STC Series 7 Greenlight Exam 2

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Relative to a corporate bond purchased at a discount, place the following in the proper order from lowest to highest yield. I. Current yield II. Nominal yield III. Yield to maturity A. I, II, and III B. II, I, and III C. III, I, and II D. III, II, and I

A bond trading at a discount has a nominal yield that is less than its yield to maturity. Current yield falls between the nominal yield and yield to maturity. A bond trading at a premium has a nominal yield which is higher than the yield to maturity, with the current yield in between the other two yields.

An investor purchases $200,000 of an inverse ETF. If the underlying index appreciates by 10% on the first day, but then depreciates by 5% on the second day, the value of the investment will be: A. $189,000 B. $190,000 C. $210,000 D. $209,000

A. $189,000 An inverse ETF is designed to return the inverse (opposite) of the performance of an underlying index. In this case, the first day's 10% increase in the underlying index should result in a 10% decrease in the value of the investment ($200,000 x 10% = a $20,000 decline to $180,000). The second day's 5% decrease in the index will result in a 5% increase in the value of the investment ($180,000 x 5% = a $9,000 increase to $189,000).

The OTC Bulletin Board (OTCBB) is BEST defined as A. A quotation system for securities that are not listed on either the NYSE or Nasdaq B. An exchange for securities that are not listed on either the NYSE or Nasdaq C. An execution system for securities that are not listed on either the NYSE or Nasdaq D. A quotation system for securities that are listed on the NYSE or Nasdaq and traded in the OTC market

A. A quotation system for securities that are not listed on either the NYSE or Nasdaq The OTC Bulletin Board (OTCBB) is a quotation system for securities that are not listed on either the NYSE or Nasdaq. The OTCBB has no listing requirements and it's not an exchange. The system doesn't provide the execution services; instead, the equity traders from broker-dealers can either contact the dealer that has provided the quote by telephone or through a proprietary electronic delivery system. The companies whose stock is quoted on the OTCBB either don't meet the requirements for listing on an exchange or they've been delisted from an exchange. A similar system is the Pink Marketplace. The third market refers to exchange-listed securities that are traded over-the-counter or away from traditional exchanges.

Which of the following statements is TRUE regarding stock dividends? A. A stock dividend increases the number of shares the holder will own. B. A stock dividend creates a current tax liability when the shares are received. C. A stock dividend can only be paid if the company pays a cash dividend. D. A stock dividend will increase the owner's cost basis per share.

A. A stock dividend increases the number of shares the holder will own. The only true statement is that a stock dividend increases the number of shares the holder will own. A stock dividend reduces the cost basis per shares of an investor's overall stock position. The tax liability for the additional shares received is only realized when the shares are subsequently sold. A company can pay a stock dividend regardless of whether a cash dividend has been paid.

Stocks are considered in good deliverable form if: A. Both the certificates and the stock power are included with a signature guarantee B. The stock power has been notarized C. The stockholder endorses the certificate with his legal name without a signature guarantee D. Validated by the broker-dealer

A. Both the certificates and the stock power are included with a signature guarantee Technical analysts use price and trading volume information. Advance/decline data, chart patterns, and market momentum calculations are all methods used in analyzing this type of information. Dividend payout ratios would be important to a fundamental analyst

Which of the following investors typically are entitled to vote? A. Common stockholders only B. Common and preferred stockholders only C. All stockholders and convertible bondholders D. All stockholders and senior debt holders

A. Common stockholders only While both common and preferred stockholders are considered owners of the company, typically only the common stockholders may vote. Bondholders do not typically have voting rights

From the issuer's perspective, when comparing serial bonds to term bonds, serial bonds have: A. Declining interest payments and declining principal amounts B. Increasing interest payments and increasing principal amounts C. Stable interest payments and stable principal amounts D. Stable interest payments and declining principal payments

A. Declining interest payments and declining principal amounts Serial bonds have several (a series of) maturity dates with a lower amount of debt outstanding as time goes by. Each series of bonds will have declining interest payments and declining principal amounts. In comparison, term bonds have one maturity date (i.e., the entire principal balance is paid on one date) and have stable interest payments.

In most cases, municipal bond investors may obtain which TWO of the following choices? I. Reduced interest-rate risk by investing in issues with different maturities II. A federal tax exemption by investing in private activity bonds III. A state and local tax exemption by investing in bonds in their state of residency IV. A reduced risk of default by investing in bonds in their state of residency A. I and III B. I and IV C. II and III D. II and IV

A. I and III Municipal bond investors can obtain reduced interest-rate risk by investing in issues with different maturities. Bonds with short-term maturities will only experience a small decline in price if the general level of interest rates increases. Although most municipal bonds are exempt from federal income tax, they are not exempt from state income tax unless the owner is a resident of the state that issued the bonds, and the state elects not to tax the purchaser of the bond. The interest on municipal private activity bonds is subject to federal income tax if the investor is subject to the alternative minimum tax (AMT). The risk of default is not reduced by investing in bonds in the investor's state of residency.

Which TWO of the following choices are the greatest risks of owning Treasury securities? I. Interest-rate risk II. Liquidity risk III. Inflationary risk IV. Credit risk A. I and III B. I and IV C. II and III D. II and IV

A. I and III Of the choices listed, the greatest concern would be interest-rate risk, the risk that an increase in interest rates could cause the bond price to fall, and inflationary risk, the risk that inflation would erode the investor's purchasing power. When invested in a fixed-income security, an increase in inflation may be detrimental. Note: If Treasury Inflation-Protected Securities (TIPS) were being considered, they would be adjusted for the inflation rate. The Treasury market is generally a liquid market (being able to sell quickly). Treasury bonds are backed by the U.S. government. (They have little or no credit risk.)

A company is in the process of an initial public offering. The issuer has asked what action it would need to take in order to register the securities in nine states. It is important for the issuer to make sure the: A. Issuer has registered the securities in all nine states B. Registered persons offering the securities are registered in all nine states C. Broker-dealers offering the securities are registered in all nine states D. Issuer's securities are exempt from state registration requirements in all nine states

A. Issuer has registered the securities in all nine states State securities laws (blue-sky laws) are designed to protect investors from fraudulent securities dealings. In addition to federal filing requirements, issuers may be required to register the securities in any state where they anticipate sales. Often, state regulators simply require that the issuer make payment of a fee and provide copies of its federal filings. The issuer's only requirement is to register the securities in all nine states. Broker-dealers and their representatives are required to register in any state in which they are offering the securities to clients residing in that state.

When a municipality allocates funds for a net revenue issue, the first priority is to satisfy the: A. Operation and maintenance of the facility B. Debt service C. Reserve for retirement of the bonds D. Surplus for expansion of the facility

A. Operation and maintenance of the facility The first priority for a net revenue issue is for the operation and maintenance of the facility. It indicates how a municipality distributes revenues received. The order is as follows: Operation and maintenance Debt service A reserve for retirement of bonds A surplus for expansion of the facility

A customer whose securities have been lent to another customer for a short sale would like those securities returned. If the broker-dealer cannot locate the securities from another source, the borrowing customer: A. Would be required to return the securities B. Would not be required to return the securities C. Could return similar securities D. Could deposit 50% of the securities' value

A. Would be required to return the securities If the lender requests a return of securities that cannot be borrowed from another source, the borrower must return the securities.

XYZ Corporation's common stock has the same beta as ABC Company's common stock. However, XYZ stock, on average, produces better returns than ABC. Which of the following statements explains this difference? A. XYZ stock has a higher alpha than ABC stock B. ABC stock is more liquid than XYZ stock C. XYZ Corporation is more highly leveraged than ABC Company D. ABC Company has a smaller market capitalization than XYZ Corporation

A. XYZ stock has a higher alpha than ABC stock While a stock's beta measures its performance as it relates to the overall market, alpha measures that part of a stock's return that is independent of the market. It is influenced by factors that are unique to that company and its industry group.

A customer has a long margin account with the following securities in the account. (Assume a 50% FRB initial margin requirement.) Stock Market Price Market Value Debit Balance 100 A Co. $30 $3,000 $8,400 100 B Co. $25 $2,500 200 C Co. $15 $3,000 100 D Co. $35 $3,500 ----------- $12,000 How far can the market value of the securities in the account decline before a maintenance call will be sent? A. $8,000 B. $11,200 C. $11,400 D. $12,500

B. $11,200 The key to this question is knowing that the minimum maintenance requirement for a long margin account is 25% of the LMV. With a current LMV of $12,000 and a DEBIT of $8,400, the EQ is $3,600 (which is 30% of the LMV). Since the equity is less than 50%, but still above the minimum of 25%, no action is required. However, if the LMV falls to a point that puts the account below the minimum maintenance level, corrective action is required. With the existing DEBIT balance of $8,400, simply insert the given LMV choices into the formula LMV - DEBIT = EQ to determine which one results in the account's EQ being at 25%. In this case, the correct choice is $11,200. By using the formula, $11,200 - $8,400 = $2,800 ($2,800 ÷ $11,200 = 25%).

A municipality is issuing 50,000 bonds at a public offerings price of $1,000. The manager of the underwriting syndicate receives $1.25 per bond. The total takedown is $8.75 per bond and the selling concession is $5.00 per bond. What amount will the issuer receive? A. $991.25 per bond for a total of $49,562,500 B. $990.00 per bond for a total of $49,500,000 C. $985.00 per bond for a total of $49,250,000 D. $1,000.00 per bond for a total of $50,000,000

B. $990.00 per bond for a total of $49,500,000 In a new municipal bond offering, the underwriting syndicate assumes the risk and is, therefore, entitled to make a profit on all bonds sold. Members of the selling group do not assume any risk and make a profit on only the bonds they sell (selling concession). The members of the underwriting syndicate receive $8.75 for bonds they sell. This is the total takedown which is composed of a selling concession of $5.00 per bond and an additional takedown of $3.75 per bond for their risk. The total spread is $10.00 ($1.25 manager's fee plus $3.75 to the syndicate for risk plus a $5.00 profit for the sale of the bonds). The issuer will receive $990 per bond ($1,000 offering price minus $10.00 underwriting spread) for a total of $49,500,000 ($990 x 50,000 bonds).

A customer contacts a registered representative with information he found on a financial Web site. The 52-week range of a company is $233.82 - $442.40. The EPS is $8.60 and the current market price is $245.90. What is the company's price/earnings ratio? A. 27.2 B. 28.6 C. 39.3 D. 51.4

B. 28.6 The price/earnings ratio is found by dividing the current market price of $245.90 by the earnings per share of$8.60. This equals a price/earnings ratio of 28.6 ($245.90 / $8.60). The 52- week range of the company is not relevant in calculating the price/earnings ratio.

A bond trade is reported as 5.50s 2030 at 101 1/2. What does this mean? A. A bond with a 5.5% coupon that matures in 2030 was traded at $1,011.20. B. A bond with a 5.5% coupon that matures in 2030 was traded at a price of $1,015.00 C. A bond with a 5.5% coupon that matures in 2030 was traded at 101 less a 1/2 point concession. D. A bond with a 5.5% coupon that matures in 2030 was traded at 101 plus a 1/2 point concession.

B. A bond with a 5.5% coupon that matures in 2030 was traded at a price of $1,015.00 This trade information represents a bond with a 5.5% coupon that matures in 2030 and was sold at a price of $1,015.0

A broker-dealer's suitability obligation would be LEAST important in which of the following situations? A. A solicited order B. An unsolicited order C. A recommended transaction D. An investment product created by another broker-dealer

B. An unsolicited order An unsolicited order occurs when a customer contacts a broker-dealer directly to execute a transaction that has not been recommended by the firm. A broker-dealer does not usually have a suitability obligation when it is not recommending the transaction. If an investment product, such as a mutual fund, is created by another broker-dealer, the firm still needs to make sure it is suitable when recommending it to a customer.

Ms. Ralana elects a withdrawal plan from a mutual fund where enough shares will be liquidated to provide her with $500 each month. This plan is called: A. Fixed-share B. Fixed-dollar C. Dollar-cost averaging D. Back-end load

B. Fixed-dollar In this case, Ms. Ralana wants to receive the same (fixed) dollar amount each month. Under the fixed-share method, a specified number of shares are redeemed each month. The amount received depends on the value of the shares at that time.

In a soft-dollar arrangement between an investment adviser and a broker-dealer, the broker-dealer is permitted to pay/provide all of the following, EXCEPT: A. Research reports that assist in investment decision-making B. Furniture for a new office that an investment adviser intends to open C. Cost for attending a seminar that will be covering trends in the securities industry D. Software that can be used to implement customer financial plans

B. Furniture for a new office that an investment adviser intends to open Soft dollars are products and services that an investment adviser receives from a broker-dealer in exchange for customer order flow. It is a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. The broker-dealer is not permitted to pay for new furniture for a new office that an investment adviser intends to open. However, a broker-dealer is permitted to pay/provide research reports to assist advisers, cost for attending investment seminars, and software that can be used to implement customer financial plans.

Which of the following issues mortgage-backed securities that are fully guaranteed by the U.S. government? A. Federal National Mortgage Association B. Government National Mortgage Association C. Federal Home Loan Mortgage Corporation D. Collateralized Mortgage Obligation

B. Government National Mortgage Association Of the choices given, only GNMAs are fully guaranteed as to principal and interest.

In terms of the number of stocks in each category, rank the components of the Dow Jones Composite Index from greatest to least. I. Utilities II. Industrials III. Transportation A. I, III, II B. II, III, I C. III, I, II D. II, I, III

B. II, III, I The Dow Composite is comprised of 30 industrial stocks, 20 transportation stocks, and 15 utility stocks.

If a CMO has a PSA of 150, which of the following events most likely has occurred? A. Interest rates have increased B. Interest rates have decreased C. The credit rating of the issuer has been lowered D. There has been an increase in the secondary market trading of the securities

B. Interest rates have decreased The PSA Model is used for CMOs and estimates the speed of prepayments as measured against a benchmark. A PSA of 100 assumes that the prepayment speed will remain stable, while a PSA greater than 100 assumes faster prepayments. Conversely, a PSA that is less than 100 indicates slower-than-normal prepayment speed. If interest rates decline, homeowners often refinance and prepayments of mortgages increase. The credit rating or trading activity does not influence the PSA Model

Refunding will MOST likely occur when interest rates are: A. Higher than when the issue was originally sold B. Lower than when the issue was originally sold C. Approximately the same as when the issue was originally sold D. Following an inverted yield curve

B. Lower than when the issue was originally sold Refunding will probably occur when interest rates are lower than when the issue was originally sold. The net result will be a reduction in the amount of interest being paid by the issuer.

An individual had invested in a nonqualified variable annuity. If she withdraws the entire value of the annuity, the tax treatment would be: A. Ordinary income on the entire amount B. Ordinary income on the amount in excess of the original investment C. Ordinary income on the amount in excess of the original investment and capital gain on the original investment D. Capital gain on the entire amount

B. Ordinary income on the amount in excess of the original investment A total withdrawal from a nonqualified annuity results in two separate tax treatments. The original amount invested is treated as a return of capital and the earnings in the account (amount above the original investment) is treated as ordinary income.

An investor has purchased a general obligation bond. Which of the following statements is TRUE concerning this investment? A. Earnings from the bond are subject to federal taxes. B. Payment of principal and interest is ultimately the responsibility of the issuing municipality. C. If the revenue project that's operated by the municipality goes bankrupt, the bonds will go into default. D. The assets of the municipality are used to secure the bond.

B. Payment of principal and interest is ultimately the responsibility of the issuing municipality. For a general obligation bond (a type of municipal bond), the interest is exempt from federal income tax. In addition, a general obligation bond is backed by the taxing authority of the issuer and the issuer's general promise to repay the debt. In this example, only the taxes that are collected by the municipality are used to back the bonds. If the municipality cannot produce enough tax dollars to pay the bond's interest and/or principal, there will be a default.

A type of securities distribution in which the issuing corporation is assured of receiving the full amount of the offering and anything unsold is retained by the underwriter is a firm-commitment. A. Place a temporary hold on the customer's account B. Recommend for the customer to arrange a meeting with her trusted contact person C. Recommend for the customer to bring an accountant or attorney to a meeting D. Contact the firm's chief compliance officer and arrange a meeting with the client

B. Recommend for the customer to arrange a meeting with her trusted contact person Based on the choices listed, the best course of action is to recommend a meeting with the customer and her trusted contact person. Prior to placing a hold on the account, the RR should first attempt to resolve the matter. If the customer had designated a trust account person, the RR should contact that person to attend the meeting. A trusted person's contact information is not required to open the account, but a firm should make a reasonable effort to obtain it.

If a limited partnership must liquidate, the distribution of assets is first made to the: A. General creditors B. Secured creditors C. Limited partners D. General partners

B. Secured creditors At the liquidation of a limited partnership, the assets are first distributed to secured creditors, followed by general creditors, then limited partners, and finally general partners. Remember, the claims of owners (the general and limited partners) are subordinate to those of creditors.

Which of the following persons establishes positions in secondary market municipal bonds for a broker-dealer? A. Underwriter B. Trader C. Agent D. Principal

B. Trader A trader is responsible for positioning (carrying inventory) secondary market municipal bonds. An underwriter is involved in the distribution of new issues.

Which of the following statements is TRUE when comparing rights and warrants for XYZ Corporation common stock? A. If they were issued at about the same time, the warrants will expire before the rights. B. XYZ issued the rights to enable stockholders to maintain their proportionate interest in the company, while the warrants were probably issued with another security to make that security more attractive to investors. C. When they were issued, the exercise price on both the rights and the warrants was probably above the market value of XYZ stock. D. Warrants may be traded in the secondary market, while rights are nonnegotiable

B. XYZ issued the rights to enable stockholders to maintain their proportionate interest in the company, while the warrants were probably issued with another security to make that security more attractive to investors. Only choice (b) is true. Choice (a) is false because rights are short-term (usually less than 90 days), while warrants often last several years before expiring. Choice (c) is false because the exercise price on rights is usually less than the current market value of the stock at the time the rights are issued. Choice (d) is false because both rights and warrants can be traded in the secondary market.

In February, Mr. Hedge wrote an uncovered DOG Oct 90 put @ 7. The put was exercised in June. Mr. Hedge sold the 100 shares of DOG in November at 94. What was Mr. Hedge's profit on the sale of the stock? A. $400 B. $700 C. $1,100 D. $9,400

C. $1,100 Upon exercise, Mr. Hedge is obligated to purchase 100 shares of DOG. For tax purposes, his cost is $83 per share (90 strike price - 7 premium). His sale at $94 per share results in a profit of $1,100 ([$94 sale price - $83 cost] x 100 shares).

A customer owns 500 shares of XYZ stock selling at $15 per share and $20,000 par value of State of Alabama GO bonds selling at 101. If both securities increased by 2 1/2 points, the dollar value of the increase is: A. $1,200 B. $1,300 C. $1,750 D. $2,500

C. $1,750 The increase is $1,750. Each point for stock is $1. Each point for bonds is $10. A 2 1/2-point increase in the stock position is $1,250 ($2.50 x 500 shares). A 2 1/2-point increase in the bond position is $500 (20 bonds x $25). A $1,250 increase for the stock + a $500 increase for the bonds = a $1,750 total increase.

If ABC stock is currently trading at $35.25 and the ABC October 35 put option has a premium of 2.25, what is the time value of this option? A. Zero B. $200 C. $225 D. $250

C. $225 If ABC stock is currently trading at $35.25 and the ABC October 35 put option has a premium of 2.25, what is the time value of this option

An investor purchases a $100,000 face value municipal bond with a 5-year maturity at 105. After two years, the bond is sold at 95. For tax purposes, the investor has a(n): A. $2,000 loss B. $4,000 loss C. $8,000 loss D. $10,000 loss

C. $8,000 loss When a municipal bond is purchased at a premium, the bond's premium must be amortized to find an adjusted cost basis. If the bond is sold above the adjusted cost basis, the result is a capital gain. If the bond is sold below the adjusted cost basis, the result is a capital loss. If the bond is held to maturity, there is neither a loss nor a gain for tax purposes. This is because the adjusted basis would equal the par value after the premium is amortized. This bond is purchased at $105,000 with a 5-year maturity. The premium of $5,000 ($105,000 - $100,000 = $5,000) must be amortized over a 5-year period ($5,000 divided by 5 years equals $1,000 per year). Therefore, each year the original cost of the bond is reduced by $1,000. If the bond is sold after 2 years, the adjusted cost basis is $103,000 ($105,000 - $2,000 = $103,000). Since the bond is sold at $95,000, there is a capital loss of $8,000 ($103,000 - $95,000).

Mr. Jones purchases 100 shares of XYZ at $80 per share and writes an XYZ June 85 call receiving a $3 premium. If XYZ increased to $90 and the call option is exercised, Mr. Jones' profit is: A. $300 B. $500 C. $800 D. $1,800

C. $800 If the option is exercised, Mr. Jones will need to deliver his stock to the option holder at the 85 strike price. The IRS considers the proceeds of the sale to be the strike price (85) plus the initial premium received (3). Mr. Jones would, therefore, receive $8,800 for the stock that initially cost $8,000. His profit would be $800 ($8,800 - $8,000 = $800).

A customer owns 1,000 shares of XAM at $40 a share. If XAM declares a 10% stock dividend, what is the adjusted cost basis per share? A. 1,000 shares at $36.36 per share B. 1,100 shares at $40 per share C. 1,100 shares at $36.36 per share D. 900 shares at $44 per share

C. 1,100 shares at $36.36 per share With a stock dividend, the number of shares owned will increase. In this case of a 10% stock dividend, the investor will receive an additional 100 shares (1,000 x 10%), but the cost basis per share will be reduced for tax purposes. The cost basis per share is adjusted as follows: $40,000 total investment ÷ 1,100 shares = $36.36. Other than making the adjustment to the cost basis per share, the IRS does not consider a stock dividend as a taxable event.

Which of the following choices BEST describes a municipal security that is referred to as a certificate of participation (COP)? A. A type of bond that is backed by a special tax B. A type of bond that is typically created to fund a project for a corporation C. A type of bond that is typically created through a lease agreement D. A type of bond that is based on payments from residential mortgages

C. A type of bond that is typically created through a lease agreement A certificate of participation (COP) is a lease financing agreement which is typically issued in the form of a tax-exempt or municipal revenue bond. COPs have traditionally been used as a method of monetizing existing surplus real estate. This financing technique provides long-term funding through a lease that does not legally constitute a loan, thereby eliminating the need for a public referendum or vote.

All of the following statements are TRUE as far as call option writers are concerned, EXCEPT: A. All profitable closing transactions are taxed as capital gains B. Premiums received from unexercised options are treated as capital gains C. All unprofitable closing transactions are allowed as an ordinary loss deduction from income D. The dollar amount of the premium received is deducted from the cost price of the underlying security to determine the covered call writer's breakeven point

C. All unprofitable closing transactions are allowed as an ordinary loss deduction from income All of the statements concerning call option writers are true except all unprofitable closing transactions are allowed as an ordinary loss deduction from income. This is not true because they are subject to the maximum $3,000 capital loss restrictions

During the accumulation period, the value of an investor's interest in a variable annuity is subject to fluctuation according to the: I. AIR II. Amount of money deposited III. Performance of the separate account A. I and II only B. I and III only C. II and III only D. I, II, and III

C. II and III only In a variable annuity, as investors make additional contributions to the separate account, the value of their investment will rise through the purchase of additional accumulation units. If the account performance is positive, the value of each accumulation unit will rise. The assumed interest rate (AIR) is an important component, but only to determine the value of a variable annuity during the annuity (payout) period.

The manager of a new issue municipal syndicate wants to allocate securities in a different manner than specified in the syndicate agreement. He may do this if he: A. Notifies the SEC B. Amends the syndicate agreement C. Is prepared to justify the change to the syndicate members D. Assumes any losses incurred by the syndicate members

C. Is prepared to justify the change to the syndicate members The syndicate manager is permitted to change the priority of orders if, in his opinion, it is in the syndicate's best interest. He must be able to justify the change to the syndicate members.

Mrs. Smith is short 100 shares of DEF stock. She is concerned that the stock is going to increase in price temporarily, but does not want to cover the short position. Which option position gives Mrs. Smith the BEST protection? A. Long 1 DEF put B. Short 1 DEF put C. Long 1 DEF call D. Short 1 DEF call

C. Long 1 DEF call The best possible upside protection can be accomplished with the purchase of 1 DEF call. If Mrs. Smith is long a call, this allows her to buy the stock from the writer if the stock goes up, thus protecting the short position.

An auction rate security is a type of investment that has the interest rate or dividend rate reset periodically. The term net clearing rate refers to the: A. Average rate of all submitted bids B. Highest rate to match supply and demand C. Lowest rate to match supply and demand D. Lowest rate of all submitted bids

C. Lowest rate to match supply and demand Based on submitted bids from holders and prospective buyers, the net clearing rate set by the auction agent will be the lowest rate that matches supply and demand. After the deadline for submission of orders, the auction agent assembles all the orders from lowest to highest bid and determines the net clearing rate. The net clearing rate is the lowest rate bid sufficient to cover all the securities exposed for sale.

All of the following documents must be accompanied or preceded by an OCC risk disclosure document, EXCEPT: A. Options research reports B. A standardized options worksheet discussing straddles C. Options advertising that appears in the newspaper D. Options sales materials discussing projections

C. Options advertising that appears in the newspaper Options advertising is a type of retail communication, which must make the offer to send the OCC risk disclosure document upon the customer's request. Options retail communications must be approved by a registered options principal (ROP) prior to use. Options-related retail communications that discuss projections, must be approved by a ROP prior to use and preceded or accompanied by a risk disclosure document.

An investor in a qualified variable annuity had invested $30,000. The annuity has now grown to $50,000. The tax treatment of the distributions during the payout period would be: A. Capital gains on the entire amount B. Ordinary income on the amount in excess of the original investment C. Ordinary income on the entire amount D. Tax-free on the entire distribution

C. Ordinary income on the entire amount A qualified variable annuity is used as a retirement vehicle. Contributions are made using pretax dollars and appreciate tax-deferred. All withdrawals are taxed as ordinary income.

All of the following are fixed by the exchange on which an option contract trades, EXCEPT the: A. Strike price B. Expiration date C. Premium D. Contract size

C. Premium The premium for an option is not fixed by the exchange on which the option trades. The premium is determined by supply and demand on the floor of the exchange.

For investors who own agency-backed CMOs, which of the following risks are LEAST important in a rising interest-rate environment? A. Prepayment risk and credit risk B. Extension risk and credit risk C. Prepayment risk and interest-rate risk D. Extension risk and interest-rate risk

C. Prepayment risk and interest-rate risk Prepayment risk is associated with a falling (not rising) interest-rate environment in which mortgage holders refinance or repay their mortgages at a faster rate. Therefore, the holder of a CMO receives a larger portion of the principal earlier than anticipated and is forced to reinvest at lower rates. Many CMOs are created from government agency mortgage-backed securities (MBS), which have a minimal amount of credit risk. However, for CMOs that are constructed without this backing, credit risk is a greater concern. As is true for most fixed-income securities, CMOs carry interest-rate risk. Extension risk, which is the opposite of prepayment risk, is prevalent when interest rates are rising and the CMO holders receive a smaller portion of their principal back. As a result, the LEAST important factors in a rising interest rate environment are prepayment risk and credit risk.

Many investors prefer to receive variable annuity payments under the straight-life payout option because it: A. Is the most conservative method for receiving payments B. Allows for a beneficiary for the entire payout period C. Provides the maximum cash flow of all payout options D. Provides an equal amount each month for the investor's lifetime

C. Provides the maximum cash flow of all payout options The annuitant will receive the greatest cash flow from the straight-life annuity payout option. This option allows the annuitant to receive payments as long as the annuitant is alive. At death the payments stop. No beneficiary is designated and the insurance company is relieved of its obligation to make payments. The annuitant has the greatest degree of risk with this type of payout.

An investment banking professional's FINRA registration is not active because her firm is no longer in business. She would need to requalify by examination after: A. 30 days B. One year C. Two years D. Three years

C. Two years An individual who wants to return to a brokerage firm as a registered person, without having to requalify by examination, would be required to do so within a two-year period. The fact that the firm is no longer in business is not relevant.

Property in Boca Raton, Florida is assessed at 10 million dollars. If the millage rate is 7, what is the property tax? A. $70 B. $700 C. $7,000 D. $70,000

D. $70,000 A mill (.001) is $1 per $1,000 of assessed value. Multiply .007 times $10,000,000. This will equal a property tax of $70,000.

A DEF corporation convertible bond is convertible at $40. DEF common is selling at $50. At what price should the bond be selling for it to be at a 10% premium to the common? A. 80 B. 88 C. 125 D. 137 1/2

D. 137 1/2 Since the bond is convertible at $40 a share, the bond can be converted into 25 shares of common stock ($1,000 par value divided by $40 per share). If the bond is converted, the total value of common stock will be $1,250 (25 shares x $50 market value). A 10% premium to the parity price is $1,375 ([10% x $1,250] + $1,250).

XYZ Corporation has $400 million of convertible bonds outstanding. Each bond is convertible into 20 shares of common stock. The conversion price is: A. 20 B. 25 C. 40 D. 50

D. 50 To find the conversion price of a convertible bond, the bond's par value ($1,000) is divided by the conversion ratio (20). In this question, the conversion price is $50 ($1,000 ÷ 20). To calculate conversion price, the amount of bonds outstanding is irrelevant.

According to current regulations, if a client redeems his mutual fund shares, the fund company must send the payment within: A. 3 days B. 5 days C. 10 days D. 7 days

D. 7 days Federal regulations require that funds send payment for the redemption of mutual fund shares within seven days.

According to FINRA's financial exploitation rules, which of the following persons is considered a specified adult? A. A 50-year-old individual with diabetes B. A 40-year-old struggling with substance abuse C. A 60-year-old with high blood pressure D. A 25-year-old individual with bipolar disorder

D. A 25-year-old individual with bipolar disorder FINRA defines a "specified adult" as any person who's age 65 or older, as well as any person who's age 18 or older and who the firm believes has a mental or physical impairment that renders the person unable to protect his own interests. A person with bipolar disorder fits this definition. However, a person with diabetes, high blood pressure, or struggling with substance abuse doesn't meet the definition.

An RR's client has recently finalized her divorce. For the RR to be able to change the name on her account to her maiden name, the client MUST provide: A. Her reissued driver's license with her updated name B. A document that shows her residential address and maiden name C. A credit card with her maiden name D. Her divorce decree

D. Her divorce decree In order to change the account to her maiden name, the client must provide a court or government issued document. The only acceptable document listed is a divorce decree. A reissued driver's license is not acceptable due to the risk of fraud. Other acceptable documents include: Marriage certificate Passport Government-issued ID (e.g., a Social Security card or certification of naturalization)

Which TWO of the following securities may be included in the STRIPS program to create zero-coupon securities? I. Treasury bills II. Treasury notes III. TIPS IV. Treasury bonds A. I and III B. I and IV C. II and III D. II and IV

D. II and IV Treasury STRIPS are created when Treasury notes and Treasury bonds are separated (stripped) of their coupons. Treasury bills and Treasury Inflation-Protected Securities (TIPS) are not permitted to be stripped.

An investor has been making payments to a variable annuity for the last 20 years. The investor decides to annuitize and selects a straight-life payout. Which TWO of the following statements are TRUE? I. The investment risk is assumed by the insurance company II. The investment risk is assumed by the customer III. The amount of the payment to the customer is guaranteed by the insurance company IV. The amount of the payment to the customer is not guaranteed A. I and III B. I and IV C. II and III D. II and IV

D. II and IV Unlike a fixed annuity, the investment risk in a variable annuity is assumed by the customer. The amount of the payment depends on the performance of the separate account. The payment can increase, decrease, or remain the same. The amount is not guaranteed.

The funds removed as a result of a qualified withdrawal from which of the following were tax-deferred? A. 529 plan B. Roth 401(k) C. UTMA account D. IRA

D. IRA Traditional IRAs provide investors with the tax-deferral of earnings. In other words, an investor is not required to pay taxes on their bond interest, cash dividends, or capital gains until he withdraws the funds from his IRA. Uniform Transfer to Minors Act (UTMA) accounts are set up for children, but don't offer tax-deferral of earnings. In both 529 plans and Roth 401(k) accounts, qualified withdrawals are tax-free, but contributions are made on a non-deductible (after-tax) basis.

A customer has an account with your firm. He wants to transfer ownership of 300 shares of stock to his spouse who also has an account in your firm. This would require a: A. Due bill B. Certification to receive notice C. Tax stamp (waiver) D. Medallion signature guarantee

D. Medallion signature guarantee The customer will be asked to complete a transfer form to effect a change of ownership. This must be validated by a medallion signature guarantee, which can be provided by a bank or broker-dealer. A notary stamp is not acceptable.

Southern California Gas is issuing 5 3/4% first mortgage bonds at a price of 96.35% of their par value. The payment of interest and principal on the bond is secured by: A. Revenue from the Southern California Gas company B. The mortgages on property owned by the state of California C. The state of California D. Property owned by Southern California Gas

D. Property owned by Southern California Gas The bonds are first mortgage bonds, which means they are secured by property that is owned by the Southern California Gas Company. Since the company is publicly owned, the bonds are not secured by property that is owned by the state of California.

A broker-dealer executing a net basis transaction is required to: A. Disclose the markup on the customer's confirmation B. Disclose the markup to a customer, prior to the execution of the transaction C. Disclose the markup verbally to customers, following execution of the transaction D. Provide a confirmation, but is not required to disclose compensation

D. Provide a confirmation, but is not required to disclose compensation When executing trades on a net basis, the dealer's markup or markdown is not disclosed to the customer. In a net basis transaction, a dealer holding a customer order to buy, acquires the stock on a principal basis and executes the customer order at a different price than the dealer's acquisition price. If the dealer executes the transaction at the same price and charges the customer a markup, the capacity is disclosed as riskless principal. The markup in a riskless principal transaction must be disclosed.

Listed options are issued and guaranteed by: A. FINRA B. The company whose stock underlies the contract C. The exchange where the options trade D. The Options Clearing Corporation

D. The Options Clearing Corporation Options that are listed on exchanges are issued and guaranteed by the Options Clearing Corporation. The exchange on which the option trades sets the terms of the option contract.

If a customer is NOT a U.S. citizen, an acceptable form of identification, pursuant to the Customer Identification Program (CIP), is: A. A U.S. taxpayer ID number B. A major credit card C. A corporate photo ID D. Both documentary and nondocumentary means of identification

For persons who are non-U.S. citizens, the following documentary means are sufficient. - U.S. taxpayer ID number - Passport number and country of issuance - Alien ID card - Number and country of issuance of any government-issued document evidencing nationality or residence and bearing a photograph A CIP must describe both documentary and nondocumentary verification methods, when the nondocumentary means of identification will be used in addition to, or in lieu of, documents. The CIP does not specifically prescribe that both methods be used for non-U.S. citizens.

Pennsylvania Power Company has announced that it will refund $800 million of its outstanding 6 1/4% bonds that were to mature in 2040. The bonds will be refunded at 106.75% of par value from the proceeds of an $800 million refunding issue. The refunding issue has a 4 1/2% coupon rate and matures in 2030. Bondholders who own 6 1/4% bonds maturing in 2040 will receive: A. $1,067.50 plus accrued interest B. The new 4 1/2% bonds being issued plus accrued interest C. $1,000 plus accrued interest D. The new 4 1/2% bonds being issued without accrued interest

A. $1,067.50 plus accrued interest The company is refunding the bonds at 106.75% of its par value. The bondholders who own the 6 1/4% bonds will receive 106.75% of the $1,000 par value (106.75% x $1,000) for a total of $1,067.50 plus accrued interest.

An investor buys a 5% municipal bond at 102 1/2. The bond has a yield-to-maturity of 4 1/2%. If the investor holds the bond to maturity, he will have a loss for tax purposes of: A. 0 B. $25 C. $50 D. $100

A. 0 The IRS requires that a premium paid for a municipal bond be amortized over the life of the bond. At maturity, the investor will have an adjusted cost (after amortization) of par ($1,000). Since this is the amount received at maturity, there is no loss for tax purposes.

A customer in her late 40s, who is currently in the 15% tax bracket, has recently inherited $6,000,000. She informs you that she considers herself a conservative investor and wants your advice in investing the inheritance. Which of the following choices would be the BEST method of investing the funds? A. 50% in equities, 25% in-state municipal bonds, 15% in Treasury bonds, and 10% in a money- market fund B. 100% in equities C. 50% in-state municipal bonds, 25% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in money-market funds D. 25% in-state municipal bonds, 25% in out-of-state municipal bonds, 25% in corporate bonds, and 25% in Treasury bonds

A. 50% in equities, 25% in-state municipal bonds, 15% in Treasury bonds, and 10% in a money- market fund Although this investor is in her late 40s and considers herself a conservative investor, equities should be a part of her asset allocation. Many strategists recommend taking 100% and subtracting the investor's age as a guide to the percentage of the investor's portfolio that should be allocated to equities. As such, a 50% allocation in equities is reasonable with the remainder in various fixed-income securities and cash. Prior to inheriting the funds, she would not have been a suitable candidate for tax-exempt or municipal securities due to her low tax rate. After investing in these funds, the income/dividends/potential capital gains would have the effect of increasing her tax rate, so that municipal bonds would be an attractive investment. In-state municipal bonds would offer a higher after-tax return to this investor. Due to the potential of credit risk with municipal bonds, having a portion of the funds in Treasury securities would be a good recommendation. In addition, the investor should invest a portion of the funds in cash or cash alternatives. This is satisfied by allocating a portion of the funds to a money-market fund. Having 100% of the funds in equities or fixed-income investments does not offer the customer a balanced approach and, therefore, the other choices would not be the best mix of investing the funds.

The following closed-end funds are listed in The Wall Street Journal. Net Asset Value Market Price American Fund 23.75 24.25 Bunker Hill Fund 21.85 21.50 American Fund is selling at: A. A premium B. A discount C. Net asset value D. Parity

A. A premium The American Fund is a closed-end fund that is selling at 24.25. This is above its net asset value of 23.75. It is, therefore, selling at a premium.

A municipal bond issued at par is purchased at a discount and later sold at par or above. This transaction will result in: A. A taxable gain B. A tax-deductible loss C. A tax-free gain D. No gain or loss

A. A taxable gain If a municipal bond is purchased at a discount in the secondary market (not an original issue discount), there will be a taxable gain at maturity. A taxable gain will also result if the bond is sold prior to maturity, above the original cost.

When a municipal bond is issued as an original issue discount, the upward adjustment in the purchase price is called: A. Accretion B. Amortization C. Depreciation D. Depletion

A. Accretion The upward adjustment in the purchase price of an original issue discount bond is called accretion. If the bond is sold before its final maturity date, the bondholder must determine his adjusted cost basis. If the bond is bought at an original issue discount and held to maturity, the discount is considered to be interest and, for municipal bonds, exempt from taxes.

A high put/call ratio would MOST likely be associated with a(n): A. Bullish indicator B. Bearish indicator C. Indicator that the market will trade within a narrow range D. Indicator that the trading volume will be increasing

A. Bullish indicator The put/call ratio is a technical market indicator and is found by dividing the volume of all put transactions by the volume of all call transactions on a daily basis. Technical analysts view the put/call ratio as a contrarian indicator. The higher the ratio, the more oversold the market, and the higher the probability that the market will reverse course and turn bullish. The opposite is true for a low put/call ratio, which is viewed as a bearish

Mrs. Smith owns 100 shares of DEF stock. She is concerned that the stock is going to decrease in price temporarily, but does not want to sell the stock. Which option position will give her the BEST downside protection? A. Buy 1 DEF put B. Sell 1 DEF put C. Buy 1 DEF call D. Sell 1 DEF call

A. Buy 1 DEF put The best possible downside protection is accomplished with choice (a), buy 1 DEF put. If Mrs. Smith is long a put, this will allow her to put the stock to the writer if the stock decreases, thus protecting against the price decline.

Eliminating a bond issuer's responsibility to pay back bondholders from an offering, and also relieving their obligation to bondholder's rights, is referred to as: A. Defeasance B. Refunding C. A sinking fund D. A put provision

A. Defeasance When a bond is prerefunded, (advance refunded), the proceeds from a new bond offering are invested and the securities are placed in escrow. If these funds will be used only to retire the outstanding issue, that issue is considered to be defeased. The responsibility to pay the interest and principal on the outstanding issue is now of the escrow account. In addition the bondholder's rights as described in the indenture agreement from the prerefunded issue, are eliminated.

A stock index call option is exercised. The writer must: A. Deliver cash B. Deliver the underlying index C. Purchase the underlying index D. Close out his position

A. Deliver cash When an index option is exercised, the writer must pay the buyer the in-the-money amount of the option in cash.

The call feature on callable bonds would be most relevant when the economy is: A. Experiencing a slowdown and the FRB is trying to stimulate growth B. Experiencing a slowdown and inflation is increasing C. Growing and the FRB is trying to slow down the economy D. Growing and inflation is stable

A. Experiencing a slowdown and the FRB is trying to stimulate growth The call feature on callable bonds is most relevant when the general levels of interest rates are declining. Rates will tend to decline when the FRB is trying to stimulate the economy by increasing the money supply. The goal would be to bring down interest rates to allow the economy to grow. Rising inflation usually causes the FRB to decrease the money supply to drive up interest rates. If the economy is growing and inflation is stable, this is a beneficial situation and the FRB may simply leave rates unchanged.

A customer purchases a municipal bond with 25 years remaining to maturity. The bond has been prerefunded to its first call date. The issue is callable in 7 years at 108, declining to par in 14 years. It also has a sinking fund call provision that begins in 17 years at par. For confirmation purposes, the bond should be priced to the: A. First call date B. First par call C. Sinking fund date D. Final maturity date

A. First call date When a bond is prerefunded, the only applicable date is the first call feature. Therefore, the bond must be priced to the first call date.

You are seeking information on insider purchases. Which of the following filings would be the BEST source for such information? A. Form 4 B. Form 144 C. Form 13F D. Schedule 13D

A. Form 4 Form 4 is filed by any insider of a corporation who buys or sells shares of his company. The form must be filed no later than the second business day following the transaction. Form 3 is filed when a person initially becomes an insider. Form 5 is an annual filing by insiders. An insider is defined as any person who is an officer, director, or owner of more than 10% of the equity. The filings apply to insiders of an SEC registered company. Form 144 would only be filed in the sale (not purchase) of securities. Schedule 13D is used to report acquisitions of more than 5% of the equity of a company. Rule 13f-1 of the Securities Exchange Act of 1934 requires quarterly filings (13F) by institutional investment managers who exercise investment discretion over at least $100,000,000 in equity securities.

Which of the following statements is TRUE concerning gift and estate taxes paid by a husband and wife? A. Gifts between spouses are unlimited and no gift or estate taxes will be paid when one spouse passes away B. Gifts between spouses are unlimited and there is no gift tax, but estate taxes must be paid when one spouse passes away C. Tax-free gifts between spouses are limited to $15,000 per year, but taxes are not due on any excess until one spouse passes away D. Tax-free gifts between spouses are limited to $15,000 per year and taxes must be paid on any excess in the year the gift is given

A. Gifts between spouses are unlimited and no gift or estate taxes will be paid when one spouse passes away There is no limit on the amount of a gift between spouses. A husband or wife may give any amount to a spouse without incurring a tax liability. An estate tax may be levied on the value of a decedent's assets, but there will not be any estate tax due when one spouse dies if all the assets are passed along to the surviving spouse. The entire estate may pass tax-free to the survivor. If assets are distributed to persons other than the decedent's spouse, the estate may be taxed if the amount exceeds the allowable limits established by current tax law. Gift taxes must be paid by a donor, not the recipient of the gift. An individual may give a gift of $15,000 per person, per year ($30,000 for joint returns) without incurring a gift tax. The donor must pay the gift tax on amounts given over this figure.

ABC Corporation has issued $100,000,000 worth of bonds at a $1,000 par value. The effect of the issuance of the bonds is: I. An increase in working capital II. An increase in total liabilities III. No change in total assets IV. An increase in stockholders' equity A. I and II only B. I and III only C. II and III only D. II and IV only

A. I and II only Working capital equals current assets minus current liabilities. The cash received from the sale increases current assets. The bonds are not a current liability. Therefore, working capital increases. There is an increase in current assets from the cash received on the sale of the bonds, therefore, increasing total assets. The long-term liabilities of the company will increase because of the amount of debt incurred. There will be no increase or decrease in stockholders' equity as the money received will be exactly offset by the amount of money owed.

In most cases, municipal bond investors may obtain which TWO of the following choices? I. Reduced interest-rate risk by investing in issues with different maturities II. A federal tax exemption by investing in private activity bonds III A state and local tax exemption by investing in bonds in their state of residency IV. A reduced risk of default by investing in bonds in their state of residency A. I and III B. I and IV C. II and III D. II and IV

Which of the following statements is TRUE about revenue bonds? A. Interest is usually paid from the earnings of the facility for which the bond was issued B. Interest is subject to federal taxes C. Revenue bonds are considered safer than general obligation bonds D. The state public utility commission must approve each interest payment

A. Interest is usually paid from the earnings of the facility for which the bond was issued The interest on a revenue bond is usually paid from the earnings of the facility for which the bonds were issued. The interest is exempt from federal income tax and revenue bonds are considered riskier than general obligation bonds. State public utility commissions set utility rates within the state but they do not approve municipal revenue issue payments.

A security that has been delisted by the NYSE or Nasdaq: A. May be quoted on the OTC Bulletin Board B. Automatically is eligible for listing on any other national securities exchange C. May not be quoted by any broker-dealer D. May only be quoted by a broker-dealer if the issuer receives prior SEC approval

A. May be quoted on the OTC Bulletin Board A company that fails to meet the maintenance requirements of securities listed on the NYSE or Nasdaq will become delisted. When this occurs, the company may be quoted (but not listed) on the OTC Bulletin Board or the OTC Pink Market, Inc. (the electronic Pink Sheets). Quotes on the OTCBB or the OTC Pink Market by broker-dealers are permitted without prior approval from the SEC.

Which of the following choices is found in a variable annuity but not in a mutual fund? A. Mortality expenses B. A management fee C. A sales charge D. Administrative expenses

A. Mortality expenses Mortality expenses are charged against the account to provide the death benefit found in annuities, as well as to cover the cost of potentially providing the annuitant with payments for life. All other expenses or fees can be found in both mutual funds and annuities.

Cash trades (trades done for cash), as compared to trades done in a cash account, have a delivery date on the: A. Same day as the trade date B. Next business day after the trade date C. Second business day after the trade date D. Fifth business day after the trade date

A. Same day as the trade date Cash trades, or trades made for cash, have a delivery date on the same day as the trade date. Be sure to distinguish a cash trade from a trade done in a cash account which generally settles regular way.

A customer buys a premium bond that is callable. Which of the following is LEAST beneficial for the customer? A. The bond is called at its par value in five years B. The bond is called at its par value in ten years C. The bond is called at its par value in fifteen years D. The bond is called at its par value in twenty years

A. The bond is called at its par value in five years If the bonds are called in five years at par, the premium paid for the bond will be amortized over the shortest period. This results in the investor realizing a lower yield than if the bond were called after a longer period. It is important to note that rules require a firm to disclose to a customer the lowest possible yield that the customer can realize. On a premium bond (as in this example), the lowest yield will result from the bond being called at par in the shortest period.

When a bond is selling at a discount: A. The market price is less than the par value B. The current yield is lower than the nominal yield C. It is a better quality bond than one selling at a premium D. The yield-to-maturity is lower than the current yield

A. The market price is less than the par value The only true statement is that the market price is less than the par value. When a bond is selling at a discount, the current yield is higher than the coupon rate, and the yield-to-maturity is higher than both the coupon rate and current yield. Bonds that are selling at a discount are not likely to be of better quality than bonds selling at a premium.

An investor owning a reverse convertible security will receive less than her original principal at maturity under which of the following situations? A. The price of the underlying asset is below the knock-in price B. The price of the underlying asset is above the knock-in price C. Current interest rates are below the coupon rate of the security D. Current interest rates are above the coupon rate of the security

A. The price of the underlying asset is below the knock-in price Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. At maturity, if the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of her principal (the most beneficial option). At maturity, if the underlying asset is below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.

A customer contacts his RR to discuss whether selling short is a suitable strategy. If the customer inquires as to when borrowed stock must be returned, the RR should respond: A. There's no specific time limit, but the broker-dealer can demand that the shares be returned at any time B. There's no specific time limit and the broker dealer cannot demand that the shares be returned at any time C. Within two business days D. Within five business days

A. There's no specific time limit, but the broker-dealer can demand that the shares be returned at any time In order for a customer to sell short, the shares must be borrowed from the broker-dealer. There's no specific time limit by which the shares must be returned; however, the broker-dealer reserves the right to demand the return of the shares at any time.

Regarding a company's financial statements, total assets are equal to: A. Total Liabilities + Stockholders' Equity B. Total Liabilities - Stockholders' Equity C. Total Liabilities + Stockholders' Equity - Depreciation D. Stockholders' Equity + Goodwill

A. Total Liabilities + Stockholders' Equity The balance sheet formula is Total Assets = Total Liabilities + Stockholders' Equity. Total Assets is, therefore, equal to Total Liabilities + Stockholders' Equity.

If interest rates are increasing, the PSA Model will show that prepayment speeds on mortgages are: A. Increasing B. Decreasing C. Staying the same D. Fluctuating

B. Decreasing The PSA Model is used to estimate the prepayment rate for mortgage-backed securities. If interest rates are increasing, borrower's would be less inclined to refinance and mortgages would take longer to get repaid. If interest rates are falling, borrower's would be more likely to refinance and mortgages would be paid faster.

The initial FRB margin requirement is 50%. A customer purchases 1,000 shares of Depaul Corporation stock at $70 per share and makes the necessary deposit. If the stock increases in value to $78 per share and later declines to $67 a share, how much SMA would the A. 0 B. $4,000 C. $8,000 D. $16,000

B. $4,000 First, determine the amount of the debit balance. If the customer purchased $70,000 worth of stock at a 50% margin requirement and deposited $35,000, the debit balance is $35,000 ($70,000 market value - $35,000 margin requirement = $35,000 debit balance). Depaul increased to $78 per share, making the market value $78,000. The equity increases to $43,000. The excess equity (SMA) is found by subtracting the FRB-required equity of $39,000 (50% of $78,000) from the actual equity in the account, $43,000. The SMA is, therefore, $4,000. The SMA remains in the account until it is used. The SMA balance will never decrease because of market movements. Securities held in a margin account that increases in value can create excess equity (SMA). However, if these securities later decline in value, this will not decrease SMA.

A client has a margin account which is long 500 shares of CWS at $115 and short 2,000 shares of EXA at $22. If the customer's debit balance is $30,000 and the credit balance is $60,000, what's the combined equity in the account? A. $16,000 B. $43,500 C. $101,500 D. $57,500

B. $43,500 The easiest way to find the combined equity is to calculate the equity for the long and short positions separately. The long position has a market value of $57,500 (500 shares x $115) and a debit balance of $30,000, which means that the equity for the long position is $27,500 ($57,500 Long Market Value - $30,000 Debit). The short position has a credit balance of $60,000 and a market value of $44,000 (2,000 shares x $22), which means that the equity for the short position is $16,000 ($60,000 Credit - $44,000 Short Market Value). Therefore, the combined equity is $43,500 ($27,500 Equity for Long + $16,000 Equity for Short).

A customer purchases $15,000 in convertible bonds (15 bonds at $1,000 par). The Federal Reserve Board margin requirement is 50% and the customer deposits $7,500. If the bonds increase in value to 108 ($16,200), how much excess equity will the customer have in the account? A. $300 B. $600 C. $1,200 D. $8,700

B. $600 If the bonds increase in value to $16,200, the equity in the account will be $8,700 (market value of $16,200 - $7,500 debit balance). The initial FRB requirement on $16,200 market value is $8,100 (50% x $16,200). Since there is $8,700 of equity, there is $600 of excess ($8,700 equity - $8,100 requirement).

A registered representative is provided with the following financial information concerning a company: Debt of $225 million, par value of the common stock $40 million, paid-in capital of $70 million, and retained earnings of $750 million. The debt-to-equity ratio is: A. 21% B. 26% C. 74% D. 79%

B. 26% The debt-to-equity is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). The debt-to-equity ratio is 26% ($225 million / [the par value of the common stock is $40 million + paid-in capital of $70 million + retained earnings of $750 million = $860 million]). The debt-to-equity ratio is used to analyze the capital structure of a company.

There are 2,600,000 shares of XYZ Corporation outstanding, which are listed on the NYSE. Mr. Smith owns 300,000 shares of restricted securities of XYZ Corporation, which he has held for more than six months. He is not an affiliate of XYZ. Mr. Smith would like to sell some of his securities under Rule 144. The weekly trading volume for the last six weeks was: 1 week ago 25,000 shares 2 weeks ago 26,000 shares 3 weeks ago 27,000 shares 4 weeks ago 28,000 shares 5 weeks ago 27,000 shares 6 weeks ago 27,000 shares How many shares of XYZ Corporation is Mr. Smith able to sell according to Rule 144? A. 26,000 shares B. 26,500 shares C. 27,250 shares D. 30,000 shares

B. 26,500 shares Mr. Smith would be able to sell 26,500 shares. Under Rule 144, the amount that may be sold during any 90-day period is 1% of the outstanding shares, or the average weekly volume of trading for the four weeks prior to the sale, whichever is greater. One percent of the outstanding shares is 26,000. The average weekly volume from the prior four weeks was 26,500 shares.

According to MSRB rules, which of the following documents need not be approved by a principal prior to being sent to a customer? A. An abstract of an official statement B. A preliminary official statement C. An advertisement regarding the firm's products and services D. A research report

B. A preliminary official statement A preliminary official statement is prepared by or for the issuer. Since the MSRB does not have the power to regulate issuers, a preliminary official statement cannot be considered advertising under MSRB rules. However, an abstract (summary) of the official statement is prepared by a dealer and is, therefore, considered advertising. A final official statement and a firm's offering list are also not considered advertising.

A hedge fund would NOT be a suitable investment for an investor seeking to: A. Invest in markets outside the U.S. B. Access her funds C. Invest in securities in a specific industry D. Invest in derivatives

B. Access her funds Hedge funds are not subject to the same regulations for requiring access to their funds as are mutual funds. The shares are not redeemable on a daily basis and are not suitable for an investor requiring a certain degree of liquidity. They are suitable for an investor seeking the other choices listed.

Joseph Carlyle is a customer of a municipal securities firm. Based on his existing account documentation, he is clearly unsuitable for securities with a speculative credit rating. However, he has entered an order to purchase a bond that is rated BB by Standard and Poor's. His representative, Bob Thomas, has communicated to him that this transaction is not in his best interest based on the information that the firm has on file. Regarding this situation, which of the following statements is TRUE? A. Bob should process the order because a BB rating is not speculative B. Bob should process the order because MSRB rules allow the order to be filled if the representative explains to Joseph that the trade is unsuitable C. Bob should process the order because registered representative are not fiduciaries and, therefore, must always do what the customer says D. Bob should not process the order because MSRB rules prohibit the processing of a clearly unsuitable transaction

B. Bob should process the order because MSRB rules allow the order to be filled if the representative explains to Joseph that the trade is unsuitable According to recent interpretations of the MSRB's suitability rule, Bob should process the customer's order as long as he takes the time to explain to Mr. Carlyle why he believes the investment is unsuitable for him.

A small company would like to raise capital through a private placement in order to expand its operations. As an investment banking representative working on the deal, you would be LEAST likely to target which of the following investors when offering these securities? A. Hedge funds B. Existing shareholders who are also employees of the company C. Individual investors with a net worth exceeding $1,000,000 D. Senior executives at the company

B. Existing shareholders who are also employees of the company A private placement would least likely appeal to the employees of the company. Under Regulation D, a private placement may be offered to an unlimited number of accredited investors but only 35 nonaccredited investors. Hedge funds and individual investors with a net worth exceeding $1,000,000 are considered accredited investors. Senior executives at the company are more likely to be accredited investors than employees of the company due to the income and net worth requirements of Regulation D. The fact that they are existing shareholders would not change that status since the company may have given or allowed the purchase of its stock to employees regardless of the income and net worth.

A 28-year old individual has income of $60,000 per year, has outstanding college loans, and recently inherited $100,000. If the individual is worried about taxes and wants to know how best to invest the inheritance, his registered representative should recommend: A. Putting the money in a 529 plan and using it to pay back the loans B. Putting the money in a tax-exempt municipal bond fund C. Putting the money in a money market fund D. Putting the money in an IRA

B. Putting the money in a tax-exempt municipal bond fund Although putting the inheritance into a tax-exempt municipal bond fund will not provide any immediate tax benefits, the income generated by the interest payments from the bonds in the portfolio are federally tax-free. Putting the money into a 529 plan offers no immediate deductions and only allows for a one-time payment of up to $10,000 to pay for student loans. Also, unless the balance of the money is used to pay for qualifying education expenses, earnings will be taxed and subject to a 10% IRS penalty. Putting money into a traditional IRA will provide a maximum deductible annual contribution of $6,000, which is far less than what he's able to invest. Investing the money in a money market fund offers safety, but no tax benefits.

Which of the following individuals are NOT permitted to trade on the floor of the NYSE? A. Independent brokers B. Registered representatives C. Floor brokers D. Designated market makers

B. Registered representatives Registered representatives of a broker-dealer are not permitted to trade on the floor of the NYSE.

A client wants to donate (gift) 1,000 shares of stock to a cancer prevention foundation. Which of the following statements is TRUE? A. The donor may sign an ACATS form to initiate the transfer request B. The donor must provide written instructions to transfer the title if the stock is held in street name C. The donor is required by SEC rules to contact the DTC directly D. The donor may not sign a stock power to have the stock retitled and transferred to the foundation

B. The donor must provide written instructions to transfer the title if the stock is held in street name The donor may use two methods to transfer the securities to a charity. If the stock is held by a broker-dealer and is registered in street name, the client would provide written instructions to indicate his intention to transfer the securities to the charity. A transfer instruction form may be submitted for account title changes and gifting. The signature of the donor (or donors) is required. If the stock is held in the name of the donor, the stock certificate may be endorsed or the donor will deliver the certificates with a signed stock power. Automated Customer Account Transfer (ACATS) is the system used by broker-dealers to transfer and retitle securities when a customer transfers an account to another member firm.

Relative to a convertible bond, which of the following choices will produce a desirable arbitrage situation? A. The stock is at parity with the bond B. The stock is at a premium to parity and the bond is trading at par C. The stock is at a discount to parity and the bond is trading at par D. The yield on the bond equals the yield on the stock

B. The stock is at a premium to parity and the bond is trading at par An arbitrage situation occurs when there is a price difference in comparable securities. If the stock is selling above parity, the value of the stock received from converting the bond is more than the value of the bond. An investor could sell the stock short and buy the bond, and then convert the bond and use the stock to cover the short position. For example, a bond convertible into 25 shares is trading at 104 and the stock is selling at $42. If an investor sold 25 shares short at $42 (equaling $1,050), that would be worth more than the value of the bond ($1,040)

An RR sees that a CMO is yielding 5.95% while the comparable Treasury is yielding 5.10%. This means that: A. The CMO is rated below investment-grade B. The yield pick-up on the CMO is 85 basis points C. The annual cash flow from the CMO is $85 greater than the Treasury D. The yield curve is inverted

B. The yield pick-up on the CMO is 85 basis points If the yield on a CMO is 85 basis points higher (5.95 - 5.10) than a comparably maturing Treasury security, the CMO provides a yield pick-up or higher yield of 85 basis points.

An investor purchases stock on Monday, September 15. The settlement date on the purchase is: A. Monday, September 15 B. Wednesday, September 17 C. Monday, September 22 D. Friday, September 19

B. Wednesday, September 17 Regular-way settlement on transactions in equity securities is two business days after the trade date (T + 2). Regulation T requires payment by customers for purchases in two business days following the settlement date (S + 2).

If market interest rates increase, the prices of outstanding bonds A. Will remain unchanged B. Will revert to their call price C. Will increase D. Will decrease

Bonds are subject to interest-rate risk. Interest-rate risk implies that as market rates increase, investors will not be interested in purchasing existing bonds at par since they're able to obtain higher yields by purchasing new bonds. Therefore, existing bonds will need to be offered at a discounted price in order to attract purchasers. In other words, if interest rates increase, outstanding bond prices will decrease. Conversely, if interest rates fall after a bond has been issued, the bond will likely trade at a premium to par.

Which of the following statements is not a characteristic of a 529 plan? A. Withdrawals from 529 plans used for educational purposes are not subject to federal taxation B. There are no income limits placed on contributors C. Contributions are unlimited D. Earnings in the account are tax-deferred

C. Contributions are unlimited Although contribution limits are considerably higher than for a Coverdell Education Savings Account (limited to $2,000 per year), contributions to a 529 plan are not unlimited.

Your firm is the managing underwriter of an initial public offering. How many days must the firm's research analyst wait before issuing a research report on this IPO? A. There is no waiting period and research may begin anytime after the effective date B. Three days C. 10 days D. 25 days

C. 10 days If a firm is involved in an underwriting of an initial public offering and is the manager or comanager, it must maintain a quiet period of 10 days following an IPO or three days following a secondary offering. During this time, the firm may not issue research reports on its investment banking clients' stock. If the firm was a syndicate member or selling group member, the firm would need to wait 10 days.

A direct participation program in real estate does NOT have which of the following characteristics? A. Passive income B. The tax benefit of depreciation C. Cash dividends D. A tax rate on capital gains that is lower than ordinary income

C. Cash dividends A direct participation program in real estate, which is also known as a real estate limited partnership (RELP), would distribute either passive income or passive losses. Both depreciation of the buildings and a lower tax rate on capital gains if the property is sold after one year, are characteristics found in any real estate investment. A REIT, not a RELP, pays cash dividends that are taxable at the same rate as ordinary income.

Which TWO of the following statements are TRUE when opening new customer accounts? I. A P.O. box may be shown as the customer's address on the new account form II A street address must be reflected on the new account form III. Customer correspondence may be sent to a P.O. box IV. Customer correspondence may not be sent to a P.O. box A. I and III B. I and IV C. II and III D. II and IV

C. II and III A customer must list a legal street address on the new account form. However, a broker-dealer is allowed to mail correspondence, including account statements, to a P.O. box at the customer's request.

According to MSRB rules, the delivery of a mutilated certificate is considered a good delivery: A. Under no circumstances B. If the seller informs the buyer about the mutilation in writing C. If the certificate is authenticated by the issuer or transfer agent D. If the certificate is authenticated by the MSRB

C. If the certificate is authenticated by the issuer or transfer agent A mutilated certificate may be authenticated by the issuer or an agent of the issuer (e.g., a transfer agent or paying agent). If authenticated, it is considered a good delivery. A mutilated coupon may be guaranteed by any commercial bank as well as the issuer or its agent.

Regarding a head-and-shoulders chart pattern, a technical analyst feels that: A. A top formation is bullish B. A bottom formation is bearish C. It signifies that a trend is reversing D. It signifies that a trend is continuing

C. It signifies that a trend is reversing A head-and-shoulders formation indicates the reversal of a trend. A head-and-shoulders top formation is bearish because it indicates the reversal of an upward trend. A head-and-shoulders bottom formation (inverted head and shoulders) is bullish since it indicates the reversal of a downward trend.

A client's market order to sell is executed at $21.35; however, the client is told that it was executed at $21.85. In this case, the customer will: A. Cancel and rebill the original order B. Receive $21.85 C. Receive $21.35 D. File a complaint

C. Receive $21.35 When a market order is executed, the customer is responsible for the actual execution price, regardless of how it has been reported. If the order was reported to have been executed at one price, but was executed at another price that's either higher or lower, the actual execution price must be accepted.

A long margin account with a market value of $20,000 and a debit balance of $12,000 is considered: A. Below minimum maintenance B. Subject to a margin call C. Restricted D. To have excess equity

C. Restricted Equity is the difference between long market value and debit balance, i.e., $20,000 - $12,000 = $8,000. If equity is less than 50% of market value, the account is considered restricted, but does not need to be rectified. Since $8,000 ÷ $20,000 = 40%, equity is 40% of market value.

A private equity investor has purchased shares of a private company prior to an initial public offering (IPO). This investor has registration rights, but still owns shares of the company. After the IPO, how long must this investor typically wait before selling the shares? A. Two years B. One year C. Six months D. 30 days

C. Six months A lock-up agreement dictates the amount of time that pre-IPO investors, such as private placement buyers (private equity investors) and other insiders, typically must wait to sell their shares once the company has gone public. Although a lock-up agreement will generally expire six months (180 days) following the closing of the company's IPO, there's no statutory time limit. The lock-up is designed to prohibit management and venture capitalists that initially funded the company from immediately liquidating their shares once the issue goes public. The shares will then be sold under a Rule 144 exemption. Registration rights allow, but don't require, these holders to sell their shares along with the company when it conducts the IPO.

Which of the following statements is NOT considered misleading regarding a variable annuity communication? A. Telling a client that a variable annuity is a mutual fund B. Representing that a variable annuity will meet short-term liquidity needs C. Telling a client about the negative impact of an early redemption D. Making a representation that a death benefit guarantee applies to the investment return of the annuity

C. Telling a client about the negative impact of an early redemption FINRA is concerned about misleading communications regarding product identification, liquidity, and claims regarding guarantees. A firm should not imply that the underlying account is a mutual fund. Annuities should be purchased with long-term goals in mind, not short-term liquidity needs. Death benefits may be guaranteed, but investment results may not. It would be advisable to inform a potential investor of surrender charges incurred as a result of early redemption.

A customer bought an 8% debenture at a 7.20 basis. If the bonds are currently trading 15 basis points higher: A. The customer's yield to maturity has increased to 7.35% B. The bond's coupon has increased to 8.15% C. The bond's market price has decreased D. The investment has not been affected

C. The bond's market price has decreased When the customer bought the bond, he established a yield to maturity of 7.20%. A 7.20 basis is used to quote a bond that is offered at a price equivalent to a YTM of 7.20%. This will remain the same over the life of his investment. The coupon rate was established when the bonds were issued and will never change. However, when yields in the market increase, the market price of outstanding bonds decreases. The bond is now trading at a price equivalent to a YTM of 7.35%.

A registered representative uses text messaging on a cell phone in order to communicate with customers of her firm when she's out of the office. In this case, which of the following is TRUE? A. This type of communication with customers is prohibited. B. The broker-dealer is required to approve any communication with customers when the RR uses this type of device. C. The broker-dealer is permitted to allow its RRs to use this type of communication as long as the records are maintained by the firm. D. The broker-dealer is not required to maintain any records of the messages.

C. The broker-dealer is permitted to allow its RRs to use this type of communication as long as the records are maintained by the firm. According to FINRA rules, broker-dealers must supervise all written and electronic correspondence that their RRs have with customers (including text, e-mail, and instant messages). Additionally, these records must be maintained by the firm for a minimum of three years. If a firm permits its RRs to communicate with customers through non-firm email addresses and other electronic devices, it's required to supervise and retain those communications. In fact, some firms prohibit or block its RRs from accessing non-firm electronic platforms for business purposes.

A member firm is required to indicate which of the following items on a purchase confirmation sent to a customer? A. Whether the member firm prepares research reports on the security B. Whether the broker-dealer has an investment banking relationship with the issuer C. The firm's lack of membership in SIPC D. If the member firm acted as a market maker, the amount of profit earned on the transaction

C. The firm's lack of membership in SIPC Broker-dealers are required to indicate on a confirmation to a customer whether they acted in an agency or principal capacity. If the member acted in an agency capacity, it must disclose or offer to disclose the name of the other party to the transaction. In addition, the broker-dealer must disclose the amount of commission charged. Market makers who act in a dealer capacity generally are not required to disclose the amount of profit that they earn on a transaction. There is no requirement to disclose whether the firm prepares research reports on the security or if there is an investment banking relationship. A firm typically must disclose that it is not a member of the Securities Investor Protection Corporation (SIPC), or that the broker or dealer clearing or carrying the customer account is not a member of SIPC.

A variable annuity has an AIR of 4%. This past year, the separate account grew at a rate of 12%. The appreciation in the separate account: A. Will be taxed to the investor during the accumulation period as ordinary income B. Is taxable only to the separate account C. Will increase an annuitant's monthly payment from the annuity D. Will have no effect on the investor because the investor is guaranteed only a 4% payment increase during the year

C. Will increase an annuitant's monthly payment from the annuity If the separate account of a variable annuity grows at a greater rate than the AIR, monthly payments from the annuity will increase.

An investor purchases a zero-coupon municipal bond that matures in 15 years, but it is callable in five years at 102. If the bond is called, the investor will receive: A. Par value B. 102% of the par value C. 102% of the original cost D. 102% of the compound accreted value

D. 102% of the compound accreted value The key to this question is in realizing that the basis of a zero-coupon or original issue discount (OID) bond must be accreted (upwardly adjusted) on an annual basis. After the first year's accretion, the bond's original cost is no longer of importance. Also, any reference to the bond's par value will only become valid if the bond reaches maturity and the investor receives the par amount. Therefore, in this question, it is important to note that any reference to a call premium is based on the bond's compound accreted value. If this bond is called, the investor will receive 102% of the compound accreted value, which is equal to the original value of the bond plus the annual accretion (interest earned, but not received) to date. However, if the bond was not an OID bond and was called, the investor would receive 102% of par ($1,020).

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. Above what market price for ABC will there no longer be an effect on the individual's profit? A. 90 B, 92 C. 94 D. 95

D. 95 The spread will widen as the market price rises. The maximum spread occurs at a market price of 95. If it rises above 95, the spread will not widen beyond 5 (the difference between the strike prices)

Which of the following choices would be LEAST suitable for an investor seeking liquidity? A. Preferred stock of a financial services company B. A mutual fund that invests in international markets C. A real estate investment trust (REIT) D. A hedge fund using leverage

D. A hedge fund using leverage Of the choices listed, the hedge fund would be the least suitable since it does not offer liquidity. Hedge funds are not subject to the same regulations for requiring access to their funds as are mutual funds. The shares are not redeemable on a daily basis and are not suitable for an investor requiring a certain degree of liquidity. The preferred stock and REIT are exchange-traded and may be sold at any time

When a broker-dealer sells a security to a client and charges a commission on the transaction, it is acting as the client's: A. Market maker B. Principal C. Designated market maker D. Agent

D. Agent A broker-dealer that buys securities from or sells securities to a client without owning the securities is acting as the client's agent or broker. The broker-dealer does not have any risk and the client pays a commission on this type of transaction. When acting in a principal capacity, the client is charged a markup or markdown.

Balanced funds typically invest in: A. Hedge funds B. Investment-grade fixed-income securities only C. Growth stocks only D. Both equity and fixed-income securities

D. Both equity and fixed-income securities Balanced funds may invest in both equities and fixed-income securities and may hold both growth and value stocks.

An analysis of a revenue bond issue normally addresses the: A. Per capita debt of the municipality B. Per capita income of the municipality C. Assessed valuations of the municipality D. Debt service coverage ratio

D. Debt service coverage ratio The debt service coverage ratio indicates the number of times pledged revenues cover interest and principal payments due on a bond. This is important for the analysis of a revenue bond, which is backed by a revenue producing facility. The other choices are important for the analysis of a general obligation bond, which is backed by the full faith, credit, and taxing power of the issuing municipality.

Which of the following is NOT monitored by a technical analyst? A. Advance/decline data B. Chart patterns C. Market momentum D. Dividend payout ratios

D. Dividend payout ratios Asset allocation based on a client's risk tolerance and investment objectives is called strategic asset allocation. In theory, it is the best mix of assets given the client's goals and level of risk aversion, giving it a long-term outlook. Strategic asset allocators tend to view the market as efficient and market timing as ineffective. By contrast, those who believe securities markets are not perfectly efficient may try to use an active strategy to alter the portfolio's asset mix, to take advantage of anticipated economic events. This market timing approach is sometimes called tactical asset allocation.

A client is trying to ascertain the best investment for his child's college education. His child is currently two years old. Which of the following investments might be MOST appropriate? A. Inflation protected bond funds B. Balanced funds C. High yield funds D. Growth funds

D. Growth funds This question presents a situation that could never be acted upon in real life. Here we have a situation where there is not enough information to answer the question properly. Nonetheless, the regulatory exam will ask it. So, how do you decide? This is where you have to answer what is true in general. In other words, take some of the basic tenets of investing and apply common sense. Our situation has a goal of saving for a need in the future. That future is about 16 years away, i.e., long term. That means he needs to grow the money, which means long-term, more aggressive investing. What are the most aggressive investments on this list? The growth funds, since they are the only choices where stock is purchased. Choices (a) and (b) include the purchase of bonds, which will not provide enough growth over the projected 16-year time frame. Choice (c) is closer, but it still involves bonds, which will not outpace stocks over the long term.

Which of the following events would generally require approval by common stockholders? I. The declaration of a stock dividend II. The declaration of a stock split III. The declaration of a cash dividend IV. The election of a director A. I and III only B. I and IV only C. II and III only D. II and IV only

D. II and IV only Common stockholders are provided the right to vote on stock splits and director elections, but not on cash dividends and stock dividends. The declaration of cash dividends and stock dividends falls under the authority of the board of directors.

Bud Jones purchased 100 shares of DEF at 20 on June 16 and passed away on July 27 when the market value of DEF was 25. If the 100 shares of DEF are inherited by Mr. Jones's daughter Mary, what are the tax implications? I. Mary assumes a cost basis of 20 II. Mary assumes a cost basis of 25 III. The holding period for the stock is short-term V. The holding period for the stock is long-term A. I and III only B. I and IV only C. II and III only D. II and IV only

D. II and IV only When securities are inherited, the recipient's cost basis is the market value of the securities at the time of the deceased's death. The recipient's holding period for the stock will be long-term, regardless of the deceased's actual holding period.

A customer is considered covered if he holds which of the following positions in the same account as 5 short October 40 call options? A. Short 400 shares of the underlying stock B. Short 500 shares of the underlying stock C. Long 400 shares of the underlying stock D. Long 500 shares of the underlying stock

D. Long 500 shares of the underlying stock If a customer already owns stock and is shorting a call he is said to be covered on the transaction since he already owns the shares that must be delivered if the call option is exercised. A seller or writer of a call option is obligated to deliver stock. Each option contract is based on 100 shares or one round-lot of stock. Since the customer is shorting or selling 5 calls, the customer needs to own or be long at least 500 shares. The strike or exercise of 40 is not relevant. If the customer does not have the shares, he is said to be exposed, uncovered, or naked.

All of the following actions may create a taxable event Except? A. An investor liquidates her mutual fund shares and reinvests the proceeds in a different fund in the same family B. A dividend is paid but the investor forgoes the cash and chooses to reinvest the funds in additional shares of the same fund C. An individual receives the death benefit from her father's variable annuity D. Rolling the funds of one annuity into another annuity

D. Rolling the funds of one annuity into another annuity Switching from one mutual fund to another in the same family is considered by the IRS to be a sale of an existing asset and a new purchase. This would generate a taxable event. Reinvestments in the same fund are still taxable but add to a client's cost basis. An annuity death benefit may generate a taxable event for the recipient if she receives an amount above the contributions put into the contract by the deceased. Section 1035 of the IRS code does allow the transferring of assets from one annuity contract into another annuity contract without tax liability.

An increase in which of the following metrics would cause the price of a bond to drop? A. The bond's rating B. The bond's liquidity C. The issuer's financial strength D. The general level of interest rates

D. The general level of interest rates Interest rates and bond prices are inversely related. When interest rates increase, bond prices will fall. When interest rates decrease, bond prices will rise. Any of the other choices would usually have a positive effect on a bond's price.

Which of the following statements is TRUE concerning member firms' suitability requirements for institutional investors? A. Institutional investors are exempt from SRO suitability requirements B. The SRO suitability requirements apply unless the account is defined as a Qualified Institutional Buyer C. The suitability requirements are more stringent than those of retail accounts D. The suitability requirements are less stringent than those of retail accounts

D. The suitability requirements are less stringent than those of retail accounts Institutional investors are subject to FINRA suitability requirements, but they are less stringent than those of retail accounts. There is no special exemption for QIBs. Firms have a suitability obligation to all clients. When determining the suitability obligations of a broker-dealer concerning institutional customers, the two most important considerations are the customer's ability to evaluate the investment risk independently, and the extent to which the customer is exercising that ability in connection with the recommendation.

A company in Japan will be importing California wines. The company must pay in U.S. dollars and is, therefore, concerned that the U.S. dollar will appreciate in value. To provide protection in the event that the U.S. dollar does appreciate, the company can buy: A. U.S. dollar calls B. U.S. dollar puts C. Yen calls D. Yen puts

D. Yen puts If the U.S. dollar appreciates, the value of the yen declines. Therefore, the company should buy puts on the yen. The company cannot buy U.S. dollar calls since there are no options on the U.S. dollar (trading on an options exchange in the United States). If the expectation is that the U.S. dollar will decline, the company could buy yen calls.

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