest and this year's principal). In a gross revenue pledge, the order is reversed

A customer with no other mutual fund investments wishes to invest $47,000 in the XYZ Technology Fund. If the Class A shares are eligible for a breakpoint sales charge discount at the $50,000 investment level, the least appropriate action for an agent is to

place the order as instructed -- If a customer intends to invest an amount just below a breakpoint threshold, she should be informed of the breakpoint discount, as well as the various methods by which she can receive it

FINRA Rule 2231 describes the required frequency of customer account statements. In those cases where there is a highly active customer account, statements must be sent

quarterly -- Unless a customer account contains penny stocks, statements are sent quarterly. For statement purposes, the term activity includes the receipt of dividends or interest, but that does not change the quarterly requirement

After accepting as good delivery securities that have minor irregularities, a buying dealer can return the securities to the delivery dealer through

reclamation -- Reclamation is available if a member inadvertently accepts a delivery on settlement date and later discovers that the securities were not in good deliverable form. The difference between reclamation and rejection is the timing. Rejection happens at the moment of delivery; the delivery is not accepted by one of the parties. Reclamation is post-delivery

Corporations issue equity securities. One category of equity is preferred stock. A number of different adjectives can apply to preferred stock issues. All of the following are types of preferred stock except

straight cumulative preferred -- Preferred stock can be noncumulative (straight) or it can be cumulative. It cannot be both. Cumulative preferred has the right to receive skipped dividends before any dividend can be paid to common shareholders. Those skipped dividends are known as dividends in arrears, or arrearage. Straight preferred does not have the right to receive skipped dividends; there is no arrearage. Once the dividend is not paid, the holder of straight preferred has no claim on it

Listed options on U.S. exchanges are available on all of the following currencies except

the U.S. dollar -- In the U.S., exchange-listed currency option contracts exist on foreign currencies, not on the U.S. dollar. With U.S. exchange-listed currency option contracts, the U.S. dollar is the base currency to which movements in the foreign currency is compared

A customer wants to be a day trader but is interested in the term pattern day trader and asks you to define the term. You state that all of the following are true of pattern day traders except

the buying power in margin accounts is the same as for other customers -- Pattern day traders are also treated differently when it comes to buying power. Buying power for day traders is four times the maintenance margin excess. Maintenance margin excess is defined as the equity in the account above the 25% minimum requirement. For regular customers, buying power is double SMA.

An investor begins a periodic payment deferred variable annuity purchase program. One respect in which this differs from purchasing a mutual fund is that

the investor in the variable annuity contract reports no taxable consequences during the accumulation period -- One of the features of annuities is the tax deferral of all earnings until the money is withdrawn. Mutual fund distributions are taxable when received. On the other hand, when the annuity accumulation is withdrawn, everything above the cost basis is taxed as ordinary income (10% penalty if younger than 59½)—there is never any capital gains treatment with annuities. Variable annuities invariably have higher expense ratios than mutual funds with similar portfolios. Surrender charges are found with annuities. Do not confuse those with the conditional deferred sales charge (CDSC) applied to certain mutual fund share classes.

All of the following are advantages of buying a put versus selling stock short except

the put's time value, which gradually dissipates, is added to the intrinsic value -- Selling short could result in unlimited loss, whereas buying a put limits loss to the premium and requires a smaller capital outlay than does selling short. Remember that short sales must be done in a margin account, and 50% of the short market value (SMV) must be deposited by the short seller. Short sales require locating the securities to be borrowed; buying a put does not. The time value that erodes in a put option is a disadvantage because for each day that elapses, the option's time value decreases

All of the following statements regarding government and agency securities are true except

they are always directly backed by the federal government -- Only GNMAs are directly backed by the federal government. FNMAs and FHLMCs are only indirectly backed but are still considered less risky than corporate debt. All are subject to federal taxation, and all were authorized by Congress