Final Practice Exam

Section 28(e) of the Securities Exchange Act of 1934 deals with A) a safe harbor for non-cash compensation from broker-dealers to investment advisers. B) the requirement to update customer account information at least every 36 months. C) authorizing the Federal Reserve to regulate credit in the securities markets through Reg. T. D) the registration requirements of national stock exchanges.

A

The capital asset pricing model (CAPM) states that A) the pricing of a stock should take into account systematic risk as well as nonsystematic risk. B) there are three types of changes in stock prices; primary trends, secondary trends, and short-term fluctuations. C) the direction of individual stock or overall market prices is unpredictable. D) securities markets are efficient markets, meaning securities prices react so quickly to most investment information that no analyst is likely to outsmart the market as a whole.

A *The capital asset pricing model (CAPM) is used to calculate the return that an investment should achieve based on the risk that is taken.

Your client wishes to sell XYZ short. You explain that this can be done A) at any time during the trading day. B) only on the opening trade of the day. C) only on the last trade of the day. D) only if the stock ticks up in price first.

A

A customer enters a market order to buy 100 shares of XYZ. The broker-dealer reports the purchase price of 100 shares of XYZ at 27.50 to the customer; shortly after, it is determined that the actual price paid when the order was filled was 28. The customer A) must accept the trade at the price of 28. B) can request the dispute go to arbitration. C) can elect to accept or decline the trade. D) can reject the trade under the terms of the Uniform Practice Code.

A **confirmed

When one of the partners in a partnership account dies, the registered representative (RR) must A) cancel any unexecuted orders and freeze the account. B) automatically retitle the account in the names of the remaining partners. C) cancel any unexecuted orders, liquidate the account, and hold all assets in cash until further instructions are received. D) allow existing orders to be executed or expire and then freeze the account until further instructions are received.

A **confirmed

A customer buys 1,000 shares of XYZ at $47. Several months later, the stock is at $56. The customer, concerned about a possible pullback and wanting to best protect the unrealized gain, should A) buy 10 XYZ 55 puts. B) buy 10 XYZ 60 calls. C) buy an XYZ 55 put D) sell 10 XYZ 55 calls.

A *1,000 shares of XYZ @ $47. (CB=$47,000) *XYZ rises to $56. (CB=$56,000) *Best option is to BUY 10 55 PUTS. Why? Better option than D, because if the stock drops below 55, he can sell the 1,000 shares. Downside, paying the 10 premium contracts.

A popular vehicle for saving for retirement is the variable annuity. A registered representative explaining the benefits of this product would probably be making an incorrect statement by claiming that variable annuities offer A) a less expensive way to invest in equities than a mutual fund with similar investment objectives. B) the ability to exchange funds between subaccounts without incurring a tax liability under IRS Code Section 1035. C) tax deferral on earnings until withdrawn from the account. D) the choice of a large number of different subaccounts with varying objectives

A *Annuities tend to have much higher expenses than mutual funds. This is how insurance companies make money on annuities: in exchange for the guaranteed income or growth, they earn more in the market on your money and pay you less.*1035 exchange: the IRS allows annuity and life insurance policyholders to exchange their policies without tax current liability.

A technical analyst notices a head and shoulders top formation on a chart. The formation is generally an indicator of A) the reversal of an upward trend. B) a breakout below the support level. C) the reversal of a downtrend. D) a breakout above the resistance level.

A *The head-and-shoulders TOP pattern indicates the beginning of a bearish trend in the stock. (Indication of a bearish reversal of an uptrend) --- *a head-and-shoulders BOTTOM, or an inverted head-and-shoulders, and indicates a bullish reversal. (Indication of a bullish reversal of a downtrend)

A customer asks you for a quick, accurate definition of 12b-1 fees. A good reply would be that they are A) often referred to as asset-based distribution fees and are used to cover the costs of marketing and distributing the fund shares to investors. They can be used to compensate registered representatives with commissions for servicing an account (trailers), but are not sales charges. B) often referred to as asset-based distribution fees and are used to cover the costs of marketing and distributing the fund shares to investors. They can be used to compensate registered representatives with commissions for servicing an account (trailers) and therefore are considered to be a part of the sales charges. C) not asset-based, but are pure sales charges used to cover the costs of marketing and distributing the fund shares to investors. D) an additional sales charge added on to fund the compensation of registered representatives who receive commissions in the form of trailers.

A *As an asset-based fee, 12b-1 fees are often called asset-based distribution fees. Named after the SEC rule that allows them, 12b-1 fees are used to cover the costs of marketing and distributing the fund to investors. These 12b-1 fees are also used to compensate registered representatives for servicing an account (trailer commissions) but shouldn't be confused with sales charges.

An issuer interested in reducing its interest cost can use the call provision to call in outstanding bond issues. The issuer is most likely to call bonds with A) a high coupon and low call premium. B) a low coupon and low call premium. C) a low coupon and high call premium. D) a high coupon and high call premium.

A *Call premium is the dollar amount over the par value of a callable debt security that is given to holders when the security is redeemed early by the issuer.

The alternative minimum tax (AMT) would be least likely to affect taxpayers who A) receive a large state income tax refund. B) take accelerated depreciation on investment property. C) earn interest from general obligation bonds. D) receive incentive stock options with a grant price below the current market value.

A *Congress enacted the AMT in 1969 to make certain that high-income taxpayers do not escape paying taxes. Certain items receive favorable tax treatment. These items must be added back into taxable income for the AMT.

An investor holds shares of the CTS Balanced Fund and wants to exchange them for shares of the CTS Growth Fund. One of the features the CTS fund family offers to shareholders is the conversion privilege. The exchange of one fund for another within the same fund family would have which of the following consequences? A) Shares of the CTS Growth Fund would be purchased at the net asset value (NAV) without a sales charge and any gains from the sale of the CTS Balanced Fund would be taxable. B) Shares of the CTS Growth Fund would be purchased at the POP and any gains from the sale of the CTS Balanced Fund would taxable. C) Shares of the CTS Growth Fund would be purchased at the NAV with a sales charge assessed and any gains from the sale of the CTS Balanced Fund would be taxable. D) Shares of the CTS Growth Fund would be purchased at the public offering price (POP) and any gains from the sale of the CTS Balanced Fund would be non-taxable at this time.

A *Conversion privilege permits or exchange privilege allowed the conversion of one fund to another fund in the same family at the current NAV per share. *This is a taxable event, if there is a gain or loss, it must be reported.

Fees can have a major impact on long-term performance of an investment. Your client interested in purchasing a periodic payment deferred annuity would not be concerned about A) death benefit fee. B) M&E fees. C) 12b-1 fees. D) surrender charges.

A *Death benefits in a variable annuity (VA) may be triggered by the death of the annuitant or the contract owner. Fees for a VA death benefit are part of the mortality and expense charge (M&E), included in the VA prospectus, and can be as high as 2% of the contract value.*A periodic payment deferred annuity allows investments over time. Benefit payments for this type of annuity are always deferred until a later date selected by the annuitant. *A "surrender charge" is a type of sales charge you must pay if you sell or withdraw money from a variable annuity during the "surrender period" - a set period of time that typically lasts six to eight years after you purchase the annuity *Variable annuities have investment and management fees. These fees can be referred to as expense ratios, 12b-1 fees or service fees. *M&E: Morality and expense fees

A new client, age 26, has a $15,000 inheritance to invest and notes that it is for long-term savings. He tells you that it won't be needed for many years and wants to simply see it grow over time. Given his age and the small amount to invest, you recommend a balanced fund, but which share class would be most suitable? A) Class B shares B) Class A or C shares C) Class A shares D) Class C shares

A *Firms usually don't allow Class B purchases of more than $100,000. *Class B: No Front-End Fees: Your entire initial investment contribution benefits from capital gains and interest income. That is a substantial benefit for new investors saving for retirement because of compound returns. *Class C shares are appropriate for investors who have short time horizons because they become quite expensive to own if investing for more than four years. *Class A: High Initial Investment and long-term investment horizon. *12b-1 Fees: charges quarterly fees. Covers prospects, advertising and sales literature fees. (DOES NOT INCLUDE MANAGEMENT FEES). "No-Load =0.25% rule.". FINRA allows 0.75% max charge for 12b-1.

Some information found on a municipal bond confirmation is only relevant to new issues. One example of this type of information is A) the dated date. B) the source of revenue backing a revenue bond. C) the name of the guaranteeing corporation if the issue is an industrial revenue bond. D) the in-whole call dates.

A *For a new bond issue, the date from which interest accrual begins is called the dated date. Even if a bond is issued at a later date, the bond starts accruing interest on the date designated as the dated date. For example, if the bond's dated date is April 1 and the interest payment dates are June 1 and December 1, the first interest payment will be on December 1 and will be for eight months of interest.

The flow of funds statement found within a municipal trust indenture relates to A) revenue bonds only and is found within the bond resolutions. B) revenue bonds only and is found in the official notice of sale. C) both general obligation and revenue bonds and is found within the bond resolutions. D) both general obligation and revenue bonds and is found within the official notice of sale.

A *The face of a revenue bond certificate may refer to a trust indenture (or bond resolution). This empowers the trustee to act on behalf of the bondholders. *Flow of funds. Revenues generated must be sufficient to pay all of the facility's operating expenses and to meet debt service obligation. *Flow of funds. The priority of disbursing the revenues collected.

A registered representative recommends a variable annuity with an income rider to a client. The client's investment objectives, tax bracket, investment experience, and risk tolerance all align well with a variable annuity recommendation. The client agrees to purchase the contract and informs the registered representative that he will be cashing out a variable annuity he purchased two years ago to fund the new contract and will forward the check as soon as he receives it. Based on this information, the representative should A) reevaluate whether the recommendation for the variable annuity contract is still suitable based on the client's proposed funding of the investment. B) contact the issuer of the client's existing variable annuity contract to facilitate the client's surrender of the contract. C) complete all paperwork to purchase the annuity contract and obtain the client's signature immediately. D) suggest to the client that perhaps a loan or refinancing his vacation home might be a better way to fund the variable annuity contract purchase.

A *Funding a VA contract by cashing out either life insurance policies or existing VA contracts, especially those held for a short period of time is not suitable. These contracts come with high surrender charges. Suggesting that loans or drawing equity from a home to fund VA contracts have also been targeted as abusive sales practices. Of the answer choices given the best would be to reevaluate the recommendation based on the new information tendered by the client.

Your broker-dealer is compiling a list of investments suitable for a qualified retirement plan. The list should not include A) investment-grade municipal bonds. B) Treasury bills. C) investment-grade corporate bond. D) highly rated common stocks.

A *Municipal bonds interest is tax-free, therefore, not a suitable investment for Qualified Retirement Plans.

One of the concerns of the Employee Retirement Income Security Act of 1974 (ERISA) is fair treatment of all employees. Towards that goal, ERISA established certain eligibility requirements to ensure there would be A) nondiscrimination. B) rollovers to IRAs. C) funding. D) vesting.

A *Nondiscrimination. All eligible employees must be treated impartially through a uniformly applied formula. *Vesting. Vesting defines when an employer contribution to a plan becomes the employee's money, such as an employer-matching contribution to a 401(k) plan. ERISA limitshow long the vesting schedule can last before the employee is fully vested. Note that an employee is always fully vested in the employee's own contributions to a plan. *Funding. Funds contributed to the plan must be segregated from other corporate assets. Plan trustees must administer and invest the assets prudently and in the best interest of all participants. IRS contribution limits must be observed.

For a municipal bond, the opinion rendered by the bond counsel would attest to A) the legality of the issue. B) the economic feasibility of the issue. C) the marketability of the issue. D) the credit rating of the issue.

A *Printed on the face of every bond certificate (unless the bond is specifically stamped Ex- Legal) is a legal opinion written and signed by the bond counsel, an attorney specializing in tax-exempt bond offerings. The issuer of the debt is responsible for retaining the bond counsel. The legal opinion states that the issue is legally binding on the issuer and conforms to applicable laws.

A customer writes 1 XYZ Feb 50 put at 1 and buys 1 XYZ Feb 60 put at 7. The breakeven point is A) 54. B) 66. C) 44. D) 56.

A *SHORT 1 XYZ Feb 50 Put @ 1 (+$100). OBL to buy *LONG 1 XYZ Feb 60 Put @ 7 (-$700). RHT to sell -$700 - $100 = -$600 -Selling @ $54 = $600 BE. *Note that we purchased the put with the higher strike price (the more you can put the stock for, the higher the premium) and that made this a debit spread. On a put spread, the breakeven follows the Put DOWN rule. We take the net debit (or credit) and subtract it from the higher strike price.

Savings incentive match plans for employees (SIMPLEs) are A) funded with pretax contributions and allow catch-up contributions for those age 50 and older. B) funded with after-tax contributions but do not allow catch-up contributions for employees. C) funded with pretax contributions but do not allow catch-up contributions for employees. D) funded with after-tax contributions and allow catch-up contributions for those age 70½ and older.

A *SIMPLE plans are retirement plans for businesses with 100 or fewer employees who earned $5,000 or more during the preceding calendar year. *The employee makes pretax contributions into a SIMPLE up to an annual contribution limit. *Matching contribution requirements and limits for employers are specified by the IRS and include catch-up contributions up to $3,000 for those age 50 and older.

The volatility market index (VIX) is best characterized as A) a "fear" index, measuring the expectations of market volatility. B) a measurement of the implied stability of options written on the S&P 500. C) a highly volatile index-tracking exchange-traded fund ETF. D) an index option traded on the NYSE.

A *Some indexes have a very particular focus, such as the Volatility Market Index (VIX).This index is a measure of the implied volatility of the S&P 500 Index options tradedon the CBOE. VIX options, also traded on the CBOE, are designed to reflect investor expectations of market volatility over the next 30 days. It is often referred to as the fear gauge or index.

Securities exempt from regulation under the Trust Indenture Act of 1939 include A) U.S. Treasury and municipal bonds. B) corporate debentures and municipal bonds. C) short-term commercial paper and secured corporate bonds. D) U.S. Treasury and secured corporate bonds.

A *The Trust Indenture Act of 1939 applies to corporate bonds (nonexempt) with the following characteristics: -Issue size of more than $50 million within 12 months -Maturity of nine months or more -Offered interstate *Securities that are not subject to regulation under the Securities Act of 1933 are exempt from the Trust Indenture Act of 1939. For example, municipal bonds are exempt from the TIA. *There are several reasons why securities may be exempt from registration requirements (1933 act): the securities are considered safe because they are issued by a government authority, such as US Treasuries or municipal bonds;

A municipality's statutory debt limit imposes a limit on A) the issuance of additional general obligation (GO) bonds. B) the debt coverage ratio on the municipality's bonds. C) the raising of tax rates within the municipality. D) the raising of property taxes within the municipality.

A *The amount of debt that a municipal government may incur can be limited by state or local statutes to protect taxpayers from excessive taxes. Debt limits can also make a bond safer for investors. The lower the debt limit, the less risk of excessive borrowing and default by the municipality.

Which of the following statements is correct? A) Interest received on GNMA securities is taxable on both the state and federal level. B) Coupon interest paid on TIPS bonds is taxable on the federal level and any increase to principal is taxed as capital gain when the bond matures. C) The difference between the purchase price and maturity value of a U.S Treasury bill is taxed as short-term capital gain. D) Interest received on U.S. Treasury notes and bonds is taxable on the state level, but not the federal level.

A *The interest you earn from a GNMA bond is fully taxable. You must claim the interest and pay taxes at both the federal and state levels. In this respect, GNMA bonds differ from Treasury securities. Interest earned from a Treasury bond is taxable at the federal level, but exempt from state income taxes. The fact that taxes must be paid on GNMA bond interest is one reason why the bonds carry a higher yield than Treasuries. -- C*The interest received on a Treasury bill is based on the difference between the discounted purchase price and the face value received when the bill is redeemed at maturity, and is taxable as interest, not a capital gain. This amount is taxable in the year the bill matures (not when it is purchased), and the interest is subject to federal income tax, but exempt from state and local income taxes. -- C*The difference between maturity value and purchase price is taxed as interest income. If the T-bill is sold prior to maturity, a capital gain or loss will result.

The owner of a variable annuity contract chooses a joint life with last survivor option. In choosing this option, the annuity payments A) will continue as long as one of the annuitants is alive and be smaller than if a life with period certain option had been chosen. B) will continue only as long as both annuitants are alive and be smaller than if a life with period certain option had been chosen. C) will be use a different assumed interest rate (AIR) than a contract with a single life. D) will be based on the life expectancy of the younger person.

A *The joint life with last survivor option guarantees payments over two lives. It is often used for spouses. Because the insurance company is obligated to pay a check over two lifetimes, this check will be smaller than a life with period certain option. *The life annuity with period certain option is a little less risky because it allows for payments to a beneficiary. To guarantee that a minimum number of payments are made even if the annuitant dies, this option can be chosen. The contract will specifically allow the choice of a period of 10 or 20 years, for instance. The length of the period certain is a choice that is made when a payout option is selected. The annuitant is guaranteed monthly income for life with this option, but if death occurs within the period certain, a named beneficiary receives payments for the remainder of the period.

Your client has sold 300 shares of stock. All of the following are considered good delivery except A) four 75-share certificates. B) one 300-share certificate. C) three 60-share certificates, two 40-share certificates, two 20-share certificates. D) two 100-share certificates, one 70-share certificate, and one 30-share certificate.

A *To be good delivery, certificates must generally be stackable, or breakable, into 100-share units or multiples of 100.

When the inside market (best bid and best offer) for XYZ stock was 17.30-17.60, a market maker sold 100 shares to a customer at 17.90. At the time of the trade, the market maker's quote was 17.25-17.70. What was the amount of the markup? A) 0.30 B) 0.20 C) 0.60 D) 0.65

A -$17.30 (BID, highest price MM is willing to buy @) -$17.60 (ASK, lowest price MM is willing to sell @) *$17.60 - $17.90 = $0.30 markup.

Your customer, divorced with two children and age 52, has a portfolio consisting of 80% equities with the remaining 20% diversified among several other products. Her annual income is $115,000. Which of the following events would most likely be cause to immediately reallocate her investments? A) She has been notified by her employer that due to corporate downsizing her position is being eliminated. B) She will be remarrying a person of considerable wealth next month. C) The father of her children has established trust funds for each of them in the amount of $50,000 each. D) Equities are rebounding slowly after a two-year slump.

A -52, Divorced w/ two kids. Annual Income:$115,000 -Portfolio: 80% equity, 20% diversified. *Equities carry a high risk and if her high paying job is at risk, she will probably need to reduce her portfolio's risk.

Of the following investors, the creditor with the lowest priority claim to the assets of a corporation during a liquidation would be the holder of its A) common stock. B) collateral trust certificates. C) warrants. D) subordinated debentures.

A LIQUIDATION ORDER: -1st: Secured creditors (e.g., mortgage bonds, equipment trust certificates, collateral trust bonds) -2nd:Unsecured creditors (e.g., general creditors, including debenture holders) -3rd: Subordinated debt holders -4th: Preferred stockholders -5th: Common stockholders

A convertible bond has a conversion price of $50 per share. If the market value of the bond rises to a 10 point premium over par, which of the following statements is true? A) Conversion ratio is 20:1 with parity price of the common at $55 B) Conversion ratio is 22:1 with parity price of the common at $60 C) Conversion ratio is 22:1 with parity price of the common at $55 D) Conversion ratio is 20:1 with parity price of the common at $60

A *1,000/50 = 20. 20:1 conversion ratio. *1,100 / 20 = $55 parity price. **Computing Conversion Ratio: "Therefore, if the conversion price is given, to compute the number of shares into which the bond is convertible, always divide the par value ($1,000) by the conversion price. For example, a bond convertible at $20 per share is convertible into 50 shares ($1,000 ÷ $20 = 50 shares). If the bond has a conversion price of $50, the conversion ratio is 20 shares ($1,000 ÷ $50 = 20 shares)." ----- *Computing Parity Example: -Debenture conertible into common at $50. Currently trading at $1,200. What is the Parity Price? -Par Value: $1,000/ 50 = 20. -$1,200/20 = $60

In a new margin account, a customer buys 100 XYZ at 62 and simultaneously writes 1 XYZ Jan 65 call at 2. The margin call will be for A) $3,100. B) $2,900. C) $3,450. D) $3,300.

B *100 * $62= $6,200. *Write 1 XYZ Jan 65 Call @ 2= +$200 profit *50% of $6,200 = $3,100. *$3,100 - ($200 profit)= $2,900 *Receiving a premium for writing calls can be added to the margin call.

XYZ Corp. has issued $30 million of debentures. Each bond issued has a warrant attached enabling the holder to buy three shares of XYZ common at $30 per share. If all of the warrants are exercised, XYZ Corp. will receive A) $6.6 million. B) $2.7 million. C) $9 million. D) $19.8 million.

B *30,000,000 / $1,000 = 30,000 Debentures. *$30 x 90,000 shares = $2,700,000 raised by XYZ corp.

What would be the impact of a 10% stock dividend on the exdate for a retail investor that owns an option contract the following option contract? 1 ABC July 40 call A) The number of contracts owned will increase by 10%, and the strike price stays the same. B) The number of contracts owned will stay the same, and the strike price will be reduced. C) The number of contracts owned will increase by 10%, and the strike price is reduced. D) The number of contracts owned will stay the same, and the strike price increases.

B *A call option on a stock is a contract whereby the buyer has the right to buy 100 shares of the stock at a specified strike price up until the expiration date. Since the price of the stock drops on the ex-dividend date, the value of call options also drops in the time leading up to the ex-dividend date.

Your client signs a discretionary account form and tells you the signed form was mailed to your attention. Before receiving the form, you notice that one of his stocks is dropping sharply on adverse news, but you are unable to contact him. In this situation, you A) can enter a discretionary order if you are able to contact the person who was given discretionary authorization. B) cannot enter a discretionary order. C) can enter a discretionary order if a principal of the broker-dealer has approved the order prior to entry. D) can enter a discretionary order if written documentation of the situation has been made.

B *A discretionary order cannot be entered until the signed discretionary account form has been received.

Designated Market Makers (DMMs) on the floor of the NYSE cannot handle A) stop orders. B) market not-held orders. C) odd-lot market orders. D) limit orders.

B *A market order coded NH (not held) indicates that the customer agrees not to hold the floor broker or broker-dealer to a particular time or price of execution. This provides the floor broker with the authority to decide the best time or price at which to execute the trade. *Market NH orders may not be placed with the NYSE DMM.

The calculation of accrued interest for a municipal bond A) is not made when a bond trades "and interest." B) includes interest from and including the last payment date. C) includes interest through the settlement date. D) is based on an actual day month.

B *Accrued interest is calculated from the last interest payment date up to but NOT including the settlement date (two business days after the trade date).

You have entered an all-or-none order to purchase 1000 shares of stock for a customer. Regarding this order, which of the following statements is not true? A) It may be a day order. B) It must be filled immediately. C) It may be a good-til-canceled (GTC) order. D) It must be executed in its entirety.

B *All-or-none (AON) orders must be executed in their entirety or not at all. AON orders can be day or GTC orders. They differ from the FOKs in that they do not have to be filled immediately.

A speculative investor believes the market in Australian dollars will remain flat for the next several months. Which of the following positions allows the investor to take advantage of a lack of movement in the exchange rate between Australian dollars and U.S. dollars? A) A long straddle B) A short straddle C) A long combination D) A credit put spread

B *An investor who writes a short straddle expects that the stock's price will not change or will change very little. The investor collects two premiums for selling a straddle.

A registered representative is obligated to adhere to the prospectus delivery requirements of the Securities Act of 1933 when making a sale of A) shares of the XYZ closed-end investment company, a fund whose shares trade on the Nasdaq Stock Market. B) shares of the STU open-end investment company, a fund whose portfolio makeup is exclusively U.S. Treasury issues. C) shares of the LMN S&P 500 index EFT, traded on the NYSE. D) a new issue of B-rated industrial revenue bonds to provide funding for a new facility for the Boomer Widgets Company.

B *Because the shares are always a new issue, it is required to deliver a prospectus prior to or concurrent with the sale. As a consequence, investors in mutual funds are always purchasing a new issue. *The Securities Act of 1933 regulates new issues of corporate securities sold to the public and is designed to prevent fraud in the sale of newly issued securities. Trading and the secondary markets are regulated under the Securities Exchange Act of 1934. *Issuers exempt from the 1933 Act: U.S. government, U.S. municipalities and territories.

One July 45 mini-option contract call is quoted at 3. A buyer will pay A) $300. B) $30. C) $45. D) $450.

B *Call contract quoted @ 3. Normally would be $300. 1/10th of that is $30. *Mini options are a new contract size, designed for use by retail investors, who often have underlying positions of less than 100 shares. Mini contracts carry a deliverable of 10 shares of an underlying security, unlike standard contracts of 100 shares.

In a direct participation program limited partnership for tax purposes, A) income for the general partners is earned income, but for the limited partners it is tax credits. B) income for the general partners and limited partners is considered passive income. C) income for the general partners is earned income, but for the limited partners it is passive income. D) income for the general partners and limited partners is considered earned income.

B *DPPs were formerly known as tax shelters because investors used losses to reduce or shelter ordinary income (by writing off passive losses against ordinary income). *Tax law revisions now classify income and loss from these investments as passive income and loss. Current law allows passive losses to shelter only passive income, not all ordinary income as before. Many programs lost their appeal because of this critical change in tax law.

An exchange traded fund (ETF) differs from a mutual fund in that A) its NAV is not computed after 4 pm ET. B) it can be sold short. C) only ETFs can track an index. D) it is usually an open-end investment company.

B *ETFs can be sold short. INDEX ETF's can be sold short at ANY time during trading hours. *Both ETFs and Mutual funds can track an index. *Mutual Funds: NAV are computer after 4:00 p.m. EST. ETF's are computed throughout the day via supply & demand of NAV.

The dollar price used to compute the yield to call must be recorded on the confirmation of which of the following callable municipal bonds? A) 6s 27 quoted at 7.5. B) 9s 25 quoted at 7.0. C) 8s 28 quoted at 8.0. D) 7s 25 quoted at 9.5.

B *For callable premium bonds quoted on a yield basis, the yield computed to the near term in-whole call is used. The confirmation shows the call date and call price as the expected maturity. The only bond shown quoted at a premium is 9s 15 quoted at 7.0.

An appeal of an adverse Code of Procedure decision may be made by either party within A) 45 days of the decision date. B) 25 days of the decision date. C) 10 days of the decision date. D) 30 days of the decision date.

B *If either side is displeased with a COP decision, an appeal must be made within 25 days of the decision date.

Your customer tells you she is very bearish on the market and thinks she can capitalize on that view by purchasing an inverse exchange traded fund (ETF) that tracks the Dow Jones Industrial Average (DJIA). In a subsequent, discussion she explains her understanding of how the fund works and makes several comments that are all accurate except one. Which is the inaccurate statement that as her registered representative you would want to correct? A) If I have a change of view I can pretty much expect to be able to sell these shares right away, not like mutual fund shares where I have to wait until they're priced again. B) If the DJIA decreases by 10%, this ETF is managed to increase by twice that amount. C) The fund is managed to perform opposite of the DJIA, and because I'm bearish on the market owning, these fund shares align with my view. D) It's like any other fund regarding potential losses in that I can't possibly lose more than I invest.

B *Inverse ETFs: An inverse ETF is an exchange traded fund (ETF) constructed by using various derivatives to profit from a decline in the value of an underlying benchmark. Investing in inverse ETFs is similar to holding various short positions, which involve borrowing securities and selling them with the hope of repurchasing them at a lower price. *Intra-day trading is available. *Cost Basis is the max potential loss.

Stocks have statistically been in a bull market for several years. An investor that studies technical analysis is bearish on the stock market in the short term. They would like to invest $100,000 of an investment portfolio valued at $10 million and try to take advantage of the coming stock market correction. Which of the following would be the WRONG thing for a registered representative to recommend? A) Buy a hedge fund that has a contrarian investment style. B) Buy puts on broad based index options. C) Place buy stops on the securities in the portfolio identified as the most likely to fall. D) Buy an inverse ETF that is based on the S&P 500.

B *Investor w/ $10,000,000 portfolio is BEARISH. *$100,000 to invest for the upcoming "market correction". *Buying PUTS= BULLISH. OBLIGATED to buy @. *A Contrarian investor is someone who trades against prevailing market sentiments. When the market buys, the contrarian sells, and vice-versa. Contrarian investors look for opportunities to buy in a bear market. Client is an Accredited Investor and this option is suitable.

A customer of a broker-dealer is long 1 MMS July 60 call and short 1 MMS July 70 call. Which of the following is true? A) The position has an unlimited gain potential. B) The position has a limited gain and loss potential. C) The position has an unlimited loss potential. D) The position has an unlimited loss potential and a limited gain potential.

B *LONG 1 MMS July 60 CALL -- R2B @60 *SHORT 1 MMS July 70 CALL-- OB2Sell @ 70 *Loss & gain is limited because they have the right to buy @ 60 and fulfill the obligation SHORT call @ 70.

A customer purchases 300 XYZ at 35 and writes 3 XYZ October 35 calls at 3. The customer will profit under all of the following circumstances except A) if XYZ is between 32 and 35 at expiration. B) if XYZ falls below 32 at expiration. C) if XYZ remains at 35 through expiration. D) if XYZ rises and the calls are exercised.

B *LONG Common 300 XYZ @ 35. ($10,500) *SHORT 3 XYZ OCT 35 calls @ 3 ($900 profit) -300 @ $32 = $9,600 + 900 Profit= $10,500

A local school district needs to invest funds short term. They do so in a trust formed specifically for this purpose, which allows the municipal entity to purchase shares or units of the trust's investment portfolio. This investment vehicle is known as A) a unit investment trust (UIT). B) a local government investment pool (LGIP). C) a real estate investment trust (REIT). D) a bond anticipation note (BAN).

B *Local government investment pools (LGIP) are mutual funds set up by governments for investing excess money. LGIPs are sponsored and organized by the state treasurer of a state or a governing body like a county commission. They're set up to invest excess cash.

A firm has prepared a research report on the equity securities issued by the CDT Corporation. Regarding the report and its distribution from broker-dealers to clients, which of the following statements is NOT true? A) A broker-dealer can base a recommendation on a report prepared by another party. B) The report must disclose whether, within the last five years, the firm has received fees for investment banking services from CDT Corporation. C) A broker-dealer presenting the report to a client must disclose that the report was prepared by a third-party and not the broker-dealer. D) The report must disclose whether, within the last 12 months, the firm has received fees for managing or co-managing a public offering for CDT Corporation

B *Research reports must disclose whether, within the last 12 months, the firm has received fees for investment banking services from—or managed or co-managed—a public offering for a company that is the subject of a research report.

A customer writes 1 July 40 put at 6. The put is exercised when the market price is 30. For tax purposes, what is the effective cost basis of the stock put to the writer of the contract? A) 46 B) 34 C) 30 D) 40

B *SHORT 1 JULY 40 PUT @ 6 (+$600) *Exercised @ $30 *100 shares sold @$40 ($4,000 CB - $600 profit)=$3,400 cost basis. ($34) --- *His cost basis is the amount he paid plus commission minus the put premium. For example, if he received a $200 put premium, and then must buy the assigned 100 shares for $4,500 and pay a $7 commission, then his cost basis = ($4,500 share - $200 premium) = $4,300

Your customer sells 2 IJK October 50 calls at 4 and 2 IJK Oct 50 puts at 3. The customer will break even when the price of IJK is A) 47 and 54. B) 36 and 64. C) 43 and 57. D) 44 and 58.

B *SHORT 2 IJK Oct 50 CALLS @ 4. OBL to sell (+$800) *SHORT 2 IJK Oct 50 PUTS @ 3. OBL to buy (+$600) BE: SHORT CALL: $64 BE: SHORT PUT: $36

The IRS allows investors to minimize tax liability when reporting sales by limiting gains or maximizing loses in anticipation of what an investors year-end tax liability might be. Given year-end tax needs can only be anticipated when a sale occurs, which of the following reporting methods allows an investor the most flexibility? A) Last in, first out (LIFO) B) Share identification C) First in, first out (FIFO) D) Average cost basis

B *Share identification is the most flexible of the three methods. The investor keeps track of the cost of each share purchased and specifies which shares to sell based on his anticipated year-end tax needs. For investors, the idea is to minimize tax liability if able by limiting gains or maximizing loses in anticipation of what one's year-end tax liability might be.

One of your clients interested in a hedge fund notes that the fund invests in blank-check companies. He seems uncertain what blank-check companies are, so you explain that they are sometimes known as special purpose acquisition companies (SPACS) and are unique in that A) they carry high risk because the funds will always be invested in the best available opportunity even though it isn't immediately identified. B) they have no business operations but instead raise money for the sole purpose of seeking out a business to engage in. C) they are synonymous with blind-pool companies that sell shares to investors without telling them what the specific use of the funds raised will be or what industry or sector might be targeted. D) they carry unique risks because in a blank-check company, shareholders have no vote on any business opportunity targeted for investment.

B *Some hedge funds target blank-check companies to invest in. Blank-check companies, sometimes known as special purpose acquisition companies (SPACs), carry their own unique risks. Blank-check companies are companies without business operations that raise money through IPOs in order to have their shares publicly traded for the sole purpose of seeking out a business or combination of businesses. When a business is located, they will present proposals to holders of their shares for APPROVAL. *Similar to blank-check companies, these issuers raise capital by selling securities to the public without telling investors what the specific use of the proceeds will be, but MIGHT TARGET a particular industry or sector.

The MSRB has no jurisdiction or authority to regulate A) municipal bond broker-dealers. B) municipal bond issuers. C) municipal bond quotes. D) municipal bond registered representatives.

B *The SEC maintains oversight for the MSRB and enforces MSRB rules. The MSRB is not authorized to regulate municipal bond issuers directly.

When the holder (owner) of an index option exercises the contract, the account of the holder will be A) credited the out-of-the-money amount. B) credited the in-the-money amount. C) debited the in-the-money amount. D) debited the out-of-the money amount.

B *Unlike an equity option, the exercise of an index option settles in cash rather than in delivery of a security. Furthermore, settlement, if the option is exercised, requires the cash to be delivered on the next business day, (T+1). If the option is exercised, the writer of the option delivers cash equal to the intrinsic value of the option to the buyer. If an index option is in the money by 5 points, the owner of a put can exercise and receive $500 from the assigned seller.

Which of the following choices describes the strategy most likely to be recommended to a fixed income client looking to reduce interest rate risk? A) Buy interest rate put options. B) Buy variable rate bonds. C) Buy top-rated bonds. D) Buy bonds with longer maturities.

B *Variable rate bonds have resetting coupons pegged to interest rate changes. When interest rates rise, so will the coupons of variable rate bonds.

Among the items shown on a customer confirmation for a bond transaction is the amount of accrued interest. The amount of accrued interest is A) added on the buyer's confirmation and added on the seller's confirmation. B) subtracted on the buyer's confirmation and added to the seller's confirmation. C) subtracted on both the buyer's and the seller's confirmations. D) added on the buyer's confirmation and subtracted on the seller's confirmation.

B *What happens to an investor who sells a bond before the semiannual interest payment date? The buyer pays the seller the amount of interest that has accrued since the last interest payment. Then on the next payment date, the new owner receives the full six months of interest.

A customer of a broker-dealer has opted to use share identification for tax reporting when selling shares of her mutual funds. With this method of tax reporting, she would want to identify the shares to be sold as those that have A) the lowest cost basis generating the greatest gain. B) the highest cost basis generating the least gain. C) the highest cost basis generating the greatest gain. D) the lowest cost basis generating the least gain.

B *When using the share identification accounting method, the investor keeps track of the cost of each share purchased and uses this information to liquidate the shares that would provide the lowest capital gain.

A customer who had invested in a Coverdell Education Savings Account (ESA) on behalf of her 10-year-old daughter for many years may A) receive distributions that are taxable when the funds are withdrawn for qualified educational expenses. B) make an investment into a Section 529 Plan in the same year for the same child. C) roll the accumulated funds into a traditional IRA set up for the custodian if funds are not used by age 30. D) make before-tax contributions on an annual basis.

B *You may contribute to both a Coverdell ESA and a 529 plan at the same time, so long as the combined annual contribution is less than the annual gift tax exclusion amount. --- *Coverdell distributions can avoid taxations for QUALIFIED EDUCATIONAL EXPENSES. *$2,000 contribution limit. *Contributions can only be w/ after-tax $ *If the funds are not used by the *30 years old: distributions are tax-free if used for qualified educational expenses. *If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty on the earnings or rolled over into a different Coverdell ESA for another family member. ----- *There are two basic types of 529 plans: prepaid tuition plans and college savings plans. *No contribution limits.

Individuals meeting which of the following standards meet the definition of an accredited investor? A) Income for the past year of at least $200,000 B) Net worth of at least $1 million excluding net equity in a primary residence C) Net worth of at least $2.1 million excluding net equity in a primary residence D) Net worth of at least $1 million excluding net equity in all residences

B *any natural person whose individual net worth, or joint net worth with that person's spouse, excluding the net equity in his primary residence, exceeds $1 million at the time of his purchase; *any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in

A registered representative has a recently retired couple in their late sixties as her customers. They each have modest monthly pensions and collect Social Security benefits putting them in the lowest income tax bracket. They have accumulated savings and investments totaling $175,000 that they want to reallocate now that they are both retired. Which of the following portfolio asset allocations is most suitable for their current circumstances? A) 10% domestic equities, 40% bonds, 10% cash, 40% international equities B) 25% domestic equities, 60% investment grade bonds, 15% cash C) 30% domestic equities, 30% bonds, 30% international equities, 10% cash D) 50% domestic equities, 40% Treasury bonds, 10% Treasury bills

B -Retired Couple, late 60s. Moderate monthly income via pension & social security. Lowest tax bracket. $175,000 to reallocate. *75% will be in cash or investment grade bonds and 25% in domestic equities to help w/ the cost of living and inflation. Other options have too much of the portfolio in equities.

An investor sold short 1,000 shares of LUMN at 52 on January 10. If the investor covered the short position at 43 on January 15 of the following year, which if the following statements is true? A) Only $3,000 of the investor's loss is deductible against ordinary income. B) The investor has a short term capital gain. C) Buying the same stock back within 30 days created a wash sale. D) The investor has a long-term capital gain of $9,000.

B (short-term, not long-term gain). -Jan 10th: Sold Short 1,000 shares LUMN @ $52. -Jan 15th: LUMN drops to $43. ($9 gain on 1,000 shares. Selling Short profits when LMV drops.)

An investor is interested in a limited partnership and asks his registered representative to explain the "crossover point" referred to in discussions about the tax consequences of the program. The best definition would be A) the point at which the program begins to generate taxable income instead of losses, which generally occurs quickly if not in the very first year. B) the point at which the program begins to generate losses instead of taxable income, which generally occurs in later years. C) the point at which the program begins to generate taxable income instead of losses, which generally occurs in later years. D) the point at which the program begins to generate losses instead of taxable income, which generally does not occur until near the time the partnership is expected to be dissolved.

C

An investor purchases a 7% general obligation GO bond on a 7.30 basis. If the bond is callable in five years at par and matures in 10 years, it is true that A) nominal yield is higher than YTM. B) YTC is lower than YTM. C) yield to call (YTC) is higher than yield to maturity (YTM). D) nominal yield is higher than YTC.

C

Direct participation limited partnerships offer a number of benefits for those in high income tax brackets but there can be tax consequences that are not advantageous, one of which is A) tax deductions. B) tax credits. C) recourse debt assumed included in cost basis. D) depreciation recapture.

C

A customer writes 1 ABC July 35 put at 3 when ABC is trading at 36. Maximum potential loss is A) $3,300. B) $300. C) $3,200. D) $3,500.

C *+300 profit for writing the call. OBLIGATED to buy @$35. ABC has the possibility of dropping to $0. $3,500 loss potential MINUS the $300 profit from writing the PUT. MAX POTENTIAL loss is $3,200.

All of the following municipal bonds are callable at par. Yield to call (YTC) must be displayed on which of the following confirmations? A) 5.5%, at par, maturing 2036 B) 6%, 6.5% YTM basis, maturing 2040 C) 5.5%, 5% YTM basis, maturing 2040 D) 6%, 6.5% YTM basis, maturing 2036

C *5.5% coupon > 5% YTM = premium bond.

Flow-through is one of the characteristics of a direct participation program (DPP). In general, for tax purposes, losses cannot exceed a limited partner's cost basis. Which of the following would be a way to increase that cost basis? A) Receiving tax credits B) Using the depletion allowance C) Assumption of recourse debt D) Depreciation on the partnership's assets

C *A LPs basis consists of -cash contributions to the partnership, -noncash property contributions to the partnership, -recourse debt of the partnership, and -nonrecourse debt for real estate partnerships only. *and repayments of recourse debt (also nonrecourse debt for real estate only) are reductions to a partner's basis. Partners are allowed deductions up to the amount of their adjusted cost basis.

An investor holding shares of several funds from the CDS fund family has opted for a fixed dollar withdrawal plan to supplement her income each month. With this type of withdrawal plan, the amount received each month A) must be at least equal to the account earnings that period in order to be distributed. B) will always be more than the account earnings that period. C) could be less than, equal to, or more than the account earnings that period. D) must be less than the account earnings that period in order to be distributed.

C *A customer may request the periodic withdrawal of a fixed-dollar amount. Thus, the fund liquidates enough shares each period to send that sum. The amount of money liquidated may be more or less than the account earnings during the period.

For corporate retirement plans, which of the following characterizations is true? A) Defined contribution plans use actuaries to determine contribution so that the exact benefit at retirement is known well in advance. The plans favor those with longer time left to retirement. B) Defined benefit plans use a specified contribution, but the exact benefit at retirement is unknown. The plans favor those with shorter time left to retirement. C) Defined benefit plans use actuaries to determine the needed contributions. The plans favor those with shorter time left to retirement. D) Defined contribution plans use a specified contribution so that the exact benefit at retirement is known well in advance. The plans favor those with longer time left to retirement.

C *Because of this risk, defined-benefit plans require complex actuarial projections and insurance for guarantees, making the costs of administration very high. *employees with the highest salaries and the fewest years to retirement benefit the most

A registered representative intends to send the same email regarding an investment strategy and product this week to her 10 retail clients currently having the highest net worth. Which of the following accurately depicts how the email will be regulated under the Financial Industry Regulatory Authority's (FINRA's) communications with the public rule? A) The email must be reviewed by a principal before use and the content must be filed with FINRA. B) The email can be reviewed by a principal before or after use in accordance with the firm's written procedures regarding correspondence as long as it has been pre-filed with FINRA. C) The email can be reviewed by a principal before or after use in accordance with the firm's written procedures regarding correspondence and need not be filed with FINRA. D) The email must be reviewed by a principal before use, but need not be filed with FINRA.

C *Correspondence is written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. FINRA means this to include current and prospective customers. *Each member must establish written procedures that are appropriate to its business, size, structure, and customers for the review of incoming and outgoing correspondence withthe public. *Procedures may allow for either pre- or post-review of correspondence by a principal.

All of the following are characteristics associated with equity-linked exchange-linked notes except A) they are considered to be nonconventional structured investments with unique risks. B) they can be bought and sold throughout the trading day. C) they can be linked to a single stock or basket of stocks and are, therefore, equity securities. D) they have final payments at maturity linked to the return of an underlying stock or basket of stocks.

C *Despite their name, equity-linked notes (ELNs) are debt instruments, not equity instruments. They have a partial fixed return as well as a final payment linked to the performance of a single stock or equity index. Some are exchange traded while others trade OTC. FINRA who considers ELNs to be nonconventional structured investments has expressed concerns that investors might not fully understand ELNs or the risks associated with them.

One of your clients is interested in setting up an Achieving a Better Life Experience (ABLE) account for his son who was recently diagnosed with a disability at age five and is currently receiving benefits through Social Security Disability Insurance (SSDI). Regarding these accounts, you correctly explain that A) income earned by the account is not taxed, and his son is eligible to be the beneficiary of such an account. B) income earned by the account is not taxed, but due to his age, the son is still a minor and therefore not eligible to be the beneficiary of such an account. C) income earned by the account is tax deferred, and his son is eligible to be the beneficiary of such an account. D) income earned by the account is tax deferred, but because the son already receives SSDI, he is not eligible to be the beneficiary of such an account.

C *Earnings in an ABLE account grow tax-deferred, and withdrawals are tax-free when used for qualified disability-related expenses, including, but not limited to, education, housing, transportation, assistive technology, employment training and support, financial management and health care expenses. *The ABLE Act limits eligibility to individuals with significant disabilities where the age of onset of the disability occurred before turning age 26. One need not be under the age of 26 to be eligible to establish an ABLE account. One could be over the age of 26, but as long as the onset of the disability occurred before age 26, the person is eligible to establish an ABLE account.

Your client has sold securities in a long margin account. All of the following are affected by the sale of these securities in the account except A) market value. B) SMA. C) equity. D) debit balance.

C *Equity is only affected by changes in market prices and never by sales of securities in the account.

A customer is likely to experience the greatest purchasing power risk with which of the following investments? A) A BBB-rated convertible preferred stock B) A Ba-rated debenture maturing in eight years C) A 30-year U.S. Treasury bond D) American Depositary Receipts (ADRs)

C *Fixed-income securities are the most vulnerable to this risk; equity securities are historically the least susceptible. The longer the maturity, the greater the purchasing power risk because the interest rate is FIXED.

When compared to mutual funds, which of the following statements regarding hedge funds is least accurate? Hedge funds A) use derivatives to a greater extent. B) are generally only appropriate for qualified investors. C) tend to be more diversified in order to hedge risk. D) can take both long and short positions.

C *Hedge Fund Strategies/ Characteristics: -the use of short positions, -utilizing derivative products such as options and futures, -Generally, these investment vehicles are considered suitable for sophisticated investors—those meeting the standard of accredited investors.

The term for the annual increase of cost basis of a municipal bond purchased at a discount is A) internal rate of return. B) basis adjustment. C) accretion. D) amortization.

C *If a municipal bond is bought at a discount, the discount is accreted. Accretion is the process of adjusting the cost basis back up to par. ---- *The purchaser of a municipal bond at a premium must amortize the premium on a straight- line basis over the remaining life of the bond. It makes no difference if the bond was purchased as a new issue or in the secondary market. Straight-line amortization means that an equal amount of the premium will be amortized each year the bond is held.

XYZ Corporation issued 7 million shares of common stock in its initial public offering. It later purchased 500,000 shares of Treasury stock. XYZ recently engaged an underwriter to raise capital by selling an additional 3 million shares through a standby rights offering. By the expiration date of the offering, only 2 million shares were sold through exercise of the rights. As a result, how many shares will XYZ have outstanding? A) 8.5 million B) 9 million C) 9.5 million D) 10 million

C *Issued Stock - Treasury Stock= Outstanding Stock -Issued Stock: 7,000,000 -Treasury Stock: 500,000 -Rights Offering (stand by): 3,000,000 *10,000,000 - 500,000 = 9,500,000 shares.

Jim and Pam Thomas have been married for many years. How will the estate be taxed when transferred to the remaining spouse if one of them dies? A) Taxes are due at the federal level only at the time the estate is transferred to the surviving spouse. B) An estate transferred to a surviving spouse is taxable at all levels at the time of transfer. C) Taxes will not be owed on the estate until the death of the surviving spouse. D) There is no exclusion or deferral of estate taxes at the state or local level for a surviving spouse.

C *Married couples are allowed to transfer their entire estate to the surviving spouse at death. This unlimited marital deduction results in taxes being owed at the death of the survivor.

The official notice of sale to solicit competitive bids for a new municipal bond issue is usually published in A) the Wall Street Journal. B) the MSRB bid list. C) the Bond Buyer. D) EMMA.

C *Municipalities solicit bids for new issues from interested persons by placing an Official Notice of Sale in the Daily Bond Buyer. Do not confuse this with the Official Statement, which is the disclosure document given to all purchasers of new municipal issues.

A limited partner A) is a passive investor with a fiduciary responsibility to the partnership attempting to take part in a management role. B) jeopardizes limited liability status unless the general partner agrees. C) is a passive investor with no partnership management responsibilities. D) can lose more than her initial investment plus any allocated interest in nonrecourse notes.

C *No management responsibility: Provides capital for the business but may not participate in its management; known as a passive investor *All investors interested in becoming LPs (passive investors) must complete a subscription agreement.

A registered representative interviewing a new client learns that the client has an investment objective of earning income and is willing to assume moderate risk to do so. The objective and risk tolerance of the client can be met by which of the following mutual funds? A) A money market fund B) A high-yield bond fund C) A preferred stock fund D) A U.S. government bond fund

C *OBJECTIVE: earning income *MODERATE risk *Money market fund and U.S. government bond provide income but are very safe. *High-yield provide the highest income opportunity, but is the most riskiest.

An agent has recommended investments in the XYZ fund family to his customers for 10 years. He is referred by one of his customers to a prospect who has inherited $500,000 as beneficiary of a life insurance policy. The prospect tells the agent she has never invested in the market before, is risk averse, and wants safety of principal to be the first priority with liquidity second. The agent recommends the following investments: -XYZ government bond fund, B shares $200,000 -XYZ large-cap growth and Income B shares $150,000 -XYZ liquid reserve money market $150,000 The recommendation is A) suitable because it addresses the customer's safety objective. B) suitable because it addresses the customer's liquidity objective. C) unsuitable because it does not address the customer's two primary objectives. D) suitable because he recommended conservative investments.

C *Principle is first priority and liquidity is second. *The customer's objectives of safety and liquidity are not satisfied by these recommendations. The government bond fund and large-cap growth and income fund are both subject to market risk and, as Class B shares, are subject to a contingent-deferred sales charge in the event the customer wishes to access the funds before the back-end load expires. The back-end load is not consistent with the customer's liquidity objective.*

A corporation has reported earnings per share of $1.00. If it pays a dividend of $.75 per share, the effect of the remaining $.25 will be to A) increase working capital. B) increase retained earnings. C) decrease book value. D) increase earnings per share.

C *Retained earnings represent the net income a company has retained and not paid out in dividends.

The resale restrictions of Securities and Exchange Commission (SEC) Rule 144 would apply to A) an individual who owns 100 shares of the company's stock and is a registered representative of the firm who did the underwriting of the company's initial public offering (IPO). B) the niece of the company's CEO. C) a regional sales manager of the company who acquired the stock in the secondary market. D) an individual who owns 100 shares of the company's stock and is the daughter-in-law of the company's CFO.

C *Rule 144 regulates the sale of control and restricted securities, stipulating the holding period, quantity limitations, manner of sale, and filing procedures. ------- *"Affiliates" of an issuing company always need a Rule 144 opinion before selling any stock of the issuing company, without regard to whether it is restricted stock or stock purchased pursuant to a registration statement or purchased in the open market. ------- **SEC expands the definition of an affiliated person quite broadly. -Persons owning 10% or more of any class of a company's stock -Any person who is a promoter of the company and connected with the company in any capacity -Any principal underwriter of the securities being registered -Any person providing management or advisory services for the company -"Any associate of any of the foregoing persons"

A statement of additional information (SAI) is available upon request to investors in each of the following investment companies except A) an exchange traded fund. B) a closed-end investment company. C) a unit investment trust. D) a mutual fund.

C *SAI MUST be available for open-ended, closed ended, and ETFs. *UIT are NOT required for SAIs

In late September, a customer sells 5 XYZ calls for total premiums of $750. One month later, the investor closes this position when the contract is trading at 2. The result is A) a gain of $50. B) a loss of $50. C) a gain of $250. D) a loss of $250.

C *SHORT 5 XYZ calls @ 1.5 ($750 total premium) *SHORT 5 XYZ calls @ 2 ($1,000 total premium) *Short-term gain of $250

A source of funds used to service municipal revenue special tax bond issues might be A) property taxes. B) income taxes. C) gasoline taxes. D) ad valorem taxes.

C *Special tax bonds are backed by taxes other than an ad valorem tax, such as liquor taxes, gasoline taxes, cigarette taxes or sales taxes. They are considered to be a non-self supporting debt since they are paid from tax collections. Self supporting debts are revenue bond issues that pay their own way from collected revenues.

Your customer is interested in up-to-the-minute price information for municipal securities transactions. This information is available through an approved portal within 15 minutes of a trade and is captured by which of the following? A) Morningstar B) The National Quotation Bureau C) The MSRB's Real Time Transaction Reporting System (RTRS) D) Thompson Muni Market Monitor

C *The MSRB operates the Real-Time Transaction Reporting System (RTRS). The system collects and disseminates transaction data in municipal securities for market transparency, surveillance purposes, and analytics. Broker-dealers and municipal securities dealers must report transactions in municipal securities pursuant to MSRB Rule G-14. Firms may employ agents for the purpose of submitting transaction data. However, the primary responsibility for timely and accurate submission remains with the firm that effected the transaction. The data is captured and made available to the marketplace within 15 minutes of a trade.

When a limited partnership interest is sold, gain or loss to the partner is determined by the difference between the sales proceeds and the A) original investment minus any debt assumed by the general partner(s). B) original cost basis. C) adjusted cost basis. D) total of deductible losses.

C *The adjusted basis is a limited partner's cost basis at any point in time. Gain or loss on the sale of the partnership is determined by comparing the sales proceeds to the adjusted basis.

In examining the balance sheet of a corporation, you would expect to be able to determine A) the amount of cash expended each quarter. B) the corporation's gross revenues for the year. C) the net worth of the firm on the date of the balance sheet. D) net sales for each of the past five years.

C *The balance sheet provides a snapshot of a company's financial position at a specific point in time. It identifies the value of the company's assets (what it owns) and its liabilities (what it owes).

An investor purchases a Treasury Inflation Protection Securities (TIPS) bond with a 4% coupon. If during the first year the inflation rate is 9%, the approximate principal value of the security will be A) $1,040. B) $1,092. C) $1,090. D) $1,045.

C *Treasury "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 interest 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.

One way in which real estate investment trusts (REITs) differ from direct participation programs (DPPs) is that a REIT A) is generally traded on a stock exchange or the Nasdaq Stock Market while most DPPs trade in the over-the-counter market. B) must have at least 75% of its total assets in real estate assets and cash while it is unusual to find real estate in the portfolio of a DPP. C) must distribute at least 90% of its taxable income to shareholders annually in the form of dividends while all of a DPP's income flows through to the investors. D) must distribute all of its taxable income to shareholders annually in the form of dividends while a DPP must pass through at least 90% of its income.

C *Under the guidelines of Subchapter M of the IRC, a REIT can avoid being taxed as a corporation by receiving 75% or more of its income from real estate and distributing 90% or more of its taxable income to its shareholders.

An investor is seeking tax advantages through an oil and gas direct participation program (DPP). With this type of partnership, he would expect to benefit most from A) depletion and tax credits. B) depreciation allowances and intangible drilling costs. C) depletion and intangible drilling costs. D) depletion and depreciation allowances.

C *Unique tax advantages associated with oil and gas programs include intangible drilling costs (IDCs) and depletion allowances.

Which of the following descriptions applies to settlement of index option contracts? A) Settlement price is determined by the opening value of the index on the day the option is exercised. B) Buyers of calls and sellers of puts take delivery of the underlying index on settlement date. C) Index options are settled in cash when exercised. D) Exercise of index options settles in T+2.

C *Unlike an equity option, the exercise of an index option settles in cash rather than in delivery of a security. Furthermore, settlement, if the option is exercised, requires the cash to be delivered on the next business day, (T+1). If the option is exercised, the writer of the option delivers cash equal to the intrinsic value of the option to the buyer. If an index option is in the money by 5 points, the owner of a put can exercise and receive $500 from the assigned seller.

An employee has enrolled in his company's nonqualified deferred compensation plan. The benefit paid at the time of the employee's retirement is A) nontaxable to the employee and can be taken as a deduction by the employer. B) taxable as ordinary income to the employee with no benefit allowed to the employer. C) taxable as ordinary income to the employee and can be taken as a deduction by the employer. D) taxable as a capital gain to the employee and can be taken as a deduction by the employer.

C *When the benefit is payable at the employee's retirement, it is taxable as ordinary income to the employee. The employer is entitled to the tax deduction at the time the benefit is paid out. ---- *A nonqualified deferred compensation plan is an agreement between a company and an employee in which the employee agrees to defer receipt of current income in favor of payout at retirement. It is assumed that the employee will be in a lower tax bracket at retirement age

A couple with a child 10 years away from entering college has saved $160,000 for that single purpose. Which of the following portfolio mixes would be the most suitable for meeting the investment objective? A) 20% T-bills, 10% corporate bonds, 70% equities and equity funds B) 30% corporate bonds, 70% equities C) 30% T-notes, 70% zero-coupon bonds D) 85% corporate bonds, 15% zero-coupon bonds

C *Zero-Coupons = saving for college.

An investor who is considering the purchase of Mount Laurel, New Jersey, general obligation municipal bonds for an investment for his portfolio should know that the bonds A) are not subject to registration with the SEC, but are required to make full disclosure by delivering an offering circular. B) are subject to registration with the Municipal Securities Rulemaking Board (MSRB) and are required to make full disclosure by delivering an official statement. C) are not subject to registration with the Securities and Exchange Commission (SEC), but are required to make full disclosure by delivering an official statement. D) are not subject to registration with the SEC, but are required to register in the state of New Jersey.

C *municipal bonds provide a form of prospectus, (disclosure document), known as an official statement (OS). *Not all offerings of securities must be registered with the SEC. The most common exemptions from the registration requirements include: -Private offerings to a limited number of persons or institutions; -Offerings of limited size; -Intrastate offerings; and -Securities of municipal, state, and federal governments.

Balance sheet items affected by the issuance of new common stock would be A) total assets and net worth. B) total assets and retained earnings. C) current liabilities and net worth. D) current liabilities and retained earnings.

C As we know every transaction effects both side of balance sheet. So issuing shares will also affect both side i.e. Assets and liabilities. On assets side company cash account will be increased by amount paid by borrowers, on the other hand equity of shareholders will be increased on liability side.

Your client, age 75 and not yet retired from his job of the past 45 years, wants to continue contributing to a retirement plan for as long as possible. Which of the following plans would NOT allow contributions to be made for someone his age? A) 401(k) B) Roth IRA C) Traditional IRA D) SEP IRA

C * Traditional IRA: if you're 70 ½ or older, you can't make a regular contribution to a traditional IRA. *401(k): Regardless of age, if you are still working you can continue to contribute to a 401(k). *Roth IRA: Anyone with earned wages may contribute to a Roth IRA, and there is no mandate requiring the contributor or his or her spouse to take RMDs. *SEP IRA: Clients who are still working after age 72 may generally continue contributing to employer-sponsored 401(k) accounts and SEP IRAs. In fact, employers must continue to make employer contributions to the SEP IRA of an employee who is over age 72 if it makes similar contributions to younger employees' accounts.

An investor would like to buy a stock currently trading at $44, but is willing to pay no more than $40. Which of the following orders would be the most appropriate for a registered representative to recommend? A) Buy a call contract with a strike price of $40. B) Place a buy stop at $40. C) Place a market order to be triggered at $40. D) Place a buy limit order at $40.

D

There are some actions taken by corporations that do not require shareholder approval. One such action would be A) the issuance of convertible corporate bonds. B) issuing additional common stock. C) the declaration of a stock split. D) the declaration of a stock dividend.

D

Your new customer wishes to do an options trade as soon as possible. Which of the following is not required before he can execute a trade? A) The customer must be sent or given an Options Clearing Corporation (OCC) disclosure booklet. B) The account must be approved by a Registered Options Principal (ROP). C) A new account form must be completed. D) The customer must sign and return the options agreement.

D

A margin account has a market value of $24,000 and a debit balance of $20,000. The maintenance call will be for A) $6,000. B) $4,000. C) $8,000. D) $2,000.

D *25% minimum, anything below will trigger a maintenance call. -LMV: $24,000.. DB: $20,000 -Equity: $4,000 -50%: $12,000 -25%:$6,000. *$6,000 - $4,000 = $2,000 maintenance call.

An investor sells 1,000 shares of DEF short at 50 and meets the initial margin requirement. If DEF falls to 45, what is the equity in the account? A) $30,000 B) $40,000 C) $35,000 D) $20,000

D *50 x 1,000 = $50,000 LMV.. DB: $25,000. -Equity: $25,000 -LMV falls by $5,000. LMV: $45,000 - $25,000 DB =$20,000. *If The LMV has fallen, so the EQ must be changed

An investor was able to acquire 10,000 shares of RITVA common stock on its IPO at $10 per share. Today, the stock is selling for $50 per share and the investor is nervous about the future for the market. An order is turned in to sell 100 RITVA 55 calls at a premium of 2 and buy 100 RITVA 45 puts at a premium of 2. This strategy is A) a diagonal. B) exposing the investor to potential unlimited loss. C) a combination. D) a cashless collar.

D *A collar is an option strategy generally used to protect an unrealized gain on a long stock position. *A cashless collar is one where the premium received on the short call is the same amount or higher than the premium paid for the long put.

An investor owns 100 shares of XYZ at $5 per share. After a 1:2 reverse split, the investor will own A) fewer shares that are each individually worth less than before the split. B) more shares that are each individually worth less than before the split. C) more shares that are each individually worth more than before the split. D) fewer shares that are each individually worth more than before the split.

D *A reverse split has the opposite effect on the number and price of shares. After a reverse split, investors own fewer shares worth more per share.

A corporate offering of 1 million additional shares to existing shareholders is a A) shelf offering. B) tender offer. C) secondary offering. D) rights offering.

D *A rights offering allows stockholders to purchase common stock below the current market price. *A rights offering (rights issue) is a group of rights offered to existing shareholders to purchase additional stock shares, known as subscription warrants, in proportion to their existing holdings.

If Company DC has returned 10.4% with a beta of 1.2, what would the alpha be if the return on the Standard & Poor's 500 was 9% and the 91-day T-bill rate was 3%? A) +2.0% B) -0.4% C) +.2% D) +1.4%

D *Alpha is the extent to which an asset's or portfolio's return exceeds or falls short of its expected return. *Beta of 1.2= 20% more volatile than the market.

Asked to point out the differences between open-end funds and closed-end funds, you could state that closed-end funds A) issue redeemable shares, which are purchased in commissionable transactions in the secondary market. B) trade in the secondary market and must be purchased at the public offering price plus a sales charge. C) issue redeemable shares, which must be purchased at net asset value in the secondary market. D) trade in the secondary market and can trade above or below the net asset value of their investment portfolio.

D *Closed-end investment companies are commonly known as publicly traded funds. After the stock is distributed, anyone can buy or sell shares in the secondary market, either on an exchange or OTC. Supply and demand determine the bid price (price at which an investor can sell) and the ask price (price at which an investor can buy). Closed-end fund shares usually trade at a premium or discount to the shares' NAV.

Which of the following direct participation programs typically generates a dollar-for-dollar credit against federal income taxes? A) Equipment leasing to minority controlled business B) Exploratory oil and gas drilling C) Building new residential housing D) Rehabilitating certified historic structures

D *Construction of low income housing and Rehabilitation of certified historic sites offer dollar-for-dollar tax CREDITS.

Regarding the performance of a variable annuity's separate account and the assumed interest rate (AIR), which of the following is true? A) If separate account performance is more than the AIR, next month's payment is equal to this month's. B) If separate account performance is less than the AIR, but greater than last month's, the next month's payment is more than this month's. C) If separate account performance is equal to the AIR, but less than last month's, the next month's payment is less than this month's. D) If separate account performance is less than the AIR, next month's payment is less than this month's.

D *If the separate account returns are greater than the AIR, these extra earnings are reflected in an increase in death benefit and cash value. If the separate account returns equal the AIR, actual earnings meet estimated expenses, resulting in no change in the death benefit. Should the separate account returns be less than the AIR, the contract's death benefit will decrease. It is important to note that it will never fall below the amount guaranteed at issue.

A syndicate is underwriting $200 million in municipal bonds and sets up a Western underwriting account with 10 syndicate members. Only one syndicate member, Atlas Municipal Securities (AMS), sells out its 10% commitment, amounting to a total of $20 million sold by them. At the syndicate settlement date, $18 million of bonds are still unsold. The financial obligation of AMS is A) $1.8 million. B) $18 million divided by nine syndicate members. C) $2 million. D) $0.

D *In an undivided or eastern account, each underwriter accepts responsibility for selling any shares that remain unsold by other members of the syndicate. In a western account, each underwriter takes responsibility only for its own share of the total. The risks and potential rewards are greater in an undivided account.

For tax purposes, a limited partner in a direct participation program will include in their cost basis, cash and property contributions to the partnership and any recourse and nonrecourse debt assumed for which of the following types of programs? A) Equipment leasing B) Exploratory oil and gas C) Developmental oil and gas D) Raw land real estate

D *LPs are liable for a proportionate share of recourse loans assumed by partnerships. LPs have no liability for nonrecourse loans and only in real estate DPPs does the nonrecourse loan add to the investor's basis.

A registered representative recommending an exchange traded index fund (ETF) to a client could accurately explain that, as a general rule, these funds are A) passively managed and have low tax efficiency. B) actively managed and have high tax efficiency. C) actively managed and have low expense ratios. D) passively managed and have low expense ratios.

D *Most, but not all, ETFs are passive. *Index funds invest in securities that mirror a market index, such as the S&P 500. An index fund buys and sells securities in a manner that mirrors the composition of the selected index. The index may be broad, such as the S&P 500, or narrow, such as a transportation index.The fund's performance should closely track the underlying index performance. Turnover of securities in an index fund's portfolio is minimal because the only trades that take place are triggered by a change in the index (one company is replaced by another company). As a result, an index fund generally has lower management costs than other types of funds.

A customer wants to know who guarantees that the contra party to a listed yield-based option on T-bonds she owns will deliver the cash if she exercises the option contract. Her registered representative should answer A) there is no guarantee with any investment or security B) the federal government because it is the issuer of the underlying security C) the FRB because the contract is based on Treasury-notes D) the Options Clearing Corporation (OCC) because it guarantees all listed option contracts.

D *One of the important guarantees of the OCC is the exercise of options contracts. That means, if for some reason a seller is unable to perform, the OCC does. If a holder of an option wishes to exercise, her broker-dealer notifies the OCC. The OCC then assigns exercise notice against a broker-dealer with a customer who has written that option.

An example of a security that cannot trade in the secondary market would be A) brokered CDs. B) double-barreled municipal bonds. C) shares of stock of foreign companies. D) open-end investment company mutual fund shares.

D *Open-ended securities are sold directly from the issuer, therefore, trade only on the primary market. *Brokered CDs can be traded on the secondary market.

If an investor holds certificates of beneficial interest in a real estate investment trust (REIT), the investor A) will receive income and capital gains distributions from the issuer who will redeem the shares if the investor wants to divest. B) will receive income and capital gains and loss distributions from the issuer and may sell the certificates in the secondary market to divest. C) will receive income and capital gains and loss distributions from the issuer who will redeem the shares if the investor wants to divest. D) will receive income and capital gains distributions from the issuer and may sell the certificates in the secondary market to divest.

D *REITs are not redeemed by the issuer. REITS are publicly traded units that represent either an interest in pooled capital for real estate financing or an interest in real property and that pass through income and capital gains distributions to investors. Investors who wish to liquidate their interests must sell them in the secondary market.

The XYZ Growth Fund is an open-end investment company registered under the Investment Company Act of 1940. The fund's principal underwriter offers a schedule of reduced sales when certain investment levels are reached. Reinvestment of gains and dividends and share appreciation may be added to the current account value when determining if a subsequent purchase qualifies for the reduction. This feature is known as A) conversion privilege. B) breakpoints. C) letter of intent (LOI). D) rights of accumulation.

D *Rights of accumulation (ROA) are rights that allow a mutual fund shareholder to receive reduced sales commission charges when the amount of mutual funds purchased plus the amount already held equals a rights of accumulation (ROA) breakpoint. *EXAMPLE: An investor deposits $5,000 (paying a 6.5% sales charge) in a mutual fund but does not sign an LOI. The $5,000 grows to $10,000 over time and the investor decides to invest another $15,000. If rights of accumulation exist, the new $15,000 receives a 5.5% sales charge, which is based on the new money plus the accumulated value in the account ($15,000 + $10,000 = $25,000). If rights of accumulation do not exist, the sales charge would have been 6.5%.

Proper handling of customer accounts requires adhering to a number of rules. Which of the following is an example of a rule that must be followed? A) A member is required to disclose on a customer confirmation the mark-up on a transaction in corporate debt securities with an institutional customer if the dealer also executes one or more offsetting principal transaction(s) on the same trading day as the customer transaction in an aggregate trading size that meets or exceeds the size of the customer trade. B) A member shall include in a customer account statement a per share estimated value of a listed real estate investment trust (REIT) security, developed in a manner reasonably designed to ensure that the per share estimated value is reliable. C) A customer whose account holds a penny stock purchased four months ago must receive a quarterly statement even if no activity occurred since that purchase. D) A customer whose account holds a penny stock purchased four months ago must receive a monthly statement even if no activity occurred this month.

D *Rule 15g-6 requires members to provide penny stock purchasers with monthly statements showing the estimated market value of each penny stock purchased.

Certain order types on the order book are reduced for cash dividends on the exdividend date. These order types are A) buy limits and buy stops. B) sell stop limits and buy stops. C) sell stop limits and sell limits. D) buy limits and sell stop limits.

D *SLoBS -------- BLiSS *Orders placed below the market (buy limits and sell stops) are automatically reduced on the ex-date. The exception to this rule is for orders marked DNR (do not reduce).

A customer is short 200 shares of ABC at 32 and simultaneously writes 2 ABC January 30 puts at 2.50. The customer will break even on this strategy if the underlying stock subsequently trades at A) $29.50. B) $32.50. C) $37.00. D) $34.50.

D *Sold Short: 200 @ $32 ($6,400 cost basis) *SHORT 2 ABC Jan 30 PUTS @ 2.50 ($500 profit) -Break Even: $6,400 + 500 = $6,900 -$6,900 / 200 = $34.50.

The 5% markup policy applies to each of the following transactions except A) agency transactions in nonexempt unlisted securities. B) principal transactions occurring in the OTC market. C) agency trades occurring on a listed exchange. D) new issue transactions.

D *The 5% markup policy applies to secondary market transactions in nonexempt securities.

The visible supply as shown in The Bond Buyer is the A) the percentage of new issues sold versus new issues offered for sale. B) the total dollar volume of general obligation (GO) offerings expected to reach the market in the next 30 days. C) the total dollar amount of new issues offered for sale divided by dollar amount of new issues sold. D) the total dollar volume of municipal offerings expected to reach the market in the next 30 days.

D *The Bond Buyer publishes the 30-day visible supply (the total dollar volume of municipal offerings—not including short-term notes—expected to reach the market in the next 30 days)

A registered representative has had a well-established customer for over eight years who has purchased penny stocks through the broker-dealer on numerous occasions. If the RR wants to make recommendations to the customer for penny stock purchases, the RR is required to A) have the trades preapproved by a principal of the broker-dealer. B) have the customer sign a suitability statement annually for penny stocks. C) have the customer sign a suitability statement for each penny stock trade prior to execution of the transaction. D) take into account the customer's financial ability and investment objectives.

D *The account approval requirements for penny stocks under SEC Rule 15g-9 do not apply to existing customers who have maintained an account with a broker-dealer for more than one year or have previously engaged in three or more transactions involving penny stocks. All recommendations to a customer should take into account the customer's investment objectives.

Your customer has a discretionary trading account with your municipal firm. According to Municipal Securities Rulemaking Board (MSRB) rules, customer authorization is required for A) any transaction in newly issued municipal bonds. B) a purchase of municipal securities rated lower than Better Business Bureau (BBB). C) a purchase or sale of a municipal bond fund containing no bonds issued by the customer's state of residence. D) a purchase of municipal securities in which there is a control relationship between the issuer and your firm.

D *The dealer must disclose the control relationship to the customer before it can affect any transaction in that security for that customer. Although, initially, this disclosure can be oral, the dealer must make a written disclosure at or before the transaction's completion. The disclosure is made on the confirmation. If the transaction is for a discretionary account, the customer must give express permission before the transaction can be executed.

JGH 6.0% bonds are convertible into 25 shares of JGH common stock and are trading at 106. Later, when the JGH common is trading at $42, the bonds are called at 104. Which of the following choices would maximize the investment value for a holder of the JGH convertible bonds, once the call is announced? A) Tender the bonds for the call. B) Sell the bonds in the market. C) Continue to hold the bonds and receive 6% interest. D) Convert the bonds into common stock and sell the stock.

D *The maximum value would be achieved by converting the bonds into JGH common stock and selling the stock. To lock-in the maximum value, the investor should sell the JGH stock short and then cover the position once the conversion is completed. The bonds are convertible into 25 shares of common, each of which is priced at $42; this equals a value of $1,050 (25 x $42); this is more than the $1,040 value that would have been received had the investor tendered the bonds for the call. Choice B is a bit challenging; although the bonds had been trading at 106, once the call is announced, the bonds would trade no higher than the call price. Choice D is inaccurate. Once bonds are called, the issuer will only pay interest up until the call date.

If the placement ratio found within The Bond Buyer is high, this would indicate that A) the market for municipal bonds is weak with dealers more likely to bid on new municipal issues. B) the market for municipal bonds is strong with dealers less likely to bid on new municipal issues. C) the market for municipal bonds is weak with dealers less likely to bid on new municipal issues. D) the market for municipal bonds is strong with dealers more likely to bid on new municipal issues.

D *The placement ratio is used by investors as an indicator of the overall situation of the municipal bond market. ... The higher the placement ratio, the better off the municipal bond market is, as a high ratio indicates that the municipal bond market is sold and there is a lot of interest from bond underwriters. *If the placement ratio is high, the market for municipal bonds are strong. If it is LOW, dealers will likely be concerned about bidding new issues.

A customer wishes to transfer his account positions to another broker-dealer. After validating the positions, the carrying broker-dealer is required to complete the transfer within how many business days? A) Five B) Four C) Seven D) Three

D *Under the Uniform Practice Code the carrying broker/dealer has 1 business day to validate positions and 3 business days to transfer to the receiving broker/dealer after validation. *1 DAY: VALIDATE *3 DAYS: COMPLETE TRANSFER

Your new client informs you that she has a variable annuity purchased several years ago and soon will begin taking distributions. The variable annuity is not part of an employer-sponsored plan or held in an IRA. She asks you how the withdrawals will be taxed. You should inform her that A) the contributions that were made with after-tax dollars are considered cost basis and will not be taxed, but earnings above cost basis will be taxed as a long-term capital gain distribution. B) if she decides to annuitize before she reaches age 59½, the taxable portion will be subject to the 10% penalty. C) because this is an annuity, all withdrawals will be taxed as ordinary income. D) the contributions that were made with after-tax dollars are considered cost basis and will not be taxed, but earnings above cost basis will be taxed as ordinary income.

D *Variable annuities aren't taxed until you withdraw the money. ... But if you invested using after-tax dollars, the earnings will be taxed as income, and the rest will be a tax-free return of principal.

A new registered representative is a member of your team and asks you about prospectus delivery requirements. It would be correct to state that delivery of a prospectus to a customer is not required for the purchase of A) a new issue of AAA rated corporate bonds. B) a U.S. government bond mutual fund. C) a variable annuity. D) a new issue of general obligation bonds.

D *municipal bonds provide a form of prospectus, (disclosure document), known as an official statement (OS). Analysts study the documents included in the OS to determine the issuer's financial condition at the present and in the foreseeable future.

You have several clients interested in a tax sheltered annuity (TSA), but one of them is not eligible to participate. Who is it? A) A maintenance worker at a large state university B) A minister tending to the congregation for a small church C) An administrator for a charity given tax-exempt status by the IRS D) A student enrolled full time in the local community college

D *Students are not eligible for TSA annuities. *Tax-sheltered annuities (TSAs) offered through 403(b) plans are available to -employees of public educational institutions; -tax-exempt organizations (501(c)(3) organizations); -religious organizations.