SIE Questions

Which of the following positions or actions would cover a client who has shorted a call? A) Buying a call that expires sooner B) A long stock position C) A short stock position D) Buying a put with a higher strike price

B) A long stock position Explanation: A short call (call writer) is a bearish position, which requires the client to deliver stock at the strike regardless of how far the share price rises. A long stock position would hedge the call since the client would already own the deliverable shares. A client who has written a call against an existing long stock position would be considered covered.

Which of these would be unlawful regarding the use of a mutual fund prospectus? A) Sending a prospectus to someone who has shown no interest in the fund B) Calling an investor's attention to a section that may be interesting C) Leaving a typographical error in the text unmarked D) Failing to highlight a small section the customer has specifically asked about

B) Calling an investor's attention to a section that may be interesting Explanation: A prospectus for any security, not just for a mutual fund, may not be marked; highlighted; or otherwise altered in any way; nor may steps be taken to call an investor's attention to some passage or section that might be of special interest, even if the potential customer asked that it be done.

CDC Pharmaceutical stock is currently trading at $50 a share. The CDC Nov 55 put is trading at $7. Which of the following is true? The time value is $2. The intrinsic value is $5. The time value is $5. The intrinsic value is $2. A) III and IV B) I and II C) I and III D) II and IV

B) I and II Explanation: With the stock at $50 a 55 put is $5 in-the-money, or has $5 of intrinsic value. Using the (IV + TV = Pr) formula the time value must be $2 (5 + 2 = 7).

Which of these reasons would allow for a municipality to issue revenue bonds easier instead of general obligation bonds? I. Revenue bonds do not require voter approval. II. Revenue bonds generally have a higher rating than GO bonds III. from the same issuer. III. Revenue bonds are not constrained by a statutory debt limit. IV. Revenue bonds are supported by ad valorem taxes. A) I and IV B) I and III C) II and IV D) II and III

B) I and III Explanation: Because revenue bonds are designed to be self-supporting from the revenue derived from the project funded by the bonds, voter approval is not required. On the other hand, because GO bonds are backed by taxes, such as ad valorem taxes, voter approval is generally required and there is a debt ceiling or limit imposed on the issuer.

Which of these statements regarding options are true? I. Investors who are bullish on a stock should buy calls. II. Investors who are bullish on a stock should buy puts. III. Investors who are bearish on a stock should sell puts. IV. Investors who are bearish on a stock should buy puts. A) I and III B) I and IV C) II and III D) II and IV

B) I and IV

CDC Pharmaceutical stock is currently trading at $50 a share. The CDC Nov 45 PUT is trading at one. Based on this information, which of the following is true? Time value is $1. Intrinsic value is $1. The premium must be greater than $1. Intrinsic value is zero. A) I and III B) I and IV C) II and III D) II and IV

B) I and IV Explanation: The basic formula is intrinsic value plus time value equals the premium (IV + TV = Pr). The intrinsic value of an out-of-the-money option, like this example, is zero. If the premium is one and the intrinsic value is 0, then the time value must be 1 (0 + 1 = 1).

Which type of DPP would be most likely to enable the investor to claim a deduction for depletion? A) Equipment leasing B) Oil and gas income program C) Real estate limited partnership D) Oil and gas exploratory program

B) Oil and gas income program Explanation: The depletion allowance is a tax benefit to compensate the program for the decreasing supply of oil or gas (or any other natural resource or mineral) after it is taken and sold. Exploratory programs have a low expectation of success—there may not be any oil or gas being taken out of the ground. With income programs, the wells have been drilled and are already producing, hence there is something being depleted.

The United States Supreme Court decision that provided our current definition of a security is A) SEC v. Lorenzo B) SEC v. Howey C) County of San Francisco v. State of California D) Hawkins v. Florida

B) SEC v. Howey

Which of these is in correct order of priority for a corporate liquidation? A) Convertible bonds, participating preferred stock, common stock, subordinated debentures B) Secured bond, debenture, subordinated debenture, common stock C) Guaranteed bond, secured bond, debenture, common stock D) Subordinated debenture, participating preferred stock, common stock, convertible preferred stock

B) Secured bond, debenture, subordinated debenture, common stock

A 6% corporate bond trading on a 7% basis is trading A) with a current yield above 7%. B) a discount. C) with a coupon rate below 6%. D) a premium.

B) a discount. Explanation: The term a 7% basis means that the YTM is 7%. YTM is higher than the coupon rate (6%), so the bond trades at a discount. Current yield must be between the coupon rate and the YTM.

A CMO consists of A) bonds and money market instruments. B) an FNMA, FHLMC, and other mortgage backed securities. C) different sorts of nonmortgage debt. D) various government backed mortgages.

B) an FNMA, FHLMC, and other mortgage backed securities. Explanation: A Collateralized Mortgage Obligation is made up of different mortgage backed securities (including FNAM and FHLMC), not the mortgages directly.

Class B mutual fund shares are also called A) reverse load shares. B) back-end load shares. C) deferred-load shares. D) CDSC shares.

B) back-end load shares. Explanation: Class B mutual fund shares are bought with no sales charge at the time of purchase. The sales charge is paid instead at the time of redemption, or at the back end. Hence, they are known as back-end load shares. For this type of share, the sales charge percentage is reduced each year of ownership, typically becoming zero after five years. At this time, they convert to Class A shares.

Another term for stocks and bonds is A) voting and nonvoting. B) equity and debt. C) taxable and tax-free. D) shares and units.

B) equity and debt.

Included under the term, equity security, would be A) debentures. B) participating preferred. C) equipment trust certificates. D) collateral trust certificates.

B) participating preferred.

The primary risk associated with ETNs is A) business risk. B) risk of default. C) call risk. D) reinvestment risk.

B) risk of default. Explanation: Exchange-traded notes (ETN) are debt instruments (that is what note means) and subject to default. Business risk is not a significant concern as these notes are not normally based on the cash flow of a business. They are not callable nor do they pay an ongoing interest payment, so no significant call or reinvestment risk exists.

The Windmill Growth Fund has breakpoints at $10,000, $25,000, and $50,000. Your customer places an unsolicited purchase through you for $47,000. You place the trade as requested without question or comment. This action is A) acceptable in all situations. B) unsolicited trade are not allowed in mutual funds. C) a rules violation. D) acceptable because the transaction is unsolicited.

C) a rules violation. Explanation: This trade, though unsolicited, would still require the representative to disclose the existence of the breakpoint. Unsolicited trades are allowed in mutual funds. The representative's duty is to disclose the existence of the breakpoint, failure to do so is a breakpoint sale.

A zero-coupon bond interest pays A) annually and is taxed at maturity. B) and is taxed at maturity. C) at maturity and is taxed annually. D) and is taxed annually.

C) at maturity and is taxed annually.

Pedro dislikes Seabird Coffee and thinks the company's stock is overvalued. He is currently short 1,000 shares of the company. He is concerned with the potentially unlimited risk he is exposed to and would like to use options to hedge that risk. His best option position would be A) buy 10 Seabird Coffee puts. B) sell 10 Seabird Coffee calls. C) buy 10 Seabird Coffee calls. D) buy 10 OEX (S&P 100 index) calls.

C) buy 10 Seabird Coffee calls. Explanation: Long calls provide the best protection against a short stock position. The calls give the owner the right to exercise and buy the stock at the exercise price, thereby locking in the cost to replace the shares.

A customer says they have a diversified portfolio of notes and bonds. This means their portfolio consists primarily of A) equity securities. B) hedge funds. C) debt instruments. D) limited partnerships.

C) debt instruments.

A security that is a contractual obligation between two parties and whose value is based on the specifics of the contract in relation to a different security is a A) contractual plan. B) investment company. C) derivative. D) hedge fund.

C) derivative. Explanation: A contract that derives its value from its relationship to another security is a derivative. A contractual plan is a type of investment company that is no longer issued.

Lando Entertainment, Inc., issues a bond collateralized by a trust holding the company's Las Vegas headquarters. This type of bond is called a A) collateral trust bond. B) headquarters debenture. C) mortgage bond. D) guaranteed bond.

C) mortgage bond. Explanation: A secured bond backed by real estate is called a mortgage bond. Collateral trust bonds hold other securities in trust as collateral. A guaranteed bond is an unsecured bond backed by a third party. A headquarters debenture is a fictional thing.

A mutual fund has been in existence for 15 years. The prospectus must disclose the fund's performance A) over the last 1, 5, 10, 15, 20, and 25 years. B) for each year over the last 10 years. C) over the last 1, 5, and 10 years. D) broken out as an average over the last 10 years.

C) over the last 1, 5, and 10 years. Explanation: The prospectus of a mutual fund must show the fund's performance over the last 10 years or the life of the fund, whichever is shorter. The data must be shown as the last year's performance, the performance over the last 5 years, and the performance over the last 10 years. With this fund, the 15-year performance need not be shown.

All of the following statements regarding penny stocks are true except A) established customers of the firm need not sign a suitability statement. B) the SEC rules require that prospects, before their initial transaction in a penny stock, be given a copy of a risk disclosure document. C) penny stock rules apply to both solicited and unsolicited transactions. D) if an account holds penny stocks, broker/dealers must provide a monthly account statement to the customer.

C) penny stock rules apply to both solicited and unsolicited transactions.

All of these are debt-security-maturity schedules except A) serial. B) balloon. C) series. D) term.

C) series.

Equity is to debt as A) stock is to preferred stock. B) stock is to mutual fund. C) stock is to bond. D) hedge fund is to mutual fund.

C) stock is to bond.

All of these are potential risks of private, nontraded, REITS except A) liquidity. B) transparency. C) tax treatment. D) reliability of valuations.

C) tax treatment. Explanation: Nontraded REITs are taxed the same way as public (traded) REITs. There are concerns about the private REITs lack of liquidity, transparency in operations, and the difficulty of valuing the programs.

Evan is a 75 year old customer with $100,000 to invest. He would like the money to generate additional income. He relates that he intensely hates paying taxes and dislikes the government in general. He is, however, interested in tax-free municipal bonds. All of these are important to gather before making a recommendation except A) his liquid net worth. B) his current tax bracket. C) why he hates the government. D) the makeup of his portfolio.

C) why he hates the government.

Which of these Treasury securities is in correct order of shortest to longest maturities? A) Bonds, notes, bills B) Notes, bills, bonds C) Notes, bonds, bills D) Bills, notes, bonds

D) Bills, notes, bonds

All of these are part of the expense ratio of a mutual fund except A) legal and accounting costs. B) a 12b-1 fee. C) management fees. D) CDSC.

D) CDSC. Explanations: The Contingent Deferred Sales Charge (CDSC) is charged against the proceeds of a sale of the fund's shares, not against the fund's assets.

Which of the following securities would be least likely to be issued by a corporation? A) Debentures B) Preferred stock C) Common stock D) Call and put options

D) Call and put options

The Alta Loma High School District is asking voters to approve a bond to fund the purchase of new computers and software. The bond will mature in 40 years and the interest and principal payments will be funded from real estate taxes. This is an example of a A) revenue bond. B) a debenture. C) an equipment trust bond. D) GO bond.

D) GO bond. Explanation: If a municipal bond requires a vote it is most likely a GO bond. Generally revenue bonds do not require a vote (note that there is no revenue generating source here). Debentures and equipment trust certificates are issued by corporations, not municipalities

Squidco, Inc., is issuing 100 million dollars in 4 ½% bonds maturing in 20 years. When purchased at issue, the buyers will receive an additional security that allows them to purchase 20 shares of Squidco common stock at $50 a share, anytime in the next 10 years. Squidco common is currently trading at $29.95 a share. This is an example of a A) warrant B) call. C) follow-on offering. D) stock right.

a) warrant

For this election cycle, Big Trucks, Inc., has three open board seats. Big Trucks operates under a cumulative voting system. Your customer owns 300 participating preferred shares of Big Trucks. He has A) no voting rights. B) 300 votes total to spread among the three open seats. C) 300 votes each for the open seats. D) 900 votes he can divide anyway he wants among the three seats.

A) no voting rights

A mutual fund's public offering price is $10.50. An investor who wishes to invest $1,000.00 in the fund is able to purchase A) 95.238 shares. B) 96 and owe $8.00. C) Partial shares are not allowed. D) 95 shares with $2.50 left.

A) 95.238 shares. Explanation Mutual funds may be purchased in even dollar amounts and partial shares may be issued.

Under the Investment Company Act of 1940, which of the following is not considered an investment company? A) Hedge fund B) Face-amount certificate company C) Separate account within a variable annuity D) Unit investment trust

A) Hedge fund Explanation: Investment companies include face-amount certificates, unit investment trusts, and management companies (both open- and closed-end). The separate account within a VA is a type of open-end management company. Hedge funds are organized as private investment companies (often limited partnerships), which are excluded under the definition of investment company under the Investment Company Act of 1940.

Under Rule 144, which of these sales are subject to volume limitations on the number of shares sold? I. Control person selling registered stock held for 1 year II. Control person selling restricted stock held for 2 years III. Nonaffiliate selling registered stock held for 1 month IV. Nonaffiliate selling restricted stock held for more than 6 months A) I and II B) I and IV C) III and IV D) II and III

A) I and II

An investor considering the differences between purchasing open-end investment company shares or ETFs with a similar objective should understand which of these? I. Each time an investor purchases and sells ETFs there is a commission. II. The operating expense ratio for an ETF is generally very high because they usually track indexes such as the S&P 500. III. It is possible that an investor liquidating ETF holdings will receive less than the NAV per share. IV. The margin requirements to purchase an ETF are higher than that for an open-end investment company. A) I and III B) II and III C) I and IV D) II and IV

A) I and III Explanation: Because ETFs usually track an index, the operating expense ratios are generally lower than that of open-end companies. That advantage can be canceled out by the commission charges when purchasing and selling an ETF. An open-end investment company must redeem shares at the NAV per share; ETFs pricing is based upon supply and demand making it possible to receive less than NAV. One cannot purchase open-end shares on margin.

Which of these trading strategies are employed by hedge funds but are generally prohibited to mutual funds? I. The act of limiting investments to a narrow group of securities II. The use of borrowed money to purchase portfolio securities III. The act of taking long positions in speculative stocks IV. The act of taking short positions in NYSE listed stocks A) II and IV B) I and III C) II and III D) I and IV

A) II and IV Explanation: Under most conditions, mutual funds are prohibited from purchasing securities on margin (i.e., using leverage—borrowed money) and from selling short. However, both of those strategies are commonly employed by hedge funds.

Which of these would cause a change in the net asset value of a mutual fund share? A) The market value of the portfolio declines B) Securities in the portfolio are sold for a capital gain C) Many shares are redeemed D) The fund takes a new position

A) The market value of the portfolio declines

Before an option trade may be entered for a customer, that customer's account must be approved for option trading by A) a Registered Options Principal. B) a branch manager. C) a firm principal. D) an executive officer.

A) a Registered Options Principal.

A state sponsored investment pool designed for municipalities with short-term cash investment needs is called A) an LGIP. B) a 457 plan. C) a tax-free money market. D) a city and county money plan.

A) an LGIP. Explanation: This is the basic definition of a Local Government Investment Pool (LGIP).

If a fund sponsor allows an investor to move funds from one fund to another within its fund family, this is called A) an exchange privilege B) a right of accumulation. C) a reinvestment right. D) a 12b-1 waiver.

A) an exchange privilege

An american depository receipt is a A) domestic security representing a foreign security in U.S. markets. B) foreign security representing a domestic security in foreign markets. C) foreign security trading in U.S. markets. D) domestic security trading in foreign markets.

A) domestic security representing a foreign security in U.S. markets.

All of these dates are declared by the board of directors of a corporation except the A) ex-dividend date. B) record date. C) declaration date. D) payable date.

A) ex-dividend date.

All of these are true regarding no-load shares except they A) have fees associated with sales and redemptions. B) offer more return-per-dollar invested versus load funds if investing results are the same. C) are redeemed with no charges or fees of any kind. D) are sold by the fund with no sales charges or fees of any kind.

A) have fees associated with sales and redemptions.

All of these are risks associated with limited partnerships except A) limited liability risk. B) audit and recapture risk. C) business risk. D) liquidity risk.

A) limited liability risk. Explanation: One of the primary benefits to an investor is the limited liability of an LP. An audit by the IRA may result in a recapture of prior tax benefits. All businesses are subject to business risk, and limited partnerships are famous for their lack of liquidity.

Your customer asks to buy a bond that carries a very attractive yield. When checking the bond you see that it has a B rating from the major credit rating agencies. When communicating this information to the customer, all of these terms might be used to describe the bond except A) lower grade. B) high-yield. C) noninvestment grade. D) junk bond.

A) lower grade.

MSRB rules apply to all of the following except A) municipalities. B) investment bankers. C) municipal dealers. D) FINRA member firms performing trades with municipal bonds.

A) municipalities. Explanation: The MSRB has no authority over municipal governments. They do make rules for underwriters (investment bankers) bringing municipal bonds to market, and municipal bond trading for both dealers and brokers acting on a customer's behalf.

The price that the buyer of a contract pays, or the writer receives, on a per share basis for an option contract is called the A) premium. B) time value. C) intrinsic value. D) strike price.

A) premium.

Your customer is a resident of the state of Utah. She owns bonds issued by Puerto Rico. The interest from these bonds is A) tax free at all levels for U.S. citizens. B) taxable at all levels because the bonds are not issued by a state. C) taxable at the state and local level because she is not a resident of Puerto Rico, but still tax free at the Federal level. D) taxable at the state level only.

A) tax free at all levels for U.S. citizens.

All of these are true for an Achieving a Better Life Experience account except that A) the account must be opened before the beneficiary turns 26. B) the account owner and beneficiary must be disabled. C) the income is tax-free. D) the onset of the disability must have occurred before the owner turns 26.

A) the account must be opened before the beneficiary turns 26. Explanation: The account does not need to be opened before the owner turns 26, but the qualifying disability does need to have begun before that age. Income from an ABLE account is received tax-free.

The exercise of an equity option requires that stock must be delivered A) two business days after the exercise. B) that day. C) three business days after the exercise. D) the next business day.

A) two business days after the exercise. Explanation: If an equity option is exercised one side of the contract will need to deliver the shares. If they do not already own those shares then they will go into the market to buy them. The two business days to deliver the shares allows for the purchase and regular way settlement to occur.

In 2011, RST Corp. had both common stock and $100 par value 4% noncumulative preferred stock, outstanding. The preferred stock, like the common stock, pays dividends on a quarterly basis. Because of financial difficulties, the company stopped paying dividends after 2011. After resolving its problems in 2015, the company resumed dividend payments in 2016. Before paying the first quarterly common stock dividend that year, the company would have to pay a quarterly dividend to the preferred stockholders of A) $1.00. B) $17.00. C) $4.00. D) $20.00.

A) $1.00

Your customer, Leo, recently purchased one put contract on Napa Valley Spirits, Inc., stock. The strike price is $50.00 and the premium was $4.50. He later executed the contract. How much did he pay for the contract? A) $500.00 B) $450.00 C) $5000.00 D) $4,550.00

B) $450.00 Explanation: The question asks what he paid for the contract, not what he received when he executed it, or the breakeven price. One contract of 100 shares at $4.50 a shares is $450.00.

Under the Investment Company Act of 1940 all of these are examples of management companies except A) A growth fund option for a VA. B) A Windmill Income UIT. C) A Windmill Income Fund, an exchange-listed:closed-end fund. D) An S&P 500 Index Trust ETF.

B) A Windmill Income UIT. Explanation: Unit investment trusts are investment companies, but not management companies under the act. Closed-end funds, ETF's, and separate accounts are all types of management companies.

Your client, Mickey, just purchased 10 July Euro Dollar Put contracts at 1.10. She notices that they are European Style contracts and asks you what the means. You tell her A) she may not exercise the contracts. The contracts will exercise at expiration if they are in-the-money. B) she may only exercise the contracts on the last day of trading before expiration. C) she may only exercise the contacts in the last week before expiration. D) she may exercise the contracts whenever he wants to.

B) she may only exercise the contracts on the last day of trading before expiration. Explanation: European style contracts may only be exercised on the last day the contract trades before expiration. American style may be exercised by the owners at any time. American style is much more common.

Big Company, Inc., an NYSE listed manufacturer of large objects, has declared a 50-cent-per-share-dividend payable next month. Big Company also has options available for trade. The actual ex-dividend date will be declared by A) the CBOE. B) the NYSE. C) the OTC. D) FINRA.

B) the NYSE.

Your customer, Shea, has a large portfolio of bonds and dividend paying stocks. Her primary interest is generating current income. She is trying to understand how taxes work for her T-bonds. You explain that A) the interest from her T-bonds is exempt at all levels. B) the interest from her T-bonds is exempt at the state and local level, but she will still owe taxes at the federal level. C) the interest from her T-bonds is exempt at the state level, but she will still owe taxes at the local and federal level. D) the interest from her T-bonds is exempt at the federal level, but she will still owe taxes at the state and local level.

B) the interest from her T-bonds is exempt at the state and local level, but she will still owe taxes at the federal level. Explanation: Securities issued by the federal government produce interest that is not taxed at the state or local level. It is taxed at the federal level.

The first step in the process of adding options trading to a customer account is A) the customer account is approved for option trading by a branch manager. B) the representative determines, based on reasonable grounds, the customer can understand and afford the risks of the recommendations the representative provides. C) the customer reads and understands the option risk disclosure you provided. D) the customer signs the option agreement.

B) the representative determines, based on reasonable grounds, the customer can understand and afford the risks of the recommendations the representative provides

One characteristic of an open-end investment company that distinguishes it from a closed-end one is that A) it may avoid taxation by distributing all of its net investment income to shareholders. B) there is a continuous public offering. C) it may be either diversified or nondiversified. D) there are a wide variety of objectives available for investors to select from.

B) there is a continuous public offering. Explanation: The key difference between open-end investment companies and closed-end investment companies is the fact that new shares are continuously being offered for open-end companies. In the case of the closed-end, once the IPO is over, the only way to acquire shares is in the secondary market. Both types of funds may operate as regulated investment companies and avoid taxation, both may choose to be diversified or not, and both offer a wide variety of investment objectives.

Your client holds ADRs of Daikon Motors, Inc., an automobile manufacturer based in Asia. All of these are true about the position except A) the security may be traded in U.S. markets. B) they have the same voting rights as an owner of the common stock. C) they have the right to request the underlying common shares be issued to them directly. D) they will receive dividends in U.S. dollars.

B) they have the same voting rights as an owner of the common stock.

If a customer had a large cash position and was interested in purchasing stock at prices below where they are today, and possibly generating some income in the process, an option strategy would be to A) place a buy stop order below the market. B) write covered puts that are currently out-of-the-money. C) write uncovered calls that are currently out-of-the-money. D) buy out-of-the-money calls.

B) write covered puts that are currently out-of-the-money. Explanation: Writing the puts would generate premium income. If the stock declines in value and the option is exercised the customer will buy the stock at a price lower than where the market is at this moment. The short calls would force him to sell the shares if exercised. Buying out-of-the-money calls cost money and the strike price would be higher than the market. The buy stop does not generate income.

Which of these securities would likely provide the greatest potential for capital appreciation? A) A convertible bond B) A common stock C) A preferred stock D) A U.S. Treasury STRIP

B) A common stock

An investor shorts 2 DEF January 55 puts, at a premium of two each, when the market price of DEF is 56.25. What is the investor's maximum potential loss? A) $5,425 B) $5,300 C) $10,600 D) Unlimited

C) $10,600 Explanation: When short a put, the risk is that the stock falls. The maximum risk occurs if the stock falls to zero. The maximum potential loss therefore is the strike price less the premium received for the put (55 - 2 = 53). The maximum loss per contract is $5,300, but with two contracts, the potential loss is $10,600. Note that the market price of the stock at the time of the sale of the put is of no consequence.

A letter of intent may be backdated to include a prior purchase up to A) 90 days. B) 6 months. C) 13 months. D) indefinitely.

C) 13 months.

Yusef would like to save money for his 10-year-old daughter's college tuition costs. She has her heart set on a small liberal arts school with a growing reputation in the arts. His biggest concern is the potential increase in cost over the next several years. The program best suited to hedge against the increasing cost of college tuition at the school is a A) custodial account in the child's name. B) 529 college savings program. C) 529 prepaid tuition program. D) Coverdell ESA account.

C) 529 prepaid tuition program Explanation: The 529 prepaid tuition plan is designed to pay tuition costs, at today's rate, to be used later. It is the best-suited option to cover tuition inflation. Both the college savings and ESA accounts allow for investing that has good growth potential, but not specifically locking down costs in today's dollars. A custodial account has similar issues, and the account is in the child's name, potentially harming scholarship and grant eligibility.

Which of these risks are not normally associated with bonds? A) Interest rate risk B) Purchasing power risk C) Business risk D) Default risk

C) Business risk Business risk is related to the growth prospects of a business and is most closely associated with common stock. Bond prices are subject to changes in interest rates. Default occurs when a company fails to meet its obligations to the bond holders. Most bonds are subject to a loss of purchasing power due to inflation.

Which of these would most likely require shareholder approval? A) Firing the CEO B) Declaring a dividend C) Changing the corporation's name D) Hiring a new CFO

C) Changing the corporation's name

Your customer, MJ, has a strong preference for investing in equity securities; however, she is hoping to increase the amount of current income her portfolio generates. Which of these is the least suitable for her? A) Long Beach Electric, a utility B) BuyMore, Inc., a big-box retailer with a long history of healthy dividend payments C) Duratech common stock, an exciting new tech manufacturer D) Generic Motors, Inc., 4 ¾% preferred stock

C) Duratech common stock, an exciting new tech manufacturer

Five years ago your client purchased at par $100,000 of New Brunswick City GO bonds maturing in 20 years from now and callable in six months. Interest rates have gone down over the last five years. Which of these should your client do? I. Your client should recognize that the bonds have a high probability to be called. II. Your client should recognize that the bonds are unlikely to be called. III. Your client should expect the bond is trading at a large discount. IV. Your client should expect the bonds are trading at a small premium. A) I and IV B) II and IV C) I and III D) II and III

C) I and III Explanation: If rates have declined the bonds are likely trading at a premium and very likely to be called at the first call date in six months. The proximity of the call date means the bonds premium will be small.

Which of these would not be included in a mutual fund's list of expenses? I. Shareholder records and service II. Investment adviser's fee III. Broker-dealer sales charges IV. Underwriter's sales loads A) I and II B) II and IV C) III and IV D) I and III

C) III and IV Explanation: Costs to maintain shareholder records, costs to provide services to shareholders, and the investment adviser's fees are all expenses to the fund. The costs paid in the form of sales charges (loads) to an underwriter, or broker-dealers selling mutual funds to the public may never be treated as an expense to the fund. These are expenses to the investor.

Which of these statements regarding a general partnership is correct? A) Partners participate in the gains but not the losses of the business and are fully shielded from the businesses liabilities. B) Partners participate in the gains and losses of the business and are partially shielded from the businesses liabilities. C) Partners participate in the gains and losses of the business and are fully liable for the businesses actions. D) Partners participate in the gains and losses of the business and are fully shielded from the businesses liabilities.

C) Partners participate in the gains and losses of the business and are fully liable for the businesses actions.

Which of these is not considered an advantage of owning an exchange-traded fund? A) Tax efficiency B) Liquidity C) Pass through of losses D) Intraday pricing

C) Pass through of losses

Which of these would not affect the NAV per share of a mutual fund share? A) The fund pays its monthly operating expenses like utility bills B) The portfolio's market value undergoes a large increase C) Portfolio securities that had to be sold for a big capital loss D) The fund receives a dividend from one of the portfolio stocks

C) Portfolio securities that had to be sold for a big capital loss Explanation: Selling securities out of the portfolio, whether for a gain or a loss, simply replaces the securities with an equivalent amount of cash, leaving the NAV per share unchanged. The other choices involve changes in net assets with no accompanying change in the number of shares outstanding, which would change the NAV per share.

Which of these statements regarding Treasury bills is correct? A) They are issued with initial maturities of 3, 12, 24, and 50 weeks. B) They are usually issued at a slight premium to par value. C) Treasury bills are the only type of Treasury security issued without a stated interest rate. D) They have the highest interest rate risk of all Treasury securities.

C) Treasury bills are the only type of Treasury security issued without a stated interest rate. Explanation: Treasury bills are always issued at a discount, without a stated interest rate. Receiving par value back at maturity represents the interest income to the investor. Because of their short-term maturities, they have the lowest interest rate risk for Treasury securities, not the highest. T-Bills are issued in initial maturities of 4, 13, 26, and 52 weeks.

Which of these is not backed by the full faith and credit of the U.S. government? A) Treasury bills B) Treasury bonds C) Treasury receipts D) Treasury STRIPS

C) Treasury receipts Explanation: Treasury bills, bonds, and notes are backed in full by the U.S. government. Treasury STRIPS are also backed in full by the U.S. government but Treasury receipts are not because they are issued by broker-dealers. Therefore the government's backing can only be as good as the credit rating of the broker-dealer that issued them.

All of the following are considered securities except A) Treasury bonds. B) 15 British pound put contracts. C) U.S. minted gold coins. D) common stock of XYZ corporation.

C) U.S. minted gold coins.

Mikayla is a big fan of Seabird Coffee and is an enthusiastic investor. She currently owns 1,000 shares of the company stock and 10 call contracts on the stock as well. What is her maximum gain for this position? A) Unlimited gain on the stock and limited gain on the option position B) Limited gain on both the option and stock position C) Unlimited gain on the stock and the option position D) Limited gain on the stock and unlimited gain on the option position

C) Unlimited gain on the stock and the option position

Last year Brownstone Properties, LP distributed $200 per unit to investors and reported a $500 business loss per unit on the K-1. For tax purposes the investors received A) a $500 reduction in ordinary income. B) $200 per unit of passive income. C) a $500 per unit passive loss. D) a net $300 loss.

C) a $500 per unit passive loss. Explanation: Income and losses in an LP are always treated as passive and are reported to the investor via the K-1. The tax results for the year are included in that document.

An investor who is seeking income might choose a corporate bond because A) corporate bond interest is tax-free. B) bonds can grow faster than the rate of inflation. C) a corporate bond pays a steady income and is generally reliable. D) bonds pay a higher dividend than stocks.

C) a corporate bond pays a steady income and are generally reliable. Explanation: Corporate bonds are, depending on rating, generally reliable producers of income through interest payments. Bonds do not pay dividends, nor do they grow in value with inflation. Corporate interest is fully taxable.

Darcy owns 5,000 shares of English Manor Properties. It is her belief that the company is unlikely to grow much over the next year. She is curious how he might generate some additional income from the position as English Manor pays a paltry dividend and asks about covered calls. You tell her that A) buy puts is the best hedge against this position. B) selling covered calls is very aggressive but has a solid chance of generating substantial income. C) writing calls against her stock position is a conservative strategy for generating income. D) writing calls against her stock position is a conservative strategy but is ineffective for generating income.

C) writing calls against her stock position is a conservative strategy for generating income. Explanation: Only selling an option will generate income. Selling covered calls is an effective and very conservative way to do so.

An investor can take advantage of intraday price changes due to normal market forces when investing in which of these? I. Closed-end funds II. Exchange-traded funds III. Hedge funds IV. Open-end funds A) I and IV B) III and IV C) I and II D) II and III

C. I and II Explanation: Both closed-end funds and ETFs trade in the marketplace based upon supply and demand. Open-end funds use forward pricing and generally price only once per day (usually at the end of the trading day). Most hedge funds are organized as private investment partnerships and are considered illiquid. Some have minimum holding requirements known as lock-up provisions, and in that light, their interests do not reliably trade intraday.

Your customer calls you with a question. They tell you that they received a phone call from the bond desk telling them that they bought 20 bonds at 100. They want to know how much they paid for the bonds before any commission or other charges. You tell them A) $200,000. B) $2,000. C) $1,000. D) $20,000.

D) $20,000. Explanation: 100 means they paid 100% of par ($1,000) per bond. They purchased 20 bonds, so the total amounts to $20,000. Note that the question asked how much they paid for the bonds, not the price per bond.

Your customer is in the 30% federal tax bracket. They consider purchasing a 7% corporate bond. Their after-tax yield would be A) 7%. B) 10%. C) 2.1%. D) 4.9%.

D) 4.9%. Explanation: The formula for the calculation is 7% (corporate rate) × (100% — 30% (tax bracket)). 7 × (1 - 0.3) = = 7 × 0.7 = 4.9%

Your customer, Eleanor, purchased an InDebt Inc., 5% debenture at a price of 94. It matures in 12 years. What is the yield to maturity? A) 5 B) 5.32 C) 4.69 D) 5.73

D) 5.73 Explanation: You do not have to calculate YTM for this problem. You could if you really wanted to, but it is not necessary for the question. You do need to recall the bond inverse relationship chart. The bond is trading at a discount so the YTM must be higher than the coupon of 5%; that eliminates two responses. Note that YTM is higher than current yield, and that you do need to calculate CY. The bonds annual interest divided by the price (50/940) is 5.32% (the CY). Only one response is higher than 5.32%.

Which of the following is a money market security? A) A TAN maturing in 14 months B) A short-term T-bond mutual fund C) A newly issued T-note D) A 30-year T-bond issued by the Treasury 29 years ago

D) A 30-year T-bond issued by the Treasury 29 years ago Explanation: A money market security is a high quality and highly liquid security with one year, or less, left to maturity. Both the T-note and the Tax Anticipation Note are more than a year form maturity. The mutual fund has no maturity.

ACE, an open-end investment company, operates under the conduit, or pipeline, tax theory. Last year, it distributed 91% of all net investment income as a dividend to shareholders. Therefore, which of the following statements is true? A) ACE paid taxes on 91% of its net investment income last year. B) ACE paid taxes on 9% of its net investment income and capital gains last year. C) ACE paid no taxes last year because it qualified as a regulated investment company under IRC Subchapter M. D) ACE paid taxes on 9% of its net investment income last year.

D) ACE paid taxes on 9% of its net investment income last year. Explanation: ACE pays taxes on any portion of income it does not distribute, as long as it distributes at least 90%; ACE paid taxes on 9%.

GEMCO Oil and Gas, a non-NMS stock, wishing to sell up to $100 million of convertible debt as market conditions permit, files a shelf registration statement with the SEC. Which of these statements are true? I. For securities offered via a shelf registration, a supplemental prospectus must be filed with the SEC before each sale. II. The registration statement is effective upon completion of the cooling-off period. III. Shelf registration allows the issuer to sell portions of a registered shelf offering over a 2-year period without having to reregister the security. IV. Shelf registration allows the issuer to sell portions of a registered shelf offering over a 4-year period without having to reregister the security. A) I and IV B) II and III C) II and IV D) I and III

D) I and III Explanation: Section 415 of the Securities Act of 1933 allows publicly traded issuers to register an offering for sale at times to be determined by the issuer. In essence, the issuer is taking the securities off the shelf and selling them when needed; hence the name, shelf offering. No new registration is required for a period of two years, but a supplemental prospectus must be filed with the SEC before each sale. Some issuers, called Well-Known Seasoned Issuers (WKSI), may have a three-year period. This relatively small non-NMS stock is not likely to be a WKSI.

Under the IRC Subchapter M, if the WWF Fund only distributes 85% of its net investment income to its shareholders, then which of these is true? I. The fund must pay taxes on the undistributed 15% of net investment income. II. The fund must pay taxes on 100% of the net investment income. III. The shareholder pays no tax if the income is reinvested. IV. The shareholder must pay taxes if the income is received in cash or reinvested. A) II and III B) I and III C) I and IV D) II and IV

D) II and IV Explanation: To avoid triple taxation according to the IRC Subchapter M, an investment company must distribute at least 90% of its net investment income. Since WWF Fund only distributed 85% of its net investment income, it must pay taxes on 100% of the net investment income. Shareholders always pay taxes on taxable income whether received in cash or reinvested.

Jon owns 100 shares of the Bayside Fishing Company. Bayside has 1,000,000 shares outstanding and operates under a statutory voting system. At the next election for the board, there are two open seats. All of these are true except A) Jon has a right to freely transfer his shares. B) Jon has control of 200 votes, and he can cast up to 100 of those votes for each open seat. C) Jon owns 1/10000 of the Bayside Fishing Company. D) Jon has control of 200 votes, which he can cast any way he likes among the two open seats.

D) Jon has control of 200 votes, which he can cast any way he likes among the two open seats.

Which of these statements regarding a 529 plan is correct? A) The assets in the plan belong to the beneficiary B) The beneficiary must be below age 18 C) Contributions are limited to $2,000 annually D) One person can be both the beneficiary and owner

D) One person can be both the beneficiary and owner Explanation: Anyone can establish and contribute to a 529 plan. This means parents, other family members, friends, and even the designated beneficiary can establish a 529 plan. A Section 529 College Savings Plan is a type of tax advantaged account used to save for education expenses. The person who opens the 529 plan is the account owner and the beneficiary is the future student. Most 529 plans are set up for children by parents or other family members, but there is no requirement that the owner and beneficiary have to be related. Plan assets belong to the account owner, not the beneficiary. The account owner has the right to change the plan's beneficiary. For example, if a parent had two children and one received a full scholarship, assets could be shifted for the benefit of the other child. Coverdell Education Savings Account (ESA) plans limits contributions to $2,000 annually.

Your customer, Amelia, is excited about an investment she recently purchased from another firm. At maturity, in five years, she will receive her principal back plus an interest payment based upon the returns of five well-known technology companies. It pays no interest during the five years. She has likely invested in A) an ETF. B) a mutual fund. C) a VA. D) an ETN.

D) an ETN. Explanation: It appears Amelia has purchased an exchange-traded note (ETN). ETFs, VAs, and mutual funds do not have set maturity dates. ETFs and mutual funds may pay dividends, not interest.

Your customer, Ford, wrote 5 SPX (S&P 500 equity index) 2990 call options. Today, Tuesday, he received word that his options have been exercised. The SPX closed at 3000. He will have to deliver A) 500 shares in two days. B) cash in two days. C) 500 shares tomorrow. D) cash tomorrow.

D) cash tomorrow. Explanation: This is an exercise of an index option. This exercise will require the seller of the option, to deliver cash equal to the in-the-money amount, on the next business day.

A bond's rating is used primarily as a measure of its A) interest rate risk. B) volatility risk. C) purchasing power risk. D) default risk.

D) default risk.

Mary owns 8% of Doyle Inc., a publically traded publishing company. She has recently married John, a doctor who owns 3% of Doyle. John wants to sell some of his shares to pay off the debt from the wedding and honeymoon. When he does so he will need to A) not file Form 144 because only owns 3% and is not a control person. B) file Form 144 because he is a doctor. C) not file Form 144 due to the spousal exception. D) file Form 144 because he is a control person.

D) file Form 144 because he is a control person.

When a customer chooses to annuitize a variable annuity, all of these are factors the insurance company will use in calculating the initial payout amount except A) age of the annuitant. B) balance of the separate account. C) gender of the annuitant. D) historic inflation rate.

D) historic inflation rate. Explanation: Insurance companies do not consider inflation when making this calculation. The components are GAAPI: gender, age, account balance, payout option, and interest rate (AIR).

American Liquidators Corporation (the ticker is LQDT) has 100 million outstanding common shares. The company would like to raise capital by selling 100 million new shares. In order to do this they must give their existing shareholders an opportunity to buy shares sufficient to maintain the shareholders percentage of ownership. In order to accomplish this they would A) perform a stock split. B) offer warrants to existing shareholders. C) suggest that existing shareholders go to the market and double their existing position. D) offer stock rights to existing shareholders.

D) offer stock rights to existing shareholders.

The investment return of a variable annuity comes from A) computing the excess of the premiums received over the mortality experience. B) the insurance company's general account. C) the assumed rate stated in the policy documents. D) the performance of the selected subaccounts within a separate account.

D) the performance of the selected subaccounts within a separate account. Explanation: A key feature of the variable annuity is that most of the premium is invested into the insurance company's separate account rather than the general account. Within the separate account, a number of subaccounts may be selected, depending on the investor's objectives. It is the performance of these subaccounts that provides the annuity's investment return.

All of the following characteristics are true of securities issued by the Government National Mortgage Association except A) they are backed by the federal government. B) they are called pass-through securities because the payments are made up of both interest and principal. C) they pay monthly. D) they generate tax-free interest.

D) they generate tax-free interest. Explanation: GNMA interest is fully taxable. All the other statements are true.

The Options Clearing Corporation (OCC) assigns exercise notices to broker-dealers with short positions A) on a LIFO basis. B) using any method that is considered fair and reasonable. C) on a FIFO basis. D) using a random selection method.

D) using a random selection method. Explanation: The OCC assigns exercise notices to short broker-dealers (those with customers who are short) on a random basis. It is the broker-dealers who may then assign exercise notices to their short customers on a random basis; on a first in, first out (FIFO) basis; or any other method that is fair and reasonable.