7-Final 10

All of the following are types of oil and gas direct participation programs EXCEPT: A. Sector B. Income C. Exploratory D. Developmental

The best answer is A.Exploratory oil and gas programs drill for oil in unproven areas. Developmental programs drill near existing fields. Income programs simply buy proven oil reserves in the ground, and sell them using the depletion allowance as a partial tax shelter. Combination programs combine all three types. There is no such thing as a "sector" oil and gas program. This term only applies to an investment company that invests in a specific industry.

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

The best answer is A.If the position is closed, the customer loses 2.50 points (Bought at $3; Sold at $.50) = $250 loss. The position cannot be exercised because it is "out of the money." If the position expires, the holder loses the $300 premium paid. It is better to lose less, so closing the position is the best strategy. The last choice, "rolling-up the position" is an advanced strategy that is not tested. question # 5

Which positions create a credit calendar spread? A. Buy the near expiration / Sell the far expirationB. Buy the far expiration / Sell the near expiration C. Buy the near expiration / Buy the far expiration D. Sell the near expiration / Sell the far expiration

The best answer is A.In a calendar spread, the expiration months are different but the strike prices are the same. The nearer expiration will be cheaper than the farther expiration since it has less "time." To create a credit spread, the more expensive option must be sold (the far expiration) and the cheaper option must be purchased (the near expiration).

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

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

In 2019, a self-employed person earning $100,000, who also has $100,000 of investment income, wishes to open a Keogh Plan. Their maximum permitted contribution is: A. $20,000 B. $40,000C. $56,000 D. $66,000

The best answer is A.Keogh (HR10) contributions are based only on personal service income - not investment income. $100,000 of personal service income x 20% effective contribution rate = $20,000. Note that this is less than the maximum contribution allowed of $56,000 in 2019.

A primary dealer buys Treasury Securities in a competitive bid at the weekly Treasury Auction. Settlement between the dealer and the Treasury occurs: A. on issue date B. the next business day after issue dateC. the next business day after the auction D. 5 business days after issue date

The best answer is A.Primary U.S. Government dealers are obligated to bid in the weekly Treasury Auctions. The auctions are conducted each Monday and Tuesday. The issue date of the securities set at the following Thursday. If a primary dealer wins the bid, settlement is made with the Treasury on issue date - that is Thursday.

Blue Sky Laws require registration of all of the following EXCEPT: A. exempt issues B. non-exempt issues C. broker-dealers D. sales representatives

The best answer is A.State blue sky laws are independent of the Federal Securities Acts. As a general rule, securities exempt from Federal registration are also exempt from state registration. Blue sky laws require registration of broker-dealers, sales representatives, and non-exempt issues in that state. Under these laws, states have the power to suspend or expel individuals or issues from registration.

Which of the following non-exempt securities are marginable? I Securities included in the Pink SheetsII Securities included in the NASDAQ Global MarketIII American Stock Exchange listed securitiesIV New York Stock Exchange listed securities A. I and II only B. III and IV onlyC. II, III, IVD. I, II, III, IV

The best answer is C.All securities listed on an exchange, such as the NYSE, NYSE American (AMEX) or NASDAQ, are marginable. Regarding over-the-counter securities, those on the OTCBB or in the Pink Sheets are not marginable (since the market is illiquid).

Which orders guarantee execution but not price? I Buy LimitsII Buy StopsIII Sell LimitsIV Sell Stops A. I and II B. III and IV C. I and IIID. II and IV

The best answer is D.If a "Stop" order is elected, it becomes a market order to be filled at the first opportunity. Thus, the actual price at which the order is executed is not known. On the other hand, a "Limit" order specifies that the execution must comply with the limit price specified or better. Thus, limit orders are filled at that price or better.

Credit on securities extended by brokers to customers is controlled by: A. Regulation T B. Regulation U C. Regulation Q D. Regulation G

The best answer is A.Credit on securities from broker to customer is controlled by Regulation T of the Federal Reserve Board.

A customer executes the following transactions during the same year: Jul 1stBuy 100 ABC at $30 per shareDec 1stBuy 100 ABC at $20 per shareDec 15Sell 100 ABC at $22 per share The customer uses the FIFO method of tax accounting. The tax consequence of these transactions for this tax year is: A. No gain or loss B. $200 loss C. $800 loss D. $1,000 loss

The best answer is A. This is a very subtle question. The "wash sale" rule states that if a customer liquidates a position at a loss, and then reestablishes that position within 30 days, the loss deduction is disallowed. The 30-day time period counts from 30 days prior to the sale date, until 30 days after the sale date. Thus, if the position is reestablished in anticipation of selling at a loss, the deduction is disallowed. In this case, the stock was purchased at $30 per share on July 1st. Towards the end of the year, the customer knows that he has a loss, and that he wishes to take the loss this tax year. The customer also knows that if he or she sells first, and then buys back the position in 30 days, the loss will be disallowed. To "fool" the IRS, the customer buys the stock on December 1st at $20 before selling the stock at $22, fifteen days later. Well, the IRS is not fooled. From the IRS's standpoint, the stock was purchased at $30 and sold at $22 on December 15th for an $8 per share loss. The customer repurchased the stock at $20 within 15 days, so the loss is disallowed under the "wash sale rule." The disallowed loss is added to the customer's basis, for a new basis in the stock of $28. When the customer liquidates this position at a later date, any gain or loss is computed from the $28 adjusted basis. In essence, the loss is deferred by the "wash sale" rule.

A customer has a restricted margin account with $5,000 of SMA. If the customer wishes to buy $10,000 of marginable common stock, the customer must deposit? A. 0 B. $5,000 C. $10,000 D. $20,000

The best answer is A.A restricted margin account is one that is below the 50% Regulation T initial margin requirement. Restriction has no effect on purchases in the account. To buy a marginable security, the customer must deposit the Regulation T requirement. To buy $10,000 of a marginable stock, the customer must deposit $5,000 (50% Regulation T requirement). The existing $5,000 of SMA can be used to meet this requirement, so no deposit need be made.

The market sentiment of a customer who sells a "put spread" is: A. bullishB. bearish C. neutral D. volatile

The best answer is A.A sale of a "put spread" is similar to simply selling a put. In a rising market, the puts expire "out the money" and the profit is the premium received. The difference is that a short put gives ever increasing downside loss potential - all the way to "0" in return for the premium received. A short put spread gives limited downside loss potential in return for a lower premium received.

The long leg of a bull call spread: A. provides potential gain B. reduces potential risk C. limits potential gain D. limits potential loss

The best answer is A.An example of a bull call spread is:Buy 1 ABC Jan 50 CallSell 1 ABC Jan 60 CallThe long 50 call allows the customer to buy the stock at $50 per share in a rising market. Thus, if the market rises above $50, this position gives increasing gain. However, if the market rises above $60, the short 60 call will be exercised, obligating the customer to sell the stock at $60. Thus, maximum gain is limited to 10 points (Buy at $50; Sell at $60).

Industrial development bonds are backed by: I the lease obligating the private user to rent the facility for the life of the bond issueII the unconditional guarantee of the private userIII securities pledged as collateral by the private userIV the faith and credit of the governmental issuer A. I and II only B. III and IV onlyC. I, II, IV D. I, II, III, IV

The best answer is A.An industrial development bond is backed by the rents paid by a corporation using the facility built with the proceeds of the offering, and the guarantee of that corporation. However, there is no actual collateral pledged to back the issue. If the corporation defaults, the bondholders cannot claim any assets to satisfy the debt. Industrial bonds are not backed by G.O. (full faith and credit of a governmental issuer) pledge.

Customers must be given information about SIPC: A. at, or prior to, account opening B. on the first trade confirmation sent after account opening C. on the first account statement sent after account opening D. semi-annually on the account statement

The best answer is A.At, or prior to, account opening, the customer must be provided with the telephone number and web site address of SIPC (Securities Investor Protection Corp., which insures customer accounts against broker-dealer failure), through which the customer can obtain a copy of the SIPC brochure. In addition, this information must be provided to the customer annually thereafter.

A customer sells short 100 shares of ABC stock at $50 per share. The stock falls to $40, at which point the customer writes 1 ABC Sept 40 Put at $4. The stock falls to $30 and the put is exercised. The customer's cost basis upon exercise of the put is: A. $36 B. $44 C. $46 D. $54

The best answer is A.The customer sold the stock short at $50 per share (sale proceeds). Later, the customer sold a Sept 40 Put @ $4 on this stock. If the short put is exercised, the customer is obligated to buy the stock at $40 per share. Since the customer received $4 in premiums when the put was sold, the net cost to the customer is $36 per share for the stock (this is the cost basis in the stock for tax purposes). The stock that has been purchased is delivered to cover the short sale, closing the transaction. The customer's gain is: $50 sale proceeds - $36 cost basis = 14 point gain.

A customer buys $20,000 of ABC stock in March of 20XX. On December 31, 20XX, the stock is valued at $16,000. The customer will be able to deduct how much on this year's tax return? A. 0 B. $1,000C. $3,000 D. $4,000

The best answer is A.The loss is not "recognized" for tax purposes until the securities are sold. Thus, none of the loss is deductible on this year's tax return.

In a corporate new issue offering, the underwriter's responsibilities include which of the following? I Managing the syndicate accountII Determining each syndicate member's participationIII Printing the certificatesIV Registering the certificates A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

The best answer is A.The manager runs the syndicate account and determines each member's participation in the underwriting's profit or loss. In a new issue offering, the issuer is responsible for originally printing and delivering the shares. These shares go to the transfer agent, who transfers the shares into the names of the purchasers of the new issue. Corporate new issues must be registered with the SEC under the Securities Act of 1933, unless an exemption is available. These securities must also be registered in each state under that state's "Blue Sky Laws". Both registrations are the responsibility of the issuer.

All of the following statements are true about the second market for equity securities EXCEPT: A. companies that are traded must meet listing standards B. FINRA regulates the over-the-counter market C. a greater number of companies trade over-the-counter than trade on any single exchange D. the over-the-counter market is a negotiated market

The best answer is A.The over-the-counter market is a negotiated market. A greater number of companies trade OTC (about 6,000 smaller companies) than on any single exchange. For example, the NASDAQ Stock Market has about 3,000 issues; while the NYSE lists about 2,800 issues. OTC equities are quoted in either the OTCBB or the Pink OTC Market. These "quotations vendors" have no listing standards. In contrast, each exchange has its own listing standards. FINRA regulates the OTC market.

A person who makes a secondary market in securities is called a(n): A. market maker B. registered representative C. underwriter D. retail broker

The best answer is A.The secondary market is the trading of issues outstanding in the market. The individuals making the secondary market are the market makers (dealers). Market makers deal with the public through registered representatives (retail brokers). Underwriters are the market makers in the primary market (new issues), not the secondary market.

A customer has a tax shelter unit with an adjusted cost basis of 0 and has $3,000 of unused passive losses. The customer sells the unit for $3,000. What is the capital gain or loss? A. $0 B. $3,000 loss C. $3,000 gain D. $6,000 loss

The best answer is A.The tax treatment of unused passive losses when a partnership interest is sold, is to add them to the cost basis. In this example, the customer has a partnership basis of $0 and $3,000 of unused passive losses, for an adjusted cost basis of $3,000. Since the sale proceeds from disposing of the partnership interest are $3,000, the customer has no capital gain or loss.

In order to open a new account for an individual customer, which information is required on the new account form? I Date of birthII Date of reaching legal majorityIII Social security numberIV Telephone number A. I and III B. I and IV C. II and III D. II and IV

The best answer is A.There are 4 critical pieces of information that must be collected to open a new account for an individual customer - Name, Address, Birthdate, and Social Security number. The member firm must independently verify the customer's identity - either by matching this information to a government issued identification such as a driver's license or passport; or by using a database service that allows computer matching of this information.

Interest on Eurodollar bonds is paid: A. annually B. semi-annually C. quarterly D. monthly

The best answer is A.Unlike normal interest bearing obligations in the U.S. which pay interest semi-annually, Eurodollar bonds pay interest once a year.

Which disclosure is optional when advertising a CMO Tranche? A. CouponB. Credit Rating C. Final Maturity DateD. Average Life Of Investment

The best answer is B. FINRA sets minimum disclosure requirements when advertising a CMO tranche. It requires disclosure of the: Coupon Anticipated Yield and Average Life Specific Tranche ID - Number and Class Final Maturity Date Underlying Collateral In addition, FINRA requires the following statement: "The yield and average life shown above consider prepayment assumptions that may or may not be met. Changes in payments may significantly affect yield and average life. Please contact your representative for information on CMOs and how they react to different market conditions." Then FINRA states that the following disclosures are optional: Minimum Denomination Rating Agency / Government Backing Income Payment Structure Generic Description of Tranche (e.g., PAC, Companion) Yield to maturity of CMOs Offered at Par

Issuers that wish to give "earnings guidance" to research analysts must conform with the provisions of SEC: A. Regulation SBB. Regulation FD C. Regulation SK D. Regulation SP

The best answer is B. Regulation FD (Fair Disclosure), passed in 2000, is basically an elaboration of the insider trading rules. It prohibits issuers from making selective disclosure of non-public information to research analysts, mutual fund managers, and other industry professionals, unless at the same time, the information is broadly disseminated to the public. Regulation SP requires financial institutions to provide customers with a copy of their privacy policies and procedures, including whether customer information is provided to third parties; and requires that customers be given the ability to "opt out" of any such disclosures. Regulation SK standardizes the reporting of financial and non-financial information by issuers to the SEC.

An American Style stock option differs from a European style stock options because it can be: A. traded anytime until expirationB. exercised anytime until expiration C. issued at any time until expiration D. redeemed anytime until expiration

The best answer is B. The very first options contracts were single stock options, which started trading on the CBOE in 1973. All single stock options are "American Style" - these are options that can be exercised at any time. In contrast, European style options can only be exercised at expiration and not before. All options contracts can be traded anytime until expiration. Options contracts cannot be redeemed and they can only be issued based on the cycles set by the Options Clearing Corporation.

A 60-year old man is looking to create a portfolio that will provide current income and preservation of capital. Which of the following portfolios would be the BEST recommendation to the client? A. Long term corporate bonds rated AA or better, high yield corporate bonds and blue chip stocksB. Treasury bills, a money market mutual fund and bank certificates of deposit C. Treasury STRIPS, corporate income bonds and PO tranches D. Growth stocks, defensive stocks and foreign stocks

The best answer is B. This customer wants current income and preservation of capital. Choice A provides current income, but does not provide preservation of capital. Long term bonds are subject to loss of value if interest rates rise; high yield corporate bonds have this risk as well as higher default risk; and blue chip stocks also can lose substantial value in a bear market. Choice B meets both objectives. Treasury bills, money market funds and bank certificates of deposit all provide income (but not high levels of income) and safety of principal. Choice C consists of long term securities that do not provide income, and that also have high levels of interest rate risk. Treasury STRIPS are zero coupon Treasury obligations - they have high levels of interest rate risk and do not provide current income. Corporate income bonds only pay interest if the corporation has enough earnings. PO tranches are CMO tranches that pay "Principal Only." Because mortgage payments in the early years are mostly interest and in the later years are mostly principal, they pay very little in the early years and make most of their payments in their later years. Thus, they are most similar to a long-term zero coupon bond with high levels of interest rate risk. Choice D consists only of common stocks, which do not provide for preservation of capital.

A smaller company with 75 employees wishes to establish a retirement plan. Some of the employees are highly paid, but most are part-time low wage earners. The company would like to maximize contributions for the highly-paid employees to keep these talented individuals. The company has erratic cash flow but is profitable overall. What type of retirement plan would be the best for the company? A. 401(k) PlanB. Profit Sharing Plan C. Keogh Plan D. 457 Plan

The best answer is B.A Profit Sharing Plan is a type of defined contribution plan under ERISA. It permits contributions to be made based on a formula, and this formula can take into account business conditions. Thus, if there are "no profits," then no contributions are made; and if the business is profitable, contributions are made. Thus, it is good for a company that has variable earnings (as in this example) or years when there are no earnings. The plan must cover both the rank-and-file employees and the owners/managers - but the owners/managers can get much larger contributions since the amount contributed is a percentage of income. The maximum contribution deductible to the employer is 25% of income (statutory rate; 20% effective rate), capped at $56,000 in 2019. 401(k) plans have much lower contribution limits, so they do not "maximize" contributions. Keogh plans can only be established by self-employed individuals. 457 plans, generally, can only be established by government employers.

A bond issue where the bonds have the same maturity but different dates of issuance is a: A. term bond offeringB. series bond offering C. serial bond offering D. combined serial and term bond offering

The best answer is B.A bond issue where the bonds have the same maturity but different dates of issuance is a series bond issue. These are rarely issued and are used to finance long-term construction projects where all of the money is not needed at once.

If market rates of interest decline, bonds issued at par would trade at (a): A. discountB. premium C. par D. parity

The best answer is B.A declining market rate of interest means that interest rates are dropping. If market interest rates drop, then bond prices will rise to a premium above par, and the yields on those bonds will fall.

Margins on government and municipal securities are set by (the): A. MSRBB. FINRA C. FRB D. SEC

The best answer is B.Because municipals and governments are exempt, the Federal Reserve has no power to set margins. However, FINRA sets minimum maintenance margins for these securities that member firms must meet.

When comparing fixed fee accounts to wrap accounts: I Fixed fee accounts generally only cover transaction costsII Fixed fee accounts generally cover transactions costs, asset allocation and portfolio managementIII Wrap accounts generally only cover transaction costsIV Wrap accounts generally cover transaction costs, asset allocation and portfolio management A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is B.Fixed fee accounts (non-managed fee based accounts) only cover trading costs. They do not include charges for asset allocation and portfolio management. Wrap accounts include asset allocation and portfolio management. Any fixed fee product is defined as an "investment adviser" product.

A customer purchases 200 shares of ABC stock. ABC declares a 3:2 stock split. After the stock split, how many additional shares will the customer now own? A. 50B. 100 C. 200 D. 300

The best answer is B.For every 2 shares the customer had, she will now have 3 shares. After the 3:2 split, a customer who owned 200 shares will now have 300 shares or 100 additional shares.

REITs receive preferential tax treatment based upon: A. portfolio of real estate investmentsB. distribution of income to shareholders C. registration with the Securities and Exchange Commission D. listing on the New York Stock Exchange

The best answer is B.If a Real Estate Investment Trust distributes at least 90% of its net investment income to shareholders, then it is regulated under Subchapter M of the Internal Revenue Code. The REIT pays no tax on the distributed income - the shareholder who receives the net income pays tax once. In addition, REITs must derive at least 75% of their income from real estate related activities to be "regulated" - however Choice A is not the best answer because these activities include investments in mortgages, as well as investments in real estate.

Your customer, age 68, that has an IRA account at your firm valued at $500,000, passes away. The customer leaves the account to his wife, age 48, who does not work. She needs current income and wishes to know her best option to minimize taxes. You should advise the spouse to: A. roll the funds over into a new IRA in the spouse's nameB. transfer the IRA funds to a beneficiary distribution account C. cash out the inherited IRA account D. disclaim or give away the inherited IRA account

The best answer is B.If the spouse rolls over the IRA into her a new account in her name, and begins to take distributions immediately (which is not required in a roll over), then she would be subject to regular income tax plus the 10% penalty tax imposed on premature distributions (since she is under age 59 1/2 and the account is her IRA). If the funds are transferred into an IRA beneficiary distribution account, then it is titled in both the decedent's name and the beneficiary's name. Distributions must start immediately and are taxable, but there is no penalty tax (even if the beneficiary is under age 59 1/2), since the account is considered to be the property of the estate of the decedent. The minimum amount to be distributed annually is based on the longer of 5 years or the expected life of the beneficiary (since she is age 48, and she would be expected to live to age 81, this would be 33 years). This is the best option. Immediate cash out of the account would subject the entire proceeds to ordinary income tax that year - again, not meeting the customer's goal of minimizing taxes. Finally, the customer needs the income, so disclaiming (giving away) the account makes no sense.

The last time to trade expiring equity options is: A. 4:00 PM Eastern Standard Time; 3:00 PM Central Time; on the day prior to expirationB. 4:00 PM Eastern Standard Time; 3:00 PM Central Time; on the expiration day C. 5:30 PM Eastern Standard Time; 4:30 PM Central Time; on the day prior to expiration D. 5:30 PM Eastern Standard Time; 4:30 PM Central Time; on the expiration day

The best answer is B.Listed equity options trade until 4:00 PM Eastern Standard Time on the third Friday of the expiration month. The contracts expire at 11:59 PM Eastern Standard Time, on the third Friday of the month. Note that Central Time is included in the question because both the CBOE and OCC are located in Chicago, which is on Central Time.

A customer buys 1 ABC Jan 80 LEAP Call @ $6 that has 12 months left until expiration in a margin account. Regulation T requires that the customer deposit: A. $300B. $450 C. $600 D. $8,000

The best answer is B.Regulation T sets the initial margin requirement to buy LEAP options with over 9 months to expiration at 75% of the purchase amount. 75% of $600 = $450 margin requirement.

Which of the following are synonymous terms for the "parties" to a brokerage account? A. First Party / CustomerB. Second Party / Customer C. Second Party / Broker D. Third Party / Customer

The best answer is B.The "First Party" to a brokerage account is the brokerage firm; the "Second Party" to a brokerage account is the customer; the "Third Party" to a brokerage account is anyone other than the broker or customer.

The Major Market Index Option contract is traded on the: A. Boston Stock ExchangeB. American Stock ExchangeC. Chicago Stock Exchange D. Philadelphia Stock Exchange

The best answer is B.The Major Market Index Option contract (XMI) is traded on the American Stock Exchange.

Many years ago, a customer bought 1,000 shares of XYZ stock at $40 per share. The company spins off a subsidiary to its shareholders, and the customer gets 100 shares of PDQ stock as a result. On the first day of trading after the spin off, PDQ closes at $20, while XYZ closes at $50. The customer will have a: A. $40,000 cost basis in XYZ and a $2,000 cost basis in PDQB. $38,000 cost basis in XYZ and a $2,000 cost basis in PDQ C. $50,000 cost basis in XYZ and a $2,000 cost basis in PDQ D. $48,000 cost basis in XYZ and a $2,000 cost basis in PDQ

The best answer is B.The aggregate cost basis does not change in a spin-off. The original cost basis in XYZ stock is $40,000. After the spin off, the customer gets 100 shares of PDQ, with a $20 per share value = $2,000. This is the PDQ cost basis, and it comes out of the XYZ cost basis. $40,000 XYZ cost basis - $2,000 PDQ cost basis = $38,000 adjusted XYZ cost basis.

The person who shares in selling responsibility and liability, but who does not have decision making authority in a new issue syndicate, is known as the: A. managing underwriterB. syndicate member C. selling group member D. broker's broker

The best answer is B.The managing underwriter forms the syndicate and selling group, establishes the spread and the portions of the spread to be earned by each member of the underwriting group, and manages the offering of the securities. For this work, the manager earns the management fee out of the spread. The syndicate members share in the financial liability and profit potential for selling the issue. For selling his or her allotment, the syndicate member earns the "underwriter's concession." The selling group members help the syndicate find purchasers for the issue, but take no financial liability. For this work, the selling group members earn the "selling concession."

Arrange the following compensation items found in corporate underwritings from largest to smallest? I Underwriter's ConcessionII Selling ConcessionIII SpreadIV Reallowance A. I, III, II, IVB. III, I, II, IV C. IV, II, I, III D. III, IV, I, II

The best answer is B.The spread is the gross compensation earned by the syndicate. This is the largest amount of compensation in an underwriting, and it is out of this that portions are paid to the various participants in the offering. The manager retains a management fee (typically the smallest amount), giving up the underwriter's concession to the syndicate. The underwriter's concession is earned by a syndicate member that sells directly to the public. Out of the underwriter's concession, the syndicate member can give up a selling concession to a selling group member for helping to find a customer. Also out of the underwriter's concession, a syndicate member can give up a reallowance (a smaller amount than a selling concession) to a non-member of the selling group who finds a customer for some of the issue.

A customer account holds the following: 10%Market Index-Linked CDs20%Plain Vanilla CMOs20%ACME Drug Company shares10%REITs25%Health Care Sector ETFs15%Growth Fund Shares This portfolio is MOST susceptible to which risk? A. market riskB. business risk C. interest rate risk D. purchasing power risk

The best answer is B.This portfolio is concentrated in the Health Care sector, with 25% of the portfolio being in Heath Care ETFs and 20% in a drug company. A portfolio concentrated in one stock or industry is susceptible to business risk - the risk that the business may turn sour. For drug companies, this can result from existing profitable drugs losing patent protection, so prices and profitability drops; class-action lawsuits for selling dangerous drugs, etc.

Which statements are TRUE regarding Real Estate Investment Trusts? I Mortgage REITS can only invest in long term mortgages, but not short term loansII To be regulated under Subchapter M, 90% of Net Investment Income must be distributed to shareholdersIII Equity REIT income is derived from the difference between net rental income and interest paid on loansIV REIT losses can be passed through to shareholders under the "conduit" rules A. I and IIB. II and III C. II, III, IV D. I, II, III, IV

The best answer is B.To be regulated, REITs must distribute at least 90% of their Net Investment Income to shareholders. Equity REIT's invest in real estate and use the net rental income to service the debt used to purchase the properties. Mortgage REITs invest in both mortgages and short term construction loans, profiting from the spread between the REIT's cost of borrowing funds and its earnings on the mortgages and construction loans. REITs cannot pass losses to shareholders; they can only distribute income.

Which statements are TRUE about buying stock in a margin account? I 50% of the purchase amount must be deposited in cashII 100% of the purchase amount must be deposited in cashIII 50% of the purchase amount must be deposited in fully paid securitiesIV 100% of the purchase amount must be deposited in fully paid securities A. I or IIIB. I or IV C. II or III D. II or IV

The best answer is B.To meet a Regulation T call, either 50% of the purchase amount must be deposited in cash; or 100% of the purchase amount must be deposited in other fully paid securities (which have a loan value of 50% to pay for the new purchase).

A registered representative sends a prospecting letter to customers stating that significant profits can be achieved by purchasing call options in a rising market. This claim: A. is prohibited under the rules of the options exchangesB. must be balanced by a statement that trading options can also result in significant losses C. can only be made if it is documented by actual customer examples which occurred within the past year D. is permitted and does not require any prior approval

The best answer is B.Under the communications rules of the exchanges, any claims that profits can be generated from an investment strategy must be balanced by a statement that losses can also occur.

A municipal bond dealer quotes an 8 year 4% bond trading in the secondary market on a 6% basis. After considering all taxes, the customer's yield will be: A. less than 4% B. 4%C. more than 4% but less than 6% D. 6%

The best answer is C. Even though the coupon rate earned from a municipal bond is free of federal income tax, any market discount is taxed as interest income earned. This is nothing more than a "tax grab" by the Federal government - the idea being that wealthy people buy municipal bonds, so if there is a way that they can be taxed without jeopardizing their basic Federal income tax-free status, why not? The discount can be accreted annually and tax paid, or the tax can be paid at maturity or sale date. There are two components to the yield earned on a discount security - the coupon rate and the annual earning of the discount. With this bond the customer is earning 4% per year in annual interest plus 2% per year in annual gain (which equals the 6% basis.) The 4% interest earned is not taxable, however, the annual 2% accretion of the discount is taxed at ordinary income tax rates. Therefore, the after tax yield will be more than 4% but less than 6%.

Which statements are TRUE regarding a Roth IRA? I Roth IRAs allow a greater contribution than Traditional IRAsII Roth IRA contributions are not tax deductibleIII Distributions from a Roth IRA are not taxable if the investment is held for at least 5 yearsIV The legal maximum contribution amount can be made to both a Roth IRA and a Traditional IRA annually A. I and III B. I and IVC. II and III D. II and IV

The best answer is C. Roth IRAs, introduced in 1998, are an alternate to the Traditional IRA. Both allow the same contribution amount - a maximum of $6,000 per person in 2019 for individuals under age 50. If one contributes the maximum to a Traditional IRA, a contribution cannot be made to a Roth IRA; and vice-versa. Roth IRA contributions are not tax deductible. However, all distributions from a Roth IRA made after age 59 1/2 are 100% excluded from taxation as long as the investment has been held for 5 years. Compared to a Traditional IRA which allows a tax deduction for the contribution, a Roth contribution is not tax deductible. The benefit is that when distributions commence from a Roth IRA, there is no tax due (in contrast, distributions from Traditional IRAs are taxable).

A municipal dealer is reoffering 7% bonds which he just purchased at par. All of the following quotes would be considered "fair and reasonable" EXCEPT: A. 6.90 less 1/2 B. 100 1/2C. 108 D. 6.75 net

The best answer is C. The MSRB does not impose a fixed percentage mark-up that it considers to be "fair and reasonable." The dealer is supposed to use his judgment about the size of the trade; dollar amount involved; the difficulty of the trade; etc., to determine a fair and reasonable mark-up. In this example, the bond has a 7% coupon rate and was purchased by the dealer at par. If the bond is reoffered at 100 1/2, the dealer is taking a 1/2% mark-up. If the bond is reoffered at 108, the dealer is taking an 8% mark-up. If the bond is reoffered at 6.75%, the dealer is reducing the yield by .25 from the stated 7.00 yield. .25/7.00 = 3.6% reduction in yield, which approximates the percentage mark-up. The quote of 6.90 less 1/2, means the dealer is pricing the bond to yield 6.90% and is then deducting 1/2 point from the price. This bond will be priced at a slight premium less 1/2 point. Of all the quotes, it appears that 108 is by far the most expensive.

Which of the following statements about 403(b) Plans are TRUE? I Contributions are tax deductible to the employeeII Employees of any organization can contribute to this type of planIII Employees make voluntary contributions through their employersIV Earnings on contributions by employees are tax deferred A. I and II only B. III and IV onlyC. I, III and IV D. I, II, III, IV

The best answer is C.403(b) plans are only available to non-profit organization employees, such as school and hospital employees. These are tax qualified annuity plans, where contributions made by employees are tax deductible. Earnings in the plan grow tax deferred. When the employee retires, he or she may take the annuity, which is 100% taxable as ordinary income as taken.

What does a BDC invest in? A. Publicly-held small-cap companies B. Publicly-held mid-cap companiesC. Privately-held small-cap and mid-cap companies D. Privately-held large-cap companies

The best answer is C.A BDC is a Business Development Company. It is a registered investment company under the 1940 Act that is listed and trades like any other stock. Instead of investing in securities, it makes "private equity" investments in privately-held start-up companies, and also mid-size companies.

What portfolio construction is most appropriate for a retired married couple, ages 60 and 70, for the wife and husband respectively? A. 100% common stocks B. 70% common stock/30% bondsC. 35% common stock/65% bonds D. 100% bonds

The best answer is C.As one gets older, portfolio composition should shift to "safer" assets that generate reliable income. The general rule is to take "100 minus the investor's age" to get the appropriate investment portion to be held in stocks. Since these investors are a married couple, ages 60 and 70, this gives either 30% or 40% of the portfolio holding in stocks; with the remaining 60 - 70% of the holding in bonds. Note that a 100% bond holding is not appropriate because people are living much longer and they need the "extra return" that is provided by stocks that can grow in value, on top of the somewhat lower fixed return provided by bonds.

Which of the following statements are TRUE for both mutual funds and variable annuities? I Asset appreciation is untaxed for bothII Dividend and capital gains distributions are taxable each year for bothIII Both have portfolios that are managedIV Both are regulated by the Investment Company Act of 1940 A. I and II only B. III and IV onlyC. I, III, IVD. I, II, III, IV

The best answer is C.Both variable annuities and mutual funds are regulated under the Investment Company Act of 1940; have managed portfolios; and asset appreciation is untaxed. Mutual fund asset appreciation is taxable only when a capital gains distribution is made. Dividend and capital gain distributions made by variable annuity separate accounts must be reinvested and are tax deferred. Dividend and capital gain distributions from other investment companies do not have to be reinvested and are always taxable, whether reinvested or not.

CMO investors are subject to which of the following risks? I Default riskII Extended maturity riskIII Prepayment riskIV Interest rate risk A. I and II only B. III and IV onlyC. II, III, IV D. I, II, III, IV

The best answer is C.CMO investors have almost no default risk, since the underlying mortgages are usually implicitly backed by the U.S. Government. CMO tranch holders are subject to extension risk - the risk that the expected life of the tranch becomes much longer due to a rise in interest rates causing homeowners to keep their existing mortgages longer than expected. CMO tranch holders are subject to prepayment risk - the risk that the expected life of the tranch becomes much shorter due to a decline in interest rates causing homeowners to refinance and prepay their existing mortgages earlier than expected. The purchaser of a CMO tranch is subject to interest rate risk - if interest rates go higher, then the value of the tranch will decline.

Which statement is TRUE about federal taxation of contributions to 529 plans? A. Contributions are tax deductible to the donor B. Contributions are capped at $10,000 annuallyC. A 1-time gift of up to 5 times the gift tax exclusion amount can be given that will not be subject to gift tax D. A 1-time gift of up to 10 times the gift tax exclusion amount can be given that will not be subject to gift tax

The best answer is C.Contributions to 529 plans are not federally tax deductible. Any gifts above the annual gift tax exclusion amount ($15,000 in 2019) are subject to gift tax. Gift tax is paid by the donor, not the recipient. Note that a tax benefit offered by 529 plans is a 1-time gift that can be made into the account equal to 5 times the current gift tax exclusion, without the donor worrying about having to pay gift tax. Since the current exclusion is $15,000 in 2019, 5 times this amount or $75,000 can be donated as a 1-time gift and not be subject to gift tax.

Which of the following enforce MSRB rules for bank dealers that are NOT registered with FINRA? I Securities and Exchange CommissionII Office of the Comptroller of CurrencyIII Federal Deposit Insurance CorporationIV Federal Reserve Board A. I and IV B. II and IIIC. II, III, IV D. I, II, III, IV

The best answer is C.Enforcement of MSRB rules for bank dealers that are not registered as broker-dealers with FINRA is performed by the bank regulatory bodies - the Office of Comptroller of Currency; the Federal Reserve; and the Federal Deposit Insurance Corporation. Note that the SEC has no authority over banks unless the bank has a separate FINRA registered broker-dealer unit.

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

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

All of the following are true statements about U.S. Government Agency securities EXCEPT: A. U.S. Government Agency Securities are quoted in 1/32nds B. U.S. Government Agency Securities have an implicit backing by the U.S. GovernmentC. U.S. Government Agency Securities trade flat D. U.S. Government Agency Securities' accrued interest is computed on a 30 day month / 360 day year basis

The best answer is C.Government agency securities are quoted in 32nds, similar to U.S. Government securities. Government agency securities have an indirect backing (or implicit) by the U.S. Government. Unlike U.S. Governments, on which accrued interest is computed on an actual day month/actual day year basis, Agency securities' accrued interest is computed on a 30 day month/360 day year basis. U.S. Government and Agency securities never trade flat (meaning without accrued interest), since a default is almost impossible.

A hospital revenue bond issue is being underwritten on a negotiated basis. The offering consists of $100,000,000 par value of term bonds. The underwriter has agreed to a spread of $50.00 for each $5,000 bond. The manager has set the additional takedown at $20.00 per bond and the selling concession at $22.00 per bond. If a selling group member sells a $5,000 par value bond directly to the public, the selling group member earns: A. $8.00 B. $20.00C. $22.00 D. $50.00

The best answer is C.If a selling group member sells a bond to the public, he earns the selling concession of $22.00.

Which statements are TRUE about CMBs? I CMBs are sold at parII CMBs are sold at a discount to parIII CMBs are sold at a regular weekly auctionIV CMBs are sold on an "as needed" basis A. I and III B. I and IV C. II and IIID. II and IV

The best answer is D.CMBs are Cash Management Bills. They are sold at auction by the Treasury on an "as needed" basis to meet unexpected cash shortfalls, so they are not part of the regular auction cycle. They are the shortest-term U.S. government security, often with maturities as short as 5 days. They are sold in $100 minimums at a discount to par value, just like Treasury Bills.

In the weekly auction of Treasury Bills, which of the following statements are TRUE? I Competitive bids are always filledII Non-competitive bids are always filledIII The Federal Reserve allocates securities from the lowest yields to the higher yieldsIV The Federal Reserve allocates securities from the highest yield to the lower yields A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.In the weekly T-Bill auction, the amount of non-competitive bids is set aside from the total securities to be auctioned and is filled at the average winning rate. The remaining T-Bills to be auctioned are filled from the lowest interest rate bid on up. Once the issue is "sold out," all of the winning bidders are filled at the highest interest rate bid that completed the sale (so all winning bidders get the same interest rate - this is a "Dutch Auction"). The remaining higher rate competitive bids are void.

Customer Z is a single 26-year-old man who earns $125,000 annually. He informs you that he is getting married and that his new wife's income of $75,000 per year will put them into the highest federal tax bracket. The couple will have investable income of $25,000 per year. The couple wishes to buy a house in 5 years that will be substantially more expensive than the condominium in which they currently reside. To meet the customer's needs for the large cash down payment in 5 years and to reduce taxable income, the BEST recommendation is to: A. open a margin account and invest in income bonds B. open an Individual Retirement Account and invest in tax-deferred variable annuitiesC. open a cash account and invest in mutual funds holding high yielding common and preferred stocksD. open a trust account and invest in Treasury STRIPs

The best answer is C.Income bonds are not a reliable source of income or principal repayment (since payment depends on earnings of the issuer), and the interest is 100% taxable. Tax-advantaged investments like variable annuities should never be purchased in tax-deferred accounts. The annual accretion on Treasury STRIPS is taxable, unless the bonds are held in a tax-deferred account. Only Choice C makes sense - since cash dividends are taxed at a maximum rate of 15% (reducing taxable income), and the mutual fund shares can be easily liquidated in 5 years to make the house down payment.

A customer buys 100 shares of ABC stock at $50 as an initial transaction in a margin account. At the end of that day, the stock is valued at $60 per share. The customer must deposit: A. $1,500 B. $2,000C. $2,500 D. $3,000

The best answer is C.Initial margin to buy stocks is 50% of the purchase price. 50% of $5,000 = $2,500. The subsequent increase in value that day cannot be used to reduce the customer's deposit amount.

Which statements are TRUE regarding money market funds? I Money market funds are typically sold with a sales chargeII Money market funds are typically sold without a sales chargeIII Fund dividends are taxable, whether or not reinvested in additional sharesIV Fund dividends are not taxable if reinvested in additional shares A. I and III B. I and IVC. II and IIID. II and IV

The best answer is C.Money market funds usually do not impose sales charges. Fund dividends are taxable, whether or not they are automatically reinvested in additional fund shares.

Which statement is TRUE regarding dividend and capital gain distributions made by mutual funds? A. The payments are not taxable if they are reinvested in additional fund shares B. The payments are only taxable when the fund shares are liquidatedC. The payments are taxable in the year they are distributed D. The payments are tax deferred

The best answer is C.Mutual fund distributions are taxable to the shareholder in the year they are distributed by the fund, whether or not the distributions are automatically reinvested in new fund shares.

Which is the BEST definition of an "annuity unit"? A. An accounting measure used to determine the number of units the contract holder may purchase in the separate account B. An accounting measure used to establish the contract holder's ownership interestC. An accounting measure upon which the amount of pay out is determined D. An accounting measure used to determine the contract holder's death benefit

The best answer is C.Once a variable annuity contract is annuitized, accumulation units are converted to annuity units. These determine the annuity payments to be made.

State-sponsored education savings programs that permit contributions to build tax-deferred are known as: A. Coverdell Education Savings Accounts B. Education IRAsC. Section 529 plans D. Section 403(b) plans

The best answer is C.State sponsored education savings programs are "Section 529" plans. Coverdell Education Savings Accounts are a Federal plan.

The purpose of OFAC (Office of Foreign Assets Control) is to: A. set higher margin requirements for foreign nationals that wish to invest in the United States B. monitor the activities of foreign investors in the U.S. marketsC. impose economic sanctions against hostile foreign countries and groups D. monitor foreign currency inflows into the U.S. markets

The best answer is C.The Department of Treasury's Office of Foreign Assets Control (OFAC) maintains a list of named countries, organizations, and individuals with whom anyone in the U.S. is prohibited from doing business. The "SDN" (Specially Designated Nationals) list includes such countries as Iran and North Korea and such organizations as the Al-Qaeda, as well as specified individuals associated with these countries and organizations. The intent is to place economic pressure on these groups by stopping U.S. investment in them. The SDN list must be checked before opening an account for a foreigner or foreign entity.

All of the following gifts given by a mutual fund sponsor to a registered representative violate FINRA rules EXCEPT: A. a discount from the public offering price that is not included in the fund prospectus B. wholesale overrides on fund salesC. $50 per person per year D. a trip to Hawaii based solely on sales volume

The best answer is C.The FINRA "anti-reciprocal" rule prohibits investment companies from compensating salesmen at broker-dealers for selling their shares outside of the sales charges stated in the Prospectus. Therefore, registered representatives cannot be given "discounts," wholesale overrides, or excessive gifts such as trips. FINRA does allow a maximum gift of $100 value per person per year from a mutual fund sponsor to a registered representative that is not considered as "compensation."

The Federal Reserve Board is: I a primary purchaser of Treasury securitiesII not a primary purchaser of Treasury securitiesIII an active participant in the secondary market for Treasury securitiesIV not an active participant in the secondary market for Treasury securities A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.The Federal Reserve Board is not a primary purchaser of Treasury securities - it does not bid at the weekly Treasury auction - only the primary dealers are required to bid. However, it does trade them in the secondary market to influence the availability of credit.

Which of the following statements are TRUE regarding the Official Statement? I The Official Statement is required by the Securities Act of 1933 for all new municipal issuesII The Official Statement is requested by underwriters to satisfy SEC due diligence requirements and the disclosure requirements of new issue purchasersIII The Official Statement is required to be delivered to customers at, or prior to settlement, if availableIV The Official Statement is required to be delivered only to those customers who request one in writing A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.The Official Statement for a new municipal issue is not required under the Securities Act of 1933 since municipal issues are exempt, nor is it required by the MSRB, since the MSRB has no regulatory authority over municipal issuers. It is requested by underwriters to help them perform due diligence on the offering (as required by the SEC) and also to help sell the issue. The MSRB states that if the Official Statement is available, it must be given to purchasers at, or prior to, settlement of sale.

The Order Book Official: I is an exchange memberII is an exchange employeeIII manages the book of public ordersIV maintains bid and ask quotes in options contracts A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.The Order Book Official (OBO) is an exchange employee who manages the book of public limit orders for options contracts. The OBOs cannot act as market makers, therefore they cannot maintain bid and ask quotes in options contracts. Market makers are separate individuals under the CBOE system.

Which of the following individuals trades on the New York Stock Exchange Floor? I Specialist (DMM)II Floor BrokerIII Two Dollar BrokerIV Registered Representative A. I and II only B. III and IV onlyC. I, II, IIID. I, II, III, IV

The best answer is C.The Specialist (now renamed the DMM - Designated Market Maker) is the assigned market maker in a security on the NYSE floor. The Floor Broker handles orders as agent for retail member firms. The Two Dollar Broker executes orders for retail member firms, usually when its Floor Brokers are too busy. Registered representatives cannot trade on the NYSE floor.

The Trust Indenture Act of 1939 applies to: I U.S. Government BondsII Municipal BondsIII Corporate Bonds A. I only B. II onlyC. III only D. I, II, III

The best answer is C.The Trust Indenture Act of 1939 applies to corporate bond issues of more than $50,000,000.

Treasury Bonds are issued by the U.S. Government in: I bearer formII book entry formIII minimum denominations of $100IV minimum denominations of $10,000 A. I and III B. I and IVC. II and IIID. II and IV

The best answer is C.The U.S. Government issues Treasury Bonds (and Treasury Bills and Notes) in book entry form, in minimum denominations of $100.

The most complete information about the nature of a new municipal bond issue can be found in the: A. Prospectus B. Underwriting AgreementC. Bond Resolution D. Official Notice of Sale

The best answer is C.The bond resolution authorizes the municipality to sell a specific new bond issue. The resolution gives a complete description of the proposed issue and its features. The resolution is incorporated into the bond contract once the bonds are actually issued. There is no Prospectus for new municipal bond issues. Disclosure is given through the Official Statement. This document also gives complete information about a new municipal bond issue - but it was not given as a choice! The Underwriting Agreement is the signed contract between the issuer and the underwriter, where the underwriter agrees to buy the bonds at the winning interest rates. The Official Notice of Sale is the advertisement placed in the Bond Buyer by a municipality, soliciting bids for a new issue of its bonds.

When an issuer refinances an outstanding debt issue, the bonds which are MOST likely to be refunded by the issuer are bonds with the: I lowest interest ratesII highest interest ratesIII lowest call premiumsIV highest call premiums A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.The bonds most likely to be refunded are those with the highest interest rates (to be replaced by lower interest rate bonds) and low call premiums (so it will not be too expensive to the issuer to call in the debt for refunding).In a refunding, an issuer refinances an outstanding debt by issuing new bonds. The proceeds of the new issue are used to retire the old debt; or are placed in escrow to "pre-refund" an older issue that cannot be immediately repaid because the first call date or maturity date is years in the future. This is either done to reduce interest cost or to remove an onerous restrictive covenant.

A customer buys 100 shares of ABC stock at $40 and sells 1 ABC Jan 45 Call @ $2 on the same day in a cash account. The customer must deposit: A. $200B. $2,000C. $3,800 D. $4,000

The best answer is C.The customer bought 100 shares of stock at $40 in a cash account. 100% must be deposited = $4,000. However, he receives $200 from writing the covered call. The premium received reduces his net cash outlay to $3,800. There is no margin on the short call because it is covered by the ownership of the stock.

Which statements are TRUE regarding ADRs? I Dividends are declared by the issuer of the underlying stock in U.S. dollarsII Dividends are declared by the issuer of the underlying stock in the foreign currencyIII Receipt holders receive dividend payments in U.S. dollarsIV Receipt holders receive dividend payments in the foreign currency A. I and III B. I and IVC. II and III D. II and IV

The best answer is C.The foreign corporation whose shares are "packaged" into an ADR declares any dividend in its currency. The bank that assembled the ADR converts the dividend to U.S. dollars and remits it to the ADR holders.

The separate account that the insurance company maintains for a variable annuity is: A. directly invested in common stocksB. invested in Legal List securities onlyC. invested in designated mutual funds D. invested in U.S. Government guaranteed securities

The best answer is C.The separate investment account buys shares of a designated mutual fund. The performance of the mutual fund shares held in the separate account determines the amount of the annuity to be received.

What would be the BEST investment recommendation for a single mother who is in a low tax bracket who wishes to start saving for her young child's college education? A. Municipal bonds B. Treasury billsC. Growth stocks D. Speculative stocks

The best answer is C.There is not much information here, but since the child is young, over the long term, growth stocks offer the best investment to fund the kid's college education - since they offer growth over time. Speculative stocks are a reasonable second choice, but they are high risk, so all the money for college could be lost if the speculative investments turn sour. Municipal bonds are not appropriate, since the customer is in a low tax bracket. T-bills are the safest investment, but they are short term and give the lowest yield.

A Registered Investment Adviser has a retired client who wishes to put aside funds for the purchase of a car 5 years from now. Preservation of capital is important to this client. The RIA should recommend investments in: I Money market fundsII Bank certificates of depositIII 5 Year Treasury BondsIV 30 Year Treasury STRIPS A. I and II only B. III and IV onlyC. I, II, III D. I, II, III, IV

The best answer is C.This customer needs funds in 5 years and preservation of capital is important to the client. Money market funds and bank certificates of deposit are clearly suitable. The 5 year Treasury Bond works as well, since the funds are needed in 5 years and this bond will mature at that time. The 30 year Treasury STRIPS is clearly unsuitable, since in 5 years, its value may have dropped sharply if interest rates rise (bonds with low coupons and long maturities are most affected by interest rate risk).

A customer purchases a stock. Two years later, he sells his stock position at a loss. Under the "Wash Sale Rule," the loss will be disallowed if the customer, within 30 days of the sale: I buys a call option on that stockII sells a call option on that stockIII buys a put option on that stockIV sells a "deep in the money" put option on that stock A. I or II B. III or IVC. I or IV D. II and III

The best answer is C.Under the wash sale rule, if a stock is sold at a loss and is then repurchased within 30 days of the sale date, the loss deduction is disallowed. It is disallowed if the customer buys an equivalent security, such as a convertible, call option, right or warrant. Furthermore, instead of buying the stock or an equivalent, if the customer sells a put that is "deep in the money," the contract is virtually guaranteed to be exercised prior to expiration - forcing the customer to buy the stock. Tax rules state that the sale of the "deep in the money" put is essentially the same as buying the stock, and the loss deduction is disallowed. Please note that if the put was sold "at the money," there would be no certainty of exercise forcing the customer to buy back the stock. In this case, the "Wash Sale Rule" does not apply.

If a registered representative wishes to distribute an options retail communication to her customers, which statement is FALSE? A. The retail communication must be approved in advance of distribution by a Registered Options Principal B. The retail communication must be approved 10 days in advance of use with the SRO if it is distributed to customers who have not received an Options Disclosure Document C. The retail communication can be distributed to any customer who has already received an Options Disclosure Document without requiring prior filing with the SROD. The retail communication must be approved 10 days in advance of use with the SRO, regardless of whether it is distributed to customers who have already received, or who have not already received, an Options Disclosure Document

The best answer is D. A retail communication regarding options is defined as one distributed to more than 25 existing or prospective clients. When a client opens an options account, the customer must be given the latest Options Disclosure Document (the ODD) - which is basically an options primer, explaining how options and the OCC (Options Clearing Corporation) work. If the retail communication is distributed to customers who have already opened options accounts, then they have already received the ODD. These retail communications do not need to be pre-filed with the SRO (either the CBOE or FINRA) If the retail communication is distributed to customers who have not already opened options accounts, then they have not received the ODD. These customers are "new" to options, so the SRO is more concerned about what might be in these communications, therefore the SRO (FINRA or the CBOE) requires that the communication be filed 10 days in advance and get SRO approval before it can be used. Finally, no matter what, any options retail communication must be approved by a Registered Options Principal before it can be distributed.

Which of the following describes a riskless principal or simultaneous transaction? A. Selling a security and using the proceeds to purchase a different security B. Buying a security into inventory direct from a customer with a mark-down C. Buying and simultaneously selling short the same security in different markets to lock in a price differentialD. After receiving a buy order, the dealer purchases the stock into inventory and resells it to a customer

The best answer is D.A riskless principal or simultaneous transaction occurs when a dealer receives a buy order from a customer and then purchases the stock into inventory and resells it to the customer. The dealer wasn't holding the security when the order was received, so there is no "risk" to the dealer of falling prices giving the dealer an inventory loss. Choice A describes a "proceeds" transaction; Choice B describes a "principal" transaction; and Choice C describes an "arbitrage" transaction.

Accrued interest is computed on a 30 day month/360 day year for: I U.S. Government BondsII General Obligation BondsIII Revenue BondsIV Corporate Debentures A. IV only B. II and III only C. I, II, IIID. II, III, IV

The best answer is D.Accrued interest on U.S. Government bonds is computed on an actual day month / actual day year basis. Accrued interest for corporate and municipal bonds is computed on a 30 day month / 360 day year basis.

Which of the following requires filing with the SEC? I Purchase of a 5% position in one company's stockII An officer selling 1% of that company's stockIII Broker-Dealer Net Capital computationIV Corporate proxy materials A. I only B. II only C. I, II, IVD. I, II, III, IV

The best answer is D.All of the items listed are filed with the SEC. Anyone who accumulates a 5% position in one company must make a 13D filing with the SEC; officers must report their sales of that company's stock under the insider rules by filing a Form 4 within 2 business days of the trade; broker/dealers must report their Net Capital to the SEC; corporate proxy materials must be filed with the SEC 10 business days before use.

An older customer, age 63, who is in the lowest tax bracket, seeks an investment that will give him an income stream. The BEST recommendation would be: A. Variable annuity B. Municipal bond C. Certificate of depositD. AAA Corporate bond

The best answer is D.Because the customer is in a low tax bracket, you would not recommend the municipal bond. Most variable annuity separate accounts are invested in equities for growth to supplement other forms of retirement income. Because they are equity funds, they do not give much of an income stream. The CD and the AAA Corporate bond both provide income, which is the stated objective. However, the AAA corporate bond is top-rated and will give a higher income stream than a CD. This is the best choice. Note that the question tells us nothing about risk tolerance, which would certainly be helpful, but this is typical of "test-like" questions!

Which call covenant MUST be considered when computing the dollar price of a municipal premium bond quoted on a yield basis? A. Catastrophe call B. Extraordinary optional call C. Sinking fund callD. In whole call

The best answer is D.MSRB rules require that if a premium bond is quoted on a yield basis, that the dollar price that is computed be the lower of the price computed to any call dates or maturity. This usually means that the price is computed to give the yield to the near term call date, since the premium is lost in the fastest time. The only calls that must be considered are those that have a "reasonable" certainty of occurring. An "in whole" call means the issue or maturity is callable in whole at predetermined dates. These call dates must be considered. Sinking fund calls are chosen on a random order basis - since we don't know which bonds will be selected for call, there is not a "reasonable" certainty. Extraordinary optional calls, such as a mortgage revenue bond issue calling in bonds if mortgages are prepaid, also is not considered. Finally, a catastrophe call (for example, bonds are called if a facility is destroyed) does not have a "reasonable" certainty and is not considered.

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

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

The director of a public corporation wishes to sell stock of that company in compliance with Rule 144. Which statements are TRUE? I Registered control stock must be held for 6 months, fully paid, before it can be soldII Unregistered restricted stock must be held for 6 months, fully paid, before it can be soldIII If the sale is for 5,000 shares or less, worth $50,000 or less, no SEC filing is requiredIV Any short swing profits (within 6 months) from trading the stock must be returned to the corporation A. I and II B. II and III C. I, III, IVD. II, III, IV

The best answer is D.Rule 144 requires that unregistered shares be held fully paid for 6 months before they can be sold under the rule. Registered shares held by officers can be sold without meeting the holding period requirement, but are subject to the other provisions of the rule. No filing is required if 5,000 shares or less, worth $50,000 or less, are sold every 3 months. Under the Securities Exchange Act of 1934, any short swing profits (achieved within a 6-month time frame) that officers derive from trading that company's stock must be repaid to the company.

The New York Stock Exchange automated trading system is called: A. CAES B. RAES C. OSSD. Super Display Book

The best answer is D.The NYSE automated trading system is called the Super Display Book. This replaced the previous DOT (Designated Order Turnaround) system in late 2009.

All of the following statements are true about "odd lot" transactions EXCEPT: A. orders for odd lot amounts have no standing on the NYSE trading floorB. an odd lot is an order for less than the normal trading unit of 100 shares C. odd lot transactions are handled by the Specialist (DMM)D. odd lot commissions are set by the NYSE

The best answer is D.The NYSE does not set commission rates - these are set by brokers and dealers themselves. Odd lots are transactions for less than the normal trading unit of 100 shares. Odd lot orders are handled by the Specialist (now renamed the DMM - Designated Market Maker), by buying the odd lot into the Specialist's (DMM's) inventory account; or selling the odd lot out of the Specialist's (DMM's) inventory account. Orders for odd lots have no priority on the NYSE trading floor - trading is in round lot units only.

A municipal bond is purchased in the secondary market at a discount and the bond is held to maturity. If the discount has not been accreted, what is the tax consequence at maturity? A. No gain or loss B. A capital gain equal to the discount C. Part capital gain and part taxable interest income on the discountD. Taxable interest income equal to the discount

The best answer is D.The discount on market discount municipal bonds is treated as taxable interest income earned. This is nothing more than a "tax grab" by the Federal government - the idea being that wealthy people buy municipal bonds, so if there is a way that they can be taxed without jeopardizing their basic Federal income tax-free status, why not? The holder can either accrete the discount annually as taxable interest income earned and adjust the cost basis of the bond upwards by this amount; or can wait until the bond is sold or matures to report the accumulated "earned" discount as taxable interest income at that point (this is the better choice from a tax standpoint).

A customer buys 100 shares of XYZ stock at $43 per share. The customer then sells 1 XYZ $45 Call contract for a premium of $500. The call contract expires unexercised. After expiration, the customer's cost basis in the XYZ shares is: A. $3,800 B. $4,000 C. $4,200D. $4,300

The best answer is D.The expiration of the call contracts results in a short term capital gain to the writer of $500, taxable in that year. The cost basis of the stock position is unaffected at $43 per share, for a total cost basis for 100 shares of $4,300. Notice that this tax treatment is the one that is most beneficial to the IRS; and worst for the investor. The call premium is taxed as a short term capital gain at expiration; it cannot be used to reduce the cost basis of the long stock position, which has the same effect as increasing the potential capital gain on the stock and deferring taxation to the time when the stock is sold.

Which asset allocation is BEST for a 35-year old single risk tolerant investor looking to achieve the highest returns? A. 25% Stocks / 25% Bonds / 25% REITs / 25% Money Markets B. 50% Stocks / 50% Bonds C. 60% Stocks / 40% BondsD. 95% Stocks / 5% Money Markets

The best answer is D.The investor is 35 years old, single and risk tolerant. While an argument could be made for any one of the choices offered, the one choice that is clearly different from the others is Choice D - 95% equities and 5% money market instruments. This gives both the greatest growth potential for a relatively young investor along with the greatest risk - and this investor is risk tolerant. The other choices have a fairly large portion of the portfolio allocated to bonds, which do not have any growth potential over a long-term investment time horizon, but also have much lower risk.

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

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

A customer has purchased 1,000 shares of ABC stock at $58 per share, paying a commission of $2 per share for the transaction. ABC stock declares a 20% stock dividend. When the dividend is paid, the tax status of the investment is: A. 1,000 shares held at a cost basis of $58 per share B. 1,000 shares held at a cost basis of $60 per share C. 1,200 shares held at a cost basis of $58 per shareD. 1,200 shares held at a cost basis of $50 per share

The best answer is D.There is no tax due when a stock dividend is paid; instead the investor gets more shares; with each share worth proportionately less. The payment of a stock dividend increases the number of shares held by the investor and the cost basis must be reduced accordingly, since each share is theoretically worth less after the stock dividend is paid. The customer will have 1,000 shares x 1.20 = 1,200 shares after the stock dividend is paid. Each share originally had a cost basis of $60 ($58 price plus $2 commission). After the stock dividend is paid, the cost basis is adjusted to $60/1.20 = $50 per share.

A registered representative is talking to an institutional client and has just recommended that the institution place an order to buy a block of XYZ stock. Just before the client says "Yes," the registered representative overhears a representative in the adjoining cubicle taking a large buy order from another institutional investor for XYZ stock. Which statement is TRUE about this situation? A. The representative cannot accept the buy order from his or her client because it would be a "front running" violation B. The representative cannot accept the buy order from his or her client because it would be a "trading ahead of research" violation C. The representative cannot accept the buy order from his or her client because it would be an "interpositioning" violationD. The representative can accept the order from the client

The best answer is D.This question is all about timing! The registered representative made the recommendation to buy BEFORE overhearing the rep in the adjacent cubicle taking the big block buy order in the same stock. Thus, the representative had no knowledge of this order and there is no front running violation if the representative places the buy order for his or her client.