SIE/TOP OFF Final

Quick Ratio

(Current Assets - Inventory) / Current Liabilities

If a corporation wishes to sell additional shares, which of the following persons can subscribe using pre-emptive rights? A Common stockholders B Preferred stockholders C Convertible preferred stockholders D Bondholders

The best answer is A. Only common stockholders have pre-emptive rights. Holders of senior securities (preferred stock and bonds) do not have pre-emptive rights; nor do warrant holders since they do not own the common stock unless the warrants are exercised.

A 25-year old single client has just started his own small business and is not covered by a retirement plan. He has $5,000 to invest and currently has a low level of income. He wishes to start saving for retirement. The BEST recommendation is a: A Roth IRA B SIMPLE IRA C Traditional IRA D Roth 401(k)

The best answer is A. Anyone with earned income can open an IRA. Because this individual is in a low tax bracket, a Roth IRA contribution, which is non-deductible, makes sense (there is no real benefit from making a deductible contribution to a Traditional IRA). With $5,000 to invest, this is within the $6,000 contribution limit for 2020. Earnings build "tax-free" in a Roth, and distributions taken at retirement age are non-taxable. Also remember that high-earners cannot open a Roth IRA. In contrast, if a Traditional IRA were opened, this individual would get a tax deduction (he is not covered by another qualified plan), but it would have little value because of his low tax bracket. Earnings would build tax deferred and when distributions are taken at retirement age, they would be taxable, so the Roth is the better deal. A 401(k) is an employer-sponsored salary reduction plan under ERISA that requires major paperwork to establish. It allows a contribution of up to $19,500 in 2020, far more than the $5,000 this individual has to invest. This is not suitable for a very young single person starting a small business. A SIMPLE IRA is another qualified retirement plan that is "simpler" to set up than a 401(k), and that is only available to businesses of 100 or fewer employees. It allows for a larger deductible contribution than an IRA ($13,500 in 2020), which is more than this person needs. Also, it is still not as easy to set up as an IRA.

Which of the following trades settle in "clearing house" funds? I General Obligation Bonds II U.S. Government Bonds III Agency Bonds IV GNMA Pass-Through Certificates A I only B I and II C II and IV D III and IV

The best answer is A. Corporate and municipal bond trades settle in clearing house funds. These are funds payable at a registered clearing house, which are usually not good funds for three business days. These trades are settled through NSCC - the National Securities Clearing Corporation. U.S. Government and agency bond trades settle in Federal Funds, which are good funds the business day of the funds transfer (next business day for regular way settlement of government securities). Ginnie Mae Pass-Through certificates are U.S. Government guaranteed, so trades settle in Fed Funds. These trades are settled through GSCC - the Government Securities Clearing Corporation.

The setting of specific goals for an investment plan to be created for a customer is known as: A Strategic asset management B Tactical asset management C Dollar cost averaging D Portfolio rebalancing

The best answer is A. Strategic asset management is the setting of the investment "strategy" under an asset allocation scheme. Tactical asset management is the permitted variation to the established strategy, to take advantage of market opportunities. Dollar cost averaging is the periodic (say monthly) investment of a fixed dollar amount into a given security. By using dollar cost averaging, the average cost per share purchased can be lower than the arithmetical average cost of the security over the same time frame - as long as the security's price has been moving up and down (as the security's price drops, the fixed periodic dollar amount buys proportionately more shares than when the security's price rises). Portfolio rebalancing is used in an asset allocation scheme when a chosen asset class outperforms the others, so that its percentage allocation increases beyond the strategic limit. The excess in that class is sold off and the proceeds reinvested in th

A registered representative is notified verbally by an immediate family member of one of her customers that the customer has passed away. Which statement is TRUE regarding freezing the assets in the account? A The assets in the account can be frozen based on this verbal information B The family member must give a notarized written statement in order to freeze the assets in the account C The family member must provide a certified copy of the customer's death certificate before the assets in the account can be frozen D The assets in the account cannot be frozen under any circumstances

The best answer is A. A registered representative can act on verbal notice that a customer has died and can freeze the account because the notice came from an immediate family member. However, no further action can be taken until proper papers are presented. To transfer the assets of the deceased customer to a beneficiary, a copy of the death certificate is needed and other paperwork can be required as well (such as a copy of the will and proof that the will was filed for probate).

Dividends are paid to the holders of which of the following? A ADRs B Rights C Treasury Stock D Warrants

The best answer is A. ADRs - American Depositary Receipts - receive dividends. The bank that issues the receipts against foreign securities "passes through" dividends paid on the stock to the receipt holders. Warrants and rights do not receive dividends nor are there dividends paid on Treasury shares which have been repurchased by the issuer.

Which statements are TRUE regarding American style options? I The contracts can be exercised at any time II The contracts can only be exercised at expiration III The contracts can be traded at any time IV The contracts can only be traded at expiration A I and III B I and IV C II and III D II and IV

The best answer is A. Both European style and American style option contracts can be traded at any time until expiration. The distinction between the contract types relates solely to exercise provisions. American style contracts can be exercised at any time up until expiration. European style contracts can only be exercised at the expiration date. In the U.S., all equity option contracts and OEX index option contracts are American style. Almost all other index options are European style. PHLX World Currency options are only available in European style.

ERISA legislation was enacted to protect: A employee retirement funds from employer mismanagement B employee retirement funds from government mismanagement C retirement fund accounts against broker-dealer mismanagement D retirement fund accounts against investment adviser mismanagement

The best answer is A. ERISA was enacted to protect employee retirement funds from employer mismanagement.

If a security was held for more than one year and it is donated to a charity by the investor, which of the following statements are TRUE about the tax consequence of the event? I The investor gets to deduct the fair market value of the security as a donation II The investor gets to deduct his original cost basis of the security as a donation III The investor has no tax liability on the appreciation IV The investor has tax liability on the appreciation

The best answer is A. In order to donate appreciated securities at fair market value and have no tax consequences on the gain, the securities must be held "long term" - meaning over 1 year. The investor gets to deduct the fair market value of the donation.

A customer asks the following; "One of my neighbors was talking about his investment in an ETF (Exchange Traded Fund) and said that it is "low cost." Is this true?" The registered representative should respond that: A the expense ratios of most ETFs are lower than those for comparable index mutual funds B there is no commission cost when buying an exchange traded fund share whereas there is a commission cost when buying a mutual fund share C there is a commission cost when buying an exchange traded fund share whereas there is no commission cost when buying a mutual fund share D there is an opportunity cost relative to the expected potential investment return when buying an exchange traded index fund as compared to buying an actively traded mutual fund

The best answer is A. ETFs have been increasing in popularity as compared to traditional mutual funds because of their low cost (low expense ratios). However, when buying or selling an exchange traded fund, there is a commission cost; whereas when buying or redeeming a mutual fund there is no charge if the fund is "no-load" or there can be a sales charge.

Which of the following is (are) progressive taxes? I Estate and Gift Tax II Sales Tax III Excise Tax A I only B II and III C III only D I, II, III

The best answer is A. Estate and gift tax rates increase with the size of the gift or estate, so they are progressive. Sales and excise tax rates are constant, regardless of the dollar amount involved, so they are regressive.

A corporation has issued $100 par, 4% cumulative convertible preferred stock, callable at par. The preferred is convertible into 4 shares of common stock. Currently, the preferred stock is trading at $103 while the common stock is trading at $26. If a customer buys 100 preferred shares, converts, and then sells the common stock in the market, the profit or loss is (ignoring commissions): A $100 gain B $100 loss C $7,400 gain D $7,400 loss

The best answer is A. If the customer buys 100 shares of the preferred stock, he or she will pay 100 x $103 per share = $10,300. Since each share of preferred is convertible into 4 common shares, the 100 preferred shares will be converted into 4 x 100 = 400 common shares. The sale of 400 common shares at the current market price of $26 will yield $10,400. The net gain is: $10,400 - $10,300 = $100.

A customer buys 100 shares of ABC at $50 and buys 1 ABC Jan 50 Put @ $5. This position results in a profit when the market: I rises II falls III is stable A I only B II only C I and III D II and III

The best answer is A. If the market falls, the customer will exercise his put which he purchased for a premium of $5. He bought the stock at $50 and bought the right to sell the shares at $50. The loss would be the $5 per share ($500 total) premium paid. If the market remains stable, the put expires "at the money" and the customer loses the $500 premium. If the market rises, the long put expires "out the money." However, the stock can be sold at the higher market price creating a profit. The maximum potential gain comes from the stock position and is unlimited - the put would expire and the stock could be sold at the higher market price. The maximum potential loss is $500 - the premium paid in this case. Breakeven is at $55 - the customer has paid $5 in premiums and $50 per share for the stock, for a total outlay of $55 per share. The stock must be sold for this amount to breakeven.

If a foreign broker-dealer that does not have U.S. based operations wishes to solicit customers in the United States, the broker-dealer: I must establish an SEC-registered U.S. subsidiary II is not required to establish an SEC-registered U.S. subsidiary III can effect its business through another registered U.S. broker-dealer IV cannot effect its business through another registered U.S. broker-dealer A I and III B I and IV C II and III D II and IV

The best answer is A. In order for a broker-dealer to solicit in the U.S., it must be registered with the SEC. For foreign broker-dealers, this means setting up an SEC-registered U.S. subsidiary; or establishing a correspondent relationship with a registered U.S. based broker-dealer.

As the initial transaction in a new short margin account, a customer sells 1,000 ABC @ $50 per share. The stock then rises to $55. After the market rise, the customer's equity in the account is: A $20,000 B $25,000 C $30,000 D $55,000

The best answer is A. Initially, the account sets up as:

Position trading by "over-the-counter" firms is: I buying securities into, or selling securities from, the firm's inventory account II buying customer positions from, or selling customer positions to, other market markers III permitted under FINRA rules IV a prohibited practice under FINRA rules A I and III B I and IV C II and III D II and IV

The best answer is A. Position trading is the buying of securities into a dealer's inventory account; and the selling of securities out of the dealer's inventory account. The profit to the dealer is the spread between the bid and ask quote. This is the basic function of an over-the-counter market maker; and is, of course, permitted under FINRA rules.

XYZ Corporation has declared a rights offering to stockholders of record on Wednesday, November 15th. Under the offer, shareholders need 5 rights to subscribe to 1 new share at a price of $24. Fractional shares can be rounded up to purchase 1 full share. A customer owning 200 shares wishes to subscribe. The market price of the stock is currently $34. The customer can buy: A 40 shares for $960 B 40 shares for $1,360 C 200 shares for $4,800 D 200 shares for $6,800

The best answer is A. Since 5 rights are needed to buy 1 new share, the customer receiving 200 rights can buy 200 / 5 = 40 shares at $24 each = $960 total for 40 shares.

The loan value of a long option contract is: A 0 B 25% C 50% D 100%

The best answer is A. Since the margin to buy an option is 100%, it cannot be borrowed against - the loan value is "0."

A brokerage firm offers the following 4 products to customers: A flat commission rate of $80 per equity trade that includes the services of a dedicated representative $30 commission per equity trade without a dedicated representative $3,000 per year fee-based account that includes unlimited trading with the services of a dedicated representative $1,000 per year fee based account that includes unlimited trading without a dedicated representative The best choice for a customer that is new to investing, who needs heavy guidance, and who trades 2 or 3 times per month, would be the: A $80 per trade commission charge B $30 per trade commission charge C $3,000 annual fee-based structure D $1,000 annual fee-based structure

The best answer is A. Since this customer needs heavy guidance, the best choice must include the services of a dedicated representative. If the customer chooses the $80 per trade commission fee that includes guidance, he would expect to pay $80 x 30 expected trades per year (2.5 trades per month x 12 months) = $2,400 in annual commission costs. If the customer chose the $3,000 flat fee per year account, it would cost the customer $600 more. The other 2 choices do not make sense since there is no registered representative "hand holding" included.

Which statements are TRUE about speculative stocks that are included in a portfolio allocation model? Speculative stocks have: I higher expected returns than other securities included in the portfolio II lower expected returns than other securities included in the portfolio III higher standard deviations (risk) than other securities included in the portfolio IV lower standard deviations (risk) than other securities included in the portfolio A I and III B I and IV C II and III D II and IV

The best answer is A. Speculative stocks give higher returns, but to get this, the investor must assume higher risk.

The "interest" received from a zero-coupon corporate bond is: A accreted and taxed annually B accreted and tax deferred until maturity C not accreted and not taxed annually D not accreted and taxed as capital gain at maturity

The best answer is A. The "interest" earned on a zero-coupon bond is the annual accretion of the discount. This amount is taxed annually by the IRS, even though no physical interest payment is received from the issuer. The only way to avoid annual taxation of the accretion amount is to hold the securities in a tax deferred retirement plan account.

All of the following statements are true about the interbank market EXCEPT: A the market is centralized B trading is unregulated C foreign policy actions affect values in the market D foreign currency values are determined in this market

The best answer is A. The Interbank market is a free wheeling, unregulated, worldwide currency trading market open 24 hours a day. It is completely unregulated, but is influenced by central bank trading. Central bank trading actions are directed by each country's government.

The Official Statement published for a new municipal issue: A is a disclosure document for use by potential investors B is a source document for selecting underwriters to be included in the syndicate C establishes the procedures for calculating reoffering scales D solicits bids from interested underwriters

The best answer is A. The Official Statement provides disclosure about a new municipal issue to investors. It is requested by underwriters in order to perform due diligence on the issue, and to help sell the issue by having a disclosure document available for potential customers. It is not required under the Securities Act of 1933 since municipals are exempt.

A customer buys 100 shares of preferred at $51 per share. The par value is $50. The dividend rate is 8%. Each dividend payment would be: A $200 B $400 C $600 D $800

The best answer is A. The annual rate is 8% X $50 par value = $4 per share X 100 shares = $400. Since preferred dividends are paid semi-annually, each payment is for $200.

On the same day, a customer: Sells 1 ABC Jan 50 Call@ $3 Sells 1 ABC Jan 50 Put@ $5 At that time, the market price of ABC is $48. The maximum potential gain is: A $800 B $4,500 C $5,800 D unlimited

The best answer is A. The customer has sold a put and a call on the same stock with the same strike price and expiration. This is a short straddle. If the market does not move from $50, both the call and put expire "at the money" and the $800 premium is earned. This is the maximum potential gain. If the market rises, the writer loses on the call side of the straddle. If the market falls, the writer loses on the put side of the straddle.

A cyclical stock would be characterized by which of the following? I Earnings variability due to changes in economic growth II No earnings variability due to changes in economic growth III A stock price that tends to move in the same direction of the market as a whole IV A stock price that tends to move in the opposite direction of the market as a whole A I and III B I and IV C II and III D II and IV

The best answer is A. The performance of cyclical stocks follows the business cycle. In times of GDP expansion, they do well; in times of recession, they do poorly. Their earnings and stock prices follow the economic cycle. The classic cyclical stocks are home building, automobile manufacturers and durable goods producers. All of these purchases are deferrable in hard times.

On the same day, in a margin account, a customer buys 1 ABC Jan 60 Call @ $11 and sells 1 ABC Jan 80 Call @ $6. The breakeven point is: A $65 B $71 C $74 D $86

The best answer is A. To breakeven, the customer must recover the $5 debit ($11 paid, net of $6 received). Since this is a long call spread, the customer profits from the long call position. To breakeven, the market must rise above $60 by the 5 points paid in net premiums. Therefore, the breakeven is $60 + $5 = $65. To summarize, the breakeven formula for a long call spread is:

A customer margin account shows: 200 shares of ABC @ $40 200 shares of DEF @ $25 400 shares of PDQ @ $15 Debit = $9,000 SMA = $500 Reg. T = 50% What is the equity in the account? A $9,000 B $10,000 C $18,500 D $19,000

The best answer is B.

A customer, age 60, is ready to retire, and has an investment objective of preservation of capital and current income. The BEST asset allocation mix to recommend to this customer is: A 100% common stocks B 50% common stocks; 50% bonds C 10% common stocks; 90% bonds D 100% bonds

The best answer is B. A customer who has an objective of both income and capital preservation would invest in a balance of common stocks and fixed income securities. The fixed income securities provide income; while the common stocks provide little current income. The common stock values will tend to increase over time, as the economy grows, preserving the customer's capital. However, if interest rates rise, forcing the value of the fixed income securities down; the common stock portion of the portfolio would be minimally affected. If economic conditions deteriorate, forcing the value of the common stocks down; then interest rates would tend to fall. This would push up the prices of the fixed income securities in the portfolio, countering the loss in value of the common stocks. Thus, a relatively even mix of common stocks and fixed income securities best meets this customer's needs. You can always use the guideline that the customer should invest his or her "age" in bonds, with the balance in equities. This would give 60% bonds; 40% equities, which is not a choice here! However Choice B is the closest to this allocation.

A $10,000 par corporate bond is purchased in the secondary market with a .30 mark-down. If the bond is held to maturity, the tax consequence is: A $30 capital gain B $30 taxable interest income C $300 capital gain D $300 taxable interest income

The best answer is B. If a corporate bond is purchased in the secondary market for less than par, the market discount is treated as "taxable interest income." The holder has the choice of accreting the market discount annually and paying tax each year, or waiting until maturity or sale to pay the tax (the better option). This bond is purchased at $10,000 less a .30 mark-down, which is a mark-down of .30% of $10,000 = $30. The bond is purchased for $9,970. If the bond is held to maturity, the $30 gain is taxable interest income.

A parent opens a custodial account for a 10-year old child. The grandparents then donate into the account. If the total investment income in the account exceeds $2,200 in 2020, the income is taxed at the: A minor's tax rate B parent's tax rate C grandparent's tax rate D gift and estate tax rate

The best answer is B. If a custodial account is opened by a parent for a minor who age 18 or under; and if the income exceeds $2,200 in 2020, then the income is taxed at the parents' tax rate, which is generally higher. The rule is attempting to stop parents from shifting income to their children, who would typically have less income and thus would be taxed at lower rates.

Which of the following strategies has unlimited gain potential? A Long stock / short call B Long stock / long put Short stock / long call D Short stock / short put

The best answer is B. If a customer is long stock, and sells a call against that stock position, then in a rising market, the stock is "called away" at a fixed price, limiting upside gain. If a customer is long stock and buys a put (for protection), then in a rising market, the put expires "out the money" and the customer can sell the stock at whatever price to which the market rises. If a customer is short stock, and sells a put against that stock position, then in a falling market, the stock is "put to the customer" at a fixed price, limiting downside gain. On the other hand, if the market rises, the put expires "out the money" and the customer has unlimited loss potential on the remaining short stock position. If a customer is short stock and buys a call (for protection), then in a falling market, the call expires "out the money" and the customer can buy in the stock at whatever price to which the market falls. However, remember that the market can only fall to "0" - it cannot fall an unlimited amount.

An "accredited investor questionnaire" is required when which type of offering is made to investors? A Rule 147 B Regulation D C Regulation A D Rule 144

The best answer is B. Private placements under Regulation D are typically only offered to "accredited investors." These are wealthy individuals and institutional investors. To document that the purchasers are, indeed, accredited, an "accredited investor questionnaire" must be completed and signed by the potential purchaser. This is retained by the broker-dealer or issuer selling the securities and is proof that the purchasers were accredited. Rule 147 is the intrastate exemption; Rule 144 is an exemption from SEC registration for the resale of private placement stock owned by an investor where the company subsequently went public; and Regulation A is an exemption from registration for the sale of a small dollar amount ($50 million or less).

Which of the following economic events would have a positive long term impact on common stock prices? I Rising interest rates II Rising capital gains tax rates III Rising employment rates IV Falling inflation rates A I and II only B III and IV only C I, II, IV D I, II, III, IV

The best answer is B. Rising interest rates are bad for stock prices. More investors will switch from investments in stocks to bond investments. A rising capital gains tax rate also makes stocks less attractive to investors (why would an investor want to invest in stocks if the capital gains tax is so high?) Rising employment indicates that the economy is expanding. This is bullish (not bearish) for corporate profits and hence, stock prices. Low inflation means that interest rates are low, making debt investments unattractive. Thus, investors are more likely to invest in the stock market than in the bond market.

A customer sells 1 ABC Jan 70 Call @ $4 and sells 1 ABC Jan 70 Put @ $1 on the same day when the market price of ABC stock is $72. Assume that the market price falls to $66 and the call premium falls to $.50, while the put premium rises to $5.50. The customer closes the positions. The gain or loss is: A $100 gain B $100 loss C $500 gain D $500 loss

The best answer is B. The customer established two positions with a credit of $5 x 1 contract = $500 credit. When the market is at $66, the customer closes the call at $.50 and closes the put at $5.50. Thus, the positions are closed at: Buy 1 ABC Jan 70 Call@ $ .50Buy 1 ABC Jan 70 Put@ $5.50 $6.00 debit = $600 debit The customer closed for a d

A customer owns 107 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 10 rights tendered, a shareholder may purchase one additional share at $22 per share. Any fractional rights holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is TRUE? A The shareholder can buy a maximum of 10 shares by paying $220 B The shareholder can buy a maximum of 11 shares by paying $242 C The shareholder can buy a maximum of 107 shares by paying $2,354 D The shareholder can buy a maximum of 110 shares by paying $2,420

The best answer is B. The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 107 shares and thus, will receive 107 rights. 107 rights / 10 rights per share = 10.7 shares, which is rounded up to 11 shares @ $22 each = $242 necessary to subscribe.

When comparing the effect of changing interest rates on prices of a CMO issues versus the prices of regular bond issues, which of the following statements are TRUE? I When interest rates rise, mortgage backed pass through certificates fall in price faster than regular bonds of the same maturity II When interest rates rise, mortgage backed pass through certificates fall in price slower than regular bonds of the same maturity III When interest rates fall, mortgage backed pass through certificates rise in price faster than regular bonds of the same maturity IV When interest rates fall, mortgage backed pass through certificates rise in price slower than regular bonds of the same maturity . A I and III B I and IV C II and III D II and IV

The best answer is B. When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. This is true because when the certificate was purchased, assume that the expected life of the underlying 15 year pool (for example) was 12 years. Thus, the certificate was priced as a 12 year maturity. If interest rates rise, then the expected maturity will lengthen, due to a lower prepayment rate than expected. If the maturity lengthens, then for a given rise in interest rates, the price will fall faster. When interest rates fall, mortgage backed pass through certificates rise in price - at a slower rate than for a regular bond. This is true because when the certificate was purchased, assume that the expected life of the underlying 15 year pool (for example) was 12 years. Thus, the certificate was priced as a 12 year maturity. If interest rates fall, then the expected maturity will shorten, due to a higher prepayment rate than expected. If the maturity shortens, then for a given fall in interest rates, the price will rise slower.

If the price of a stock breaks out through the support level, it is expected that the stock's price will: A rise B fall C remain stable D become volatile

The best answer is B. A "support" level is a price below the current market, through which a stock's price tends not to fall. Thus, the stock is said to have "support" at this price, meaning it is resisting further price declines, because investors are willing to buy at this price. If a stock breaks the support level, this is strongly bearish, since all of the ready buyers have been "cleaned out" and there are still sellers of the stock. If there are many more sellers than buyers, prices will fall.

Institutional portfolio managers have been allocating an increasing percentage of their funds to cash and cash equivalent positions. This is an indication that their market sentiment is: A bullish B neutral C bearish D cautious

The best answer is C. From a "market sentiment" standpoint, a portfolio manager will increase his or her cash position; and decrease the portion of funds invested in securities, when he or she is bearish on the market. Conversely, if the manager is bullish, he or she will decrease the cash position and increase the invested portion of the portfolio.

Which of the following bond issues would most likely have a mandatory sinking fund? I U.S. Government bond II General Obligation bond III Hospital Revenue bond IV Airport Revenue bond A I and II only B III and IV only C II, III, IV D I, II, III, IV

The best answer is B. A bond issue is likely to have a mandatory sinking fund provision if it is perceived to be somewhat risky causing potential purchasers to demand this additional safeguard. Treasury Bonds are backed by the full faith and credit of the U.S. Government, so these issues have no credit risk. State General Obligation bonds are backed by the unlimited taxing power of the State, and also are perceived to be of low risk. Hospital Revenue bonds and Airport Revenue bonds are backed solely by the facility's revenues and are considered to be somewhat risky. (If there is hospital overbuilding or patient stays are shortened, revenues can fall; if another airport is built nearby that takes away passengers, revenues can fall; etc.)

A customer who is short 1 ABC Jan 40 Put wishes to create a "short put spread." The second option position that the customer must take is: A long 1 ABC Jan 30 Call B long 1 ABC Jan 30 Put C long 1 ABC Jan 50 Call D long 1 ABC Jan 50 Put

The best answer is B. A spread consists of the purchase and sale of the same type of option with a different strike price and/or expiration - therefore Choices A and C are incorrect. In a bull put spread (the same as a short put spread), the customer purchases the lower strike price (lower premium since the contract allows the holder to sell at a lower price) and sells the one with the higher strike (higher premium, since the contract allows the holder to sell at a higher price). The spread results in a credit received, which the customer wants to keep. If the market rises, then the contracts expire "out the money" and the net premium received is kept. This is the maximum gain. If the market falls, in this case below $30, then both contracts are exercised at a loss to the customer. If the market falls below $30, then the customer is obligated to buy stock at $40; that he sells at $30; for a 10 point loss (net of any premium credit received). This is the maximum potential loss.

The portfolio management technique that uses a market index as a performance benchmark that the asset manager must exceed is called: A Passive asset management B Active asset management C Strategic asset management D Tactical asset management

The best answer is B. Active asset management is the management of a portfolio to exceed a benchmark return (say the return of a comparable index fund). The manager's "active" return is any incremental return achieved over the benchmark return. In contrast, passive asset management is simply the management of a portfolio to match the benchmark return (the "passive return"). Active managers believe that underpriced securities can be found in the market and that performance of the benchmark can be exceeded. Passive managers believe that the market is efficient at pricing securities and that one cannot do any better than the "market" return as measured by a relevant index.

Which statements are TRUE about ETNs? I ETNs are a structured product II ETNs are an investment company product III ETNs are suitable for investors seeking income IV ETNs are suitable for investors seeking long-term capital gains A I and III B I and IV C II and III D II and IV

The best answer is B. An ETN is an Exchange Traded Note. It is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. ETNs make no interest or dividend payments, so they are not suitable for an investor seeking income. Their value grows as they are held based on the growth of the benchmark index, with any gain at sale or redemption currently taxed at capital gains rates. Thus, they are tax-advantaged as compared to conventional debt instruments.

An "accumulation unit" of a variable annuity contract is a(n): A share of common stock representing an interest in the underlying portfolio B accounting measure of the owner's interest in the separate account C accounting measure of the annuity amount to be received by the owner D share of beneficial interest in a fixed portfolio

The best answer is B. An accumulation unit is an accounting measure used for valuing a variable annuity holder's interest in the separate account.

A 60-year old customer asks about the tax consequence of taking distributions from his Traditional 401(k) plan. You should tell him that: A withdrawals representing principal are tax exempt and any withdrawals representing earnings are taxed at 15% B all withdrawals are taxable at ordinary income tax rates C withdrawals representing principal are taxed at 15% and any withdrawals representing earnings are tax exempt D all withdrawals are tax exempt

The best answer is B. Contributions to tax qualified plans such as corporate 401(k) plans are tax deductible. They are made with "before-tax" dollars, hence those funds were never taxed. Earnings accrue tax deferred. When distributions commence, since no tax was paid on the entire amount, the distribution is 100% taxable.

Income from all of the following securities is partially tax exempt to a corporate investor EXCEPT: A Preferred Stock Mutual Funds B Convertible Bonds C Preferred Stock D Common Stock

The best answer is B. Corporations that receive dividends from investments held generally are allowed to exclude 50% of the dividends received from taxation. This exclusion does not apply to individual investors (however, individual investors get the benefit of taxation of cash dividends received at a substantially lower rate - 15% (or 20% for those in the highest tax bracket) - than do corporate investors). Thus, a corporation that receives dividends from common stock holdings, preferred stock holdings, or mutual fund holdings where the fund's income is from common and/or preferred stock investments, is allowed to exclude 50% of that income from taxation. This tax benefit for corporate investors does not apply to interest received from bond holdings.

Which of the following statements are TRUE regarding the transfer of Individual Retirement Accounts from one trustee to another? I Each transfer is considered to be an "IRA Rollover" and thus is permitted only once per year II The funds can be transferred by having the trustee or custodian make a check payable to the account holder; who will then deposit the check with the new trustee or custodian III The transfer can be effected by wiring the funds directly between trustees or custodians IV The transfer can be effected by having the predecessor trustee or custodian make a check payable to the successor trustee or custodian A I and II only B III and IV only C I, III, IV D I, II, III, IV

The best answer is B. IRA transfers between trustees must be made directly from trustee to trustee. There is no limit on the number of transfers that can be made each year. If the transfer is effected by having the check made out to the account holder, this is considered to be an IRA rollover, which must be completed within 60 days and only 1 rollover per year is permitted. Thus, transfers cannot be effected by having the check made out to the account holders - the funds must go directly from trustee to trustee.

A customer is short 1 ABC Jan 90 Call @ $5. The call is exercised when the market price of ABC is $100. The sales proceeds of the shares is: A strike price minus premium B strike price plus premium C market price minus premium D market price plus premium

The best answer is B. If a short call is exercised, the writer is selling the stock at the strike price ($90). Since $5 per share was received in premiums, the writer's sales proceeds is $95 per share for tax purposes. Note that this is the same as the breakeven on the position, which is the strike price plus the premium.

A customer that wishes to open an account to buy new issues is required to make a: I positive representation that he or she is not restricted within 12 months preceding the first purchase II negative representation that he or she is not restricted within 12 months preceding the first purchase III positive representation that he or she is not restricted annually thereafter IV negative representation that he or she is not restricted annually thereafter A I and III B I and IV C II and III D II and IV

The best answer is B. In order for a customer to buy IPOs (Initial Public Offerings) of equity securities, the customer must sign a representation letter that he or she is not restricted from buying the issue under FINRA rules (FINRA prohibits industry "insiders" from buying the issue from the underwriter). Because the customer must sign this representation, this is a "positive" affirmation. Annually thereafter, the customer must be sent a notice that the firm has the customer's representation on file that he or she is not restricted, and that if this has changed, the customer must notify the firm so that the account file can be amended. Because the customer does not sign this representation, this is a "negative" affirmation

Information barriers are required between which brokerage firm departments? I Margin and Reorganization II Research and Accounting III Investment Banking and Research IV Trading and Investment Banking A I and II B III and IV C I and IV D II and III

The best answer is B. Information barriers, so called "Chinese Walls," as used in the securities industry, are the complete separation of a broker-dealer's investment banking unit from its trading and research units. In its normal operations, an investment banking unit may advise on takeovers; or receive other confidential information that could influence the price of an issuer's securities once the information is public. Broker-dealers establish a "wall" between the investment banking unit and the trading unit, so that this information is not received by the firm's traders in advance of its release to the public. A wall is put between research and investment banking because research should not be influenced by pending investment banking deals - e.g., research could "help" the deal by putting out a "buy" recommendation on that stock. In addition, research personnel might buy the stock themselves, which can be viewed as trading on "inside information."

New issues of Treasury Bills are sold: A through selling syndicates B via weekly yield auction C through subscriptions placed by registered purchasers D via negotiated underwritings

The best answer is B. New issues of Treasury Bills are auctioned each week by the Federal Reserve. The lowest interest rate bid (lowest interest cost to the government) wins the auction.

A corporation has issued 20,000,000 shares of common stock at $2 par. The corporation has 5,000,000 shares of Treasury Stock on its books. The aggregate value of the outstanding shares is: A $10,000,000 B $30,000,000 C $40,000,000 D $50,000,000

The best answer is B. Outstanding stock is: Issued stock (20,000,000 shares) - Treasury stock (5,000,000 shares) = 15,000,000 shares outstanding at $2 par = $30,000,000 value.

To claim a private placement exemption: A a registration statement must be filed with the SEC B a Form D must be filed with the SEC C a Form 144 must be filed with the SEC D no filing is required with the SEC

The best answer is B. Private placements are exempt transactions under the Securities Act of 1933. No registration is required. The issuer must file a Form D with the SEC within 15 days of the offering to claim the exemption. The filing of Form D is not a registration. It simply notifies the SEC that the issue is being offered in compliance with the exemption.

Which type of real estate limited partnership offers no depreciation benefit? . A New Construction B Raw Land C Existing Housing D All of the above

The best answer is B. Raw land is not depreciable; only the building on the land is depreciable. Existing housing is immediately depreciable. New construction is only depreciable after the building is completed - during the building phase, no depreciation deductions are permitted.

Which of the following is NOT defined as an "investment company" under the Investment Company Act of 1940? A Face Amount Certificate Company B Real Estate Investment Trust C Management Company D Unit Investment Trust

The best answer is B. The Investment Company Act of 1940 defines 3 types of investment companies; face amount certificate companies, unit investment trusts, and management companies. Real Estate Investment Trusts are not defined under the Investment Company Act of 1940 because they do not invest in securities; rather, they make real estate investments.

A registered representative ("rr") is an MFP of a municipal securities firm that is an underwriter for that municipal issuer. The MFP volunteers his time to the election campaign of a candidate for mayor of the issuer by offering to host a reception. The "rr," who is entitled to vote in the election, does not make a contribution to the elected official's campaign, but does pay $300 of "out of pocket" expenses for the cost of the reception. Which statement is TRUE? A This is permitted under MSRB rules because the MFP is volunteering his time to the elected official's campaign B The $300 of "out of pocket" expenses exceeds the MSRB's political contribution limit and will result in the municipal securities firm being banned as an underwriter for that issuer for 2 years C The $300 of "out of pocket" expenses are permitted because the MSRB places a $500 limit on the value of services that can be volunteered to each election campaign by an MFP D Because the MFP is entitled to vote in the elected official's campaign, he or she is permitted to make a contribution, up to the maximum federal limit of $1,000

The best answer is B. The MSRB political contribution limit of $250 placed on an MFP (Municipal Finance Professional) applies not only to cash contributions, but also to "anything of value" given to an elected official's campaign. Thus, the $300 of expenses paid by the MFP for the reception exceeds the $250 limit, and the broker-dealer would be subject to a 2-year ban doing negotiated underwritings for that issuer.

On the floor of the Chicago Board Options Exchange, duties similar to those performed by the NYSE Specialist (DMM) are handled by the: A floor broker B market maker C floor trader D competitive trader

The best answer is B. The Specialist (now renamed the DMM - Designated Market Maker) on the NYSE floor performs 2 functions. The DMM acts as market maker is a specific security, buying and selling for his own account. The DMM also keeps the "book" of limit and stop orders that are away from the market for other brokers, and executes these orders for a commission.The CBOE splits this "dual function" into two jobs. The market maker on the CBOE buys and sells for his own account but does not hold a book of public orders. The "book" of orders is handled by an exchange employee known as the order book official ("OBO").

A "consolidating market" is one where trading: A volumes are stable B prices are stable C volumes are volatile D prices are volatile

The best answer is B. The market is said to be "consolidating" when prices are flat - not moving in any direction for a long period after a previous price rise or fall.

The most commonly used measure to evaluate the ability of a revenue bond issuer to pay interest and repay principal is the ratio of: A Gross Revenues / Debt Service B Net Revenues / Debt Service C Overall Net Debt / Population D Overall Net Debt / Assessed Value

The best answer is B. The ratio used to analyze revenue bonds is the Debt Service Coverage Ratio. It is the ratio of Pledged Revenues to Debt Service cost. Almost all revenue bonds have a net revenue pledge, where "net revenues" are pledged to the bondholders (net revenues are gross revenues minus operation and maintenance costs). Thus, the most commonly used ratio to analyze revenue bonds is the ratio of Net Revenues / Debt Service.

A customer buys 1 ABC Jan 65 Call @ $3 and 1 ABC Jan 60 Put $2 on the same day in a margin account when ABC closes at $62. The customer must deposit: A 0 B $500 C $1,500 D $2,000

The best answer is B. To buy an option, 100% of the premium must be deposited. $300 + 200 = $500 deposit.

The first use of funds under a "gross lien revenue pledge" is to pay the: A operation and maintenance fund B debt service fund C debt service reserve fund D maintenance reserve fund

The best answer is B. Under a gross revenue pledge, bondholders have claim to the gross revenues of the facility. After the debt service is paid, then operation and maintenance is paid. Contrast this with a "net revenue pledge." Under this pledge, bondholders only have claim to net revenues after operation and maintenance is paid. In this case, the first use of funds is to pay operation and maintenance.

A customer buys 1 ABC Jan 35 Call @ $5 and exercises the contract. The tax consequence is a: A cost basis of $30 per share B cost basis of $40 per share C sale proceeds of $30 per share D sale proceeds of $40 per share

The best answer is B. When a call contract is exercised, the customer is buying the stock. The customer establishes a cost basis equal to all monies paid for the stock - $35 per share strike price plus $5 per share paid in premiums equals a $40 per share cost basis. Notice that the basis is the same as the breakeven.

When a variable annuity contract is "annuitized," which statements are TRUE? I The number of annuity units is fixed II The number of annuity units is variable III The annuity unit value is fixed IV The annuity unit value is variable A I and III B I and IV C II and III r. D II and IV

The best answer is B. When a variable annuity contract is annuitized, the accumulation units are converted into a fixed number of annuity units. This calculation is based on the dollar value of the accumulation units, the annuity option chosen, and the customer's expected mortality. The fixed number of annuity units times the unit value (which varies with the performance of the mutual fund held in the separate account) determines the monthly payment.

For bonds trading at a premium, rank the yield measures from lowest to highest? A Nominal; Current; Yield to Maturity; Yield to Call B Yield to Call; Yield to Maturity; Current; Nominal C Current; Nominal; Yield to Call; Yield to Maturity D Yield to Maturity; Current; Yield to Call; Nomina

The best answer is B. When bonds are trading at a premium, the yield to call will be the lowest measure since the annual return is reduced by the annual amortized portion of the premium that will be "lost" over the life of the bond to the call date. The next highest yield will be the yield to maturity, since the premium will be lost over a longer "life" than if the bond is called early. Current yield will be higher than yield to maturity, since it does not include the annual premium loss. Stated yield will be the highest since it is the return based on par value.

All of the following are true statements about Individual Retirement Accounts EXCEPT: A the earliest a taxpayer may make an annual contribution is January 1st of that tax year B the latest a taxpayer may make an annual contribution is April 15th of the following tax year C if the taxpayer obtained a 4 month filing extension, he can make the annual contribution up to the extension date D annual contributions may be made even if the person is covered by another qualified retirement plan

The best answer is C. Annual IRA contributions can be made anytime from January 1st of that year until April 15th of the next tax year. If the taxpayer requests an extension for filing his tax return, he does not get an extension for making the IRA contribution. IRA contributions can be made even if the employee is covered by another qualified pension plan, but may not be tax deductible in that case.

A registered representative has a client who is an exceptionally intelligent doctor of medicine. The doctor does most of his own investment research and makes many of his own investment decisions. The doctor is married, but his wife is not involved in the investment planning or decision-making process. When constructing a portfolio for this client, the registered representative should: A choose the investments in the portfolio based solely on the research conducted by the doctor B balance the portfolio in a manner that addresses the doctor's investment strategy and that customizes the strategy to meet the needs of the spouse C charge fees on the assets held in the portfolio that were chosen by the representative without using the doctor's research D disregard the doctor's research because the doctor is not properly licensed to act as a representative

The best answer is B. When constructing a portfolio for a client, the representative can take into account a customer's special expertise in a given area when selecting specific investments. For example, a doctor might have a special insight into the sales prospects for a medical device manufacturer, and could tell the representative that he wants to invest in this company. It is the role of the representative to review this investment decision and, if appropriate, to make sure that it is not overweighted in the portfolio. Because the doctor is married, the representative should construct the portfolio to meet both the needs of the doctor and his wife.

When a private equity firm makes an investment in a company that is publicly listed and trading on an exchange, this is known as a(n): A Leveraged buy out B Bought deal C PIPE transaction D Horizontal merger

The best answer is C. A PIPE transaction (Private Investment in Public Equity) is a way for a company that is already public to raise additional capital quickly, without having to take the time and expense of registering securities with the SEC. Large institutional investors who are accredited agree to quickly make an investment and get discounted private placement stock of the company in return. The company agrees to file a shelf registration with the SEC for those shares, so the institutional investors can "cash out" anytime they want (and if they want) over the next 3 years (the life of the shelf registration). If the investor wishes to maintain its investment longer than 3 years (because the stock has been performing well), then the company will renew the shelf registration for another 3 years, and so on. The basic advantage for the company is that it gets a quick injection of money. The advantage for the accredited institutional investor is that it gets to invest at a discounted price and can "cash out" by selling those shares to the public at any time thereafter under the shelf registration.

A customer has signed a Letter of Intent to buy at least $50,000 of a mutual fund in return for getting a lowered sales charge. The customer has already invested $40,000, and the customer notices on his account statement that the current NAV of the position is $52,000. The fund is going to make a distribution of the $12,000 capital gain. The registered representative recommends that the customer take the capital gain as cash and use the proceeds to buy shares of the fund to finish the breakpoint. This suggestion by the registered representative is inappropriate because it was not disclosed that: A the breakpoint has already been completed by the asset appreciation in the account B customers can only complete breakpoints with money that is not obtained from mutual fund share liquidations C the capital gain would be automatically reinvested at NAV if not taken in cash while the purchase of the shares would occur at POP including a sales charge D if the capital gain were automatically reinvested, there would be no tax due, but if the capital gain is taken in cash, it is taxable

The best answer is C. Asset appreciation does not complete a breakpoint for a client. The client contractually agreed to buy $50,000 of fund shares (within 13 months) under a Letter of Intent to get a lower sales charge. If the customer does not deposit the full $50,000, then the sales charge is recomputed to a higher percentage, based on how much the customer actually purchased. So the customer must deposit another $10,000 to complete the breakpoint. If the customer were to take the capital gains distribution as cash and use that money to buy additional shares to complete the breakpoint, then the customer would have to pay a sales charge (which would be lower because the breakpoint is being completed). But the customer must understand that if the capital gains distribution were simply reinvested, that would occur at NAV and there would be no sales charge. Not completing the breakpoint and the resulting fractional bump-up in sales charge would be less costly to the customer than the sales charge that would be imposed on the additional purchase (usually - there can be exceptions here). Regarding taxes, whether the capital gain is taken as cash or reinvested, it is taxable.

What entity was created to provide clearing and settlement efficiencies by immobilizing securities and to make "book entry" changes to ownership of securities? A FRB B OCC C DTC D PSA

The best answer is C. Depository Trust and Clearing Corporation (DTCC, sometimes just called DTC), is owned by U.S. banks and brokerage firms. It is the central clearing house for stock and bond transactions, and also maintains custody of both physical certificated securities and electronic book-entry securities. The OCC (Options Clearing Corporation) performs a similar function for the options markets. PSA stands for Prepayment Speed Assumption - which is used to determine the average life of a mortgage backed security.

All of the following options orders to sell calls are permitted EXCEPT a(n): A individual selling naked calls in a discretionary account B investment company selling calls against securities in its portfolio C corporation selling calls against its underlying stock D custodian selling calls against securities in a custodial account

The best answer is C. Issuers are prohibited from selling call options against their underlying stock. If they were exercised, they could simply issue more shares to deliver on the exercise notice, diluting existing stockholders' equity. Furthermore, the issuance of the new shares would require a registration with the SEC. Thus, issuers are prohibited from selling calls against their own stock. There is no prohibition on investment companies selling calls against stocks held in their portfolios - this is a very popular strategy for enhancing income. Custodians can also sell covered calls against securities held in the custodial account to increase income. In a discretionary account, all orders are permitted as long as a written power of attorney is received from the customer and the trades are suitable for the account.

On December 1st, an officer of ABC Corporation wishes to sell stock under Rule 144. ABC has 20,000,000 shares outstanding. The previous weeks' trading volumes are: Week EndingVolumeNov 28Nov 21Nov 14Nov 7Oct 31100,000 shares220,000 shares230,000 shares210,000 shares180,000 shares If the Form 144 had been filed one week prior to December 1st, the maximum sale would be: Incorrect answer A. You did not choose this answer. A 190,000 shares Incorrect answer B. You chose this answer. B 200,000 shares Correct answer C. You did not choose this answer. C 210,000 shares Incorrect answer D. You did not choose this answer. D 230,000 shares

The best answer is C. Rule 144 allows the sale of the greater of 1% of the outstanding shares or the weekly average of the preceding 4 weeks trading volume every 90 days. 1% of 20,000,000 shares = 200,000 shares. If the Form 144 was filed the preceding week, the trading volumes would have been: 220,000 shares230,000 shares210,000 shares180,000 shares840,000 shares/ 4 weeks = 210,000 share average(this is the greater amount)

A 4 ½%, 10-year corporate bond is priced to yield 4%. For an investor in the 35% tax bracket, the equivalent tax free yield is: A 1.40% B 2.09% C 2.60% D 2.76%

The best answer is C. The formula for the equivalent tax free yield is: Thus, the equivalent tax free yield is = 4% (100% - 35%) = 4% x .65 = 2.6%. Remember that the interest income from municipal bonds is exempt from Federal income tax; whereas the interest income from corporate bonds is subject to Federal income tax. Thus, the corporate yield (taxable) must be equalized to the tax free municipal yield.

Which industry is most susceptible to swings in market interest rates? A Consumer Goods B Auto Manufacturer C Public Utility D Technology

The best answer is C. Utilities are capital intensive - building electric generating plants is expensive! To obtain long term funds, utilities can issue either stock or bonds. Because their revenue stream is stable, utilities can issue large amounts of bonds at favorable interest rates without negatively affecting their credit rating. The vast majority of utility financing is done via the issuance of mortgage bonds. It is typical for a utility to have 90% of its capitalization come from the sale of bonds with only 10% from equity. It contrast, mature manufacturing companies can rarely have more than 30% of their capital base coming from the issuance of debt without negatively affecting their credit rating. Tech companies can only issue bonds once they have seasoned in the market, typically for 10 years or so, so that they can prove to the credit rating agencies that their business will survive for the long-term. If interest rates drop steeply, a utility can call its outstanding bonds and refund at lower current market rates. This reduces its interest cost (which is one of its largest expenses), so earnings will improve, and the price of the stock will rise in the market. Because the other industries listed cannot issue such a large amount of bonds, the positive impact of refunding at lower current market rates is not as great. If interest rates rise steeply, as its bonds mature, the utility must replace them with new bonds at steeply higher interest rates. This increases its interest cost (which is one of its largest expenses), so earnings will deteriorate, and the price of the stock will fall in the market.

Covered call writing is an appropriate strategy in a: A declining market B rising market C stable market D fluctuating market

The best answer is C. A covered call writer owns the underlying stock position. The customer sells the call contract to generate extra income from the stock during periods when the market is expected to be stable. If the customer expects the market to rise, he or she would not write the call against the stock position because the stock will be "called away" in a rising market. If the customer expects the market to fall, he or she would sell the stock or buy a put as a hedge.

Which of the following information items are needed to open a cash account for a customer? I Customer's name and address II Customer's social security number or tax I.D. number III Customer's signature IV Customer's occupation and employer A I and II only B III and IV only C I, II, IV D I, II, III, IV

The best answer is C. A customer signature is not needed to open a cash account (thus cash accounts can be opened over the phone). A signature is required for margin accounts only, since such an account requires that the customer pledge all the securities in the account to the brokerage firm in return for a margin loan. To open a cash account, the registered representative must complete a new account form which includes the Social Security number of the customer (tax I.D. number) so that the IRS gets its 1099 reports of income earned in the account; and the customer's occupation and employer because if the customer is employed by another brokerage firm, special procedures must be followed. The registered representative and the manager (principal) must sign the form. By signing, the registered representative indicates that the information is written as stated by the customer; and the manager is signing that the information has been reviewed prior to accepting the account for the firm.

ABC Jan 50 call contracts are trading in the market at 3.40. What is the dollar price that a customer would pay for 2 contracts at this price? A $34.00 B $340.00 C $680.00 D $1,360.00

The best answer is C. A premium of 3.40 is $3.40 per share. Equity contracts cover 100 shares, so the total premium is $3.40 x 100 = $340.00 per contract. Since there are two contracts, the total premium would be $680.

All of the following are sources of income that can be used for debt service on municipal revenue bonds EXCEPT: A User Fees B Special Taxes C Capitalized Interest D Lease Rentals

The best answer is C. A revenue bond is defined as a debt where payment of interest and principal is derived from a source other than ad valorem taxes. Thus, revenue bonds can be paid off by lease rental fees, user fees, and special taxes (such as excise taxes). Capitalized interest is not an income source; rather it is part of the cost of a construction project that is included in the total financing needs when building a facility.

Which of the following cover a short call contract? I Long a depository receipt for the stock II Long the cash value of the stock III Long an escrow receipt for the stock IV Long the stock A IV only B I and III only C I, III, IV D I, II, III, IV

The best answer is C. A short call cannot be covered by the deposit of cash because the theoretical loss is unlimited. The only way to cover a short call is with the ownership of the stock or owning an option that allows for the purchase of the stock at a price not to exceed the strike price of the short call, good for the entire life of the short call. Being long the stock covers a short call; long an escrow receipt shows that the stock is on deposit at a bank; long a depository receipt shows that the stock is on deposit with a clearing corporation.

A 25-year old man receives $50,000 and wants to retire at age 65 with an income of $1,500 per month from his investment portfolio. The adviser should invest: A 100% in bonds and 0% in stocks B 65% in bonds and 35% in stocks C 25% in bonds and 75% in stocks D 0% in bonds and 100% in stocks

The best answer is C. As a "rule of thumb," when balancing investments between stocks and bonds, the portion of the portfolio that should be invested in equities is "100% minus that person's age." Since this individual is age 25, 75% should be invested in equities for growth; with the other 25% invested in safe bonds.

Which statements are TRUE regarding bids placed at the Treasury Auction? I Competitive Bids are always filled II Competitive Bids are not always filled III Only the lowest interest rate bids are filled IV Only the highest interest rate bids are filled A I and III B I and IV C II and III D II and IV

The best answer is C. At the weekly Treasury auction, non-competitive bids are always filled at the average winning yields of the competitive bids. Only the lowest interest rate competitive bids are filled; the higher rate competitive bids that exceed the amount of securities up for auction that week are rejected.

Cabinet trades effected on the CBOE: I can be used by customers to close out worthless long positions II can be used by customers to close out worthless short positions III result in an aggregate $1 premium per contract as a result of the transaction IV result in an aggregate $1 commission per contract as a result of the transaction A I and IV B II and III C I, II, III D I, II, III, IV Explanation

The best answer is C. Cabinet trades on the CBOE, also called "accommodation liquidations," are a means for customers to close out worthless contracts. If a contract is left to expire worthless, the customer does not have a printed record of this event. With a cabinet trade, the customer can close out worthless long or short positions at a premium of $.01 per share ($1 per contract). This results in a printed closing trade confirmation for the customer's records. For executing the trade, the broker will charge a commission - which will surely be more than $1!

Which of the following statements are TRUE about Individual Retirement Accounts? I Contributions are allowed based solely upon personal service income II Contributions may be made if the individual is covered by another type of retirement plan III All contributions reduce the individual's taxable income IV To remain tax deferred, distributions from other retirement plans must be rolled over within 60 days A I and III B II, III, IV C I, II, IV D I, II, III, IV

The best answer is C. Contributions to IRAs are based solely upon personal service income; other income sources such as interest and dividends do not count. Contributions may be made, even if the individual is covered by another pension plan, however they may not be tax deductible if the person's income is too high (making Choice III wrong). IRA "rollover" rules allow pension plan distributions to be rolled over into an IRA within 60 days to remain tax deferred.

The sale of Direct Participation Programs is regulated by all of the following EXCEPT: A StateBlue Sky Laws B FINRARules C MSRBRules D Securities Act of 1933

The best answer is C. Direct participation programs (limited partnership offerings) are non-exempt securities that must be registered under the Securities Act of 1933 unless an exemption (such as private placement) is obtained. The issue must also be registered in the state(s) where it will be offered. FINRA regulates the sale of limited partnerships. The MSRB has no regulatory authority over limited partnerships. It simply makes (but cannot enforce) rules for the municipal markets.

Execution of a trade routed to an ECN is: I guaranteed since the ECN is a market maker in the security II not guaranteed since the ECN executes trades solely by matching customer orders III subject to the "best execution" rule IV not subject to the "best execution" rule A I and III B I and IV C II and III D II and IV

The best answer is C. ECNs - Electronic Communications Networks - do not act as dealers - only as agents, earning a fee on each successful transaction. Thus, there is no assurance that an order placed on an ECN will be filled. All orders sent by broker-dealers to any public marketplace are subject to the "best execution rule" - that is, the broker-dealer can only direct the order to the market posting the best price at that moment. If a number of markets are posting the same "best" price, then the broker-dealer can choose any of those markets to get the order - and can use "payment for order flow" as a deciding factor in the order routing.

ABC Corporation declares a $1 dividend, payable to stockholders of record as of July 29th. The last day that a customer can get the dividend if he or she is willing to buy the stock "for cash" is: A July 24th B July 25th C July 29th D July 30th

The best answer is C. If a customer buys the stock "cash settlement," the stock is delivered and paid for that day. Therefore, a purchase settled for cash on the 29th settles that day and places the buyer on the record books to receive the dividend as of the close of business. Note that customers pay more to buy stock in a cash settlement than in a regular way settlement, because the dividend amount deducted on the regular way ex date is added back to the trade price.

The steps that must be taken by a registered representative when he or she is informed that a customer has died are: I Cancel all open orders II Mark the account as "deceased" III Liquidate all securities positions IV Wait for instructions from the estate before taking further action A I and II B II and III C I, II, IV D I, II, III, IV

The best answer is C. If a customer dies, all open orders must be canceled; the account should be noted as "deceased;" and you should await further instructions from the attorney for the estate. Securities positions are not liquidated unless so instructed by the executor of the estate.

A corporation declares a cash dividend to shareholders. Which of the following choices are affected? I Current Assets II Current Liabilities III Net Worth IV Net Working Capital A I and III B I, II, III C II, III, IV D I, II, III, IV

The best answer is C. If a dividend is declared, then it is not yet paid. Dividends payable increases (a current liability) and net worth decreases (since the dividend is appropriated from retained earnings). If current liabilities increase, then working capital falls.

Regulation SHO requires that: I if a stock falls by 5% in a trading day II if a stock falls by 10% in a trading day III it can only be sold short on an up bid IV it can only be sold short on a down bid A I and III B I and IV C II and III D II and IV

The best answer is C. If an NMS (National Market System stock - NYSE, NYSE American (AMEX), or NASDAQ listed) falls by 10% or more, it can only be sold short on an "up bid" for the remainder of that trading day and the entire next trading day. Thus, it can only be sold short into a rising market. This stops the relentless short selling of stocks with the intent of driving market prices down - a market manipulation.

As compared to a cash account, margin accounts have: A greater volatility B less volatility C greater leverage D less leverage

The best answer is C. Margin accounts have greater leverage than cash accounts because a portion of the purchase price is borrowed. For example: Deposit $10,000 to buy $10,000 of stock in a cash account. If the market value increases 20% to $12,000, the change in equity is $2,000. The percentage return on cash invested is $2,000 / $10,000 = 20%; or Deposit $10,000 to buy $20,000 of stock in a margin account. If the market value increases 20% to $24,000, the change in equity is $4,000. The percentage return on cash invested is $4,000 / $10,000 = 40%. Note that the price volatility of the security in this example was the same; the greater leverage in a margin account gave a greater percentage return on cash invested.

A new customer wishes to open an account at your firm by purchasing $5,000 of DEF mutual fund shares. He informs you that he has previously invested $30,000 in the fund at another broker-dealer. As the registered representative handling the account, you should tell the customer that: A to qualify for thebreakpoint, he must buy the shares from the other broker-dealer B he must transfer the account from the other broker-dealer in order to qualify for the breakpoint C he qualifies for a breakpoint sales charge reduction on the $5,000 purchase D cannot qualify for a breakpoint sales charge reduction on the $5,000 purchase

The best answer is C. Mutual fund breakpoints are calculated based on amounts invested with a given fund sponsor - it makes no difference which broker-dealers were used to make the fund share purchases. The breakpoints are not calculated based on how much of a fund is purchased through a given broker-dealer.

Pension funds seeking safety of principal and maximum income would use which investment strategies? I Purchase Government and Agency securities II Sell short Government and Agency securities III Sell covered Treasury Bond calls IV Enter into Overnight Repurchase Agreements with government dealers A I and IV only B II and III only C I, III and IV D I, II, III, IV

The best answer is C. Pension funds must be prudently managed. The purchase of government and agency securities is appropriate, as is the sale of covered calls against the securities in the portfolio to generate extra income. Short sales are not suitable because of unlimited loss potential, as is the sale of naked calls. Pension funds would lend money overnight via repurchase agreements to government dealers as a way of generating an extra investment return from cash balances that await investment in longer term securities.

Which of the following projects would be financed by a revenue bond issue? I The construction of a new subway line II The construction of a new junior high school III The construction of a new hydroelectric generating plant IV The construction of a new sewage treatment plant A I and II only B III and IV only C I, III, IV D I, II, III, IV

The best answer is C. Public schools do not produce revenue and thus are not funded by revenue bond issues. Rather, school bond issues are general obligations of the issuer. A subway line, hydroelectric plant, and sewage treatment plant all charge for their use and can be financed with revenue bonds.

When comparing Real Estate Investment Trusts (REITs) to Real Estate Limited Partnerships (RELPs), all of the following statements are true EXCEPT: A REITs allow for flow through of gain B RELPs allows for flow through of gain C REITs allow for flow through of loss D RELPs allow for flow through of loss

The best answer is C. REITs do not allow for flow through of loss - only net income flows through to shareholders under conduit tax treatment. On the other hand, Real Estate Limited Partnerships are a tax sheltered investment that allow both gain and loss to flow through to the partnership investors.

All of the following statements are true about Real Estate Investment Trusts EXCEPT: A REITs may be traded on stock exchange floors B REITs may be traded on NASDAQ C REITs are securities which are redeemable with the sponsor D REITs are securities that are negotiable in the market

The best answer is C. REITs issue shares of beneficial interest which trade like other stocks, either on stock exchanges or NASDAQ. These securities are not redeemable. To liquidate, they must be sold in the market at the current market price.

The Regulation T initial margin requirement for short stock positions is: A 25% B 30% C 50% D 100%

The best answer is C. Regulation T initial margin for short stock positions is set at 50%.

Trades of NASDAQ listed securities that take place in all markets are consolidated and reported through the: A Network A Tape B Network B Tape C Network C Tape D Network D Tape

The best answer is C. Reports of trades of NASDAQ issues are made through the Network C Tape, regardless of the market venue where the trade took place. The Network A Tape reports trades of NYSE-listed issues, regardless of the market venue where the trade took place. The Network B Tape reports trades of NYSE American (AMEX) and regional exchange-listed issues, regardless of the market venue where the trade took place. There is no Network D Tape.

The maximum coverage provided by Securities Investor Protection Corporation for securities held in a customer's account is: A $250,000 B $400,000 C $500,000 D $600,000

The best answer is C. Securities Investor Protection Corporation provides protection on customer securities up to $500,000 in total cash and securities, but only covers cash balances for $250,000 included within the $500,000 limit.

An investor in a "Ginnie Mae" mutual fund assumes which of the risks? I Prepayment Risk II Credit Risk III Fluctuation of Net Asset Value IV Reinvestment Risk A I and II only B III and IV only C I, III, IV D I, II, III, IV

The best answer is C. Since Ginnie Maes are backed by the full faith and credit of the U.S. Government, there is no credit risk (as is the case with direct Government obligations). Since Ginnie Mae only issues mortgage backed pass-through certificates, in periods of declining interest rates, prepayment risk exists. Homeowners tend to pre-pay their "old" high rate mortgages when rates have declined by refinancing at the new lower rates. When these pre-payments are reinvested by the fund, the monies earn lower current rates, so reinvestment risk is also present. As with any mutual fund (other than a money fund which has a constant $1 per share NAV), there is the risk that NAV can decline - which would occur if interest rates rise, forcing Ginnie Mae certificate values down.

Which statements are TRUE regarding the use of a "red herring" prior to the effective date of a securities registration? I It is used to solicit indications of interest II It is used to help publicize the issue, without legally being considered an "advertisement" III Its use ends when the Final Prospectus is available IV It includes the issue's final Public Offering Price A I and IV only B II and III only C I, II, III D I, II, III, IV

The best answer is C. The "red herring" is used during the 20- day cooling off period to solicit indications of interest in the issue. This helps the underwriters gauge public interest in the issue; and helps the underwriters to set the final Public Offering Price. The "red herring" is not legally considered to be an offer or advertisement of the issue - these are prohibited activities under the Securities Act of 1933. However, it does help publicize the issue without running afoul of the law. The red herring typically does not contain the Public Offering Price, since this is not set until just prior to the effective date. Once registration is effective, the use of the red herring stops. Now, the issue is offered and publicized through the Final Prospectus that is now available.

Which of the following are defined as "investment companies" under the Investment Company Act of 1940? I Face Amount Certificate Company II Unit Investment Trust III Management Company IV Oil and Gas Leasehold Partnership A I and II only . B III only C I, II, III D I, II, III, IV

The best answer is C. The Investment Company Act of 1940 defines 3 types of investment companies; face amount certificate companies, unit investment trusts, and management companies.

A Specialist (DMM) on the NYSE is quoting ABC stock as follows: $50.05 - $50.06 60 x 30 The Specialist/DMM receives an order via Super Display Book to sell 6,000 shares of ABC at the market. The Specialist/DMM will: A place the order on his book for execution B fill 3,000 shares at $50.05 and place the unfilled portion of the order on his book C fill 6,000 shares at $50.05 D fill 6,000 shares at $50.06

The best answer is C. The Specialist (now called the DMM - Designated Market Maker) is quoting the stock at $50.05 Bid with a size of 60 (good for 60 x 100 = 6,000 shares); and $50.06 Ask with a size of 30 (good for 30 x 100 = 3,000 shares). These are the next orders to be filled on the Specialist's/DMM's book. If the Specialist/DMM receives a market order to sell for 6,000 shares, the Specialist/DMM will fill that order in full at the current bid price of $50.05.

The bond counsel will review which of the following concerning a new municipal issue? I Feasibility II Constitutionality III Statutory Requirements IV Legislative or Voter Approval Requirements A I and II only B III and IV only C II, III, IV D I, II, III, IV

The best answer is C. The bond counsel reviews the legal and tax status of a new municipal issue; he does not examine the economic viability of the project. Thus, the bond counsel does not examine the feasibility study, but would examine the constitutionality of the issue (is it permitted in that State?); any statutory requirements that must be met; and any voter or legislative approval requirements that must be met before the issue can legally be sold.

Which of the following measures would be evaluated when analyzing a General Obligation Bond? I Debt to assessed valuation ratio II Debt per capita ratio III Tax collection ratio IV Debt service coverage ratio A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is C. The debt service coverage ratio is used for revenue bond analysis - not G.O. bond analysis. The debt service coverage ratio is Net Revenues From the Facility / Debt Service Requirements. G.O. bonds are paid off from property tax collections, not collected revenues. Therefore, the relevant measures for G.O. bond analysis are Debt / Assessed Valuation of Property; Debt / Population; and Taxes Collected / Taxes Assessed.

A customer buys 1 ABC Feb 50 Call @ $7 when the market price of ABC is $52. The stock moves to $80 and the customer exercises the call and sells the stock at the current market price. The gain or loss to the customer is: A $700 loss B $700 gain C $2,300 gain D $3,000 gain

The best answer is C. The holder has bought the right to buy the stock at $50 per share. She bought this right for a premium of $7 per share. By exercising the call, the holder buys the stock at $50 and then sells the stock in the market at $80, for a 30 point gain. Since 7 points was paid in premiums, the net gain is 23 points or $2,300 on the contract covering 100 shares.

During the normal sequence of the economic cycle, after a period of recovery, the economy will move to a period of: A depression B recovery C expansion D prosperity

The best answer is C. The normal sequence of the economic cycle is a period of expansion, followed by an economic peak (prosperity), followed by a decline in economic activity (recession), followed by an economic recovery leading to further expansion, etc.

In a rising market, which orders will be executed? I Open Buy Stops II Open Buy Limits III Open Sell Stops IV Open Sell Limits A I and II B III and IV C I and IV D II and III Explanation

The best answer is C. The orders that are executed if the market drops are "OBLOSS" - Open Buy Limits and Open Sell Stops. The orders that are executed in a rising market are "OSLOBS" - Open Sell Limits and Open Buy Stops.

Client A's portfolio consists of the following: Equities:85%Fixed Income:10%Cash:5% The breakdown of these holdings is: Equities35%DEFF Total Market Index Fund30%2,100 shares of ABCD25%3,100 shares of XYZZ10%PDQQ International Small Cap Growth FundFixed Income:75%Investment Grade25%SpeculativeCash:100%Money Market Fund Client A is 55 years old, single with no children. He is beginning to think about retirement and wishes to modify his portfolio so that he can start receiving an assured income stream starting at age 65. Which recommendation would be the BEST choice to meet the customer's changed investment objective? A The ABCD and XYZZ stock holdings should be liquidated in full immediately, with the proceeds invested in 10 year income bonds of companies in special situations B The DEFF Total Market Index Fund holding should be liquidated in full immediately, with the proceeds invested in 10-30 year Treasury bonds C The customer should set minimum and maximum threshold prices at which the ABCD and XYZZ stock positions are to be liquidated; and if this occurs, the proceeds should be invested in 10-30 year maturity Treasuries D The customer should liquidate the ABCD and XYZZ stock holding to purchase 10, 15 and 20 years STRIPs that will mature in even installments

The best answer is C. This customer's portfolio is 85% invested in stocks and only 15% invested in bonds and cash. Since he is looking for income 10 years from now, more of the portfolio mix must be allocated to bond investments. Immediate liquidation of some of the stock investments might cause the customer to sell at a loss; or to miss out on potential stock gains that he or she anticipates. Setting minimum and maximum threshold prices to begin liquidating the stock investments, and reallocating the proceeds to safe income generating bond investments, is the best way to meet the customer's income objective.

Customer Name:John Doe Age:41 Marital Status:Married Dependents: 1 Child, Age 13 Occupation:Engineer Household Income:$140,000 Net Worth:$240,000 (excluding residence) Own Home:Yes Investment Objectives:Total Return / Tax Advantaged Investment Experience:12 years Current Portfolio Composition:8% Common Stocks 62% Corporate Bonds 30% Money Market Fund This client has just been informed that he has been promoted and will be earning $190,000 per year instead of $140,000 per year. The customer intends to use this extra income to fund his 13-year old child's college education. Based on the customer's existing asset mix, the best recommendation would be for the customer to invest the extra $50,000 per year into a(n): A money market fund B income fund C growth fund D inflation protected fund

The best answer is C. This customer's portfolio is 92% invested in cash and bonds with only 8% in equities. Since he has 6 years to fund the child's education, growth stocks would help balance the portfolio and enhance the overall return.

To impose the maximum sales charge, mutual funds must offer investors which of the following benefits? I Family of Funds II Breakpoints III Letter of Intent IV Rights of Accumulation A I and II only B III and IV only C II, III, IV D I, II, III, IV

The best answer is C. To impose the maximum sales charge of 8 1/2%, FINRA requires funds to give investors specified breakpoints (lowered sales charges for large dollar purchases), a letter of intent option (once the letter is signed, the investor has 13 months to complete a breakpoint), and rights of accumulation (the investor's accumulated position counts towards completion of a breakpoint). There is no requirement for the sponsor to offer families of funds.

Which of the following investments gives a rate of return that cannot be affected by "reinvestment risk"? A Treasury Notes B Treasury Stock C Treasury Strips D Treasury Bonds

The best answer is C. Treasury "STRIPS" are bonds which have been stripped of coupons - essentially they are zero coupon Treasury obligations. The rate of return on the bonds is "locked in" at purchase since the discount represents the compounded yield to be earned over the life of the bond. Because no interest payments are received, the bond is not subject to reinvestment risk - the risk that interest rates will drop and the interest payments will be reinvested at lower rates.

In connection with a new issue offering of a sought-after tech company issue, the underwriter offers shares to the officers of a manufacturing company that hired the firm 6 months ago to advise on a potential acquisition. Under FINRA rules, this is: A permitted because the purchasers of the new issue shares are not employees or officers of FINRA member firms B permitted because the purchasers of the new issue shares are not employees or officers of the tech company that is going public C prohibited because it is "spinning" D prohibited because it is "flipping"

The best answer is C. Under the IPO rule, FINRA prohibits the sale of new issues to member firms, their officers and their employees, since they are viewed as industry "insiders." FINRA expanded its list of prohibited purchasers in 2011 to include officers and directors of other publicly-held companies that do business with the underwriter. The intent is to stop a "quid pro quo" arrangement where the underwriter gives sought-after new issue shares to the officers and directors of these companies, who, in return direct future company underwriting and "M&A" business to that underwriter. This prohibited practice is called "spinning."

A customer gives a power of attorney to a caretaker to vote his shares on his behalf at the company's annual meeting. This is called (a): A discretionary authority B voting trust C proxy D trading authorization

The best answer is C. When a shareholder cannot attend the annual meeting and vote, the shareholder can give a power of attorney to another individual or the management of the company to "stand in" and cast that shareholder's votes as directed. This is called a "proxy," where the individual granted the power of attorney acts as the shareholder's proxy. The "caretaker" wording used in the question is a little odd, but that individual granted the proxy must act in the shareholder's interests, so this person could be viewed as a caretaker.

An ABLE account: A must be established prior to the beneficiary reaching age 21 B must be depleted by the time the beneficiary reaches the age of 26 C may only pay for the housing expenses incurred by a disabled individual D is used to pay for the qualified ongoing expenses incurred by a disabled individual

The best answer is D. ABLE accounts were enacted by Congress in late 2014. ABLE stands for "Achieving a Better Life Experience Act." It allows each state to set up a "municipal fund security" regulated by the MSRB that permits an account to be established to pay for the ongoing expenses of a disabled person. One of the key features of an ABLE account is that accumulated savings do not affect that person's eligibility for other Federal benefits (it used to be the case that having too much in assets would disqualify that person from other Federal benefits such as Medicaid). Up to $15,000 per year (the Federal gift tax exclusion amount) can be contributed to an ABLE account, with no tax deduction. The account grows tax-deferred, and payments to pay for qualified expenses are tax-free. Qualified expenses include medical care, transportation, housing, education, and assistive technology. The account must be established before the disabled individual reaches age 26, and proof that the beneficiary is disabled or blind must be provided. ABLE accounts are permitted under Section 529A of the Internal Revenue Code. Do not confuse these with 529 Plans, which are a municipal fund security to save for education expenses.

Which of the following is NOT subject to the registration requirements of the Securities Act of 1933? A American Depositary Receipts B American Depositary Shares C American Style Options D Foreign Currency Contracts

The best answer is D. ADRs (American Depositary Receipts) are non-exempt securities and must be registered with the SEC under the Securities Act of 1933. ADRs are the way that most foreign corporate issues trade in the United States. The bank that structures the ADRs handles the registration. Another name for an ADR is an American Depositary Share. Listed option contracts are registered with the SEC, as are investment company issues. These securities are "continuously issued" and the prospectus delivery requirement is met by giving the customer an Options Disclosure Document (which used to be called the Options Clearing Prospectus); or a fund prospectus. Foreign currency contracts are not securities, and hence are not subject to the 1933 Act (though foreign currency option contracts traded on the Philadelphia Stock Exchange are subject to the Act).

Which of the following statements are TRUE about CMOs? I CMO issues have a serial structure II CMO issues are rated AAA III CMO issues are more accessible to individual investors than regular pass-through certificates IV CMO issues have a lower level of market risk than regular pass-through certificates A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is D. All of the statements are true about CMOs. CMOs have a lower level of market risk (risk of price volatility due to movements in market interest rates) than do mortgage backed pass-through certificates. Because CMO issues are divided into tranches, each specific tranche has a more certain repayment date, as compared to owning a mortgage backed pass-through certificate. Thus, the price movement of that specific tranche, in response to interest rate changes, more closely parallels that of a regular bond with a fixed repayment date. As interest rates rise, CMO values fall; as interest rates fall, CMO values rise. When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. This is true because when the certificate was purchased, assume that the average life of the underlying 15 year pool (for example) was 12 years. Thus, the certificate was priced as a 12 year maturity. If interest rates rise, then the average maturity will lengthen, due to a lower prepayment rate than expected. If the maturity lengthens, then for a given rise in interest rates, the price will fall faster. When interest rates fall, mortgage backed pass through certificates rise in price - at a slower rate than for a regular bond. This is true because when the certificate was purchased, assume that the average life of the underlying 15 year pool (for example) was 12 years. Thus, the certificate was priced as a 12 year maturity. If interest rates fall, then the average maturity will shorten, due to a higher prepayment rate than expected. If the maturity shortens, then for a given fall in interest rates, the price will rise slower. CMOs have a serial structure since they are divided into 15 - 30 maturities known as tranches; CMOs are rated AAA; and CMOs are more accessible to individual investors since they have $1,000 minimum denominations as compared to $25,000 for pass-through certificates.

What is NOT a characteristic of investing in domestic bonds? A Price movement in the market similar to that of preferred stock B Business risk C Purchasing power risk D Political risk

The best answer is D. Domestic securities do not have political risk. Political risk is associated with investing in Third World countries (foreign investing) that have weak political systems. Investing in those securities does not have the legal protections of investing in developed counties. If market interest rates rise (which happens in times of inflation), bond prices fall, so bonds have purchasing power risk. Any corporate security has business risk - the risk that the company goes bankrupt and cannot repay its security holders.

Which of the following are entered into OATS? I Orders to buy NASDAQ issues II Orders to sell NASDAQ issues III Orders to buy OTC issues IV Orders to sell OTC issues A I and II only B III and IV only C II and IV only D I, II, III, IV

The best answer is D. OATS stands for "Order Audit Trail System." It electronically captures order information for equity securities (no more paper order tickets). OATS records of orders are now required for all U.S. equities markets - NYSE, NYSE American (AMEX), NASDAQ and also for OTCBB and Pink OTC Markets issues.The "idea" is to give FINRA an electronic order trail of each order from entry to execution to trade reporting and comparison. Since each order is entered independently, both buy and sell orders are entered.

Which of the following is defined as options "sales literature"? A Options Disclosure Document B Options billboard C Telephone recording on options investing D Lecture on options investing

The best answer is D. Options Sales Literature is any written communication distributed to customers or the public that contains any analysis, performance report, projection or recommendation. Included, as well, are standard forms of options worksheets (these detail gain, loss, and breakeven for a given strategy to be employed by a customer), and seminar texts for lectures to be given to the public about options. Sales literature must be accompanied or preceded by an Options Disclosure Document. Options Advertising is defined as any sales material that reaches a public audience through a mass media, including: newspapers, periodicals, magazines, websites, radio, television, telephone recordings, motion pictures, billboards, signs, or through written sales communications to the public that are NOT required to be preceded by an Options Disclosure Document. The content of these communications is very limited so that they are not "promotional" and they must state where an Options Disclosure Document can be obtained.

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

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

Quotes from all of the following sources are found on the Consolidated Quotations Service EXCEPT: A New York Stock Exchange B Boston Stock Exchange C Philadelphia Stock Exchange D NASDAQ Stock Market

The best answer is D. The Consolidated Quotations Service shows Bid and Ask quotes for exchange listed stocks, for all market makers in those stocks. These include the Specialist/DMM (Designated Market Maker) on the stock's principal exchange; any Specialist quotes from regional exchanges that dual list the stock; and the quotes of OTC Third Market Makers in that stock. CQS was created in 1979, when NASDAQ was in its infancy - so it was not included. The UQDF (UTP Quote Data Feed) aggregates and displays quotes for all market makers in NASDAQ issues. UTP stands for "Unlisted Trading Privileges." Not only do NASDAQ market makers quote and trade NASDAQ stocks, but exchange Specialists (DMMs) are now permitted to compete and trade NASDAQ stocks under a "UTP" plan.

Which of the following are considered in determining a fair and reasonable price in a municipal agency transaction? I Availability of the security II Dollar amount of the transaction III Value of services rendered by the municipal broker IV The fact that the municipal firm is entitled to a profit in this transaction

The best answer is D. The MSRB Fair Pricing Rule states that the factors that should be considered when pricing a municipal bond for BOTH agency and principal transactions are the: best judgment of the fair market value of the security; expense of filling the order; fact that the firm is entitled to a profit; availability of the security; total dollar amount of the transaction - a larger dollar amount should result in a smaller mark-up percentage; and value of services rendered in effecting the trade The factors to be considered ONLY for principal transactions are the: yield should be comparable to other similar securities available in the market; maturity, rating and call features of the security; nature of the dealer's business; and existence of material information about the issuer. The factors to be considered that ONLY apply to agency trades are the:

In 2020, a customer buys 1 GE 8%, $1,000 par debenture, M '35, at 85. The interest payment dates are Jan 1st and Jul 1st. The yield to maturity on the bond is: A 6.98% B 7.58% C 8.00% D 9.73%

The best answer is D. The formula for yield to maturity for a discount bond is: $80 + ($150 discount / 15 years to maturity)($850 + $1,000) / 2=$80 + $10$925= $90$925=9.73% Note: When the bond trades at a discount, its yield to maturity is GREATER than its coupon.

If the rate of inflation in the year 2020 is 2%; in the year 2019 the rate of inflation was 4%; and in the year 2018 the rate of inflation was 6%; this is known as: A deflation B depression C recession D disinflation

The best answer is D. "Disinflation" is a decline in the inflation rate - so it means that the rate of inflation is decreasing. In contrast, deflation is a decline in asset prices. A recession is 2 consecutive quarters of GDP decline. A depression is 6 consecutive quarters of GDP decline.

When does an investor receive payment of interest and principal on a Capital Appreciation Bond (CAB)? I Interest is paid semi-annually II Interest is paid at maturity III Principal is paid semi-annually IV Principal is paid at maturity A I and III B I and IV C II and III D II and IV

The best answer is D. A Capital Appreciation Bond (CAB) is a municipal zero coupon bond with a "legal" twist to it. A conventional zero coupon G.O. bond is counted against an issuer's debt limit at par value because the discount is treated as "principal." If a new issue discount bond is legally crafted as a CAB, then the principal counted against the issuer's debt limit is the discounted principal amount and the discount earned is considered to be interest income. The bond is purchased at the discounted price and then par is returned at maturity, with the 2 components of that par payment being the return of the discounted purchase price (the "principal" amount) and the accreted interest income.

A municipal dealer places an order with the syndicate manager for a G.O. bond new issue. The bonds will be placed in an "accumulation account" for a unit investment trust being established by the syndicate member. Which statement(s) is (are) TRUE? I The syndicate member must disclose to the manager that the bonds are being purchased for an accumulation account II The manager will disclose the order to the other syndicate members when the syndicate account is closed III The order will be treated as a "member takedown" order by the manager A I only B I and II C II and III D I, II, III

The best answer is D. An order placed with the syndicate by a member for an "accumulation account" is not being sold to the general public. They really are being retained by a syndicate member for his own use. The syndicate member must disclose this to the manager when the order is placed; the manager will disclose any of these orders that have been filled to the other syndicate members when the account is closed; and the manager will fill these orders last- meaning they get priority after pre-sale, group, and designated orders. They are treated as member takedown orders, and if there is sufficient interest in the issue, would not be filled because of the other orders with higher priority.

Which statement is FALSE regarding Section 529 Accounts? A Any adult can open an account for any beneficiary B Account contributions are not deductible, but earnings build tax-deferred C Non-taxable distributions may be made to pay for qualified higher education expenses D Non-taxable distributions may only be made to educational institutions in the state that sponsors the plan

The best answer is D. Any adult can open a Section 529 account for a beneficiary. Contributions are not tax deductible, but earnings build tax-deferred. Distributions to pay for qualified higher education expenses are not taxable; and these distributions can be made to any qualified educational institution in any state

A customer who lives in New York has an account with a broker-dealer and sales representative that are both registered in State of New York. The customer moves to the State of Georgia, a state where the broker-dealer and sales representative are not registered. Which statements are TRUE? I Solicitations may be directed to this customer II Solicitations cannot be directed to this customer III Unsolicited orders can be accepted from this customer IV Unsolicited orders cannot be accepted from this customer A I and III B I and IV C II and III D II and IV

The best answer is D. Because the broker-dealer and sales representative are not registered in the State of Georgia, they cannot solicit the purchase of securities in the State of Georgia (to do so requires registration in the state). Under State law, there is an "unsolicited transaction exemption" that gives an exemption from State registration to any security involved in an unsolicited transaction. However, it does NOT give an exemption from registration to the agent involved in the transaction! In order for the agent to deal with a customer in Georgia (either solicited or unsolicited), the agent and broker-dealer must be registered in Georgia as well!

Interest charges on customer debit balances are based on the: A Prime rate B Federal Funds rate C Treasury Bill rate D Broker Loan rate

The best answer is D. Brokers borrow from banks using customer securities as collateral at the Broker Loan rate, also termed the Call Loan rate. The interest charged to customers on loans made by brokers is based on this rate (e.g., the interest rate charged might be "Broker Loan Rate + 1/2%").

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

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

If a publicly traded corporation declares bankruptcy: I a 10K report must be filed II an 8K report must be filed III the required report must be filed within 1 business day IV the required report must be filed within 4 business days A I and III B I and IV C II and III D II and IV

The best answer is D. Corporations are required to file 8K reports within 4 business days of significant events such as a declaration of bankruptcy, merger, change in the Board of Directors, etc. The 8K is filed with the SEC, and is a public document.

Which of the following statements are TRUE regarding Eurodollar deposits? I Eurodollar deposits are foreign currencies held in banks in foreign countries II Eurodollar deposits are U.S. currency held in banks in foreign countries III The interest rate paid on Eurodollar deposits is based on the Federal Funds Rate IV The interest rate paid on Eurodollar deposits is based on the London Interbank Offered Rate A I and III B I and IV C II and III D II and IV

The best answer is D. Eurodollar deposits are U.S. currency held in banks in foreign countries, mainly in Europe. The Eurodollar market is centered in London - and the interest rate paid on these deposits is the London Interbank Offered Rate - "LIBOR."

Which of the following statements are TRUE regarding a registered individual who recently left the employment of a FINRA member firm? I The individual is allowed to maintain his license at another member firm without being employed by that firm II The individual cannot maintain his license at another member firm without being employed by that firm III The license remains active for an indefinite time period if the individual does not affiliate with another member firm IV The license lapses if the individual remains unaffiliated for 2 years A I and III B I and IV C II and III D II and IV

The best answer is D. FINRA prohibits "parking" of licenses when an individual is not affiliated with a member firm. If that person remains unaffiliated for 2 years, all licenses lapse

A corporation declares a cash dividend on Wednesday, December 1st. The record date is set at Tuesday, December 21st, with the dividend payable on Friday, December 31st. Based on this information, the ex date is set at Friday, December 17th. The "tax event" occurs on: A Wednesday, December 1st B Friday, December 17th C Tuesday, December 21st D Friday, December 31st

The best answer is D. For tax purposes, payments by issuers to securities holders are considered to be received as of the date the issuer sends the check. In this case, the check is sent on Friday, December 31st (payable date), therefore the income is taxable as of this date.

When evaluating the credit of a general obligation bond, the most important consideration would be growth in a municipality's: A sales tax revenue B employment rate C population D property tax collections

The best answer is D. General obligation bonds of political subdivisions are principally backed by property tax collections.

Which of the following statements are TRUE regarding an institution using its endowment as a source of revenues pledged to bondholders? I The endowment fund itself is usually the source of revenue pledged II The earnings on the endowment fund are usually the source of revenue pledged III A water and sewer revenue bond is likely to have an endowment fund IV A hospital revenue bond is likely to have an endowment fund A I and III B I and IV C II and III D II and IV

The best answer is D. Hospitals are often given large monetary gifts - known as "endowments". The hospital invests the endowment funds to generate interest and dividend income. It usually agrees not to invade the principal amount. Thus, the earnings on the endowment funds (NOT the endowment fund itself) are a source of revenue that can be pledged to bondholders under a revenue pledge.

In an oil and gas program which has a disproportionate sharing arrangement, which statement is TRUE? A The general partner agrees not to take a percentage of revenue until all costs are recovered B The general partner takes a percentage from the first barrel produced, without regard to costs C The general partner gets a percentage of defined "net profits" from the first barrel produced D The general partner agrees to bear some costs in return for a greater percentage of oil revenue

The best answer is D. In a reversionary working interest (also called a subordinated royalty interest), the general partner agrees not to take a percentage of revenue until all costs are recovered. In an overriding royalty interest, the general partner takes a percentage from the first barrel produced, without regard to costs. In a net profits interest, the general partner gets a percentage of defined "net profits" from the first barrel produced, but "net profits" as defined usually does not deduct all costs. These arrangements are all "carried interests" because the general partner does not contribute to the cost of finding oil. In a disproportionate sharing arrangement, the general partner agrees to bear some costs in return for a much greater percentage of oil revenue. This is a "working" interest.

Which of the following statements are TRUE about variable annuities? I Investment risk is carried by the purchaser of the annuity II Salespeople must register with both FINRA and the State Insurance Commission III Variable annuities are considered to be securities regulated by the Investment Company Act of 1940 IV Annuity payments may not be reduced because of increased expenses experienced by the insurance company A I and III B II and IV C II, III, IV D I, II, III, IV

The best answer is D. Investment risk in a variable annuity is carried by the purchaser. The issuer gives an expense guarantee, limiting the amount of expenses that the issuer can charge against the contract. To sell variable annuities, both an insurance and a securities registration are required. Variable annuities are considered to be securities because the purchaser bears the investment risk.

Which of the following statements are TRUE about PAC tranches? I PAC tranche holders have lower prepayment risk than companion tranche holders II PAC tranche holders have lower extension risk than companion tranche holders III If prepayment rates slow down, the PAC tranche will receive its sinking fund payment prior to its companion tranches IV If prepayment rates rise, the PAC tranche will receive its sinking fund payment after its companion tranches A I and II only B III and IV only C I, II, IV D I, II, III, IV

The best answer is D. Newer CMOs divide the tranches into PAC tranches and Companion tranches. The PAC tranche is a "Planned Amortization Class." Surrounding this tranche are 1 or 2 Companion tranches. Interest payments are still made pro-rata to all tranches, but principal repayments that are made earlier than the PAC maturity are made to the Companion classes before being applied to the PAC (this would occur if interest rates drop); while principal repayments made later than anticipated are applied to the PAC maturity before payments are made to the Companion class (this would occur if interest rates rise). Thus, the PAC class is given a more certain maturity date and hence lower prepayment risk; while the Companion classes have a higher level of prepayment risk if interest rates drop; and they have a higher level of so-called "extension risk" - the risk that the maturity may be longer than expected, if interest rates rise.

A customer has $10,000 in passive losses from a limited partnership investment. If the customer has $10,000 of passive income for that tax year, the customer may deduct: A 0 B $3,000 C $5,000 D $10,000

The best answer is D. Passive losses (which are derived from direct investments in real estate and limited partnership investments) can only be offset against other passive income. Since there is $10,000 of passive income for this tax year, the $10,000 of passive losses can be deducted in full.

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

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

The requirement for broker-dealers to disclose their privacy policies to customers, and to permit customers to "opt out" of having their information disclosed to third parties, is outlined under SEC: A Regulation SB B Regulation FD C Regulation SK D Regulation SP

The best answer is D. Regulation SP ("Statement of Privacy") requires financial institutions to provide retail customers with a copy of their privacy policies and procedures, including whether customer information is provided to third parties; and requires that customers be given the ability to "opt out" of any such disclosures.

All of the following are types of accounts in which securities transactions can be effected under Regulation T EXCEPT: A Cash account B Margin account C Arbitrage account D Non-securities credit account

The best answer is D. Regulation T defines 3 types of accounts in which securities transactions can occur - a cash account where full payment is required; a margin account where partial payment is required; and an arbitrage account for going "short against the box." A non-securities credit account is an account to do futures transactions (which are NOT securities). These do not fall under Regulation T because they do not hold securities.

Stabilization of new issues is: I a provision of the Securities Act of 1933 II a provision of the Securities Exchange Act of 1934 III permitted at, or above, the Public Offering Price IV permitted at, or below, the Public Offering Price A I and III B I and IV C II and III D II and IV

The best answer is D. Since a stabilizing bid is placed in the trading (secondary) market, the rules for stabilizing bids come under the Securities Exchange Act of 1934. Stabilizing bids are permitted at, or below, the Public Offering Price - never above.

On the same day in a margin account, a customer purchases 1 MNO Jan 45 Call @ $3 and sells 1 MNO Jan 35 Call @ $5. The customer will profit if: I the spread between the premiums widens II the spread between the premiums narrows III both contracts are exercised IV both contracts expire

The best answer is D. Since this is a credit spread, if both positions expire, the customer keeps the credit. If both positions are exercised, he loses the difference between the strike prices minus the credit. To be profitable, a credit spread must be closed out at a smaller debit. Thus, the spread between the premiums must narrow.

How much can a Municipal Finance Professional (MFP) contribute to the "clean up" campaign to pay off campaign debt of an ex-issuer official that is now out of office because she lost the general election? A 0 B $100 C $250 D an unlimited amount

The best answer is D. The MSRB's stance in this situation is that the elected official is now out of office and has no ability to steer municipal securities business to the MFP's firm in return for a large campaign contribution. Because he or she is out of office, the MFP can contribute any dollar amount to the "clean-up" campaign.

All of the following are requirements for a company to move its listing from another market to the NYSE EXCEPT: A 2,200 shareholders B Average monthly trading volume of 100,000 shares C $100,000,000 aggregate market value of outstanding shares D Minimum dividend payout of $5 per share

The best answer is D. The NYSE does not set a minimum dividend payout for a company to move its listing. It does require that the company have 2,200 or more shareholders; an average monthly trading volume of 100,000 shares for the past 6 months; $100,000,000 aggregate market value of outstanding shares; and at least 1,100,000 shares outstanding. Also, there must be a national interest in trading the stock and the company must agree to distribute proxies to be listed.

The Securities Exchange Act of 1934 regulates which of the following markets? I First II Second III Third market IV Fourth A I only B II only C II, III, IV D I, II, III, IV

The best answer is D. The Securities Act of 1933 regulates the new issue (primary) market. The Securities Exchange Act of 1934 regulates the secondary market (the trading market). The trading markets consist of the first market (trading of listed securities on an exchange), second market (over-the-counter trading of securities not listed on an exchange), third market (over-the-counter trading of securities listed on an exchange floor), and fourth market (direct trading of securities between institutions via ECNs and ATSs).

An assessment of an existing client's financial status shows the following: Name:Jack/Jill Miller Ages:57 and 59 Marital Status:Married - 3 Adult Children Income:$80,000 per year Retirement Plan:Yes - Vested Defined Benefit Plan Life Insurance:Yes Risk Tolerance:Low Home Ownership:Yes Client Balance Sheet: Assets Cash on Hand:$22,000 Marketable Securities:$96,000($15,000 in Money Market Fund; $25,000 in Treasury Notes; $56,000 in Blue Chips) Retirement Plans:$458,000(Defined Benefit Plan Valuation) Auto:$39,000 Home Ownership:$404,000 Liabilities Credit Cards Payable:$14,000 Mortgage Payable:$104,000 Net Worth: $901,000 The couple plans to retire in the next year, sell their home and move to a retirement community where a new home will cost $190,000. They wish to supplement their retirement income, which will be approximately $40,000 from their retirement plan and $8,000 from Social Security. The best recommendation to the couple is to take the $300,000 net proceeds from the sale of the home after paying off its mortgage and: A put a $50,000 down payment on the new home, finance the balance of the purchase with a $140,000 mortgage, and invest the remaining cash proceeds of $250,000 in growth common stocks B put a $50,000 down payment on the new home, finance the balance of the purchase with a $140,000 mortgage, and invest the remaining cash proceeds of $250,000 in Treasury STRIPs C pay for the $190,000 new home in full and invest the extra $110,000 in high yield bonds to provide retirement income D pay for the $190,000 new home in full and invest the extra $110,000 in high yielding blue chip preferred stocks to provide retirement income

The best answer is D. The key here is that this couple is looking for additional retirement income. Investing in growth stocks does not provide current income, so this is a bad choice. STRIPs are a zero-coupon government security and also do not provide current income - so this is another bad choice. High yield bond investments provide income (assuming that the bonds do not default); but they are high risk; and this couple has a low risk tolerance. Investing in high yielding blue chip preferred stocks gives income and safety, along with the benefit of a low 15% maximum tax rate on cash dividends received. This is the best of the choices offered.

A customer sells 1 XMI Dec 530 Put @ $8 when the index is at 529.00. The customer is exercised when the index closes at 525.00. The writer must pay: A $30,000 to the holder B $5,000 to the holder C $1,000 to the holder D $500 to the holder

The best answer is D. The put has a strike price of 530. Upon exercise, the index closes at 525, therefore the put is "in the money" by 5 points or $500. The writer must pay this amount to the holder.

A new issue of common stock has a Public Offering Price of $30 per share. The proceeds to the issuer are $29 per share. The management fee is $.10 per share and the selling concession is $.40 per share. The spread is: A $.40 B $.50 C $.90 D $1.00

The best answer is D. This one is pretty simple. The "spread" is the gross compensation to the underwriters. It is the difference between the POP (Public Offering Price) and the amount per share that was received by the issuer. In this case, the POP is $30, and the issuer received $29 per share, so the spread is $1.

All of the following participate in the Eurodollar bond market EXCEPT: A Domestic commercial banks B Foreign commercial banks C Domestic investment banks D Domestic thrift institutions

The best answer is D. Thrift institutions do not operate in the foreign markets. They only conduct business in the State in which they are organized, with their primary purpose being to give mortgages on local real estate, funded by deposits raised locally.Participants in the Eurodollar bond market include both domestic and foreign commercial banks (most domestic commercial banks have large overseas offices); as well as domestic and foreign broker-dealers.

All of the following securities represent ownership of a corporation EXCEPT: A common stock B preferred stock C convertible preferred stock D warrants

The best answer is D. Warrants do not represent ownership of a corporation; only if they are exercised do they represent ownership, since exercise results in the purchase of the common stock of the issuer. Common stock and preferred stock are both securities that represent ownership.

The Third Market is a(n): A auction market B negotiated market C unregulated market D primary market

Explanation The best answer is B. The Third Market is trading of listed securities "over-the-counter." This is a negotiated market. Third Market Makers are firms like Jefferies and Co. or Weeden and Co. They do most of their trading when the NYSE is closed and to trade, one must pick up the phone, call the market maker, and negotiate the price.

If the market price of the underlying security remains the same as the strike price of the option contract, which of the following will have a profit? I The buyer of an "at the money" straddle II The seller of an "at the money" straddle III The seller of an "at the money" call A I only B II only C III only D II and III

Explanation The best answer is D. If the market price remains the same as the strike price, then there is no reason for the holder of an option contract to exercise. The contracts will expire and the holder will lose the premium, while the writer will gain the premium. Sellers of contracts and straddles (the sale of a call and a put on the same stock with the same strike price and expiration) will profit. Holders of contracts and straddles will lose the premiums paid.

ABC 8% $100 par preferred is trading at $120 in the market. The current yield is: A 6.7% B 8.6% C 10.6% D 60.6%

The best answer is A. The formula for current yield is: $8/120 = 6.7%

Which of the following contracts create a diagonal spread? A Long 1 ABC Jan 50 Call; Short 1 ABC Apr 60 Call B Long 1 ABC Jan 50 Call; Short 1 ABC Jan 60 Call C Long 1 ABC Jan 50 Call; Short 1 ABC Apr 50 Call D Long 1 ABC Jan 50 Call; Long 1 ABC Jan 60 Put

The best answer is A. A spread is the purchase and sale of the same class of options. If the spread has different strike prices then it is a vertical spread. If the spread has different expirations, it is a horizontal spread. If both the strike prices and expirations are different then it is a diagonal spread. Choice A is the only example with both expiration and strike price being different.

When must an "at the opening" and an "at the closing" order be filled? I An "at the opening" order is to be filled at the opening price II An "at the opening" order is to be filled as close to the opening time as possible III An "at the close" order is to be filled at the closing price IV An "at the close" order is to be filled as close to the closing time as possible A I and III B I and IV C II and III D II and IV

The best answer is A. An order placed "at the opening" must be filled at the opening price. Orders placed "at the close" must be filled at the closing price or are canceled.

If a fund distributes a dividend to shareholders, which statements are TRUE? I The dividend is taxable if it is taken as a check II The dividend is not taxable if it is taken as a check III The dividend is taxable if it is automatically reinvested in the fund IV The dividend is not taxable if it is automatically reinvested in the fund A I and III B I and IV C II and III D II and IV

The best answer is A. Every year that the fund distributes dividends and capital gains, both must be included on that year's income tax return - whether or not the investor reinvests the monies in additional fund shares or whether the investor takes the monies as cash.

Homeowners will prepay mortgages: I when interest rates fall II when interest rates rise III so they can refinance at lower rates IV so they can refinance at higher rates A I and III B I and IV C II and III D II and IV

The best answer is A. Homeowners will prepay mortgages when interest rates fall, so they can refinance at more attractive lower current rates. They tend not to prepay mortgages when interest rates rise, since there is no benefit to a refinancing.

An analysis of yield curves of U.S. Government and lower medium quality corporate bonds shows the yield spread to be widening over the last 4 months. Based upon investor expectations as evidenced by the widening of the yield spread, an appropriate investment is: A U.S. Government bonds B Medium quality corporate bonds C Long term discount bonds D Long term premium bonds

The best answer is A. If the yield "spread" between Government bonds and lower medium quality corporate bonds is widening, this means that yields on lower grade corporate bonds are higher than normal relative to yields on Government bonds. This occurs because an excess of investors are buying Governments, pushing their yields down; or an excess of investors are selling lower grade corporate bonds, pushing their yields up. This behavior is typical when investors expect a recession. When a recession is expected, there is a "flight to quality." Investors liquidate holdings that are vulnerable in a recession (low grade corporate bonds) and put the money into safe havens such as government bonds.

A customer buys 1 ABC Feb 40 Call @ $2 when the market price of ABC is $39.50. The customer's maximum potential loss is: A $200 B $3,950 C $4,200 D unlimited

The best answer is A. In a falling market, a long call position will expire "out the money" and the holder loses the premium paid. This is the maximum potential loss.

All of the following securities would be used as "collateral" for a collateralized mortgage obligation EXCEPT: A "Sallie Maes" B "Freddie Macs" C "Ginnie Maes" D "Fannie Maes"

The best answer is A. Only mortgage backed pass-through certificates are used as the backing for CMOs - and Ginnie Mae (Government National Mortgage Assn.), Fannie Mae (Federal National Mortgage Assn.), and Freddie Mac (Federal Home Loan Mortgage Corp.) all issue pass-throughs. Sallie Mae issues debentures, and uses the funds to make a secondary market, buying student loans from originating lenders (Sallie Mae stands for Student Loan Marketing Association).

The portfolio management technique that uses a performance benchmark such as a market index that any investments must match is called: A passive management B active management C fundamental management D technical management

The best answer is A. Passive portfolio management relies on the belief that market pricing is efficient and that stock prices are always properly valued. Thus, finding "bargains" is impossible and index funds are appropriate investments for each asset class. Active asset managers believe that specific stocks can be undervalued in the market, and that by selecting these investments in a given asset class, investment performance can be improved.

Which of the following can be distributed by an REIT to its shareholders? I Dividends II Interest III Capital Gains IV Capital Losses A I and III B I and IV C II and III D II and IV

The best answer is A. REITs can distribute net income to shareholders in the form of dividends; and can distribute capital gains under the "conduit" taxation rules of Subchapter M. They cannot distribute capital losses; nor can they distribute "interest."

Regulation T applies to transactions in all of the following securities EXCEPT: A U.S. Government Bonds B American Depositary Receipts C Warrants D Convertible Corporate Bonds

The best answer is A. Regulation T applies to transactions in non-exempt securities - these are the securities that are NOT exempt from the provisions of the Securities Act of 1933; and the Securities Exchange Act of 1934. U.S. Government bonds are exempt. Corporate bonds, American Depositary Receipts and warrants are non-exempt.

A corporation is offering a new issue consisting of 100,000 units at $200 each. Each unit consists of 1 share of preferred stock and a 1/4 warrant to buy one additional common share. A full warrant allows the purchase of an additional common share at $5. If all the warrants are exercised, the corporation will have: A 100,000 preferred shares and 25,000 common shares B 100,000 preferred shares and 50,000 common shares C 200,000 preferred shares and 100,000 common shares D 20,000 preferred shares and 200,000 common shares

The best answer is A. Since each unit consists of 1 preferred issue, 100,000 units X 1 = 100,000 preferred shares. Since a warrant which enables one to buy 1/4 additional share is also attached to each unit, 100,000 units X 1/4 = 25,000 common shares issued if the warrants are exercised.

A customer's portfolio consists of the following positions: Market Value Cost Basis 10000ABCC$500,000 $300,000 10000DEFF$300,000 $500,000 10,000PDQQ$500,000 $500,000 Both the registered representative and the customer believe that while the investments are appropriate for the customer, the market will remain "flat" for the next 3 months. The following options with 3 month expirations are available: ABCC Jan 50 Calls @ $4 ABCC Jan 50 Puts @ $3 DEFF Jan 30 Calls @ $2 DEFF Jan 30 Puts @ $6 PDQQ Jan 50 Calls @ $1 PDQQ Jan 50 Puts @ $1 If the customer wishes to maximize income with minimum risk, and only wants to trade 100 contracts, the best recommendation for the customer is to: A Sell 100 ABCC Jan 50 Calls B Sell 100 DEFF Jan 30 Puts C Sell 100 ABCC Jan 50 Calls and 100 PDQQ Jan 50 Puts D Sell 100 PDQQ Jan 50 Calls and 100 DEFF Jan 30 Puts

The best answer is A. Since this customer owns stock, he or she can derive extra income by selling covered calls against the stock positions. To maximize income, the calls with the highest premiums should be sold - and the ABCC premium of $4 is the highest of the 3 call contracts shown. As long as the market stays flat, the calls will expire and the customer will earn the premium income, If the market rises, the stock will be called away. Since he bought the stock for $30 per share; and the call strike is at $50, if the stock is "called away," the customer will make $20 on the stock, plus will also earn the $4 premium per share. If the stock drops, the calls expire, but it can fall a long ways before the customer loses money (remember, the customer bought the stock at $30 and it is now worth $50).The sale of puts is not consistent with the customer's objective of minimizing risk. If the customer sells puts and the market drops, the customer not only loses on underlying stock position, but the short puts will be exercised, obligating the customer to buy the stock at the strike price - creating a "doubled up" loss in a falling market.

Trades of NYSE listed issues are reported via the A Network A Consolidated Tape B Network B Consolidated Tape C Network C Consolidated Tape D Network D Consolidated Tape

The best answer is A. The Network A Consolidated Tape reports all trades of NYSE listed issues, wherever they occurred. The Network B Consolidated Tape reports all trades of NYSE American (AMEX) and regional exchanged listed issues, wherever they occurred. The Network C tape reports trades of NASDAQ listed issues wherever they occur. There is no Network D tape.

On the same day, in a margin account, a customer buys 1 ABC Jan 45 Call @ $13 and sells 1 ABC Jan 60 Call @ $2. The maximum potential gain is: A $400 B $1,100 C $1,500 D unlimited

The best answer is A. The customer has purchased a long call spread. The positions are: Buy 1 ABC Jan 45 Call@ $13Sell 1 ABC Jan 60 Call@ $ 2 $11Debit If the market rises above $60, both calls will be exercised for a 15 point profit on the stock (buy at $45 and sell/deliver at $60). Since the net premium paid was 11 points, the net gain is 15 - 11 = 4 points. This is the maximum potential gain.

A customer has purchased 200 shares of ABC at $51 per share. The stock is now worth $54 and the customer buys 2 ABC Aug 55 Puts @ $5. The puts are exercised when the market is at $52. The customer's gain or loss is: A $200 loss B $200 gain C $800 loss D $800 gain

The best answer is A. The customer paid $51 per share plus she paid $5 in premiums per share for the put contracts, for a total outlay of $56 per share. If the puts are exercised, the stock is sold for $55 per share, resulting in a 1 point loss per share. Since there are 200 shares involved, the total loss is $200.

A customer buys $100,000 of a new issue 30 year U.S. Government bond at 80. At maturity, the customer will have: A no capital gain or loss B a $2,000 capital gain C a $20,000 capital gain D a $20,000 capital loss

The best answer is A. The discount on all original issue discount bonds (corporate, government and municipal) must be accreted over the life of the bond. If the bond is held to maturity, the entire discount has been accreted and the adjusted cost basis is par. Since the bonds are redeemed at par, there is no capital gain or loss at maturity.

A mutual fund has a net asset value per share of $12.00. The maximum offering price per share is: A $13.11 B $13.85 C $14.30 D $14.56

The best answer is A. The maximum sales charge on a mutual fund is 8.5% under FINRA rules. The formula to find the offering price is: Net Asset Value 100% - Sales Charge %= $12.00/ 100% - 8.5%=$12.00/.915 =$13.11

All of the following are the responsibilities of the registrar EXCEPT the registrar: A distributes dividends, corporate reports, and voting materials B acts as a watchdog over the transfer agent C accounts for the number of shares issued and canceled D maintains the integrity of the record of all shareholder names

The best answer is A. The transfer agent handles the mailings to shareholders - dividends, corporate reports, and voting materials. The registrar acts as a watchdog over the transfer agent and makes sure that any mistakes made by the transfer agent are corrected. The registrar also ensures that all shares are properly accounted for and verifies the integrity of the record of shareholders' names and addresses.

A customer buys 100 shares of ABC stock at $50 and sells 1 ABC Jan 50 Call @ $4 and sells 1 ABC Jan 50 Put @ $3. The customer's maximum potential gain is: A $700 B $4,300 C $9,300 D Unlimited

The best answer is A. This customer has a long stock position with a short straddle. The customer believes that the market will remain flat for the life of the options; and the customer will collect the total premium of $700. If the market rises above $50, the short call is exercised and the short put expires. In this case, the customer must deliver the 100 shares owned for $50 received per share. Since the customer paid $50 per share, the only gain is the combined $700 premium received. On the other hand, if the market falls, the short put is exercised and the short call expires. The exercise of the short put obligates the customer to buy 100 shares of ABC stock at $50, in addition to the 100 shares already owned at $50. In a falling market, the customer will lose on the 200 shares of ABC - with the maximum loss being $50 paid per share x 200 shares = $10,000 - $700 collected premiums = $9,300.

On the same day in a margin account, a customer buys 1 ABC Jan 50 Call @ $5 and sells 1 ABC Jan 60 Call @ $2. The customer will profit if: I the spread between the premiums widens II the spread between the premiums narrows III both contracts are exercised IV both contracts expire A I and III B I and IV C II and III D II and IV

The best answer is A. This is a debit price spread. Debit spreads are profitable if the spread between the premiums widens. At this point, the positions can be closed out at a larger credit. If both positions are exercised, the customer buys the stock at $50 through the long call and delivers it at $60 on the short call for a 10 point gain. Since $3 was paid in premiums, the net gain is $7 or $700. If both positions expire, the customer loses the $3 debit. If the spread narrows below $3, the credit upon closeout will not be enough to cover the $3 debit paid and a loss is incurred.

Which statements are TRUE about non-managed fee based accounts? I The customer must be provided with a disclosure document prior to account opening II The customer must be provided with a disclosure document within 15 business days of account opening III The account must be reviewed at least annually for its appropriateness as a fee based account IV The account must be reviewed at least bi-annually for its appropriateness as a fee based account A I and III B I and IV C II and III D II and IV

The best answer is A. To open a non-managed fee based account (NMFBA) for a customer, a disclosure document must be provided, at, or prior to, account opening. Each account must be reviewed at least annually for its appropriateness for the customer.

A Specialist (DMM) "stops stock" for a floor broker. Which of the following statements are TRUE regarding the Specialist's (DMM's) action? I The Specialist/DMM guarantees the price of the stock II The Specialist/DMM stops trading in the stock III The Specialist/DMM takes this action for a short period of time IV The Specialist/DMM takes this action for the balance of the trading day A I and III B I and IV C II and III D II and IV

The best answer is A. When a Specialist (now renamed the DMM - Designated Market Maker) "stops stock," he gives a guaranteed price for a short time period to a floor trader. The trader is free to try and get a better price, but if he fails, he can return to the Specialist/DMM for the stock at that price. This can only be done for public orders.

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

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

A 65-year old individual has just retired after working for the same employer for 20 years. He will collect an annual pension benefit of $50,000, but is not yet ready to stop working. He has lined up a part-time job that will pay $3,000 this coming year. How much can he contribute to a Traditional Individual Retirement Account for his first year in retirement? A 0 B $3,000 C $6,000 D $7,000

The best answer is B. Because this individual is not yet age 70 ½, he can still contribute to a Traditional IRA - but only based on earned income - not on his pension income. The maximum contribution in 2020 is 100% of earned income, capped at $6,000. In addition, he qualifies for a $1,000 additional catch-up contribution. But all of this is moot, because he only has $3,000 of earned income, so this is the maximum IRA contribution for this year.

Municipal bonds are NOT a suitable recommendation for a(n): A customer in a high federal tax bracket B investment in a qualified retirement plan C customer with substantial income who is moving to a state with a high income tax rate D investment in a custodial account

The best answer is B. Municipal bonds are not suitable for tax deferred accounts such as pension plans and IRAs. These accounts are already tax deferred, so putting taxable investments in them that generate a higher rate of return than municipals is appropriate. Furthermore, these higher returns will compound tax deferred as long as they are held in the pension account. Municipals give a lower rate of return than governments or corporates because of the federal tax exemption on their interest income. They are a bad choice for retirement accounts. Municipal bonds are only suitable for customers in high tax brackets. Also note that income in a custodial account is taxed annually. If the account is in a high tax bracket, municipal bonds can be a suitable investment here as well.

Arrange the following in correct order for a new municipal competitive bid: I Set the interest rate on the bonds II Write the scale III Determine the final reoffering yield IV Obtain information in the marketplace about the likely yields at which the bonds can be sold A I, II, III, IV B IV, II, I, III C II, I, IV, III D III, I, II, IV

The best answer is B. To prepare a municipal competitive bid, the underwriters contact potential customers to see if they have an interest in buying the bonds; and at what yields (Choice IV). This information is used to write the "scale" (Choice II) - these are the average reoffering yields at which the syndicate believes each maturity can be sold. From the scale, the spread is factored in, so that the interest rates to be bid can be set (Choice I). If the bid is won at the interest rates bid, the final reoffering yields are set (Choice III), and the bonds are sold to customers at those yields. Note that the final reofange from the original "writing of the scale" if market conditions have changed.

A customer has an open order to sell 1,000 shares of ABC at $50 Stop. ABC declares a 10% stock dividend. After the ex date, the adjusted order on the member firm's internal order entry system would be: A Sell 1,000 shares of ABC at 45.45 Stop B Sell 1,100 shares of ABC at 45.45 Stop C Sell 1,000 shares of ABC at 50.00 Stop D Sell 1,100 shares of ABC at 50.00 Stop

The best answer is B. When there is a stock dividend or split, the order must be adjusted on the firm's internal order entry book on "ex date." The price of the stock is reduced and number of shares covered by the order is increased. In this case, the 10% stock dividend results in a new price of $50/1.1 = $45.45. Adjusting the order for the 10% stock dividend would result in 1.1 x 1,000 = 1,100 share order.

A "short swing" profit is defined as a profit achieved by an insider who trades his or her company's stock within: A 3 months B 6 months C 9 months D 12 months

The best answer is B. A "short swing" profit is defined as one achieved by an insider (officer, director or 10% shareholder) trading that company's stock within a six month period. Short swing profits must be returned to the corporation under the Act.

An outstanding bond issue which is currently trading at 103 1/4 is callable starting next year at 102. The call premium on the bond issue is: A 3/4 points B 2 points C 2 1/2 points D 3 1/4 points

The best answer is B. A bond "call premium" is simply the price above par at which the issuer has the right to call in the bonds from the bondholders. These bonds are callable at 102, hence the call premium is 2 points.

All of the following statements are true regarding a bond that is "registered to principal only" EXCEPT: A the bond is negotiable B interest coupons are detached from the corpus of the bond C interest payments can be redeemed by anyone D at maturity, the registered owner receives the face amount of the bond

The best answer is B. A registered to principal only bond has a physical certificate with the bond's face amount registered in the owner's name, but interest coupons are attached which are payable to the "bearer." Bearer coupons can be redeemed by anyone. The bonds are negotiable. No new issues have been sold in the U.S. since 1983 - after this point only fully registered or book entry bonds have been issued. However, these bonds still trade in the market (at least until 2023, if the bond had 40 years to maturity).

NYSE MARKET DIARY Yesterday Prev. Day Advanced1866-1526 Declined577-607 Based on the information presented for both days, a technical analyst would conclude that the market: A is in a consolidation phase B breadth indicates a strong bullish trend C breadth indicates a strong bearish trend D is declining and will soon enter an upturn

The best answer is B. Advances sharply outnumbered declines on both days, with many new high prices being set. Thus, the breadth of the market indicates a strong bullish (upward) trend.

Which of the following statements are TRUE regarding joint accounts? I Orders can be given by either party II All parties must enter orders together III Checks can be made out in the name of either party IV Checks can only be made out to all parties together A I and III B I and IV C II and III D II and IV

The best answer is B. Any party in a joint account can enter orders. However, any checks drawn on the account must be made out to all names on the account.

As the initial transactions on the same day in a new margin account, a customer: Buys 1,000 shares of ACME Fund @ $10(Open-end investment company) Buys 10 PDQ Jan 50 Calls @ $5(CBOE listed security) Buys 100 shares of ABC at $50(NYSE listed security) The customer will receive a margin call for: A $10,000 B $17,500 C $18,500 D $20,000

The best answer is B. Both mutual fund shares and option purchases are not marginable - they must be paid in full. For the mutual fund shares, $10,000 is required; for the options, $5,000 ($500 premium per contract x 10 contracts) is required. To buy listed stock, the margin is set at 50%. 50% of $5,000 = $2,500 margin. Thus, the total margin requirement is $10,000 + $5,000 + $2,500 = $17,500.

Cash dividends are received in a long margin account. The cash dividends are credited to SMA for how many days? A 1 day B 30 days C 45 days D 60 days

The best answer is B. Cash dividends received in a margin account are applied against the debit balance (reducing the loan to the customer) and are simultaneously credited to SMA for 30 days. During the 30 day period, the customer can reborrow the dividends, restoring the loan balance to its original amount. After 30 days, the dividends are removed from SMA and represent a permanent reduction of the debit. This treatment of dividend receipts does not vary if the account is restricted; or unrestricted.

Convertible at $10.50 per share Question Text: After the initial offering, the bonds are trading in the secondary market at 105, while the stock is trading at $10. Which statements are TRUE? I Each bond can be converted into 95 shares II Each bond can be converted into 105 shares III The common stock is trading above parity to the current market price of the bond IV The common stock is trading below parity to the current market price of the bond A I and III B I and IV C II and III D II and IV

The best answer is B. Each bond can be converted at $10.50 per share into common stock based on its par value. Therefore, each bond is equivalent to $1,000 par / $10.50 conversion price = 95 shares. The bond is currently trading at $1,050. Based on this price, each share would have to be priced at $1,050 / 95 = $11.05 to be trading at parity. Since the common stock is trading at $10, the stock is below parity and it does not make sense to convert.

A customer buys a municipal bond in the primary market at a discount. Which of the following statements are TRUE regarding the discount and the tax consequence? I The discount must be accreted II The discount may be accreted at the option of the bondholder III The discount is taxable IV The discount is not taxable A I and III B I and IV C II and III D II and IV

The best answer is B. If a customer buys a new issue municipal bond at a discount, the discount must be accreted. Every year, a portion of the discount is "earned" and is taxed as interest income. In this case, since municipal issues are exempt from Federal income tax, no tax is due. As the bond is accreted, its basis is increased yearly by the accretion amount. At maturity, the bond's cost basis has been accreted to par. Since it is redeemed at par, there is no capital gain or loss at maturity.

What is the "intrinsic value" of the following contract? 1 ABC Jan 45 Call @ $4 ABC Market Price = $45 A -$4 B $0 C $4 D $9

The best answer is B. Intrinsic value is the amount by which an option contract is "in the money" - it has nothing to do with the premium. It is the difference between the strike price and market price, if exercise is profitable to the holder. In this case, the holder of the call can buy the stock at the strike price of $45 when the market price is $45, for no profit or loss to the holder. There is no "intrinsic value" in the contract.

Which of the following statements are TRUE regarding a managed limited partnership offering? I The underwriter takes on financial liability in selling the issue II The underwriter takes no financial liability in selling the issue III The offering is effected on a best efforts basis IV The offering is effected on a firm commitment basis A I and III B I and IV C II and III D II and IV

The best answer is B. Managed direct participation program offerings are firm commitments by underwriters who buy the issue and then sell it to the public through a syndicate - the underwriter is said to be "managing" the sale of the offering. An unmanaged direct participation program is one which is sold to investors through wholesalers, acting as agents for the issuer. These offerings are sold on a best efforts basis. The wholesalers take no financial responsibility for the issue.

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

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

The Federal Reserve will loan funds at the discount rate to which of the following? I Savings and Loans II Commercial Banks III Investment Banks IV Insurance Companies A I only B II only C I, II, III D I, II, III, IV

The best answer is B. Only commercial banks are members of the Federal Reserve System. Member banks can borrow reserves from the Fed at the discount rate.

If a municipal bond is purchased regular way on Monday, January 3rd, when does the trade settle? A Tuesday, January 4th B Wednesday, January 5th C Thursday, January 6th D Friday, January 7th

The best answer is B. Regular way settlement for municipal securities takes place T + 2 or trade date plus 2 business days. So, the trade will settle on Wednesday, January 5th.

A distribution of $15,000 is taken from a Coverdell Education Savings Account in a given year, but only $13,000 is used for the beneficiary's qualified education expenses in that year. The tax consequence is: A $2,000 is taxable B $2,000 is taxable and a 10% penalty will be imposed C $15,000 is taxable D $15,000 is taxable and a 10% penalty will be imposed

The best answer is B. Since contributions to Coverdell Education Savings Account are not deductible, normally, distributions from a Coverdell Education Savings Account to pay for qualified education expenses are not taxable. However, if distributions are taken in a given year in excess of the qualified education expenses incurred in that year, then the excess portion is taxable - with the taxable amount being the portion of the distribution that represents the "build-up" in the account above the original contribution amount. This "build-up" was never taxed. In addition, a 10% penalty tax applies as well. The moral of this tale is, use the money in the account to pay for qualified education expenses only; and use it all up for this purpose!

A married couple, ages 55 and 52, with no children, are both employed at DEF Corporation. They have asked for an evaluation of their current portfolio. They have a combined annual income of $200,000 per year and a fully paid home worth $500,000. Their current portfolio shows: $50,000 Common Stock of DEF Corp in a 401K account $100,000 Large Cap Growth Fund $150,000 Government Bond Fund $150,000Corporate Bond Fund $200,000Money Market Fund Both intend to retire in 20 years and are conservative investors, looking for moderate growth and moderate risk. Which of the following recommendations is BEST for this couple? A The current portfolio allocation is consistent with their stated investment objective and risk-tolerance level B The portfolio should be reallocated based on their stated investment objective, reducing the cash and bond percentage by 50% and using the proceeds to buy a small or mid-cap growth mutual fund C The portfolio is overweighted in fixed income securities, which should be completely liquidated and the proceeds used to buy aggressive growth stocks D The current portfolio allocation overexposes the couple to stock-specific risk if the fortunes of DEF Corp. decline in the future

The best answer is B. Since this couple has a stated investment objective of growth with moderate risk, a portfolio that only has about 25% equities and that has 75% fixed income securities is inappropriate - since it will provide income; but little growth. The long-term bond and cash allocation should be reduced and replaced with growth stocks to better balance the portfolio. Choice C is way too speculative for a "conservative investor." Choice D is somewhat true since this couple is investing in their employer's stock - but since the stock only represents 8% of the customer's total portfolio, this is not an excessively large percentage.

Which statements are TRUE about auctions of U.S. Government Bonds? I Bids are accepted on a percentage of par basis II Bids are accepted on a yield basis III Competitive bids are always filled IV Non-competitive bids are always filled A I and III only B II and IV only C II, III, IV D I, II, III, IV

The best answer is B. The Federal Reserve conducts the auctions of new issues of U.S. Government securities for the Treasury. Only "yield" bids are accepted. When the bid is competitive, a yield is specified. The lowest bidders will win the bid; with the high bidders losing out. Smaller bidders may place "non-competitive" bids, which do not specify a yield, but which are always filled at the winning yield for that auction.

Under Rule 144, the Form 144 is filed: I by the seller of the restricted shares II by the buyer of the restricted shares III 10 business days prior of the placement of the order IV at, or prior to, the placement of the order A I and III B I and IV C II and III D II and IV

The best answer is B. The Form 144 is simply a notification to the SEC that stock will be sold in compliance with the Rule - the SEC does not approve of the sale. The Form must be filed by the seller at, or prior to, with the placement of the sell order.

The Securities Exchange Act of 1934 regulates which of the following? I Futures transactions II Securities transactions III Futures brokers IV Securities brokers A I and III only B II and IV only C III and IV only D I, II, III, IV

The best answer is B. The Securities Exchange Act of 1934 does not regulate futures transactions or futures brokers. These are not defined as securities, and this market place is regulated by the CFTC - the Commodities Futures Trading Commission. The Securities Exchange Act of 1934 regulates securities transactions and securities brokers.

A customer buys 1 PHLX British Pound 180 Call @ 5.00 when the Pound is trading at 181. Later, the Pound is trading at 189 and the contract is closed at intrinsic value. The profit is: (Contract size = 10,000 Pounds) A $300 B $400 C $800 D $900

The best answer is B. The contract was purchased at a premium of 5 x a multiplier of 100 = $500. It was closed (sold) at a premium of 9 - the intrinsic value of the contract, therefore the profit is 900 - 500 = $400. The contract is "in the money" by 9 points because the holder has the right to buy the British Pound at 180 ($1.80) when the British Pound is trading at 189 ($1.89).

A customer buys 200 shares of ABC stock at $50 per share and buys 2 ABC Jul 50 Puts @ $4. The puts expire and the customer sells the stock in the market at $60. The customer has a capital gain of: A $800 B $1,200 C $2,000 D $2,800

The best answer is B. The customer has a 10 point gain on 200 shares, which amounts to a $2,000 capital gain. The two put contracts, for which a $4 per share premium was paid, expire worthless resulting in an $800 capital loss. The net capital gain is $1,200.

A customer places an order to sell 100 shares of ABC at the market. The initial execution report shows the trade occurring at $75.50. The firm later discovers that the trade occurred at $75.13. Which statement is TRUE? A The customer will receive $7,550 less any applicable commissions B The customer will receive $7,513 less any applicable commissions C The customer canDKthe trade D The customer will receive $7,513 and can submit a claim to arbitration for an additional $37

The best answer is B. The customer placed a market order to sell which was executed at $75.13. The firm erroneously reported the trade as occurring at $75.50. If there is an error in confirmation (as happened in this case), the customer gets the actual trade price. All the firm must do is send a corrected confirmation to the customer. If the firm made an error in execution, any loss due to the firm's error must be absorbed by the firm.

Third Market Makers that trade NYSE-listed issues OTC: A are not required to report their trades B must report each trade within 10 seconds C must report each trade within 60 seconds D must report each trade within 90 seconds

The best answer is B. Third market makers are over-the-counter firms who trade exchange listed stocks in competition with the exchange Specialists (now renamed DMMs - Designated Market Makers).Equity trade reporting rules are consistent for all markets - trades must be reported by the executing member within 10 seconds of execution during regular market hours.

A 5 year 3 1/2% Treasury Note is quoted at 101-4 - 101-8. The note pays interest on Jan 1st and Jul 1st. If a customer buys 5 T-Notes on Friday, April 4th, when does the settlement occur? A Friday, April 4th B Monday, April 7th C Tuesday, April 8th D Wednesday, April 9th

The best answer is B. Trades of U.S. Government and agency securities settle "regular way" on the next business day. Trades of corporate and municipal securities settle "regular way" 2 business days after trade date.

A bond issue with a single issue date and differing maturities is a: A termbond offering B series bond offering C serial bond offering D combined serial and term bond offering

The best answer is C. A serial bond offering is one with all bonds issued on the same date, but with differing maturities. This compares to a term bond issue, where all the bonds are issued on the same date; and all the bonds mature on the same date. Most municipal bond issues and corporate equipment trust certificates are serial bonds. It allows issuers to schedule principal repayment as an annual budget item.

Which statement is TRUE when a non-qualified variable annuity is annuitized prior to age 59 1/2 under the provisions of IRS Rule 72t? A 100% of each payment will be taxable at ordinary income rates B 100% of each payment will be non-taxable C Each payment received will be partially taxable but the 10% penalty tax will not be applied D Each payment received will be partially taxable and the 10% penalty tax will be applied

The best answer is C. Instead of taking a lump sum distribution, the owner of a variable annuity contract can "annuitize" and receive annuity payments for life. Each payment has 2 components - an earnings portion that is taxable and a return of capital portion (cost basis) that is not taxable. The non-taxable portion represents the return of the original investment that was made with "after tax" dollars. IRS Rule 72t gives a way for payments to be taken from the annuity prior to age 59 1/2 without the 10% penalty tax being applied. Rule 72t basically requires that annual payments deplete the account over that individual's expected life (the IRS has 3 approved methods for this). The rule also requires that a minimum of 5 annual "Substantially Equal Periodic Payments" (SEPPs) be taken, but that payments must continue until at least age 59 1/2.

The collateral backing private CMOs consists of: A private placements offered under Regulation D B mortgage bonds issued by corporations C mortgage backed securities issued by government agencies and the bank-issuer D mortgages on privately owned homes and apartments

The best answer is C. Private CMOs (Collateralized Mortgage Obligations) are also called "private label" CMOs. Instead of being backed solely by mortgages guaranteed by Fannie, Freddie or Ginnie, they are backed by a mix of these agency mortgages and "private label" mortgages - meaning mortgages that do not qualify for sale to these agencies (either because the dollar amount of the mortgage is above their purchase limit or they do not meet Fannie, Freddie or Ginnie's underwriting standards). If the bank issuer wants to offer a CMO with a higher yield, it will increase the proportion of "private label" mortgages included in the CMO. Of course, along with a higher yield comes higher risk.

All of the following statements are true about Regulation NMS EXCEPT: A the "Order Protection Rule" requires that all orders be protected and receive the best execution price during normal market hours B market makers are obligated to display customer limit orders at the same or better price than the market maker's quote C all exchange listed, NASDAQ and OTC stocks are subject to the rule D quotes from all markets must be consolidated to display a National Best Bid and Offer (NBBO) for each covered security

The best answer is C. Regulation NMS requires all market centers to electronically link and provide automated execution at the best price of all markets within 1 second for orders that are executable. It mandates that market centers cannot discriminate against customers who access their quotes. It requires that markets have procedures in place to prevent trade-throughs - which is "trading through" another market's better priced quote (the same thing as executing an order at an inferior price in that market). This is called the Order Protection Rule (Rule 611). Regulation NMS requires market makers to display all customer orders that are at the same or better price than the market maker's price. This is called the Limit Order Display Rule (Rule 604). Thus, market makers cannot bury customer orders and must show all trading interest. Regulation NMS only applies to exchange listed and NASDAQ stocks. These are called the NMS stocks. It does not apply to OTC stocks - therefore Choice C is incorrect. To make sure that orders for NMS stocks are protected and filled at the best price, quotes for that stock must be collected from each market, aggregated and displayed, so that the NBBO (National Best Bid and Offer) is shown.

A representative who has a bank as a client is permitted to borrow from that bank: A under no conditions . B as long as the loan is documented in writing C as long as the loan is offered on the same terms and conditions as those that apply to the general public D without restriction because the bank is an institutional lender

The best answer is C. Representatives are prohibited from borrowing from their clients. However, there are permitted exceptions to the rule: Representatives are permitted to borrow from immediate family members who are clients (such as a husband borrowing from a wife or vice-versa); and Representatives are permitted to borrow from banks who are clients, as long as the terms and conditions of the loan are the same as those given to the general public.

Unit Investment Trusts issue securities that are: A negotiable B fungible C redeemable D transferable

The best answer is C. Unit Investment Trusts under the 1940 Act issue redeemable securities. The wording in the prospectus says something like: "The sponsor currently makes a market in trust units, intends to continue making a market in trust unit, but is under no obligation to make a market in trust units." There is no trading of UITs - they are not negotiable. They are bought from the sponsor and redeemed with the sponsor. Fungible is a term for "interchangeable." For example, 5 $1 bills are fungible with a $5 bill. It does not relate to securities.

Which technical indicator is considered to be bearish? A Head and shoulders "bottom" formation B Saucer formation C Breakout through a support level D Oversold market

The best answer is C. A bearish technical indicator is a breakout through a support level. If a stock moves through a support level, it is breaking out to the downside. A head and shoulders "bottom" formation is bullish since the market has bottomed out and is trending upwards. A "saucer" formation is bullish since the market has bottomed out and is trending upwards. If the market is "oversold," this means that sellers have pushed prices down too low. Thus, the market is underpriced and ready to move higher (bullish).

Which of the following securities are generally traded "Over-the Counter"? I Treasury issues II Municipal issues III Corporate debt issues IV Options A I only B II and III only C I, II, III D II, III, IV

The best answer is C. All trades in Treasury issues and municipal bonds are effected "over-the-counter." The vast majority of corporate debt also trades "OTC," with the exception of a small amount of bond trading performed on the NYSE. All options trades are effected on exchanges, the CBOE being the largest options exchange. The other exchanges that trade options are the AMEX (American Stock Exchange), PHLX (Philadelphia Stock Exchange), and PSE (Pacific Stock Exchange - now renamed the ARCA exchange).

An "inverted saucer" formation is a(n): Incorrect answer A. You chose this answer. A uptrend B downtrend C reverse upward trend D reverse downward trend

The best answer is C. An inverted saucer is bearish since the market has topped out and is trending down. It is an uptrend that has reversed itself.

Which of the following money market instruments is issued by corporations? A Treasury Bill B Repurchase Agreement C Commercial Paper D Prime Banker's Acceptances

The best answer is C. Commercial paper is corporate money market debt which is NOT eligible for Fed trading. Treasury bills are issued by the U.S. Government. Repurchase agreements are entered into between Government securities dealers; and banker's acceptances are issued by commercial banks.

Which CMO tranche has the least certain repayment date? A Planned Amortization Class B Plain Vanilla C Companion Class D Targeted Amortization Class

The best answer is C. Companion classes are "split off" from the Planned Amortization Class (PAC) and act as buffers absorbing prepayment and extension risk prior to this risk being applied to the PAC tranche. The PAC, which is relieved of these risks, is given the most certain repayment date. The Companion, which absorbs these risks first, has the least certain repayment date. A Targeted Amortization Class (TAC) is like a PAC, but is only buffered for prepayment risk by the Companion; it is not buffered for extension risk.

A 65-year old retired teacher living on a pension has $200,000 invested in 2 year certificates of deposit that are yielding 4%. $20,000 of the CDs are maturing and the customer wants to diversify into an investment that gives a higher return and a moderate level of risk. The BEST recommendation would be: A High yield corporate bonds B Treasury strips C Equity REITs D Income bonds

The best answer is C. Equity REITs tend to pay a high dividend yield, since they are structured to generate net rental income. Because the underlying real estate investments are diversified, the risk level is moderate. This is the best of the choices offered. High yield bonds (junk bonds) have a very high risk of default and thus are unsuitable. Treasury Strips are zero-coupon Treasuries that do not provide current income and thus are unsuitable. Finally, Income bonds only pay interest if the issuer has high enough net income, so there may not be any "income."

Customers A, B, C and D have their portfolio assets allocated as follows: Money Markets15%5%5%0% Treasury Bonds40%10%20%20% Speculative Bonds10%30%10%30% Blue Chip Equities15%15%20%10% Small Cap. Equities10%10%30%5% EmergingMarkets10%20%10%30% REITs0%10%5%5% Which customer's portfolio is MOST susceptible to a cyclical economic downturn? A Customer A B Customer B C Customer C D Customer D

The best answer is C. In a cyclical economic downturn, the hardest hit asset group is stocks. Since earnings fall greatly in a downturn, so do stock prices. Also hard hit are speculative grade bonds, which can default. Portfolio C is the one that is most heavily invested in equities, so it would suffer the most in an economic downturn.

A 65-year old man is retired and living on social security. He is married and his wife does not work. The client has inherited a small amount of money that he wishes to invest. What should you recommend as an investment? A Individual securities B Variable annuities C CDs D Bond funds

The best answer is C. It would be nice to have more information, such as the customer's investment objective and risk tolerance, but that is not given. Since this is a retired individual living on social security, he really does not have investment funds that can be put into risky assets. The safest asset given is CDs, which would provide extra income and safety of principal. You might argue that a bond fund could be recommended, but the NAV of a bond fund will decline in a rising interest rate environment, so there is the risk of loss of principal. This is not the case with a CD.

Seventy five basis points are equal to: I $ .75 per $1,000 II $7.50 per $1,000 III .75% IV 7.5% A I and III B I and IV C II and III D II and IV

The best answer is C. One basis point is .01% of interest. 100 basis points equals 1% of interest. 75 basis points equals .75%, which is the same as $7.50 per $1,000 face amount on a bond.

28.88 Close and 2.75 Premium The American Hospital May 30 Put premium has time value of: A 0 B 1.12 C 1.63 D 2.75

The best answer is C. The American Hospital May 30 Put is in the money by 1.12 points (the market price is 28.88). The total premium for the contract is 2.75 points. The time premium is the excess above intrinsic value, which is 1.63 points.

Which of the following orders are accepted on the NYSE automated trading system? I Day orders II Market orders III Limit orders IV Large Block orders A I only B II and III only C I, II, III D I, II, III, IV

The best answer is C. The Super Display Book system cannot handle any size order. There are maximum order sizes (e.g., 3,000,000 shares for limit orders). The system accepts market and limit orders. It only accepts Day orders - any longer term order can only be accepted by that member firm into its internal system and routed to the NYSE as a new Day order each day.

A customer calls and places an order to "Buy 200 shares of ABC at the Market" and the order is executed. 20 minutes later, the customer calls and says that she has changed her mind and does not want the stock. The registered representative should: A break (reverse) the trade by taking the position to the house account for close-out by the member firm B journal the position into another customer's account over which the registered representative has discretionary authority C inform the customer that she owns the stock and can enter an order to sell it if she so desires D buy back the position from the customer under the provisions of the SEC "Buy Back Rule"

The best answer is C. The customer cannot just change his or her mind after having placed an order that has been properly filled by the firm. The execution is binding on both the firm and the customer. The customer now owns the stock and can choose to sell it, if he or she so wishes.

Which of the following are functions of the transfer agent? I Mailing dividend payments to shareholders II Canceling old shares and issuing new shares III Preparing and mailing proxies IV Setting the Declaration Date A I and II B III and IV C I, II, III D I, II, III, IV

The best answer is C. The declaration date is set by the Board of Directors of the company. The transfer agent cancels old shares and issues new shares; and mails voting materials (proxies), annual reports, and dividend payments to the shareholders.

Under Regulation D, all of the following are accredited investors EXCEPT a(n): A investment company B trust with assets in excess of $5,000,000 whose purchase is directed by a sophisticated person C partnership with assets in excess of $5,000,000 formed for the specific purpose of acquiring the securities offered D savings and loan institution

The best answer is C. There is no limit on the number of accredited investors that can purchase a private placement under Regulation D. Regarding institutional investors, any investment company, insurance company, bank, or savings and loan is accredited. A non-profit organization, trust, or institutional investor is accredited if it has at least $5,000,000 of assets and was NOT formed with the intent of buying the private placement. The idea here is that people could attempt to get around the 35 non-accredited investor limit by having these non-accredited investors contribute to a trust that would buy the issue. If the trust accumulated $5,000,000 for investment, it would be accredited. But the rule disallows this if the trust is formed for the purpose of buying the private placement!

Under FINRA rules, which of the following statements are TRUE regarding research reports? I The research report must be filed with FINRA II The research report does not have to be filed with FINRA III The research report must be approved by a supervisory analyst IV The research report does not have to be approved by a supervisory analyst A I and III B I and IV C II and III D II and IV

The best answer is C. There is no requirement to file research reports with FINRA, nor to obtain FINRA approval before sending out the report. However, FINRA rules require that a research report be prepared or approved by a supervisory analyst.

A registered representative wishes to place an announcement in the newspaper that simply includes the firm's name; the representative's name; and the following statement: "For information on investing in options,please call 1 - 800 - FOR - OPTIONS". In order to place the advertisement: A approval must be obtained from the Branch Office Manager prior to use B approval must be obtained from the Options Exchange at least 30 days prior to use C approval must be obtained from the firm's designated Registered Options Principal prior to use D no prior approval is required

The best answer is C. This is an advertisement, which must be approved in advance of use by the firm's designated Registered Options Principal (designated ROP). This is the main office compliance ROP. Approval of advertising is not performed by the Branch Office Manager (BOM). The BOM is responsible for approving new options accounts, approving options orders, and general account supervision.

Which of the following options strategies would be considered a covered call? A Long 1 ABC Jan 50 Call; Long 1 ABC Jan 50 Put B Long 1 ABC Jan 50 Call; Long 2 ABC Jan 50 Puts C Short 1 ABC Jan 50 Call; Long 100 ABC stock @ $50 D Short 1 ABC Jan 50 Call; Short 100 ABC stock @ $50

The best answer is C. To be covered, a call writer can sell a call contract against the underlying long physical security position. If the market rises, the call is exercised and the call writer delivers the long stock position that is owned.

An individual who maintains a Keogh Plan is approaching the age of 72. Which statement is TRUE? A Distributions from the plan must commence on the date that the individual reaches the age of 72 B Distributions from the plan must commence on April 1st prior to the year the individual reaches the age of 72 C Distributions from the plan must commence on April 1st following the year the individual reaches the age of 72 D Distributions are not required, but may be taken at the discretion of the individual

The best answer is C. Under the Keogh rules, any distributions from a Keogh Plan must start no later than the April 1st following the year that the individual reaches the age of 72.

Selling short against the box: A turns a short term gain into along term gain B defers taxation of a gain to the next year C locks in a gain and is taxable that year D eliminates taxation of a gain

The best answer is C. When an individual sells stock short which he owns, this is termed "short against the box." This locks in a capital gain, however, under 1997 tax law revisions, any gain is taxable at this point. Thus this strategy generally cannot be used to defer taxation of a gain.

Which of the following choices best describes an investor "selling short against the box"? A An investor sells stock short which he doesn't own B An investor sells stock long C An investor sells stock short which he owns D An investor buys stock which he immediately sells at a profit

The best answer is C. When an individual sells stock short which he owns, this is termed "short against the box." This locks in a capital gain, however, under 1997 tax law revisions, any gain is taxable at this point. Thus this strategy generally cannot be used to defer taxation of a gain.

To open a margin account: A no signature of the customer is required B a customer signature must be obtained on the hypothecation agreement prior to placing the first order in the account a customer signature must be obtained on the hypothecation agreement at, or prior to confirmation of the first transaction in the account D a customer signature must be obtained on the hypothecation agreement at, or prior to settlement of the first transaction in the account

The best answer is D. The rule for signing a hypothecation agreement when opening a margin account is interesting - it permits margin accounts to be opened over-the-phone or on line, if the firm chooses to do so! As long as the firm has the signed margin agreement by settlement of the first trade, all is good! So a potential client can be solicited to open a margin account; the representative can take a trade immediately at execute it; and the customer is sent the hypothecation agreement by overnight mail for signature and return with an enclosed overnight envelope. As long as the firm has the signed margin agreement back by settlement, which is T + 2, everything is in order!

Which of the following securities is NOT directly interest rate sensitive? A Utility Stocks B Corporate Bonds C Preferred Stocks D Growth Stocks

The best answer is D. Utility stocks are directly interest rate sensitive since utilities have an extremely large portion of their capitalization as debt. If interest rates rise, as the utilities refund maturing debt, their interest costs increase, depressing earnings and therefore the stock price. Preferred stocks and bonds are directly interest rate sensitive because they pay a fixed dividend or interest rate. If interest rates rise, their prices must fall to provide comparable market yields; and vice-versa. Common stocks and growth stocks are priced primarily on future expectations of earnings for these companies. They are not directly interest rate sensitive.

Which statements are TRUE if a customer's account is frozen? I No trading can occur during the freeze period II Trading is permitted during the freeze period III The freeze period lasts for 30 days IV The freeze period lasts for 90 days A I and III B I and IV C II and III D II and IV

The best answer is D. When an account is "frozen," for a 90 day period, the customer must pay cash in advance to buy. If the customer wishes to sell, the security must be delivered to the broker before the sell order is entered. There is no prohibition on trading during such a "freeze" - the customer must simply pay in advance, instead of paying "promptly, but no later than S + 2" (regular way settlement of 2 business days + 2 additional "grace" business days).

All of the following are broad based index option contracts EXCEPT: A Major Market Index B Standard and Poor's 100 Index C Value Line Index D Japan Index

The best answer is D. A narrow based index option is either country specific or industry specific. Broad based index options cover a variety of companies in many different industries. The Japan index option is narrow based; the Major Market index option, Standard and Poor's 100 index option, and Value Line index option, are all broad based.

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

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

Which of the following statements are TRUE about Eurodollar bonds? I The bonds are issued in the U.S. II The bonds are issued outside the U.S. III The purchasers are U.S. residents IV The purchasers are foreign residents A I and III B I and IV C II and III D II and IV

The best answer is D. Eurodollar bonds are issued outside the U.S. and are purchased by foreigners. These bonds are denominated in, and make payment in, U.S. dollars. The bonds are not registered for sale in the U.S.

All of the following procedures are required to open a Portfolio Margin account EXCEPT: A the account must be approved by the designated ROP for uncovered options writing B the customer must receive a copy of the risk disclosure document at, or prior to, account opening . C the customer must sign an acknowledgment that he or she has read and understands the risk disclosure document D the account must be approved by the CBOE or FINRA for exemption from Regulation T margin requirements

The best answer is D. FINRA requires that a portfolio margin account be opened as an options account that is qualified for naked options writing. This requires a more-detailed suitability determination and requires not only branch manager approval, but also separate approval of the designated Registered Options Principal (this is the "main office" ROP in charge of compliance as opposed to a regular branch manager-ROP). The customer must be provided with a portfolio margin risk disclosure document at, or prior to, the initial transaction in the account and must sign an acknowledgment that he or she has read and understands the disclosure document prior to the initial transaction in the account. There is no requirement for the member firm to get each customer account approved by the CBOE or FINRA

All of the following are true about confirmation disclosure in agency transactions EXCEPT the: A identity of the other party in the transaction must be made available to the customer B time of the transaction must be made available to the customer C remuneration earned by the firm in the transaction must be disclosed on the confirmation D time of confirmation must be made available to the customer

The best answer is D. In an agency transaction, the commission must be disclosed on the confirmation; the confirmation must also make available the name of the other party to the trade and the time of the trade. The "time" of confirmation is irrelevant.

A customer wishes to buy $3,000 of call options as the initial transaction in a new margin account. The customer must deposit: A $1,500 B $2,000 C $2,500 D $3,000

The best answer is D. Listed option contracts are not marginable - they must be paid in full. 100% of $3,000 = $3,000 deposit.

Under Regulation M, which statement is FALSE regarding stabilizing bids entered by market makers? A Only the syndicate manager placed a stabilizing bid B There is no time limitation on the period that a stabilizing bid can be maintained C A stabilizing bid cannot be placed unless a "Notice of Stabilization" is included in the prospectus D A stabilizing bid can be placed at any price that is reasonably related to the market

The best answer is D. Only 1 stabilizing bid, placed by the manager, is permitted at any time after registration becomes effective. The stabilizing bid is placed at, or just below the Public Offering Price. It can never be placed above the P.O.P. There is no time limitation on the period that a stabilizing bid can be maintained under Regulation M. However, stabilization must cease when the syndicate is broken by the manager. A "Notice of Stabilization" must be included in the prospectus (on the inside front cover) that details the fact that the manager can start and stop stabilizing at any time and that when stabilization stops, the price of the issue may drop.

All of the following are actively traded in the secondary market EXCEPT: . A Real estate investment trusts B Closed end funds C Corporate stock D Mutual funds

The best answer is D. REITs, closed end funds, and corporate stock are listed on exchanges or OTC and are traded like all other stocks. Mutual funds (open-end funds) are redeemable with the sponsor - they do not trade.

A customer has a cash account holding $160,000 of securities and $340,000 of cash. If the broker-dealer were to fail, which statement is TRUE regarding the status of the account in an SIPC liquidation? A SIPC will provide coverage for the $160,000 of securities only B SIPC will provide coverage for the total of $500,000 of securities and cash C SIPC will provide coverage for only $250,000 of cash D The customer will become a general creditor in the amount of $90,000

The best answer is D. SIPC covers customer claims against a failed broker-dealer for a total of $500,000, inclusive of maximum cash coverage of $250,000. For any claims above these limits, the customer becomes a general creditor of the failed broker-dealer. This customer has $160,000 of securities (covered in full) and $340,000 of cash (covered only for $250,000), for total coverage of $410,000. For the remaining $90,000 of cash not covered, the customer becomes a general creditor.

A customer short margin account shows: 100 shares of ABC @ $45300 shares of DEF @ $50 Credit = $45,000 SMA = $15,750 Reg. T = 50% How much in other listed stocks can be purchased or sold short? A $5,000 B $7,875 C $15,750 D $31,500

The best answer is D. The account only needs equity of 50% of the short market value or in this case: Credits-Short Market Value=Equity %$45,000 $19,500 $25,500 131% The equity needed for the account to be at 50% is only $9,750. Credits-Short Market Value=Equity%$45,000 $19,500 $9,75050% Since the account has $25,500 of equity, the excess equity is $15,750. This amount can be borrowed as cash; or it can be used to purchase or sell short twice this amount - $31,500 - of marginable securities.

The bond counsel will review which of the following to ascertain if a municipal issuer has the authority to sell bonds? I State constitution II Validity of the signatures of the issuer's representatives III Enabling legislation IV Local statutes and judicial opinions A I and II B III and IV C I, III, IV D I, II, III, IV

The best answer is D. The bond counsel will review all of the choices given to ascertain if a municipal issuer has the authority to sell bonds - the State constitution which gives those powers; any enabling legislation which affects the issuance of new bonds; any court opinions that are relevant; and the counsel will ascertain that the issuer's representatives are authorized to sell the bonds.

A selling dealer offering municipal bonds "firm for 1/2 hour with a 5 minute recall" means all of the following EXCEPT: A prices for bonds that are offered can't be changed for a stated period B the selling dealer has specified that he can recontact the buying dealer to reinstate a different price within a certain time period C the buying dealer can try and "round up" a customer for the bonds before the dealer actually purchases the bonds D the selling dealer has the right to rescind the price at any time

The best answer is D. The selling dealer offering the bonds "firm" means that for a stated time period the price will not be changed. These bonds are offered firm for one-half hour; during this time period that buying dealer can try and round up a customer for the bonds before actually purchasing them. The selling dealer also specifies a "five minute recall." This means that during the half hour, the selling dealer can recontact the buying dealer to tell him that he has five minutes to buy the bonds at the offered price or else the quote will be changed.

An assessment of a new client's financial status shows the following: Name:Jim/Jane Smith Ages:42 and 38 Marital Status:Married - No Children Income:$82,000 per year - both work Retirement Plan:No Life Insurance:No Risk Tolerance:Low Client Balance Sheet Assets Cash on Hand:$8,000 Marketable Securities:$61,000($22,000 in Money Market Fund; $39,000 in Treasury Bonds) Auto:$39,000 Home Ownership:$200,000 Liabilities Credit Cards Payable:$5,000 College Loan:$22,000 Auto Loan:$25,000 Mortgage:$160,000 Net Worth: $96,000 The wife informs you that she is pregnant, and that she will stop working to take care of the child. The couple wishes to begin to set aside money for the child's higher education expenses and wishes to minimize current taxes. Which recommendation would be most appropriate for this couple? The $39,000 Treasury Bond investment should be: A used to pay off the Auto Loan and the College Loan and a Second Mortgage should be taken on the house with the proceeds used to open a cash account that will purchase blue chip stocks B reallocated to a 50/50 mix of STRIPS and Treasury Bonds held in the same account C reallocated in full to aggressive growth stock investments in a Custodial account opened for the child to provide for future college education expenses D partially used to buy a $200,000 life insurance policy on the husband at an annual premium of $1,000 and to open an IRA account investing in growth stocks by making the maximum annual contribution

The best answer is D. This couple is looking to fund the child's college expenses (which will start in 18 years) and are looking to minimize taxes. The best option is to place the $39,000 proceeds from the sale of the Treasury bonds into a tax deferred vehicle, such as an IRA account. Custodial accounts do not grow tax deferred, so this is not the best choice. Furthermore, since the husband is currently 42 years old, when the monies are withdrawn 18 years from now to start paying for college, he will be age 60 and no penalty tax will be due (only regular taxes are due for withdrawals after age 59 1/2). Investing in stocks in a cash account or changing the bonds owned in the existing account does not give any tax benefit. Also, these customers currently have no insurance, but they have a big mortgage and other long-term liabilities such as a college loan and a car loan. If one should die, the other would have to work and care for the child, and there might not be enough income to make the monthly payments on these debts. Thus, buying enough life insurance to cover these liabilities is a prudent measure.

Under MSRB rules, all of the following statements are true regarding a broker-dealer recommending municipal securities EXCEPT: A the broker-dealer must have reasonable grounds for making any recommendation B the broker-dealer must have reasonable grounds to believe that the recommendation is suitable for the customer C if the customer refuses to disclose significant financial information, no recommendation can be made D if the customer refuses to disclose significant financial information, recommendations can still be made

The best answer is D. Under MSRB rules, when recommending municipal securities, the broker-dealer must have reasonable grounds for making any recommendation; the broker-dealer must have reasonable grounds to believe that the recommendation is suitable for the customer; and if the customer refuses to disclose significant financial information, no recommendation can be made. While it may be the case that a customer wishes to keep his or her financial information private, if he or she fails to provide sufficient information about his or her financial status or investment objectives, recommendations cannot be made. However, unsolicited transaction are still permitted.

In a new corporate bond offering, the lead underwriter selects syndicate members based upon: I geographic location II track record III financial capability IV historic relationships A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is D. When selecting underwriters in a corporate offering, the manager will consider the track record of that firm in previous underwritings; whether the firm has sufficient capital to handle its portion of the offering; whether the firm has participated in underwritings with that manager in the past and; the geographic location of the syndicate members. Geographic location is important because the manager wants to reach as many potential investors as possible.

Which of the following strategies has unlimited loss potential? A long stock/short call B long stock /long put C short stock/long call D short stock /short put

The best answer is D. With a long stock position, the maximum loss is the value of the stock. With a short stock position, the potential loss is unlimited. If a long call is purchased against a short stock position, the upside loss is limited. If a short put is sold against a short stock position the upside loss is still unlimited since in a rising market the short put will expire "out the money." The short stock position must be covered by purchasing the stock at the higher market price - and the price can rise an infinite amount.