FINAL #1 ... TO LEARN

A customer places an order to buy 100 shares of ABC at $60 in a cash account. The stock rises to $80 the next day and the customer sells. A check for the purchase is not received by the 5th business day after the purchase date. Which statement is TRUE? A. The account must be frozen for 90 days if no extension request was made B. All remaining positions in the account must be liquidated and the account closed C. Because the position was closed out at a profit, no action will be taken D. The customer is reported to FINRA and is prohibited from opening an account at any brokerage firm for 90 days

A. The account must be frozen for 90 days if no extension request was made

64. Which of the following CANNOT result in a long-term holding period for tax purposes? A) Opening purchase of a LEAP option B) Opening sale of a LEAP options C) Exercise of a long equity call option D) Exercise of a short equity put option The best answer is B. The opening sale of a LEAP (long-term option with a life of 30 months for equity LEAPS) is treated the same as the short sale of stock - the stance of the IRS is that, since the position is never "owned," there can never be a holding period. Thus, all gains and losses on short positions are always short-term. However, if one purchases a LEAP, then the holding period can go long term. If the holder of an equity call exercises, the stock is being purchased and the stock's holding period starts counting as of exercise date. As long as that stock position is held for more than 1 year from exercise date, the holding period is long term. Similarly, if the writer of an equity put is exercised, the writer is buying the stock, with the holding period in the stock starting to count as of exercise date. As long as that stock position is held for more than 1 year from exercise date, the holding period is long term.

An 80-year old customer with an existing individual account comes into a branch office and tells his representative that: "My son has been telling me that I need to give him a power of attorney over my account because of my advanced age, and I want to keep him happy and keep him from putting me in a retirement home." What should the representative do? A. The representative should give the customer a power of attorney form, naming the son as attorney over the account, and have the customer sign the form B. The representative should contact the son and get permission to have the customer sign a power of attorney C. The representative should escalate the matter to the branch manager or compliance department of the firm D. The representative should freeze the account until it can be determined that the customer is not mentally incapacitated The best answer is C. The SEC and FINRA are concerned about aging investors, who as their mental capacity diminishes, are prey for investment scams. To protect senior investors, firms must train their employees to identify diminished mental capacity. In this example, the red flag is that the 80-year old customer tells the representative that "if I don't give my son a power of attorney, he will put me in a home." It could be that the son really is acting in the customer's best interests; or the son could be attempting to coerce the old man to give a power of attorney so the son can drain the account. From the initial information given, we just don't know the full details of the situation. FINRA requires that firms have an internal process to permit representatives to get advice from others as to what steps to take. These include: the representative should document the suspected diminished capacity and escalate immediately; the firm should have a clearly designated individual to whom the matter is escalated. Once the problem is identified and escalated, the next step for the firm is to determine if the customer appears to be competent and if the son is acting in the elderly father's best interests. If so, then completing the power of attorney is appropriate. If not, then the next step would be to alert a government protective services organization.

VARIABLE ANNUITIES...... 1) contributions are not tax-deductible 2) Earnings in the account build tax-deferred 3) When distributions are taken, tax is due on the portion that represents the tax-deferred build-up. 4) The portion that represents the original contribution (***already taxed dollars***) is returned without any further tax due. 5) Are securities regulated under the Investment Company Act of 1940. 6) Securities that must be sold with a prospectus 7) Differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. ( For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. 8) Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as: A))))) a non-exempt security B))))) that must be registered and sold with a prospectus. 9) Are structured as participating unit trusts, AND are regulated under the Investment Company Act of 1940. 10) The guarantee of a minimum growth rate in the separate account if a higher annual fee is paid for this rider 11) The ****"GMIB"**** - Guaranteed Minimum Income Benefit - is a rider that can be purchased in a variable annuity contract. A)))))) It guarantees that the separate account will be annuitized based on a minimum annual growth rate (say 4% per year), regardless of how the investments in the separate account actually perform. B)))))) This is a nice feature, but it comes at a cost of around 1% a year in additional fees. 12) At retirement age (59 1/2 or later), distributions can be taken from the separate account without a 10% penalty tax (but tax on the build-up in the account must be paid). 13) The customer can either take a lump sum distribution or can annuitize the separate account. A))))))) With a lump sum distribution, the customer gets to deplete the account value and can do this in installments. ........The risk is that the customer depletes the entire account with many years left to live. This leaves the customer without an income stream in later life. B)))))) If the customer annuitizes, he or she gets payments for life, but loses any value in the account if he or she dies early. ........A Life Annuity option only pays for 1 person's life, so if it were a Life Annuity on a husband, and he dies, the annuity stops and the surviving spouse gets no more payments. To cover both lives, a Joint and Last Survivor Annuity option must be chosen.

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A customer has purchased 10,000 shares of Fromage stock, a Swiss cheese company. The stock is not traded in the United States. Fromage declares and pays a dividend of 15,000 Swiss Francs, which, when converted to dollars, equals $10,000. Switzerland imposes a 20% withholding tax on dividends repatriated outside its borders. How is the dividend reported on this investor's U.S. tax return? A. No dividends are reported, since the investment is made outside the United States B. $8,000 of dividends are reported, since $2,000 was withheld in Switzerland C. $10,000 of dividends are reported, along with a $2,000 tax credit for monies withheld in Switzerland D. $10,000 of dividends are reported, with no tax credit available

C. $10,000 of dividends are reported, along with a $2,000 tax credit for monies withheld in Switzerland If a direct investment is made in a foreign security, that foreign country often withholds tax on dividends repatriated out of that country. If this occurs, the tax withheld is applied as a tax credit on that person's U.S. tax return. Thus, this person who received $10,000 of dividends, but who has $2,000 of taxes withheld on those dividends in Switzerland, would report the entire $10,000 of dividends received, along with a $2,000 tax credit for the tax withheld in Switzerland..

Which investment gives the greatest protection against purchasing power risk? A. 10 year Double Barreled Bonds B. 10 year Guaranteed Bonds C. 10 year TIPS D. 10 year STRIPS

C. 10 year TIPS Purchasing power risk is the risk that inflation will cause interest rates to increase; and therefore, bond prices will fall. Since all of the choices have the same maturity, this is not a factor. "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a higher total payment, due to the increased principal amount. When the bond matures, the holder receives the higher principal amount. Thus, there is no purchasing power risk with these securities. STRIPS are zero-coupon Treasury obligations - these have the highest level of purchasing power risk.

Under MSRB rules, all of the following are defined as advertisements EXCEPT: A. Form Letters B. Circulars C. Official Statements D. Abstracts or Summaries of Official Statements

C. Official Statements The MSRB defines as "advertising" any form letters, circulars, sales literature, and abstracts of Official Statements (since these would be written by the firm). Excluded from the definition are Official Statements, since their content is similar to Prospectuses, and they are subject to legal oversight (Official Statements are written by the Bond Counsel)..

A registered representative is allowed to choose which of the following in a transaction without requiring written trading authorization from the customer? A. Quantity and price B. Security and time C. Price and time D. Security and price.

C. Price and time

Q. 54 Under the FINRA 5% Policy, proceeds transactions are subject to: A) one mark-up based on the sell side only B) one mark-up based on the buy side only C) one mark-up based on the buy and sell side combined D) two mark-ups; one for the buy side separately and the other for the sell side separately

C. one mark-up based on the buy and sell side combined In a proceeds transaction, the customer directs the firm to sell an existing position, and to use the proceeds to buy another position. Under the FINRA 5% Policy, proceeds transactions are subject to a "combined mark-up" that must be fair and reasonable. In a combined mark-up, the compensation earned for liquidating the existing position is added to the mark-up that the firm earns on the new purchase.

The legislation that requires the CEO (Chief Executive Officer) of a publicly traded company to make an annual certification of the information presented in the company's financial statements is the: A. Securities Act of 1933 B. Securities Exchange Act of 1934 C. Trust Indenture Act of 1939 D. Sarbanes-Oxley Act of 2002

D. Sarbanes-Oxley Act of 2002 The Sarbanes-Oxley Act of 2002, in an attempt to prevent fraudulent actions by corporate officers, requires both the CEO and CFO of publicly traded companies to make an annual certification as to the appropriateness of the financial statements and disclosures made in that issuer's 10K and 10Q reports.

EURODOLLAR BONDS... ...are issued outside the _______ _______ whose principal and interest will be paid in _______ . The bonds can be issued by _______ or _______ corporations, and by _______ _______ and _______ governments.

EURODOLLAR BONDS ...are issued outside the UNITED STATES whose principal and interest will be paid in DOLLARS The bonds can be issued by AMERICAN or EUROPEAN corporations, and by SOVEREIGN GOVERNMENTS and MUNICIPAL governments..

SHORT AGAINST THE BOX =

SHORT AGAINST THE BOX = an end-of-the-year tax strategy that enables an investor to lock in a gain on a profitable long position; however, under 1997 tax law revisions, it will generally not defer taxes from one year to the next (unless very specific tests are met). The investor borrows and sells short a number of shares equal to his or her profitable long position at the current market price. This locks in the gain, and taxes are due at this point. Both the long and short positions are held into the new year, at which time the investor uses the long position to cover the short (replacing the borrowed shares). This transaction is effected in an Arbitrage Account, which has a very low margin requirement because this is, essentially, a riskless transaction.

91 Which of the following statements are true about sponsored ADRs? I Sponsored ADRs are sponsored by the issuing foreign corporation II Sponsored ADRs are sponsored by the country in which the foreign corporation resides III Sponsored ADRs provide financial statements to the ADR holder in English IV Sponsored ADRs provide financial statements only in the native language of the issuing corporation A) I and III B) I and IV C) II and III D) II and IV

The best answer is A. Sponsored ADRs are sponsored by the issuing foreign corporation. When an ADR is sponsored, the issuer agrees to provide financial statements to the ADR holder in English. The NYSE will only list sponsored ADRs. Unsponsored ADRs are assembled without the participation of the issuer. These trade over-the-counter.

79 GET "SHORT AGAINST THE BOX" DOWN D___ IT! A customer who has a fully paid long position in ABC stock goes "short against the box" for a credit to his account of $50,000. ABC is a NASDAQ stock. The minimum maintenance margin requirement is: A) $2,500 B) $45,000 C) $47,500 D) $50,000

The best answer is A. When the customer goes "short against the box," the net position is "0" (e.g., 1,000 shares long / 1,000 shares short). There is no risk at this point, so Regulation T does not set an initial margin. However, FINRA sets a minimum maintenance margin of 5% of the long side. 5% of $50,000 of stock is $2,500 minimum margin. The customer can withdraw: $50,000 credit - $2,500 minimum margin = $47,500 withdrawal.

82 All of the following are methods of dividend payment EXCEPT: A) cash B) stock C) rights D) product

The best answer is C. The distribution of "rights" is not a dividend. Rather, it is the "pre-emptive" right of all shareholders to maintain proportionate ownership if the corporation wishes to issue additional shares. The corporation must distribute rights to existing shareholders if it wishes to sell new common shares. Dividend distributions, on the other hand, are voluntary payments made by the corporation to its shareholders. The amount and form of payment are determined by the Board of Directors. Dividend payments can take the form of cash; stock dividends; or product dividends. For example, in years past, Procter and Gamble would send a "variety pack" of its products to shareholders in addition to the regular cash dividend. In recent years, product dividends have not been popular, since they are taxable to the shareholder as is any dividend, and the owner would rather receive cash.

(ONE question on this side, and ONE question on the other side) 56. The collateral backing private CMOs consists of: A. private placements offered under Regulation D B. mortgage backed securities created by a bank-issuer C. mortgage backed securities issued by a "privatized" government agency D. mortgages on privately owned homes and apartments The best answer is B. Private CMOs (Collateralized Mortgage Obligations) are also called "private label" CMOs. Instead of being backed by mortgages guaranteed by Fannie, Freddie or Ginnie, they are backed by "private label" mortgages - meaning mortgages that do not qualify for sale to these agencies (either because the dollar amount of the mortgage is above their purchase limit or they do not meet Fannie, Freddie or Ginnie's underwriting standards). Bank issuers make non-conforming mortgages that cannot be sold to Fannie, Freddie or Ginnie and rather than hold them as investments, they can pool them into mortgage backed securities which are then placed into trust and sold as private label CMOs.

57 A customer sells short 100 shares of PDQ at $28 as the initial transaction in a new margin account. Subsequently, PDQ declines to $23 per share in the market. What is account's equity after the change in market value? A. $1,400 B. $1,900 C. $2,000 D. $2,500 Best answer is D. Initial margin to sell a stock short is 50% - in this case 50% of $2,800 = $1,400 initial margin requirement. However, since this is the initial transaction in a new short account, the account must meet the FINRA minimum dollar equity requirement of $2,000. Thus, $2,000 is the initial margin requirement, not $1,400. If the market value declines to $23 per share ($2,300 total), there is a 5 point per share gain on the stock. Thus, equity is increased by $500 to $2,500.

A customer buys 100 shares of ABC stock at $45 and sells 1 ABC Jan 45 Call @ $2 on the same day in a cash account. The customer's maximum potential loss is: A. $4,300 B. $4,500 C. $4,700 D. unlimited .

A. $4,300 . If the stock drops, the call expires "out the money." As the stock keeps dropping, the customer loses more and more on the stock position. Because the customer effectively paid $4,300 ($45 price - $2 premium collected) for the stock, this is the maximum potential loss.

A customer has an existing margin account and wants to write five covered calls against 500 shares of stock in the account. The margin requirement to write the calls is: A. 0 B. 5% of the market value of the stock plus the premium minus any out the money amount C. 10% of the market value of the stock plus the premium minus any out the money amount D. 20% of the market value of the stock plus the premium minus any out the money amount

A. 0 The sale of the calls is covered by the ownership of the stock. The margin requirement to sell the calls is "0" since there is no risk on the short calls..

A variable annuity is a(n): I security regulated under the Investment Company Act of 1940 II insurance product that is not regulated under the Investment Company Act of 1940 III security that must be sold with a prospectus IV insurance product that has no prospectus requirement A. I and III B. I and IV C. II and III D. II and IV

A. I and III I Security regulated under the Investment Company Act of 1940 III Security that must be sold with a prospectus Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus. Because these are structured as participating unit trusts, variable annuities are regulated under the Investment Company Act of 1940.

The risk that inflation will lower the present value of bond interest and principal repayments is: A. Credit Risk B. Purchasing Power Risk C. Legislative Risk D. Interest Rate Risk

B. Purchasing Power Risk Purchasing Power Risk is the risk that inflation will lower the value of bond interest payments and principal repayments. If inflation increases, then interest rates will rise, forcing bond prices down.

Who guarantees an Industrial Development Bond? A. Municipal issuing authority B. Corporate lessee C. MBIA D. AMBAC

B. Industrial Development Bonds are issued by municipal authorities, with the revenue source being the lease payments made by a corporate lessee. Furthermore, the corporate lessee unconditionally guarantees the bonds - so they take on the credit rating of the corporate guarantor..

Which of the following statements are TRUE regarding new issue government and new issue agency securities? I Agency securities are sold through a selling group II Agency securities are sold through auction III Direct U.S. government obligations are sold through a selling group IV Direct U.S. government obligations are sold through auction A. I and III B. I and IV C. II and III D. II and IV

B. I and IV New issues of agency securities are sold through a selling group that is appointed by the Agency. The group typically consists of large banks and broker-dealers. Out of the proceeds, a selling concession is paid to the selling group by the agency. Direct U.S. Government obligations are sold through auction.

Q. 55 Which of the following technical indicators would be considered to be bullish? I Saucer formation II Inverted Saucer formation III Odd lot purchases IV Odd lot sales A) I and III B) I and IV C) II and III D) II and IV

B. I and IV A saucer formation shows that the market has bottomed and is heading upward. The Odd Lot theory states that the small investor tends to trade odd lots and that the small investor is always wrong. Thus, the knowledgeable investor should do the opposite of what the small investor does. If the small investor is selling, one should buy (a bullish indicator). If the small investor is buying, one should sell (a bearish indicator).

All of the following are purchase and payout options for variable annuity contracts EXCEPT: A. Lump sum payment; Deferred annuity B. Periodic payments; Immediate annuity C. Periodic payments; Deferred annuity D. Lump sum payment; Immediate annuity

B. Periodic payments; Immediate annuity An investor can buy a variable annuity contract with a lump sum payment. Once the moneys are used to purchase accumulation units, annuitization can occur immediately or can occur years in the future. An investor can also make periodic payments into a variable annuity contract, but cannot annuitize until payments stop. Thus, there is no option of periodic payments with an immediate annuity. The annuity must be deferred until the payments are completed.

Q. 47 A customer has a proprietary position in an account that he wishes to transfer. He would be notified that the account: A) transfer will take longer because of the proprietary position B) cannot be transferred because of the proprietary position C) proprietary position must either be liquidated or retained at the carrying firm D) assets must be liquidated and the proceeds used to establish new positions

C) proprietary position must either be liquidated or retained at the carrying firm If the assets are held in proprietary products of the carrying firm, these cannot be transferred - since they are only offered by the carrying firm. The customer would have to liquidate these positions and transfer the money proceeds of the liquidation; or the customer could retain the proprietary positions at the carrying firm.

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

C. I, II, III I Mailing dividend payments to shareholders II Canceling old shares and issuing new shares III Preparing and mailing proxies The declaration date is set by the Board of Directors of the company. The transfer agent --- cancels old shares --- issues new shares --- mails voting materials (proxies) --- --- annual reports --- --- and dividend payments .... to shareholders.

Variable annuity contracts: I have the issuer bear the investment risk II have the purchaser bear the investment risk III are non-exempt securities IV are exempt securities A. I and III B. I and IV C. II and III D. II and IV

C. II and III Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus.

Q. 48 A customer buys a corporate bond in the secondary market, paying a premium over par, plus accrued interest. The customer chooses not to amortize the bond premium for tax purposes. Regarding the customer's cost basis in the bond which of the following statements are TRUE? I The cost basis is inclusive of any accrued interest paid by the customer II The cost basis excludes any accrued interest paid by the customer III The cost basis is inclusive of any mark-up or commission paid by the customer IV The cost basis excludes any mark-up or commission paid by the customer A) I and III B) I and IV C) II and III D) II and IV

C. II and III Accrued interest paid is not included in the customer's cost basis in the bond. Rather it is an offset against other interest received by the customer in that tax year. The cost basis is the price paid for the bond, inclusive of any mark-up or commission paid by the customer.

If a person is convicted of insider trading: I the amount of any profit achieved or loss avoided must be paid II three times the amount of any profit achieved or loss avoided must be paid III payments are made to the Department of Treasury IV payments are made to the Securities and Exchange Commission A. I and III B. I and IV C. II and III D. II and IV

C. II and III Fines assessed for insider trading convictions are paid to the Department of Treasury. The fines are not paid to the SEC. If they were, then the SEC might be tempted to "go crazy" prosecuting insider trading cases to pump up its operating budget (raises for everyone!) The amount to be paid is 3 times (treble damages) the profit achieved or loss avoided.

Q. 50 Which statements are TRUE about variable annuities? I Contributions are tax deductible II Contributions are not tax deductible III Distributions are taxable IV Distributions are not taxable A) I and III B) I and IV C) II and III D) II and IV

C. II and III Variable annuity contributions are not tax-deductible. Earnings in the account build tax-deferred. When distributions are taken, tax is due on the portion that represents the tax-deferred build-up. The portion that represents the original contribution (already taxed dollars) is returned without any further tax due.

The Specialist (DMM) can stop stock for: I proprietary orders II public orders III brief time periods IV that trading day A. I and III B. I and IV C. II and III D. II and IV .

C. II and III The Specialist (now renamed the DMM - Designated Market Maker) can only stop stock - guaranteeing a price for a brief time period to a floor broker - for public orders. This is a Specialist/DMM courtesy function that allows floor brokers to "shop around" for the best price, knowing that they have a guaranteed price from the Specialist/DMM in hand if they cannot locate a better deal.

Coverdell Education Savings Account is... ... a type of ____ deferred account that allows a maximum aggregate $____ non-deductible contribution to be made for the purpose of paying for a child's ____ expenses. A 529(b) plan is... ...a ____ -sponsored ____ savings plan that allows ____ -tax deductible contributions to be made to a ____ to pay for a beneficiary's qualified ____ ____ expenses. Maximum annual contributions and funding are set by each ____ . Earnings build tax ____ and distributions to pay for qualified higher education expenses are not ____ . A variation on a 529 plan that allows for advanced funding of tuition only is known as a prepaid ____ plan

Coverdell Education Savings Account is... ... a type of TAX deferred account that allows a maximum aggregate **$2,000** non-deductible contribution to be made for the purpose of paying for a child's EDUCATION expenses. (Compare: 529 Plans). 529(b) plan is.... ....a STATE-sponsored EDUCATION savings plan that allows NON-tax deductible contributions to be made to a TRUST to pay for a beneficiary's qualified higher education expenses. Maximum annual contributions and funding are set by EACH STATE. Earnings build tax DEFERRED and distributions to pay for qualified higher education expenses are not TAXABLE. A variation on a 529 plan that allows for advanced funding of tuition only is known as a prepaid TUITION plan

88 If a member firm is going to issue a research report about a company, that member firm's research department personnel are prohibited from buying or selling that company's securities for: A) 5 days prior to the issuance of the report B) 10 days prior to the issuance of the report C) 20 days prior to the issuance of the report D) 30 days prior to the issuance of the report

D. 30 days prior to the issuance of the report If a member firm is going to issue a research report about a company, that firm's research department personnel are prohibited from buying or selling that issuer's stock (or equivalents) for the window of time from 30 days prior to the issuance of the report until 5 days after the issuance of the report.

The mandatory buy-in provision of Regulation SHO: I applies to a fail to deliver of any equity security that is sold short II applies to a fail to deliver of a threshold list security that is sold short III must be completed within 6 settlement days IV must be completed within 13 settlement days A. I and III B. I and IV C. II and III D. II and IV .

D. II and IV If there is a short sale of a security on the threshold list of "hard to borrow" securities, and the seller fails to deliver on settlement, then Regulation SHO requires that the position be bought in no later than 10 business days from settlement. Note that Regulation SHO states that this mandatory buy-in must occur within "13 settlement days," because Regulation SHO counts from trade date, not from settlement date (T + 3 = regular way settlement + 10 for mandatory buy-in = 13 settlement days.)

All of the following terms apply to index ETFs EXCEPT: A. benchmarked B. passively managed C. marginable D. redeemable

D. redeemable . Almost all ETFs are based on a benchmark index. They mirror the composition of the index, so they are "passively" managed and have low management fees. An actively managed fund is one where the investment adviser chooses which securities to buy and sell. Active management comes with higher management fees. There are only a very few actively managed ETFs - almost all are passively managed. They trade like any other stock and are not redeemable. They can be purchased on margin and they can be sold short, like any other stock.

Industrial Development Bonds are issued by municipal authorities, with the revenue source being the lease payments made by a corporate lessee. THEREFORE, it is the corporate lessee who unconditionally guarantees the bonds - so they take on the credit rating of the corporate guarantor. The municipal bond insurers are: M _ _ _ Corp - ____ ____ ____ ____ A _ _ _ _ - ____ ____ ____ ____ ____ F_ _ _ - ____ ____ ____ ____ F _ _ - ____ ____ ____ ____

Industrial Development Bonds are issued by municipal authorities, with the revenue source being the lease payments made by a corporate lessee. THEREFORE, it is the corporate lessee who unconditionally guarantees the bonds - so they take on the credit rating of the corporate guarantor. The municipal bond insurers are: MBIA - Municipal Bond Insurance Corp. AMBAC - American Municipal Bond Assurance Corp. FGIC - Financial Guaranty Insurance Corp. FSA - Financial Security Assurance Corp.

ODD LOT TRADES = a stock trade involving less than _____ shares. On the NYSE, the ________ acts as the odd lot dealer. ROUND-LOT TRADES = a trade of a minimum normal trading u____ size. -- For common and preferred stock, a trade involving ____ shares. -- For municipal bonds, a trade of $____,____ face value bonds. -- For corporate bonds, a trade of $____ face value bonds ODD LOT TRANSACTIONS on the NYSE are: I orders for less than 100 shares II orders for multiples of 100 shares III handled by the Specialist (DMM) IV handled by the $2 Broker A. I and III B. I and IV C. II and III D. II and IV

ODD LOT TRADES = a stock trade involving less than 100 shares. On the NYSE, the Specialist acts as the odd lot dealer. ROUND-LOT TRADES = a trade of a minimum normal trading UNIT size. -- For common and preferred stock, a trade involving **100** shares. -- For municipal bonds, a trade of **$100,000** face value bonds. -- For corporate bonds, a trade of **$5,000** face value bonds A. I and III I orders for less than 100 shares III handled by the Specialist (DMM) The Specialist (now renamed the DMM - Designated Market Maker) acts as the "odd lot" dealer on the NYSE for orders in the assigned stock that are less than 100 shares. Note that these orders are handled separately from the Specialist's (DMM's) "book".

TWO QUESTIONS (ONE ON THIS CARD - followed by the answer) Q. 51 Distributions after age 59 1/2 from non-tax qualified retirement plans are: A. 100% taxable B. partial tax free return of capital and partial taxable income C. 100% tax free D. 100% tax deferred The best answer is B. Contributions to non-tax qualified plans, such as most variable annuities, are not tax deductible. They are made with "after-tax" dollars. Earnings accrue tax deferred. When distributions commence, the return of original capital is not taxed; the earnings are taxed.

Q. 52 Which of the following requires filing with the SEC? I Purchase of a 5% position in one company's stock II An officer selling 1% of that company's stock III Broker-Dealer Net Capital computation IV Corporate proxy materials A) I only B) II only C) I, II, IV D) I, II, III, IV. D) I, II, III, IV All of the items listed are filed with the SEC. Anyone who accumulates a 5% position in one company must make a 13-D filing with the SEC; officers must report their sales of that company's stock under Rule 144; broker/dealers must report their Net Capital to the SEC; corporate proxy materials must be filed with the SEC 10 business days before use.

59 An American manufacturer has contracted to sell parts to a Canadian automobile manufacturer. The contract calls for payment to be made in Canadian dollars. To hedge against an adverse currency price movement, the appropriate options strategy is to: A) Sell Canadian dollar Calls B) Sell U.S. Dollar Calls C) Sell Canadian dollar Puts D) Sell U.S. Dollar Puts ANSWER = A) Sell Canadian dollar Calls This manufacturer will be paid in Canadian dollars, and thus will lose if the Canadian dollar weakens (falls in value). To protect against a decline in value, the manufacturer could either buy Canadian dollar puts or could sell Canadian dollar calls. Since the purchase of a put to hedge the currency position is not given as a choice, the only available choice is to sell Canadian dollar calls. If the Canadian dollar falls in value, the calls will expire "out the money", and the collected premium offsets any decline in the value of the currency. However, this is a limited hedge because if the Canadian dollar falls sharply, the collected premium may not be sufficient to offset the loss on the currency. There are no U.S. traded options available on the U.S. Dollar, thus these choices are not appropriate.

Q. 60 THE QUESTION REFERS TO THE SHEET ON THE BOTTOM OF THIS CARD ----------------------------------------- ----------------------------------------- (Refer to the exhibit window to answer the following question) What is PDQ Corporation's Debt or Bond Ratio? A) 14% B) 28% C) 59% D) 86% ======================= PDQ Corporation Balance Sheet ($000) Year ending December 31, 20XX Assets Liabilities and Stockholder's Equity Cash and Equivalents 22,000,000 Notes Payable 43,000,000 Accounts Receivable 43,000,000 Current Maturity - Long Term Debt 20,000,000 Inventory 101,000,000 Accrued Liabilities 18,000,000 Prepaid Expenses 12,000,000 Accounts Payable 16,000,000 Total Current Assets 178,000,000 Total Current Liabilities 97,000,000 Property, Plant and Equipment (Net of Depreciation) 362,000,000 Bank Loans Payable 115,000,000 Patents, Trademarks and Other Intangibles (Net of Amortization) 37,000,000 Senior Debentures 50,000,000 Deferred Taxes Payable 18,000,000 Deferred Charges 16,000,000 Stockholder's Equity Preferred Stock - ($1 Par) 100,000,000 Common Stock at Par ($.10 Par) 20,000,000 Capital in Excess of Par 68,000,000 Retained Earnings 125,000,000 Total Stockholder's Equity 313,000,000 Total Assets 593,000,000 Total Liabilities and Stockholder's Equity 593,000,000 ==== ANSWER ==== Senior Debentures 50,000,000 ------- DIVIDED BY ------- 363,000,000 (see explanation below) $50,000,000 / $363,000,000 = 14% Common equity consists of common at par ($20,000,000), capital in excess of par ($68,000,000), and retained earnings ($125,000,000) for a total of $213,000,000. Total Long Term Capital consists of long term debt ($50,000,000), preferred stock ($100,000,000) and common equity ($213,000,000).

SHORT AGAINST THE BOX = an end-of-the-year tax strategy that enables an investor to lock in a gain on a profitable long position; however, under 1997 tax law revisions, it will generally not defer taxes from one year to the next (unless very specific tests are met). The investor borrows and sells short a number of shares equal to his or her profitable long position at the current market price. This locks in the gain, and taxes are due at this point. Both the long and short positions are held into the new year, at which time the investor uses the long position to cover the short (replacing the borrowed shares). This transaction is effected in an Arbitrage Account, which has a very low margin requirement because this is, essentially, a riskless transaction.

SHORT AGAINST THE BOX = an end-of-the-year tax strategy that enables an investor to lock in a gain on a profitable long position; however, under 1997 tax law revisions, it will generally not defer taxes from one year to the next (unless very specific tests are met). The investor borrows and sells short a number of shares equal to his or her profitable long position at the current market price. This locks in the gain, and taxes are due at this point. Both the long and short positions are held into the new year, at which time the investor uses the long position to cover the short (replacing the borrowed shares). This transaction is effected in an Arbitrage Account, which has a very low margin requirement because this is, essentially, a riskless transaction.

The MSRB defines as ADVERTISING: - any material designed for use in the ____ media, including any n____ , cir____ , re____ , mar____ l____ or f____ L____ . Official Statements and Preliminary Official Statements are excluded from the definition Abstracts of Official Statements are included in the definition Every piece of advertising must be approved by either a Municipal Principal or a General Principal prior to use Every piece of municipal advertising must be kept on file for 3 years No filing is required with the MSRB All advertising must be truthful and not misleading

The MSRB defines as advertising any material designed for use in the public media, including any notices, circulars, reports, markets letters or form letters, Official Statements and Preliminary Official Statements are excluded from the definition Abstracts of Official Statements are included in the definition Every piece of advertising must be approved by either a Municipal Principal or a General Principal prior to use Every piece of municipal advertising must be kept on file for 3 years No filing is required with the MSRB All advertising must be truthful and not misleading.

FILL IN THE BLANKS, THEN ANSWER THE QUESTION INTRINSIC VALUE is .... that portion of an option's premium reflecting the profit that exists to the contract holder from the difference between the market price of the underlying security and the strike price of an option, ignoring any premium paid by the holder. Call options, (and warrants) go "in the money" when the market price exceeds the exercise price. Put options go "in the money" when the market price is lower than the exercise price. Options that are "in the money" have intrinsic value. Options that are "at the money" or "out of the money" have no intrinsic value. A customer buys 1 ABC Jan 55 Call @ $4 and 1 ABC Jan 65 Put @ $7 when the market price of ABC is at 58. ABC goes to 62 and the customer closes the positions at intrinsic value. The customer has a: A. $100 loss B. $100 gain C. $1,100 loss D. $1,100 gain .

The best answer is A. The customer has bought a combination. Buy 1 ABC Jan 55 Call @ $ 4 Buy 1 ABC Jan 65 Put @ $ 7 $11 Debit If the market moves up to $62, the 65 Put is 3 points "in the money" while the 55 Call is 7 points "in the money." Closing the contracts at these premiums results in: Sell 1 ABC Jan 55 Call @ $ 7 Sell 1 ABC Jan 65 Put @ $ 3 $10 Credit The net loss is: $10 Credit - $11 Debit = $1 or $100 on the positions.

Which of the following is available to purchasers of variable annuity contracts? A. The guarantee of a minimum growth rate in the separate account if a higher annual fee is paid for this rider B. The guarantee of payments for life if the purchaser chooses to take a lump sum distribution at retirement C. Tax deductibility of contributions made to the contract if distributions are not taken until age 59 1/2 or later D. Payments covering the lives of both a husband and wife if a Life Annuity option is chosen upon annuitization

The best answer is A. A "GMIB" - Guaranteed Minimum Income Benefit - is a rider that can be purchased in a variable annuity contract. It guarantees that the separate account will be annuitized based on a minimum annual growth rate (say 4% per year), regardless of how the investments in the separate account actually perform. This is a nice feature, but it comes at a cost of around 1% a year in additional fees. At retirement age (59 1/2 or later), distributions can be taken from the separate account without a 10% penalty tax (but tax on the build-up in the account must be paid). The customer can either take a lump sum distribution or can annuitize the separate account. With a lump sum distribution, the customer gets to deplete the account value and can do this in installments. The risk is that the customer depletes the entire account with many years left to live. This leaves the customer without an income stream in later life. If the customer annuitizes, he or she gets payments for life, but loses any value in the account if he or she dies early. A Life Annuity option only pays for 1 person's life, so if it were a Life Annuity on a husband, and he dies, the annuity stops and the surviving spouse gets no more payments. To cover both lives, a Joint and Last Survivor Annuity option must be chosen. Finally, annuity contributions are not tax deductible (these are non-qualified annuities). When distributions are taken after age 59 1/2, the portion of the distribution representing the tax-deferred build up in the separate account is taxable and the portion of any payment attributable to principal is a tax-free return of capital (since there was no deduction for the contribution amount).

89 The minimum price at which an open end fund share can be purchased is: A) Net Asset Value B) Net Asset Value plus a commission C) Market Price D) Market Price plus a commission

The best answer is A. Mutual fund (open end management company) shares are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a "sales load." For a "no load" fund, the customer would simply pay Net Asset Value - this is the minimum price for an open end fund. This contrasts to a closed end fund, where the fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed end fund share is purchased at the prevailing market price plus a commission.

66 Monetary aggregates have increased over the last month. Which statement is TRUE? A) The Federal Funds rate is likely to increase B) Loans made by banks are likely to increase C) The prime rate is likely to increase D) Reserve requirements are likely to increase

The best answer is B. If monetary aggregates increase (such as M 1), then deposits in banks have increased and the banks can loan out most of these funds (they only have to retain the reserve requirement). If there is more credit available, then interest rates are likely to fall.

72 All of the following are considered in determining a fair and reasonable price in a municipal agency transaction EXCEPT: A) Availability of the security B) Cost of the security C) Expenses associated with effecting the transaction D) Value of services rendered by the municipal broker

The best answer is B. In a municipal agency trade, the MSRB states that there are 4 factors to be considered in determining a fair price: Availability of the security - meaning how difficult was it to complete the trade?; Expenses associated with effecting the transaction; Value of services rendered by the municipal broker; and; Value of any other compensation received in connection with this transaction for example, a customer directs a municipal dealer to sell one bond and use the proceeds to buy another in a "bond swap." The dealer is performing 2 trades instead of 1, and so, should charge a bit less for each trade. In a municipal principal transaction, the MSRB also lists 4 factors considered in determining a fair price, and only 1 of them is duplicated in the list above: The dollar amount of the transaction - a larger dollar amount should result in a smaller mark-up percentage; Expenses associated with effecting the trade; Best judgment of the dealer as to the value of the security; and The fact that the dealer is entitled to a profit (only the MSRB says that dealers are entitled to a profit!)

A customer sells short 100 shares of ABC stock at $38 and buys 1 ABC Mar 40 Call @ $5. The breakeven point is: A. $30 B. $33 C. $43 D. $45

The best answer is B. The customer sold the stock at $38 and paid $5 for the call, receiving a net amount of $33 per share. To breakeven, he must be able to buy the stock at $33 per share (to cover the short stock position). To summarize, the formula for breakeven for a short stock / long call position is:

65 The order to "Sell 100 ABC @ 90 Stop Limit" is: I elected at 90 or below II elected at 90 or above III executed after the order is elected at the next available price IV executed after the order is elected at a price that is at or above 90 A) I and III B) I and IV C) II and III D) II and IV

The best answer is B. This order is a sell stop limit order. Sell stop limit orders can first be looked at as a stop order, placed below the current market. If the market drops to 90 or lower, the order is elected. However, instead of becoming a market order to sell, it becomes a limit order to sell at 90 or better (meaning 90 or higher). Thus, the customer will only sell if he or she receives at least $90 per share.

70 A self-employed individual makes $95,000 per year. To which type of retirement plan can the maximum contribution be made? A) Roth IRA B) Traditional IRA C) SEP IRA D) SIMPLE IRA

The best answer is C. A SEP (Simplified Employee Pension) IRA is usually set up by small business because it simplifies all of the record keeping associated with retirement plans. Contribution amounts made by the employer cannot exceed 25% of the employee's income, up to a maximum of $51,000 in 2013. In contrast, the maximum contribution to either a Traditional, Roth or SIMPLE IRA in 2013 is $5,500 (plus an extra $1,000 catch-up contribution for individuals age 50 or older).

74 A customer has a long margin account with $12,000 of stock and a $6,000 debit balance. Below which market value will the account receive a maintenance call? A) $10,000 B) $9,000 C) $8,000 D) $6,000

The best answer is C. Long margin accounts have a minimum equity requirement of 25% of market value. Since the debit balance remains fixed for purposes of exam computations, at maintenance, the debit is equal to 75% of market value, with equity being equal to 25%. To find the market value at which the account is at maintenance, the formula is: $6,000 .75 = $8,000 Market Value If the market value declines to $8,000, the account is at maintenance. With $8,000 of market value, and a $6,000 debit, equity will be $2,000.

86 A customer writes 1 XYZ Jan 40 Put. To cover the position, the customer would: A) Buy 1 XYZ Jan 30 Put B) Sell 1 XYZ Jan 30 Put C) Buy 1 XYZ Jan 50 Put D) Sell 1 XYZ Jan 50 Put

The best answer is C. The customer has sold 1 XYZ Jan 40 Put. Thus, if the customer is exercised, he or she is obligated to buy XYZ stock at $40 per share. If the customer buys 1 XYZ Jan 50 Put, then the customer can always exercise the long put and sell that stock for $50, if it is put to him for $40. By purchasing the 50 put, the customer has created a "long put spread." Purchasing the XYZ Jan 30 Put does not cover the customer under O.C.C. rules. If the customer is exercised on the short put, buying the stock for $40, by exercising the long 30 put, he can only sell at $30 per share, losing 10 points in the process. To be covered under O.C.C. rules, the strike price of the long put must be the same or higher than that of the short put.

73 All of the following statements are true regarding overlapping debt EXCEPT: A) Overlapping debt is the debt of other governmental units shared by taxpayers in differing political subdivisions B) Overlapping debt is apportioned among political subdivisions based upon relative assessed valuations C) Overlapping debt is self-supporting, backed by a revenue pledge D) Overlapping debt is usually structured as serial bonds backed by the full faith and credit of the issuer

The best answer is C. The only debt that can be overlapping is G.O. debt - not revenue bonds. An overlapping debt is one shared by taxpayers in differing political subdivisions. For example, a school district may encompass 5 different towns. A portion of the school district debt overlaps each town, and the taxpayers in each town pay for the debt service on the school district debt based upon their relative assessed property valuations. G.O. bond issues are usually structured as serial bonds under a level debt service arrangement to match yearly payments to expected tax revenues.

69 Which of the following parties of an account can give trading authorization to another party of the account? A) A first party can give trading authorization to a third party B) A first party can give trading authorization to a second party C) A second party can give trading authorization to a third party D) A third party can give trading authorization to a second party

The best answer is C. The parties to an account are: First Party: Brokerage Firm Second Party: Customer Third Party: Someone Other Than the Broker or Customer Since only Second Parties can open accounts, only a Second Party can give trading authorization to either a First Party (a discretionary account) or to a Third Party (a Third Party trading authorization).

102 The individuals who make a secondary market in corporate bonds include which of the following? I Market Makers II Underwriters III Traders IV Dealers A) I and II B) II and IV C) I, III, IV D) I, II, III, IV

The best answer is C. The secondary market is the trading of issues outstanding in the market. The individuals making the secondary market are the market makers (also known as dealers) and traders. Underwriters take new issues public in the primary market (new issues), not the secondary (trading) market. Once these issues are placed by the underwriter, they begin to trade in the secondary market.

84 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. 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%.

71 All of the following securities can be sold by BOTH an individual holding a Series 7 General Securities License and an individual holding a Series 6 Investment Companies / Variable Annuities registered representative's license EXCEPT: A) Unit Investment Trusts B) Mutual Funds C) Initial Public Offerings of Closed End Funds D) Real Estate Investment Trusts

The best answer is D. A person holding an investment companies/variable annuities (Series #6) license is only allowed to sell mutual funds, initial public offerings of closed end funds (but afterwards these cannot be traded by this person unless Series #7 is passed) unit investment trusts, and variable annuities. To sell other securities such as Real Estate Investment Trusts, municipal bonds, corporate bonds, common stock, options etc., the broader Series #7 general securities license is required.

75 Which of the following is defined as options "sales literature"? A) Options movie B) Options prospecting letter sent to 10 clients C) Letters of an "individual" nature sent to customers D) Options research report

The best answer is D. Options Sales Literature is any written communication distributed to customers or the public that contains any analysis, performance report, projection or recommendation. Included, as well, are standard forms of options worksheets (these detail gain, loss, and breakeven for a given strategy to be employed by a customer), and seminar texts for lectures to be given to the public about options. Sales literature must be accompanied or preceded by an Options Disclosure Document. Options Advertising is defined as any sales material that reaches a public audience through a mass media, including: newspapers, periodicals, magazines, websites, radio, television, telephone recordings, motion pictures, billboards, signs, or through written sales communications to the public that are NOT required to be preceded by an Options Disclosure Document. The content of these communications is very limited so that they are not "promotional" and they must state where an Options Disclosure Document can be obtained. A letter of an individual nature to a customer is defined as correspondence, as is an options prospecting letter sent to fewer than 25 potential clients (note that if the letter is sent to 25 or more potential clients, if becomes sales literature).

The penalty tax applied for not taking required minimum distribution from a qualified retirement plan in a given year is: A. 6% of the shortfall B. 10% of the shortfall C. 15% of the shortfall D. 50% of the shortfall

The best answer is D. The penalty applied for not taking required minimum distributions from a qualified plan starting at age 70 1/2 is 50% of the under-distribution. There is an incentive to take the money out and pay tax on it, which is what the Treasury is really looking for!

67. A customer owns a real estate limited partnership interest, with an adjusted cost basis of $25,000. This interest has generated unused passive losses totaling $15,000. The partnership interest is sold for $25,000. Regarding the cost basis and capital gain or loss which of the following statements are TRUE? I The adjusted cost basis is $10,000 II The adjusted cost basis is $40,000 III The customer has a capital gain of $10,000 IV The customer has a capital loss of $15,000 A) I and III B) I and IV C) II and III D) II and IV

The best answer is D. 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 $25,000 and $15,000 of unused passive losses, for an adjusted cost basis of $40,000. Since the sale proceeds from disposing of the partnership interest are $25,000, the customer has a capital loss of $15,000 on this investment for tax purposes. The end result is that the unused passive loss is converted into a capital loss when the partnership unit is sold.

VARIABLE ANNUITIES Variable annuities differ from other products sold by _________ companies in that the _________ bears the investment risk; As opposed to the _________ _________ bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of _________ benefit that one gets from a traditional insurance policy; If the _________ investment account funding a variable annuity achieves poor investment results, the annuity payment will _________ . --> Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a _________ - exempt security that must be registered and sold with a prospectus. --> Because these are structured as _________ unit trusts, variable annuities are regulated under the Investment Company Act of 1940.

VARIABLE ANNUITIES Variable annuities differ from other products sold by INSURANCE companies in that the PURCHASER bears the investment risk; As opposed to the INSURANCE company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of DEATH benefit that one gets from a traditional insurance policy; If the SEPARATE investment account funding a variable annuity achieves poor investment results, the annuity payment will _________. --> Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a ____ -exempt security that must be registered and sold with a prospectus. --> Because these are structured as PARTICIPATING unit trusts, variable annuities are regulated under the Investment Company Act of 1940.

TWO QUESTIONS & ANSWERS (one on each side of cards) 96 An investor holds 1 ABC Jan 40 Call. ABC splits 4 for 1. On the ex date, the contract becomes: A) 1 ABC Jan 40 Call B) 1 ABC Jan 10 Call C) 4 ABC Jan 10 Calls D) 4 ABC Jan 40 Calls The best answer is C. For 2:1 and 4:1 whole share splits, the number of contracts is increased and the strike price reduced proportionately. 1 ABC Jan 40 Call becomes (after the 4 for 1 split) 4 ABC Jan 10 Calls (the new strike price is 40/4).

Which of the following is available to purchasers of variable annuity contracts? A. The guarantee of a minimum growth rate in the separate account if a higher annual fee is paid for this rider B. The guarantee of payments for life if the purchaser chooses to take a lump sum distribution at retirement C. Tax deductibility of contributions made to the contract if distributions are not taken until age 59 1/2 or later D. Payments covering the lives of both a husband and wife if a Life Annuity option is chosen upon annuitization The best answer is A. A "GMIB" - Guaranteed Minimum Income Benefit - is a rider that can be purchased in a variable annuity contract. It guarantees that the separate account will be annuitized based on a minimum annual growth rate (say 4% per year), regardless of how the investments in the separate account actually perform. This is a nice feature, but it comes at a cost of around 1% a year in additional fees. At retirement age (59 1/2 or later), distributions can be taken from the separate account without a 10% penalty tax (but tax on the build-up in the account must be paid). The customer can either take a lump sum distribution or can annuitize the separate account. With a lump sum distribution, the customer gets to deplete the account value and can do this in installments. The risk is that the customer depletes the entire account with many years left to live. This leaves the customer without an income stream in later life. If the customer annuitizes, he or she gets payments for life, but loses any value in the account if he or she dies early. A Life Annuity option only pays for 1 person's life, so if it were a Life Annuity on a husband, and he dies, the annuity stops and the surviving spouse gets no more payments. To cover both lives, a Joint and Last Survivor Annuity option must be chosen. Finally, annuity contributions are not tax deductible (these are non-qualified annuities). When distributions are taken after age 59 1/2, the portion of the distribution representing the tax-deferred build up in the separate account is taxable and the portion of any payment attributable to principal is a tax-free return of capital (since there was no deduction for the contribution amount).

62 When does an investor receive payment of interest and principal on a Capital Appreciation Bond (CAB)? I Interest is paid semi-annually II Interest is paid at maturity III Principal is paid semi-annually IV Principal is paid at maturity A) I and III B) I and IV C) II and III D) II and IV A Capital Appreciation Bond (CAB) is a municipal zero coupon bond with a "legal" twist to it. A conventional zero coupon G.O. bond is counted against an issuer's debt limit at par value because the discount is treated as "principal." If a new issue discount bond is legally crafted as a CAB, then the principal counted against the issuer's debt limit is the discounted principal amount and the discount earned is considered to be interest income. The bond is purchased at the discounted price and then par is returned at maturity, with the 2 components of that par payment being the return of the discounted purchase price (the "principal" amount) and the accreted interest income.

Which statements are true regarding moral obligation bonds? I The bonds are typically secured by the revenues from a financed project II The bonds are typically secured by the special taxing power of the issuer III Ultimate payment on a moral obligation bond occurs if the U.S. Government apportions the funds to service the debt IV Ultimate payment on a moral obligation bond occurs if the State legislature apportions the funds to service the debt A. I and III B. I and IV C. II and III D. II and IV The best answer is B. Moral obligation bonds are typically issued by state agencies or authorities, and are secured by the revenues from the financed project (recent issues have been used to finance hyper-expensive ball stadiums, where the projected revenues appear to be insufficient to cover all costs), and additionally, by a non-binding undertaking that any deficiency in pledged revenues will be reported to the State legislature which may apportion State monies to make up the shortfall. Thus, the State has a moral obligation to pay; but not a legal obligation to pay.