Mastery Exam 2

In order to draw a check from an account held "JTWROS" where the representative knows that the couple has entered divorce proceedings:

both account owners must agree in writing to the action

A customer buys 1 ABC Feb 50 Call @ $7 when the market price of ABC is $52. The customer's maximum potential loss is:

$700 In a falling market, a long call position will expire "out the money" and the holder loses the premium paid. This is the maximum potential loss.

Total Call Volume:117,867 Total Call Open Int:455,436 Total Put Volume:136,247 Total Put Open Int:575,985 The Index: High 319.99 Low 314.55 Close 315.58 - 4.41 The put / call ratio for the OEX index on this day is:

136,247 / 117,867

Section 529 plans are used to fund

Higher education needs

A syndicate member wishes to place an order with the manager for a new issue of a municipal bond underwriting. The bonds are to be purchased for the member's own portfolio. Under MSRB rules, the order is filled:

Last Remember: Pro Golfers Dont Miss

Which of the following are "classes" of options? I ABC Calls II ABC Puts III ABC Jan 50 Calls IV ABC Jan 50 Puts A I and II B I and III C II and III D III and IV

The best answer is A. A class of option consists of all options of one type on an underlying security. For example, all ABC calls are a "class;" all ABC puts are a "class." In contrast, an options "series" would be all ABC Jan 50 Calls - a series is a class of option on the same underlying stock with the same strike and expiration.

Which option strategy has the greatest loss potential? A short call B short call spread C short put D short put spread

The best answer is A. A short call has unlimited loss potential in a rising market. As the market goes up, the customer must purchase the stock in the market for delivery. A short call spread has limited upside loss. Short puts and short put spreads are profitable in a rising market as the contracts will expire "out the money" with the gain being the premium collected.

Which contract will likely have the highest premium when ABC closes at $84? A ABC Jan 80Call B ABC Jan 80Put C ABC Jan 85 Call D ABC Jan 85 Put

The best answer is A. The contract with the highest premium is likely to be the one that is the most "in the money." Here, only 2 contracts are "in the money": the 80 call is "in the money" by 4 points and the 85 put is "in the money" by 1 point. Since the 80 call is "deeper" in the money, this contract will have the higher premium. Note that the 80 put is 4 points "out the money" and the 85 call is 1 point "out the money."

When the Euro is trading at $1.39, a customer takes the following positions: Buy 1 PHLX Jan Euro 140 Put Sell 1 PHLX Jan Euro 135 Put This is a: A bear put spread B bull put spread C horizontal put spread D diagonal put spread

The best answer is A. The long 140 Put is "in the money" when the market is at 139, while the short 135 put is "out the money." Therefore the premium on the long put must be higher than the premium on the short put so this is a debit spread (long premium higher than short premium). In a debit spread, the customer is a net buyer of the position, so this is a long put spread. Long put spreads are profitable if the market drops, so this is a bear strategy.

A customer sells 1 ABC Jul 40 Put at $6 when the market price of ABC is $38. The customer's maximum potential gain is: A $600 B $3,400 C $4,000 D unlimited

The best answer is A. The maximum gain for the writer of a naked call or put is the premium collected. This happens if the contract expires "out the money."

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

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

A customer buys 1 ABC Jan 40 Straddle for a total premium of $500. Just prior to expiration ABC stock closes at $31, and the customer closes the options positions at intrinsic value. The customer will have a: A $100 gain B $400 gain C $500 gain D $900 gain

The best answer is B. A long straddle is the purchase of a call and a put on the same stock with the same strike price and expiration. In this case the customer: Buys 1 ABC Jan 40 Call Buys 1 ABC Jan 40 Put $500 Debit Note that the individual premiums are not given in the question, nor are they needed to answer the question. If the market drops below $40, the call will expire "out the money" and the put goes "in the money." Here the put is "in the money" (or has intrinsic value of) 9 points. This results in a 9 point profit on the put, if it is "closed" (sold) at intrinsic value. But, since 5 points were paid in premiums, the customer has a net gain of 4 points per share, or $400 per contract.

The market sentiment of a customer who sells a "call spread" is: A bullish B bearish C neutral D volatile

The best answer is B. A sale of a "call spread" is similar to simply selling a call. In a falling market, the calls expire "out the money" and the profit is the premium received. The difference is that a short call gives unlimited upside loss potential in return for the premium received. A short call spread gives limited upside loss potential in return for a lower premium received.

What is the "out the money" amount for the following contract? 1 ABC Jan 30 Call @ $5ABC Market Price = $26 A 0 B 4 C 5 D 9

The best answer is B. An option contract is "out the money" if exercise would be unprofitable to the holder, ignoring any premiums paid. Such a contract would be allowed to expire unexercised. In this case, the holder of the call can buy the stock at the strike price of $30 when the market price is $26, for a $4 loss to the holder. This contract is "out the money" by $4 and would be left to expire unexercised.

Which statement is TRUE regarding the exercise of World foreign currency option contracts? A The contracts solely settle in the foreign currency B The contracts settle in U.S. dollars C The contracts can be exercised any time D A variety of standard contract sizes is available for each currency

The best answer is B. Exercise settlement of foreign currency options requires the writer to pay the holder the "in the money" amount in U.S. Dollars the next business day. Only European style contracts are available for PHLX World Currency options. Remember, American style contracts can be exercised at any time up until expiration, while European contracts can only be exercised just prior to expiration. Only one contract size (10,000 units of currency except for Japanese Yen which covers 1,000,000 units of currency) is available for each foreign currency on the PHLX.

Under FINRA rules, a customer complaint that must be handled by the member firm includes: I Written complaints II E-mail complaints III Oral complaints A I only B I and II C II and III D I, II, III

The best answer is B. FINRA defines a customer "complaint" as one received in writing (e-mail is written) - screamers don't count.

When reading the morning news reports, you see that Japan is suffering from economic turmoil while Canada is experiencing record economic growth. An appropriate strategy is to buy: I Canadian Dollar Calls II Japanese Yen Calls III Canadian Dollar Puts IV Japanese Yen Puts A I and II B I and IV C II and III D II and IV

The best answer is B. If Canada is experiencing economic growth, its currency can be expected to strengthen. To profit, buy Canadian dollar calls. If Japan is having economic turmoil, its economy is in trouble, weakening the currency. To profit, buy Japanese Yen puts.

A customer buys 100 shares of ABC stock at $50 and sells 2 ABC Jan 50 Calls @ $5. This is a: A short straddle B ratio call write C covered call write D ratio call spread

The best answer is B. If a customer who is long stock sells call contracts against the stock position, then as long as the contract amount does not exceed the long stock position, the call writer is "covered." This means that if the short call is exercised, the customer already has the stock for delivery. Hence the customer is covered against the risk of having to go to the market to buy the stock at a sky high price to make delivery. If a customer sells more call contracts than the stock position owned, this is a "ratio" call write. In this example, the customer is selling calls against the stock position at a 2:1 ratio.

A customer buys 1 ABC Feb 50 Call @ $7 when the market price of ABC is 52. If the market value of ABC falls to $48 and stays there through February, the customer will: A gain $700 B lose $700 C gain $4,300 D lose $4,300

The best answer is B. If the market falls to $48, the 50 call expires out the money and the holder loses the $700 premium paid.

The most efficient way for a client to hedge a broadly diversified $2,500,000 stock portfolio is to: A buy put contracts on the individual stock positions held in the portfolio B buy SPX 2500 put options C sell short the exact same stock positions as those held in the portfolio D sell long the exact same stock positions as those held in the portfolio

The best answer is B. Index options can be used to "efficiently" hedge a broadly diversified stock portfolio because each contract has a large "notional" value. Each SPX 2500 contract covers 2500 (index value x 100 (multiplier) = $250,000 of portfolio value. The hedge a $2,500,000 portfolio, 10 put contracts are needed. This is much easier than attempting to buy individual put contracts on the stock positions held in the portfolio. If the market drops, the gain on the index puts offsets the loss on the physical stock portfolio. The short sale of stock positions in the portfolio results in a "net 0" position, so there could be no further possible gain if the market rises (and no further loss if it falls). Selling the securities in the portfolio "long" would liquidate those positions - again, that is not a hedge.

A customer buys an ABC Jul 50 Put and sells an ABC May 50 Put. The customer profits if: A the spread narrows B the spread widens C the market price moves up sharply D both contracts expire

The best answer is B. The July expiration must be longer than the May expiration. The maximum life of a regular option contract is 9 months. If it is now May, then the July contract can trade (since it is 2 months later than May). However, if it is July, a May contract cannot be trading, because the following May is 10 months away. Thus, the customer is buying the far expiration (more expensive) and selling the near expiration (less expensive since there is less time left to the contract), so this must be a debit calendar spread. Debit spreads are profitable if the spread between the premiums widens. If both contracts expire, the debit is lost. If both contracts are exercised, the customer buys the stock at 50 and sells it at 50, still losing the debit.

A customer sells short 100 shares of MNO at $48 and purchases 1 MNO Jan 45 Call @ $2.50. MNO drops to $41.25 and the customer closes the option contract at $1.40 and buys the stock at the current market price. The customer has a(n): A $112 loss B $565 gain C $587 gain D unlimited loss

The best answer is B. The customer shorts the stock at $48 and bought a call, which protects the stock position if the market were to go up. Without the call, as the market rises, the customer would have the potential for infinite loss. As the market drops, the customer's call loses value, but the short stock position increases in value. The call contract that was originally bought for $2.50; is closed (sold) for $1.40; for a loss of -$1.10. The stock that was originally sold for $48; is purchased for $41.25; for a gain of +$6.75. The net profit is: +$6.75 - $1.10 = +$5.65 = $565 for 100 shares.

A customer buys 2 ABC Jan 15 Puts @ $2 when the market price of ABC is $14. The breakeven point is: A $11 B $13 C $17 D $19

The best answer is B. The holder of a put breaks even if the premium paid is recovered. 2 points in premiums were paid per share. If the market falls below $15, the holder will exercise the options and can sell the stock at $15. The holder gains the premium paid if he buys that stock at $13. This is the breakeven point. Note that breakeven is computed on a per share basis - the fact that there are 2 contracts does not affect the computation. To summarize, the formula for breakeven on a long put is: Long Put breakeven=Strike price-premium

A customer buys 100 shares of XYZ at 87 and buys 1 XYZ Jan 90 Put @ $8. Just prior to expiration, the stock is trading at $87. The customer closes the option position at a premium of $3. One week later, the stock moves to $93 and the customer sells the stock position in the market. The net gain or loss on all transactions is: A $100 loss B $100 gain C $600 loss D $600 gain

The best answer is B. The put contract was purchased at $8 and closed (sold) at $3 for a net loss of $5. The stock was purchased at $87 and sold at $93 for a net gain of $6. The net of all transactions is a 1 point or $100 gain.

A customer who is long 1 ABC Jan 50 Put wishes to create a "bull put spread." The second option position that the customer must take is: A Short 1 ABC 45 Put B Short 1 ABC 55 Put C Short 1 ABC 45 Call D Short 1 ABC 55 Call

The best answer is B. A spread consists of the purchase and sale of the same type of option with a different strike price and/or expiration - therefore Choices C and D are incorrect. In a bull put spread (the same as a short put spread), the customer purchases the lower strike price (lower premium since the contract allows the holder to sell at a lower price) and sells the one with the higher strike (higher premium, since the contract allows the holder to sell at a higher price). The spread results in a credit received, which the customer wants to keep. If the market rises, then the contracts expire "out the money" and the net premium received is kept. This is the maximum gain. If the market falls, in this case below $50, then both contracts are exercised at a loss to the customer. If the market falls below $50, then the customer is obligated to buy stock at $55; that he sells at $50; for a 5 point loss (net of any premium credit received). This is the maximum potential loss.

Which of the following positions would "cover" the sale of 1 ABC Jan 30 Put? I Long 100 shares of ABC at $30 II Short 100 shares of ABC at $30 III Long 1 ABC Jan 40 Put IV Short 1 ABC Jan 40 Put A I and III B I and IV C II and III D II and IV

The best answer is C. A long stock position is not considered a "cover" for a short put since as the market goes down, the short put is exercised and the customer must buy another 100 shares of stock in addition to the shares already owned - so there is double downside risk. A short put is covered if the individual is short 100 shares of the security. As the market goes down, the short put is exercised and the customer is forced to buy back shares that have previously been sold "short." The credit from the short sale is used to buy the shares, so there is no loss to the put writer. The O.C.C. also accepts as "cover," a long put with the same strike price or higher (thus creating a long put spread), a bank guarantee letter (where the bank assumes responsibility for loss), or an escrow receipt for cash sufficient to pay for the stock should the short put be exercised.

If the holder of an OEX option contract decides to exercise, the holder: A must pay the strike price of the contract B will receive the current premium on the contract C will receive thein the money amount on the contract D will receive the in the money amount less the premium paid for the contract

The best answer is C. Index options settle in cash if they are exercised. The writer of the option must pay the holder the "in the money" amount.

A customer buys 1 ABC Jan 35 Call @ $3.50 and 1 ABC Jan 35 Put @ $.50 when the market price of ABC is at $34.75. The maximum potential gain is: A $75 B $200 C $400 D unlimited

The best answer is D. The customer created a long straddle. Since the customer has purchased a call, the maximum potential gain is unlimited as the market rises on the long call position (since it gives the customer the right to buy the stock at a fixed price in a rising market). If the market rises, the put side of the straddle would expire "out the money" and have no further effect on the customer.

On the same day, a customer buys 1 ABC Jan 55 Call @ $7 and sells 1 ABC Jan 65 Call @ $2. Above which of the following prices will every dollar gained on the long call be exactly offset by a dollar lost on the short call? A $55 B $60 C $65 D $73

The best answer is C. The breakeven point is $60 per share. As the market rises above 60, the customer gains 1 point on the long call for every $1 rise in the price of ABC stock. Once the market goes above $65, the short call will also be "in the money," and a dollar will be given up on the short call for every dollar gained on the long call. Thus, above $65, there is no further gain. The maximum potential gain is 5 points or $500.

The maximum loss for the writer of a put is: A the premium received B unlimited C strike price minus premium received D strike price plus premium received

The best answer is C. The maximum gain for the writer of a put occurs if the market price rises and the put expires "out the money." In this case, the put writer keeps the collected premium. However, if the market price falls, the put will be exercised and the writer must buy the stock at a fixed price. The price of this stock can fall to "0," so the put writer may have to pay the strike price for worthless stock. Since the premium was collected by the writer, the maximum loss is the strike price minus the collected premium. To breakeven, the premium received must be lost in a falling market. This occurs if the market price falls to the strike price minus the premium received.

The minimum maintenance margin for long stock positions is set at:

The minimum maintenance margin requirement is set by FINRA at 25% of the long market value. If the account falls below this level, then a "maintenance call" is sent to bring the account back up to the 25% minimum. Note that Regulation T sets initial margin at 50%. Thus, if the account loses value after the Reg. T amount is deposited, nothing happens unless the account falls below the 25% minimum.

The formula for equity in a combined margin account is:

long market value + credit - short market value - debit

A syndicate member takes a 5% participation in a $10,000,000 issue set up as an Eastern account. At the termination of the syndicate, $2,000,000 remains unsold in the account. The syndicate member sold $500,000. The syndicate member's remaining liability is:

$100,000 In an Eastern account, the syndicate member's liability is his percentage of all unsold securities. The actual sales by that member have no bearing on remaining liability. Total unsold = $2,000,000 x 5% = $100,000.

In 2022, individuals with earned income who are age 50 or over are permitted to make an extra annual IRA contribution of:

$1000

A waste disposal revenue bond issue is being underwritten on a negotiated basis. The offering consists of $10,000,000 par value of term bonds. The underwriter has agreed to a spread of $40 for each $5,000 bond. The manager has set the additional takedown at $15.00 per bond and the selling concession at $20.00 per bond. If a syndicate member sells a $5,000 par value bond directly to the public, the syndicate member earns:

$35.00 When selling a bond directly to the public, a syndicate member earns the "Total Takedown," which is the total of the additional takedown and the selling concession. The additional takedown is $15 and the selling concession is $20, so the syndicate member earns $35.

The O.C.C. assigns exercise notices on a: A first in; first out basis B last in; first out basis C random order basis D method of reasonable fairness

C

Generally, new issues cannot be margined for the:

30 day period following the issuance After that point, they are "seasoned" and are marginable if the securities are listed on an exchange or NASDAQ.

A long margin account is restricted under Regulation T if the margin percentage falls below:

50%

What are initial and maintenance margins for stock positions in a long margin account?

50/25

As the initial transaction in a new margin account, a customer buys: 100 shares of ABC @ $50 300 shares of DEF @ $80 200 shares of PDQ @ $30 The customer deposits the required margin. Subsequently, ABC stock rises to $70; DEF rises to $100; and PDQ rises to $50. The new equity in the account is: A $17,500 B $29,000 C $29,500 D $47,000

C. The initial market value of all the securities in the account is $35,000. The account sets up as: Long Market Value -Debit=Equity% $35,000-$17,500=$17,500 =50% After the increase in market values, the new long market value is $7,000 for ABC stock; $30,000 for DEF stock; and $10,000 for PDQ stock. The account now shows: Long Market Value -Debit=Equity % $47,000-$17,500=$29,500=63%

Which regulator is responsible for enforcing provisions of the Bank Secrecy Act and the PATRIOT ACT?

FinCEN

All of the following statements are true regarding the annuitization of a variable annuity contract EXCEPT: A. variable annuity contracts require the holder to select a Life Annuity - Period Certain payout option B. the variable annuity payout may vary depending on the performance of the underlying securities C. the number of variable annuity units is fixed D. the holder may not change the payout option after it is elected

The best answer is A. Variable annuity contracts allow the holder to elect a payout option that meets that person's individual requirements. The choice of payout method depends on the needs of the annuitant; and cannot be changed once elected. Once the contract is annuitized, the number of annuity units is fixed. However, the value of each unit varies with the performance of the underlying securities, hence the monthly annuity payment may vary.

The U.S. Government orders a company that has 80% of the computer software market to split itself into 4 separate operating companies, that have the right to compete with each other. This is a: A break up B spin off C fall out D leveraged buy out

The best answer is A. A "break up" is a government ordered splitting up of a company; usually as a result of the company engaging in monopolistic practices. For example, in 1983, the ATT was "broken up" into ATT and the 7 "Baby Bells" under pressure from the U.S. Government.

Which of the following statements are TRUE regarding Individual Retirement Accounts? I The earliest a taxpayer can make an annual contribution is January 1st of that tax year II The latest a taxpayer can make an annual contribution is April 15th of the next tax year III If the taxpayer obtained a 4 month filing extension, the annual contribution can be made until the extension date IV Annual tax deductible contributions may be made even if the person is covered by another qualified retirement plan A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is A. Annual IRA contributions can be made anytime from January 1st of that year until April 15th of the next tax year. If the taxpayer requests an extension for filing his tax return, he does not get an extension for making the IRA contribution. Contributions can always be made based upon earned income, but if a person is covered by another qualified retirement plan and earns too much (over $78,000 in 2022), the contribution is not deductible.

Your customers wish to give a gift of securities to their friend's child. Which statement is TRUE? A The gift can be given in a custodial account without restriction B The gift can be given in a custodial account only with the prior approval of the parents C The gift can be given in a custodial account only with the prior approval of the child D The gift cannot be given in a custodial account

The best answer is A. Any adult can open a custodial account for a minor; and any adult can donate into a custodial account.

Jack Jones, age 82, has an individual account at your firm. He gives a full written trading authorization to his son, Jack Jones Jr. under a non-durable power of attorney. Upon the death of Jack Jones, the power of attorney: A is void B continues because it was given to an immediate family member C continues because it is a "full" power of attorney D continues until the executor over the Jack Jones estate is appointed

The best answer is A. Any power of attorney granted by a customer "dies" when that customer dies. The difference between a "durable" and a "non-durable" power of attorney only relates to mental incapacitation. If an individual that has granted a non-durable power of attorney becomes mentally incapacitated, then that power of attorney becomes void. If an individual that has granted a durable power of attorney becomes mentally incapacitated, the power of attorney continues in effect.

Distributions from Section 401(k) plans are: A 100% taxable B partial tax free return of capital and partial taxable income C 100% tax free D 100% tax deferred

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

A customer sells short 100 shares of PDQ at $49 and sells 1 PDQ Sep 50 Put @ $6. The maximum potential gain while both positions are in place is: .A $500 B $600 C $700 D unlimited

The best answer is A. If the market falls, the short put is exercised and the stock must be bought at $50. Since it was already "sold" at $49, there is a loss of $1 per share ($100 total). But the customer collected $600 in premiums; so the end result is a net gain of $500. This is the maximum potential gain. Conversely, if the market rises, the short put expires, leaving a short stock position that has potentially unlimited loss.

A customer margin account shows the following: LMV:$300,000 Debit Balance:$140,000 Equity:$160,000 On the same day, the customer buys $40,000 of ABC stock and sells $36,000 of XYZ stock. The customer must deposit: A 0 B $2,000 C $4,000 D $40,000

The best answer is A. Margin deposits are based on "net" purchases each day. Because the customer bought $40,000 of ABC stock and sold $36,000 of XYZ stock, there is a net purchase of $4,000. Because the Regulation T requirement is 50%, the customer must deposit $2,000. The "trick" to the question is that the account has excess equity = SMA. With a $300,000 LMV, up to $150,000 can be borrowed. The account has a current loan (debit) of $140,000, so an additional $10,000 can be borrowed. The SMA can be used to meet the $2,000 deposit requirement.

Which of the following are ways in which an Investment Adviser account can be opened? I An omnibus account holding the monies of all clients without specific identification of each client II Separate client accounts with a power of attorney given by each client to the investment adviser III Joint account with tenancy in common for all of the investment adviser's clients IV Joint account with rights of survivorship for all of the investment adviser's clients A I and II B II only C III and IV D I, II, III, IV

The best answer is A. One way for an Investment Adviser account to be opened is for each client to open an account at a brokerage firm, with the client giving the investment adviser Third Party power of attorney. The account is held in the name of the Second Party - that is, the customer.The other way for an investment adviser to open an account is on an Omnibus basis. In this situation, the Investment Adviser is the Second Party, opening a "group account." The names of the individual customers in the account are not known to the brokerage firm. From the brokerage firm's standpoint, the customer is the Adviser. Investment advisers are prohibited from opening joint accounts containing many different clients. Under Federal and State law, investment advisers must either keep customer monies segregated in separate accounts (choice I above); or must be able to account for each customer's positions separately within a "master" account - that is, an Omnibus account.

Two unrelated persons (Person A and Person B) come into your branch office to open a new account. They tell you that the funds are being deposited by Person A, who will be the owner of the account, and that Person B wants to be able to trade the account. They also tell you that only 1 social security number is to be used on the account. How should the account be opened? A Individual account in the name of Person A with a Third Party Trading Authorization granted to Person B B Individual account in the name of Person A with Transfer On Death registration naming Person B as the beneficiary C Joint Account with Rights of Survivorship in the names of Person A and Person B D The account should not be opened and you should contact your firm's SAR officer to report suspicious activity

The best answer is A. Since Person A is the owner of the account, this will be an individual account, using the social security number of Person A for tax reporting. A Third Party Trading Authorization naming Person B as authorized to trade the account, signed by Person A, meets the requirement for Person B to be authorized to trade the account. An Individual Account held TOD does not give Person B trading authority. A Joint Account with Rights of Survivorship gives each person 100% ownership of the account, and this account is only owned by Person A, and not Person B. Choice D is simply garbage.

Which statements are TRUE regarding a custodial account? I Tax liability is the responsibility of the minor II Tax liability is the responsibility of the custodian III The minor's social security number is on the account IV The custodian's social security number is on the account A I and III B I and IV C II and III D II and IV

The best answer is A. Tax liability in a custodial account is the responsibility of the minor - it is the minor's social security number that is on the account. Thus, all income is reported to the IRS on the minor's number.

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

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

On the same day in a cash account a customer purchases 1 ABC Mar 60 Call @ $7 and 1 ABC Mar 60 Put @ $2, when the market price of ABC is 61.63. Subsequently, ABC goes to $70 and the customer lets the put expire and closes the call at intrinsic value. The customer has a: A $100 gain B $200 gain C $700 gain D $1,000 gain

The best answer is A. This is a long straddle, which is the purchase of a call and a put on the same stock, with the same strike price and expiration. Buy 1 ABC Mar 60 Call@ $7 Buy 1 ABC Mar 60 Put@ $2 $9Debit If the market rises above $60, the put will expire "out the money" and the call goes "in the money." If the market rises to $70, the call is 10 points "in the money" (or has intrinsic value of 10 points). If the call is now sold "at intrinsic value," there is a 10 point proceeds from the sale of the call. Because, initially, a combined premium of 9 points was paid, the net profit is: 10 points - 9 points = 1 point or $100.

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

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

A customer shorts 1 ABC Jan 35 Straddle for a total premium of $350. At expiration, ABC closes at $29 and the customer is exercised. As a result, the customer will have a: A $250 loss B $600 gain C $600 loss D $950 gain

The best answer is A. When a customer sells a straddle, he sells a call and a put on the same stock with the same strike price and expiration. In this case the customer: Sells 1 ABC Jan 35 Call Sells 1 ABC Jan 35 Put $350 Credit If the market stays exactly at $35, both positions expire and the customer would gain the $350 credit. In this case, the market declines to $29. The call expires "out the money," while the put is 6 points "in the money" and will be exercised at a loss of 6 points = $600 loss. Since $350 was received in premiums, the net loss is $250.

An underwriting agreement where the syndicate members are liable for any unsold securities is a(n): A firm commitment underwriting B best efforts underwriting C all or none underwriting D mini-maxi underwriting

The best answer is A. In a firm commitment underwriting, the underwriter buys the issue outright from the issuer, with the intention of reselling the issue to the public at a profit. Thus, the underwriter is a principal in the transaction, and is taking full financial liability. In a best efforts underwriting, the underwriter acts as agent, promising to use his best efforts to sell the issue, but takes no financial liability. In a best efforts - all or none underwriting, the underwriter acts as agent, using his best efforts to sell the issue, but takes no financial liability. However, if a minimum amount is not sold, then the offering is canceled. In a mini-maxi underwriting, a minimum amount of the offering must be sold, otherwise the deal is canceled. Once the minimum is reached, the underwriters will continue to use their best efforts to sell the maximum amount specified in the offering.

Which of the following statements are TRUE when describing the "build-up" in a variable annuity separate account during the accumulation phase? I All interest, dividends, and capital gains from the securities in the account are automatically reinvested to buy more accumulation units II All interest, dividends, and capital gains from the securities in the account can either be paid to the contract holder or can be automatically reinvested to buy more accumulation units III All interest, dividends, and capital gains from the securities in the account are taxable IV All interest, dividends, and capital gains from the securities in the account are tax deferred A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. During the accumulation phase, all interest, dividend, and capital gains realized from the securities held in the separate account must be automatically reinvested to buy more accumulation units for the contract holder. The "build-up" of these reinvested dividends, interest and capital gains is tax deferred during this period. This is the major tax advantage of buying a variable annuity over making a direct investment in a mutual fund.

Which statement is TRUE about 401(k) Plans? A They are established by the corporate employee B The cost basis in the plan is "0" C The maximum contribution amount is lower than that permitted for a SIMPLE IRA D Distributions at retirement age are tax-free

The best answer is B. 401(k) Plans are corporate-sponsored salary reduction plans allow employees to contribute up to $20,500 in 2022 as a salary reduction, so these are pre-tax dollars going into the plan. The cost basis in retirement plans only consists of after tax dollars. Therefore, the cost basis is "0" and when distributions commence at retirement age, they are 100% taxable at ordinary income tax rates (since none of the dollars were ever taxed). SIMPLE IRAs are corporate-sponsored salary reduction plans for small companies, but the maximum contribution in 2022 is $14,000.

All of the following terms are synonomous EXCEPT: A Clearing broker-dealer B Introducing broker-dealer C Carrying broker-dealer D General securities broker-dealer

The best answer is B. A clearing broker-dealer is one which holds customer funds and securities. It is subject to the highest net capital requirements. Other names for a clearing broker-dealer are a carrying broker-dealer or a general securities broker-dealer. In contrast, an "introducing" broker-dealer signs a clearing agreement with a clearing firm. The introducing broker-dealer "introduces" its accounts into the clearing firm, which acts as the "back office." It is the clearing firm's responsibility to send trade confirmations and statements to the introducing firm's customers. Introducing firms do not hold customer funds or securities, and are subject to much lower net capital requirements.

An options strategy where the maximum potential loss is equal to the difference between the value of the underlying long securities position and premiums received is a: A naked call writer B covered call writer C naked put writer D covered put writer

The best answer is B. A covered call writer sells a call contract against the underlying stock that is owned by that customer. If the market drops, the call expires unexercised and the customer keeps the premium. However, as the market drops, the customer loses on the long stock position. Thus, the maximum potential loss is the full value of the stock position, net of collected premiums.

A customer that earns $300,000 per year wishes to set aside funds for his 12 year old daughter's future college expenses. Which statements are TRUE? I The customer can open a UTMA account for the daughter to deposit the funds II The customer cannot open a UTMA account for the daughter to deposit the funds III The customer can open a Coverdell ESA account for the daughter to deposit the funds IV The customer cannot open a Coverdell ESA account for the daughter to deposit the funds A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Custodial accounts opened under either the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) can be opened by any adult for any minor, with no limitation on the income of the donor in determining whether the account can be opened. On the other hand, high earning individuals are prohibited from opening either a Roth IRA or a Coverdell Education Savings Account.

A registered representative takes an order from a customer to buy 100 shares of EFFE stock at $40 and writes the order ticket for processing. The registered representative fails to include the customer account number on the ticket. Which statement is TRUE? A The order will be processed for the firm's proprietary trading account B The order will be returned to the representative for entry of the account number C The order will be referred to the member firm's compliance department for resolution D The order will be canceled without any further action taken

The best answer is B. Incomplete order information on an order ticket will result in the ticket not being processed. It will be returned to the representative for entry of all of the required information.

Short Positions: 100 ABC @ $60 200 XYZ @ $50 Credit = $40,000 SMA = $16,000 Reg. T = 50% What is the minimum maintenance margin requirement? A $4,000 B $4,800 C $7,200 D $12,000

The best answer is B. Minimum maintenance margin for a short account is 30% of the market value. 30% of $16,000 = $4,800. This account currently has equity of $24,000 (Credit - Short Market Value), so it is well above the minimum requirement.

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

The best answer is B. The customer established two positions with a credit of $5 x 1 contract = $500 credit. When the market is at $66, the customer closes the call at $.50 and closes the put at $5.50. Thus, the positions are closed at: Buy 1 ABC Jan 70 Call@ $ .50 Buy 1 ABC Jan 70 Put@ $5.50 $6.00 debit = $600 debit The customer closed for a debit of $600. Since the initial credit was $500, the customer has a $100 loss.

A customer sends an IM to his registered representative with an order to buy 500 shares of ABCD at the market. Which statement is TRUE about accepting this order from the customer? A The order cannot be accepted because all customer orders must be placed by telephone B The order cannot be accepted because the firm cannot verify that it was the customer who actually sent the order C The order cannot be accepted because FINRA requires that all customer orders be sent using an app that is encrypted D The order can be accepted as given

The best answer is B. The issue with taking orders that are placed electronically is: "How does the firm know that it is really the customer who is placing the order." If the customer logs into his or her account via the firm's website to place the order, then the customer's identity can be verified because the customer must enter or use his or her e-mail address that has been previously registered with the firm and must enter a password before being let into his or her account to place the order. When an order is placed via regular email, text message, or by an IM, the firm cannot verify that it is really the customer placing the order. Because of this, orders from these sources cannot be accepted (at least until a means of verifying that it is really the customer placing the order has been developed).

A customer buys 1 ABC Jul 45 Put at $4 when the market price of ABC is $46. The customer's maximum potential gain is: A $400 B $4,100 C $4,900 D unlimited

The best answer is B. The maximum gain for the holder of a put occurs if the market goes to "0." If it does, the customer can sell the stock at $45 and purchase it for nothing. Since the customer paid $400 in premiums for this right, the maximum potential gain is: $4,500 - $400 = $4,100.

The brokerage firm department that prepares and mails trade confirmations to customers is the: A margin department B purchase and sales department C reorganization department D order department

The best answer is B. The purchase and sales department prepares and mails customer confirmations. The margin department keeps a record of securities positions, and debit and credit balances in customer accounts. The reorganization department of a brokerage firm handles corporate reorganizations such as tender offers and takeovers. The order department routes orders to the appropriate exchange; and sends execution confirmation reports back to the person placing the order.

Which of the following statements are TRUE for both mutual funds and variable annuities that are in the accumulation phase? I Distributions are taxable to the holder in the year the distribution is made II The underlying portfolios are managed III The Investment Company Act of 1940 is the regulating legislation IV The return to investors is dependent on the performance of the securities in the underlying portfolio A I and II only B III and IV only C II, III, IV D I, II, III, IV

The best answer is C. The underlying portfolios of mutual funds and variable annuities are both "managed," since separate accounts buy the shares of management companies. Both are regulated by the Investment Company Act of 1940, and have investors carry "investment risk" and corresponding gain potential. Dividends and capital gains in variable annuity separate accounts build tax deferred; mutual funds distributions are taxable. When a mutual fund distribution is made, tax liability arises. This is not the case with separate account distributions which must be reinvested.

Which statement is TRUE about a registered representative who wants to be appointed as trustee for a trust account being established by a client for the client's children? A The registered representative can act as the trustee without restriction B The registered representative can act as the trustee only with approval of the firm's compliance department C The registered representative can act as trustee only if no trustee fee is accepted D The registered representative cannot act as trustee under any circumstances

The best answer is B. The trustee over a trust account is a fiduciary who must manage the account in the best interest of the beneficiaries. It is an inherent conflict of interest for the registered representative to act as the trustee. This is the case because he or she, as "trustee," has the power to trade the account, and that trading activity will result in commissions paid to the representative. Thus, the representative would have an incentive to overtrade the account, earning excessive commissions at the expense of the trust beneficiaries. Typically, a trustee is a bank or an investment adviser, both of whom are already under a fiduciary obligation. The trustee decides who the broker will be. While it is "possible" for a registered representative to be a trustee in such an account (if there is written disclosure to the grantor of the trust of the nature of the conflict of interest and if the fees charged by the trustee are "reasonable"), many brokerage firms have an internal policy of prohibiting their representatives from being trustees in any accounts that they oversee. The only way that this can be overcome is if compliance is informed of the situation and approves.

A customer sells 2 ABC Jan 40 Puts @ $9 when the market price of ABC is $36. The breakeven point is: A $30 B $31 C $48 D $49

The best answer is B. The writer collected $9 in premiums by obligating him- or herself to buy the stock at $40. If exercised, the customer's net outlay is $31 for the stock. To breakeven, the customer must be able to sell the position for $31. To summarize, the formula for breakeven on a short put is: Short put breakeven= Strike price - premium

Which of the following are characteristics of Defined Contribution Plans? I Annual contribution amounts are fixed II Annual contribution amounts will vary III If the corporation has an unprofitable year, the contribution may be omitted IV If the corporation has an unprofitable year, the contribution must still be made A I and III B I and IV C II and III D II and IV

The best answer is B. Under a defined contribution plan, a fixed percentage or dollar amount is contributed annually for each year that the employee is included in the plan. If the corporation has an unprofitable year, it must still make the contributions.

A customer buys 1 ABC Jan 50 Call @ $6 and sells 1 ABC Jan 60 Call @ $2. Later, the positions were closed - the ABC Jan 50 Call was closed at $3 and the ABC Jan 60 Call was closed at $1. The customer has a: A $200 profit B $200 loss C $400 profit D $400 loss

The best answer is B. The opening position is: Buy 1 ABC Jan 50 Call@ $6 Sell 1 ABC Jan 60 Call@ $2 $4 Debit The closing position is: Sell 1 ABC Jan 50 Call@ $3 Buy 1 ABC Jan 60 Call@ $1 $2 Credit The net loss is $200 since the spread between the premiums narrowed from 4 to 2. Remember, debit spreads are only profitable if the spread between the premiums widens.

A customer sells short 100 shares of ABC stock at $60 and sells 1 ABC Oct 60 Put @ $6. The market rises to $68 and the put expires. The customer buys the stock in the market covering his short stock position. The gain or loss is: A $200 gain B $200 loss C $600 gain D $600 loss

The best answer is B. If the market rises, the short put expires. Here, the customer buys the stock at $68 to cover his short stock position that was originally sold at $60. There is an 8 point or $800 loss, that is partially offset by the $600 in premiums received. Thus, there is a net loss of $200.

A customer's margin account shows the following: 100 shares of ABC @ $45 200 shares of PDQ @ $64 200 shares of XYZ @ $72 Debit Balance: $12,000 SMA: $3,850 What is the minimum maintenance margin requirement? A $7,700 B $7,925 C $8,245 D $9,510

The best answer is B. Minimum maintenance margin in a long account is 25% of market value. 25% of $31,700 = $7,925 minimum maintenance margin. Since the account has $19,700 of equity, it is well above the minimum.

Which statements are TRUE about new offerings of 6-month T-Bills? I Treasury auctions are conducted on Monday of each week II Treasury auctions are conducted on Thursday of each week III Securities are issued, and settlement occurs, on the Monday following the auction IV Securities are issued, and settlement occurs, on the Thursday following the auction A I and III B I and IV C II and III D II and IV

The best answer is B. The Federal Reserve conducts Treasury Bill auctions weekly on Monday and Tuesday. The Bills are issued to the winning bidders, and must be paid for, on the Thursday immediately following the auction date.

Which of the following individuals cannot legally grant a power of attorney over his or her account to a third party? A 22-year old who has joined the armed forces and is being deployed overseas for a 2-year period B 56-year old who has been diagnosed with congestive heart failure and must undergo bypass surgery C 33-year old who has been diagnosed with a psychotic disorder and is adjudicated incompetent D 47-year old who has recently remarried and wishes to give a power of attorney to his new much younger wife over the objections of his adult son

The best answer is C.

Under FINRA rules, to ascertain which investments are suitable for the customer, the registered representative would inquire about the customer's: I Existing investment holdings II Current investment objective III Financial situation and needs IV Daily living expenses A I only B II and III C I, II, III D I, II, III, IV

The best answer is C. "Suitability" means that securities which are recommended to a customer are appropriate for that customer. To ascertain which investments are suitable for the customer, FINRA states that the basis for making the recommendation are the facts disclosed by the customer about his other security holdings and financial situation and needs. Inquiry should be made as the customer's investment objective, tax status, and financial status. Inquiring about the customer's daily living expenses might be a little too intrusive to ask.

All of the following persons can contribute to a 403(b) plan EXCEPT: A professor at a university B nurse at a hospital C student at a college D secretary at a foundation

The best answer is C. 403(b) retirement plans are established by non-profit institutions for their employees. Employees of schools, universities, municipalities, hospitals, etc, would fall under this type of plan. Students at a university are not employees of the institution and do not qualify.

A registered representative is notified verbally by the nephew of a client that his uncle has passed away. Which statements are TRUE regarding the actions that the registered representative can take based on this information? I The registered representative can freeze the assets in the account because the nephew is considered to be an immediate family member II The registered representative cannot freeze the assets in the account because the nephew is not considered to be an immediate family member III A certified copy of the customer's death certificate must be provided before the assets in the account can be frozen IV A copy of the customer's will must be provided before the assets in the account can be frozen A I and III B I and IV C II and III D II and IV

The best answer is C. A registered representative can act on verbal notice that a customer has died when that information is provided by an immediate family member and can freeze the account. However, a nephew is too far removed to be considered "immediate family." (Immediate family includes parents, children, siblings and spouses, including in-laws.) To take action, the representative would either need to contact an immediate family member to confirm that the customer has died; or if there is no immediate family, then proof of death (a certified copy of the death certificate) must be provided by the nephew.

An investor holds 1 ABC Jan 80 Call. ABC splits 2 for 1. On the ex date, the holder will have: A 1 ABC Jan 40 Call B 1 ABC Jan 80 Call C 2 ABC Jan 40 Calls D 2 ABC Jan 80 Calls

The best answer is C. For whole share splits, the number of contracts is increased and the strike price is reduced proportionately. 1 ABC Jan 80 Call becomes (after the 2 for 1 split) 2 ABC Jan 40 Calls (the new strike price is 80/2), with each contract covering 100 shares. Note that the aggregate exercise value of the contracts remains unchanged.

Prime broker-dealers do all of the following EXCEPT: A lend securities to institutional clients B lend money to institutional clients C execute all trades for institutional clients D consolidate and maintain positions for institutional clients

The best answer is C. Hedge fund investors typically use a "prime broker" to consolidate all of their positions with one brokerage firm. In a prime brokerage agreement, the institutional investor can use different executing brokers for its trades, but all of these trades are settled by the "prime broker" who maintains custody of the positions, and most importantly, provides margin financing on these positions and arranges for stock loans on short stock positions. By using a single prime broker, trade reports and position reports come from a single source, making account recordkeeping easier. The hedge fund, in return for sending trades to different executing brokers at full commission rates, gets valuable research and recommendations in return. By using a prime broker to consolidate all positions, the hedge fund gets lower financing costs on borrowed funds and "front of the line" status when it wishes to borrow securities to effect short sales.

customer buys 100 shares of ABC stock at $40 and sells 1 ABC Jan 45 Call @ $2 on the same day in a cash account. The customer's maximum potential gain until the option expires is: A $200 B $500 C $700 D unlimited

The best answer is C. If the market rises above $45 the short call will be exercised. The customer must deliver the stock that he bought at $40 for the $45 strike price, resulting in a $500 gain. Since $200 was collected in premiums, the total gain is $700. This is the maximum potential gain while both positions are in place.

Which statements are TRUE regarding the mailing of account statements to customers? I If there is no trading activity in the account, statements must be mailed monthly II If there is no trading activity in the account, statements must be mailed quarterly III If there is trading activity in the account, statements must be mailed monthly IV If there is trading activity in the account, statements must be mailed quarterly A I and III B I and IV C II and III D II and IV

The best answer is C. If there is no activity in a customer's account, statements are mailed quarterly. However, if trades take place, a statement must be sent for that month.

Investment banks perform which of the following functions? I Buy new securities offerings from issuers on a principal basis II Accept time and demand deposits III Distribute new issues on an agency basis IV Assist issuers in publicizing new issue offerings A I and II only B III and IV only C I, III, IV D I, II, III, IV

The best answer is C. Investment banks are prohibited from accepting time and demand deposits. These can only be accepted by commercial and savings banks. Investment banks can underwrite new issues on a principal basis, an agency basis, and can help publicize the issues underwritten.

Which of the following statements are TRUE regarding Net interest cost versus True interest cost in a municipal underwriting? I Net interest cost considers the time value of money II True interest cost considers the time value of money III Net interest cost is a simple average interest cost IV True interest cost is a simple average interest cost A I and III B I and IV C II and III D II and IV

The best answer is C. Net Interest Cost (NIC) is a simple mathematical average for awarding bids based on lowest interest cost. True Interest Cost (TIC) considers the "time value of money" and weights dollars paid earlier more heavily than dollars paid later.

Which of the following statements are TRUE? I New issues of Treasury Bills are generally priced at par II New issues of Treasury Bonds are generally priced at par, or at a slight discount to par III New issues of Agency Bonds are generally priced at par, or at a slight discount to par A I only B III only C II and III only D I, II, III

The best answer is C. New issues of T-Bills are always sold at a discount to par value. These are original issue discount obligations, with the accretion of the discount being the interest income earned on these securities. Treasury Bonds and Agency Bonds are issued at par (or at a very slight discount to par), and make periodic interest payments.

A customer sells 1 ABC Jul 45 Put at $5 when the market price of ABC is $41. The maximum potential loss to the writer is: A $500 B $3,300 C $4,000 D unlimited

The best answer is C. The worst case for the writer of a put is being exercised and being forced to buy worthless stock at the strike price. In this case, the put writer agrees to buy the stock at $45, but collected $5 of premiums, for a net outlay of $40. If the stock is worthless, this is the maximum loss per share ($4,000 for the contract).

Which rollover would result in a tax event? A. Exchange of one variable annuity contract for another variable annuity contract B. Exchange of a life insurance contract for a variable annuity contract C. Exchange of a variable annuity contract for a life insurance contract D. Exchange of a life insurance contract for another life insurance contract

The best answer is C. Section 1035 "tax-free" exchanges permit "like-for-like" exchanges without tax due. Thus, Choices A and D are tax free. It also permits a life insurance policy to be exchanged for a variable annuity without tax due, making Choice B tax-free. This is allowed because an individual might no longer need the death benefit and has a policy with built up cash value. This can be converted into a fixed or variable annuity, with payments to continue for life, without tax due upon conversion. Of course, the IRS is happy about this because the taxable annuity payments will start earlier than the payment of the taxable death benefit. If a variable annuity is exchanged for any insurance policy, this is NOT a like-kind exchange, and tax will be due on any appreciation in the separate account. The stance of the IRS is that the individual is only doing this to delay receipt of payments that are taxable (because the variable annuity payments would have been received earlier than the taxable death benefit.)

Which of the following transactions can only be performed in a margin account? I Long sale of stock II Short sale of stock III Sale of a naked call IV Sale of a cash covered put A I and II B III and IV C II and III D I and IV

The best answer is C. Short sales of stock and sales of naked options can only be performed in a margin account. The purchase of stock or the sale of covered options can be performed in either a cash or margin account.

Which of the following will NOT affect SMA in a short margin account? A A purchase of securities B A sale of securities C An increase in market value D A decrease in market value

The best answer is C. Similar to a long account, SMA "locks" in a short account if the market value moves adversely, and in a short account, this occurs when the market value increases. If the market value drops, SMA will increase as equity rises. A purchase of securities adds to SMA; and an additional short sale of securities uses SMA.

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

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

A 45-year old man earns $150,000 per year and is covered by his employer's 401(k) Plan. He quits his job and moves to a new company that has no retirement plan, but will also pay him $150,000 per year. He should be advised to: A continue to make maximum annual contributions to his 401(k) Plan B roll his 401(k) Plan into a Roth IRA and continue to make annual contributions to the Roth IRA C roll his 401(k) Plan into a Traditional IRA and continue to make annual contributions to the Traditional IRA D request a distribution of the 401(k) and use the proceeds to buy a variable annuity

The best answer is C. The 401(k) Plan was at this customer's ex-employer - he can no longer make contributions to it. His new employer does not have a 401(k) plan. He can roll over the 401(k) amount into an IRA account without dollar limit and continue to make annual contributions to the IRA. It must be a Traditional IRA - this guy earns too much to have a Roth IRA (complete phase-out for Roth eligibility occurs if an individual earns over $144,000 in 2022). Any funds rolled-over stay tax deferred. If he requests a distribution and uses the funds to buy a variable annuity, tax will be due, so this is not a good choice.

Each of the following individuals can buy options for his own account on an exchange floor EXCEPT the: A specialist B market maker C floor broker D competitive trader

The best answer is C. The Floor Broker acts as an agent only, handling transactions for his or her firm, or for other firms. Floor brokers are prohibited from trading for their own accounts. On the Chicago Board Options Exchange, there are Market Makers, who only make markets in options contracts. On the American Stock Exchange and the Philadelphia Stock Exchange, there are Specialists that are market makers in options. Also on the CBOE, there are competitive traders, who trade for their own accounts for profit, adding liquidity to the market.

A customer sells short 100 shares of ABC stock at $38 and buys 1 ABC Mar 40 Call @ $5. The maximum potential loss is: A $200 B $500 C $700 D unlimited

The best answer is C. The long call limits loss on the short stock position in a rising market. The stock was sold for $38 and can be bought back at $40 by exercising the call. The loss is $2 per share on the stock position. Since $5 per share was paid in premiums, the total loss is 7 points or $700.

The maximum loss potential for the holder of an index put option is the: A difference between the strike price and zero B difference between the strike price and the market price C premium paid at the time of purchase D premium at which the contract is currently trading

The best answer is C. The maximum loss for the holder of any option contract is the premium paid.

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

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

A representative meets a potential client at a convention. The client is interested in an investment giving life-long income, and the representative recommends a variable annuity contract. The customer opens an account and completes the purchase, but 30 days later, the customer calls the representative, telling him that he is not happy and he wants to move to another firm. What action should the representative take? A The representative should recommend another variable annuity to the client that better meets the customer's needs B The representative should file a SAR report about the customer C The representative should talk to the manager to determine if there was a Know Your Customer violation D The representative should offer the customer a full refund of his investment

The best answer is C. This question is judgmental, but this was a new client that was met at a convention. The client made an investment, and then 30 days later, wants it moved to another firm because he is "not happy." Before an account is opened for a client, the representative is supposed to go through extensive fact-finding to determine that the variable annuity recommended is suitable for the client. Since this client is "not happy" 30 days later with the investment, it appears that the KYC (Know Your Customer) rule was not followed. The situation should be discussed with the manager.

In an existing margin account with no SMA, a customer sells short 100 shares of ABC stock at $50 and sells 1 ABC Jul 50 Put @ $6. The customer must deposit: A $400 B $1,600 C $1,900 D $2,500

The best answer is C. To short the stock, Regulation T initial margin is 50% of $5,000 = $2,500. The short stock position covers the short put, so no margin is required to sell the put. Since $600 in premiums is received in the account from selling the put, the net deposit is $2,500 - $600 = $1,900. Because this is an existing account, the customer must already be meeting the minimum maintenance requirement and thus, his deposit can be less than $2,000.

Corporate syndicate member "A" has oversold its allotment. The manager covers from another syndicate member who has undersold. On the oversale, corporate syndicate member "A" earns: A nothing B the spread C the concession D the reallowance

The best answer is C. When a syndicate member sells its own allotment, the syndicate member earns the underwriter's concession (for a corporate underwriting) or the "takedown" (for a municipal underwriting). In a Western account, in theory, once the syndicate member has sold his allotment, it has no more profit potential. However, the manager will permit this syndicate member to help other syndicate members, if it looks like there will be an undersale on their portion of the issue. The manager allows this syndicate member to place orders filled out of the other members' allotments as a "selling group" member, and for these orders, this syndicate member earns the selling concession.

A customer sells short 100 ABC at $45 and buys 1 ABC Jan 45 Call @ $3. ABC goes to $30 and the customer lets the call expire and closes out the stock position at the market. The customer has a: A $300 loss B $1,200 loss C $1,200 gain D $1,600 gain

The best answer is C. The customer has sold short shares of stock at $45 thinking that the market is going to go down. To protect his stock position from going up, the customer buys a call as well (which allows him to buy the stock at the strike price, if needed, in a rising market). Here, the market does what the customer wants it to do and goes down. As the market goes down, the call contract will expire "out the money." The stock that was sold for $45 can be purchased in the market for $30 and replaced, for a 15 point gain. However, since $3 was paid in premiums for the call, the net gain is $12 per share or $1,200.

A client surrenders a variable annuity contract 5 years after purchase because of poor performance. Any surrender fee imposed: I increases sale proceeds II reduces sales proceeds III is deductible IV is not deductible A I and III B I and IV C II and III D II and IV

The best answer is D. If a customer surrenders a variable annuity contract early (typically due to poor performance or a pressing financial need), then the customer's cost basis is the amount invested and the sale proceeds is the amount received on redemption. Any loss is deductible as an ordinary loss, but any portion of the loss due to the surrender fee is not deductible! If a customer invested $50,000 in a variable annuity and redeemed it when the NAV was $40,000, however the customer only received $37,000 because a $3,000 surrender fee was imposed, then of the $13,000 ordinary loss, $10,000 is deductible and $3,000 is non-deductible.

A 50 1/2 year old self-employed individual has a balance of $200,000 in his HR 10 plan. This balance is composed of $140,000 of contributions and $60,000 of earnings. The individual decides to withdraw $100,000 from the plan. Which statement is TRUE? A. There will be no tax liability B. There will be regular tax liability, but no 10% penalty tax liability C. There will be a 10% penalty tax liability, but no regular tax liability D. There will be both regular tax liability and a 10% penalty tax liability

The best answer is D. Since this individual is younger than age 59 1/2, any distribution from the Keogh plan is subject to both ordinary income tax plus the 10% penalty tax. If the distribution is made after age 59 1/2, it is subject only to ordinary income tax - there is no penalty tax. Please note that 100% of all distributions from Keoghs are taxable - these are tax qualified plans where all of the investment dollars were never taxed. Once distributions commence, both the original investment (that was never taxed), and the tax deferred build-up, are now taxable in full.

A customer invests $30,000 in a variable annuity contract. Over the years, the contract grows to $60,000 in value. At age 65, the customer takes a $40,000 lump sum distribution from the contract. The tax consequence is: A $40,000 non-taxable income B $40,000 taxable income C $10,000 taxable income; $30,000 non-taxable return of capital D $30,000 taxable income; $10,000 non-taxable return of capital

The best answer is D. Variable annuity distributions are taxed LIFO (Last In; First Out). The "Last In" dollars are the tax-deferred build up in the separate account. These come out first and are taxable. Any distribution beyond this amount is a tax free return of invested capital (there is no tax deduction for variable annuity contributions). Because $40,000 was distributed, $30,000 represents the build-up (taxable) and the remaining $10,000 is a tax-free return of capital.

A customer is long an ABC Jan 60 Put. The position has a profit that the customer wishes to capture. The proper order to enter is a(n): A opening purchase B closing purchase C opening sale D closing sale

The best answer is D. All options orders must be marked either "opening" or "closing." The OCC maintains the record of all listed options contracts. Opening positions are recorded on the books of the OCC; while orders to close positions remove them from the books of the OCC. Note that a customer can open by selling an option contract and will close buy purchasing that option contract; or the customer can open by purchasing an option contract and will close by selling that option contract.

A customer with a long margin account receives a call for minimum maintenance margin on Tuesday morning. The call notice states that the funds are to be deposited by Thursday. If the funds do not arrive, the firm has the right to sell out: A the entire account on Thursday at the market close B the entire account on Friday at the market opening C enough securities from the account to meet the call on Thursday at the market close D enough securities from the account to meet the call on Friday at the market opening

The best answer is D. Calls for maintenance margin must be met "promptly." This call requires that the customer deposit the funds on Thursday. If the monies are not deposited on Thursday, at the opening on Friday morning, enough securities will be sold out of the account to satisfy the maintenance call.

Which statement is TRUE about Coverdell Education Savings Accounts? A Contributions are tax deductible; Distributions are taxable B Contributions are tax deductible; Distributions are not taxable C Contributions are not tax deductible; Distributions are taxable D Contributions are not tax deductible; Distributions are not taxable

The best answer is D. Contributions to Coverdell Education Savings Accounts are not tax deductible; and distributions from Coverdell Education Savings Accounts to pay education expenses are not taxable.

A premature withdrawal from an Individual Retirement Account can be taken without penalty for all of the following reasons EXCEPT: A. Excess medical expenses B. Disability C. Higher education expenses D. Private K-12 school tuition expenses

The best answer is D. Distributions prior to age 59 ½ from an Individual Retirement Account are subject to regular income tax plus a 10% penalty tax. The 10% penalty tax is waived if the distribution occurs because of the death or disability of the taxpayer; if the distribution is used to pay for medical expenses in excess of 10% of the taxpayer's adjusted gross income; if the distribution is used to pay for qualified higher education expenses; or if the distribution is used to pay for up to $10,000 of first-time home purchase expenses. Note that there is (currently) no exemption from the 10% penalty tax for private school tuition for grades kindergarten through 12th.

If an equity put writer is exercised, the writer has the obligation to: A deliver cash in 1 business day B buy stock in 1 business day at the market price C buy stock in 2 business days at the market price D buy stock in 2 business days at the strike price

The best answer is D. Equity put writers have the obligation to buy the stock during the lifetime of the option at the strike price (NOT the market price, as the market will be lower than the strike if the contract is exercised). If exercised, the writer must pay the strike price for the stock position 2 business days after trade date.

Unless specific authorization is given, all of the following accounts cannot be opened as margin accounts EXCEPT a: A Trust Account B Custodial Account C Guardian Account D Joint Tenants Account

The best answer is D. Fiduciary accounts cannot be opened as margin accounts unless the account documentation specifically authorizes the opening of such an account. For example, if a Trust document does not authorize the opening of the Trust account as a margin account, then it must be opened as a cash account. Fiduciary accounts include Trust accounts, Custodial accounts, and Guardian accounts - in each of these there is a Third Party managing the assets in the account for the beneficiary. A Joint Tenants account is not a fiduciary account - each tenant is a direct account owner and can manage the account (place orders) directly.

A customer sells short 100 shares of ABC stock at $60 and sells 1 ABC Oct 60 Put @ $6. The maximum potential loss is: A $600 B $5,400 C $6,000 D unlimited

The best answer is D. If the market rises, the short put expires and the short stock position must be covered by making a purchase in the market. The loss potential is unlimited.

All of the following items are associated with a competitive bid offering of General Obligation bonds EXCEPT: A Official Notice of Sale B Official Statement C Legal Opinion D Prospectus

The best answer is D. In a competitive bid offering of municipal bonds, the issuer solicits bids on the issue by placing an Official Notice of Sale in the Daily Bond Buyer. Once the bid is awarded, the bonds are printed with the winning interest rates and delivered to the winner, who pays the issuer for the securities. The securities are then reoffered by the winning syndicate. New issue disclosure on municipal bonds is given through the Official Statement; there is no prospectus requirement since these issues are exempt from the Securities Act of 1933. Any new long term municipal issue cannot be offered unless there is a legal opinion given on that security. The legal opinion is rendered by the Bond Counsel; who examines the validity of the issue, its legality, and tax exempt status.

In order to adequately assess the suitability of a recommendation to a customer that is a senior citizen, the member should make reasonable efforts to obtain information about the customer's: I Age II Life stage III Liquidity needs IV Tolerance for risk A I and II only B III and IV only C I, II, III D I, II, III, IV

The best answer is D. In its suitability rule, FINRA does not explicitly address the needs of senior citizens. However, in a separate notice to members, FINRA has stated that a customer's age and life stage are both important factors when performing a suitability determination for a senior citizen. It states that as investors age, their investment time horizons, goals, risk tolerance and tax status often change, and that liquidity takes on added importance.

Which of the following statements are TRUE about the acceptance of an "indication of interest" for a registered offering during the 20 day cooling off period? I The indication cannot be canceled by the customer II The indication cannot be canceled by the brokerage firm III The indication can be canceled by the customer IV The indication can be canceled by the brokerage firm A I and III B I and IV C II and III D III and IV

The best answer is D. Indications of interest which are accepted prior to the effective date of an issue in registration are not binding. The customer or the firm can cancel the indication at any time without penalty. During the cooling off period, orders cannot be accepted (these are binding) because the final prospectus is not yet available. Under the Securities Act of 1933, an offer or sale can only be made with the final prospectus. The final prospectus is available and sales commence as of the effective date.

Which of the following are primary purchasers of Treasury securities? I Investment companies II Broker-dealers III Unit Investment Trusts IV Commercial banks A I and II only B III and IV only C I and III only D I, II, III, IV

The best answer is D. Investment companies such as government bond mutual funds, money market funds and unit investment trusts bid at auction to buy large blocks of Treasury securities directly, bypassing a dealer or broker and therefore saving commissions or markups. Commercial banks and broker-dealers that are primary dealers bid at Treasury auctions to buy securities for their inventories.

Which statements are TRUE about Roth IRAs? I Contributions must cease at age 72 II Contributions can continue after age 72 III Distributions must start after age 72 IV Distributions are not required to start after age 72 A I and III B I and IV C II and III D II and IV

The best answer is D. Roth IRA contributions can continue after age 72, as long as that person has earned income (this is the case for all qualified retirement plans). And unlike Traditional IRAs, there are no required minimum distributions after age 72 for Roth IRAs.

The bond counsel will review all of the following concerning a new municipal issue EXCEPT: A Constitutionality B Statutory Requirements C Legislative or Voter Approval Requirements D Feasibility

The best answer is D. The bond counsel does not look at the feasibility study - or how economically viable the project is. Rather, the bond counsel would consider the legal and tax status, the constitutionality of the issue, and any statutory requirements that must be met.

In November, a customer buys 1 ABC Jan 75 Call @ $6 when the market price of ABC is 73. The customer's maximum potential gain is: A $600 B $6,900 C $8,100 D unlimited

The best answer is D. The holder of a call has unlimited gain potential. He or she has the right to buy stock at a fixed price - and the stock can rise an unlimited amount.

If a customer discovers an error on his or her account statement, the error must be reported promptly to: A FINRA B the SEC C the representative that services the account D the member firm that maintains the account

The best answer is D. The issue at hand is that FINRA is concerned about registered representatives that do unauthorized trading in their customer accounts to generate commission income, without the customer knowing about or authorizing the transactions. So FINRA requires that a legend be placed on customer account statements that any errors found must be reported to the member firm promptly. The person to whom the report cannot be made is the registered representative, since if he or she is effecting unauthorized trades, then the report just might get "lost."

Under FINRA rules, all of the following are necessary to open a corporate account EXCEPT: A Corporate Resolution B Corporate Seal C Corporate Charter D Corporate Minutes

The best answer is D. To open a corporate account under FINRA rules, a corporate resolution bearing the corporate seal must be obtained. In addition, a copy of the corporate charter must be obtained as part of the firm's CIP (Customer Identification Program) procedures. There is no requirement to obtain minutes of corporation's Board of Directors meetings.

When opening a custodial account, the social security number to be used on the account is that of:

The minor

A customer buys 100 shares of ABC stock at $58 and buys 1 ABC Jul 55 Put @ $2.50 on the same day. The maximum potential gain is:

Unlimited

The maximum loss for the writer of a call is:

Unlimited

If the market price is below the strike price on a call contract, the difference is termed the:

out of the money amount An option contract is "out the money" if exercise would be unprofitable to the holder, ignoring any premiums paid. This occurs if the market price is below the strike price on a call contract. For example, 1 ABC Jan 50 Call, when the market price is $45, is out the money by 5 points. The holder would let this contract expire. There is no reason to buy the stock at $50 per share when the market price is $45 per share.