Practice Exam #5

A customer wishing to open a numbered account must be informed that A) numbered accounts are restricted to cash accounts. B) he must supply a written statement attesting to his ownership of the account. C) he must supply proof of U.S. citizenship and reside permanently in the United States. D) the account may only be opened with prior permission from the SEC.

-He must supply a written statement attesting to his ownership of the account. *Numbered, or symbol, accounts require a signed, written statement from the client, acknowledging ownership, to be kept on file.

One of your customers is speaking to you about spread strategies for equity options and makes several statements about spreads. Which of her statements is false? A) "With a time or horizontal spread, both options expire at the same time, which means the position expires completely." B) "With spreads, I always know exactly how much I can lose or gain once the position is established." C) "No spread can ever have an unlimited maximum loss potential." D) "If a position, whether long or short, begins to move against me, I can always close it out in the market."

A- "With a time or horizontal spread, both options expire at the same time, which means the position expires completely."

An investor contributes $200,000 in cash to an oil and gas partnership. The partnership has entered into a nonrecourse loan for $500,000. The customer's cost basis in the program is A) $200,000. B) $500,000. C) $300,000. D) $700,000.

A- $200,000

One of your customers asks you to interpret her observation that the short interest in a stock she owns has been rapidly increasing over the past four months. Aligning with the short interest theory, you would tell her that this is A) a bullish indicator. B) a bearish indicator. C) an indication of predictable volatility in the stock. D) an indication of predictable stability in the stock.

A- Bullish

A mutual fund portfolio consists primarily of shares of companies considered to be prime candidates for a takeover attempt. Of these choices, this mutual fund is best described as A) a special situation fund. B) an aggressive growth fund. C) a specialized (sector) fund. D) a leveraged fund.

A- Special Situation Fund

Regarding risk, traders in broad index options are most exposed to A) systematic risk. B) financial risk. C) purchasing power risk. D) nonsystematic risk.

A- Systematic Risk

Under the Investment Company Act of 1940, the term investment company would include A) a variable annuity and a closed-end management company. B) a unit investment trust and a management company. C) a holding company and a management company. D) a unit investment trust and a holding company.

B) a unit investment trust and a management company.

The Securities Act of 1933 does not regulate A) the use of a preliminary prospectus during the cooling-off period. B) municipalities registering a revenue bond for building an airport terminal. C) review of a registration form submitted to the SEC before a public sale of stock. D) the delivery of a prospectus when selling a municipal bond mutual fund.

B) municipalities registering a revenue bond for building an airport terminal.

You use fundamental analysis to help make investment decisions. For this type of analysis, you would not be interested in A) corporate financial statements. B) trading volume and price patterns. C) positioning of a company within its industry. D) current business conditions.

B) trading volume and price patterns

XYZ Corporation declares a 4-for-3 stock split. An investor long 600 shares will receive how many additional shares? A) 300 shares B) 100 shares C) 200 shares D) 800 shares

C) 200 shares

The Achieving a Better Life Experience (ABLE) Act limits eligibility to individuals with significant disabilities where the age of onset of the disability occurred before turning age A) 50½. B) 21. C) 26. D) 18.

C) 26.

XYZ County Sewer Revenue 6.5% municipal bonds mature in 20 years. If they are currently offered at 92, they have a yield to maturity of approximately A) 6.23%. B) 5.96%. C) 7.19%. D) 6.50%.

C) 7.19%.

ABC stock is going ex-dividend today, and certain orders on the order book must be reduced prior to the opening. For a cash dividend of 0.12, which of the following orders would be reduced? A) Buy 100 ABC at the market. B) Sell 100 ABC at 50. C) Sell 100 ABC at 45 stop. D) Buy 100 ABC at 50 stop.

C) Sell 100 ABC at 45 stop.

A client interested in Treasury bills (T-bills) asks you to explain their features. Which of these is correct? A) They are generally callable after the first 6 months. B) They have a maximum maturity of 365 days. C) They are quoted with a bid higher than the ask. D) They are all auctioned on a monthly basis.

C) They are quoted with a bid higher than the ask.

A U.S. investor owns an American depository receipt (ADR). The net tax liability to the investor for any dividends received is A) zero, because there is no tax liability to U.S. investors who purchase foreign government issues. B) any foreign income tax due, but not U.S. income tax. C) any U.S. income tax due, credited by any amount of foreign income tax withheld. D) the total of both foreign and U.S. income tax due.

C) any U.S. income tax due, credited by any amount of foreign income tax withheld. *In most countries, a withholding tax on dividends is taken at the source. To the holder of an ADR, this would be a foreign income tax. The foreign income tax paid may be taken as a credit against U.S. income taxes owed.

An investor wanting to purchase municipal bonds should be aware that in most instances, if she buys the bond and then later sells it for a profit, then A) both interest received and capital gains will be exempt from taxation. B) neither interest received nor capital gains will be exempt from taxation. C) interest received will be exempt from taxation, but not the capital gains. D) interest received will be taxable, but the capital gains are exempt from taxation.

C) interest received will be exempt from taxation, but not the capital gains.

An investor has purchased American depositary receipts (ADRs) to achieve portfolio diversification. Holding the ADRs in a portfolio entitles the investor to dividends paid in A) U.S. dollars and the ability to trade ADRs on foreign markets. B) the foreign currency and the ability to trade ADRs on foreign markets. C) U.S. dollars and the ability to trade ADRs on U.S. securities markets. D) the foreign currency and the ability to trade ADRs on U.S. securities markets.

C- U.S. dollars and the ability to trade ADRs on U.S. securities markets.

A municipal securities advertising piece intended to be distributed to retail customers must be approved by A) a general securities principal or a branch manager. B) a municipal securities principal and the MSRB. C) a municipal securities principal or a general securities principal. D) a branch manager and the MSRB.

C- a municipal securities principal or a general securities principal.

Your customer wants to buy 1,000 shares of XYZ stock and has entered a not-held order with instructions to you to purchase the stock when you feel the price looks right. Under the rules, this order will be treated as A) a good-til-canceled (GTC) order. B) an immediate-or-cancel (IOC) order. C) a limit order. D) a day order.

D- Day order.

The OCC must receive exercise instructions for equity options no later than A) 4:00 pm ET on the third Friday of the expiration month. B) 11:59 pm ET on the Saturday before the third Friday of the expiration month. C) 4:10 pm ET on the third Friday of the expiration month. D) 5:30 pm ET on the third Friday of the expiration month.

D) 5:30 pm ET on the third Friday of the expiration month.

Which of the following customer information should a registered representative (RR) be most concerned about if opening a margin account? A) Has a high risk tolerance B) Participates in a 401(k) plan at work C) Wants to leverage the investment D) Does not have sufficient savings for an emergency

D) Does not have sufficient savings for an emergency

Which of the following statements regarding real estate investment trusts (REITs) and limited partnerships (LPs) is true? A) Only the REIT has centralized management, but both pass through investment gains to the investor. B) They both trade on securities exchanges and OTC and have centralized management. C) They both pass through investment gains and losses to the investor. D) They both pass through investment gains to the investor and have centralized management.

D) They both pass through investment gains to the investor and have centralized management.

With ABC stock trading at 33.10, a customer buys 2 ABC Jun 35 puts at 4.35. What is the time value of each contract? A) $0 B) $1.90 C) $4.90 D) $2.45

D- $2.45

An investor with no other positions sells 1 ABC Jun 25 put at 1.50. If the put is exercised when the stock is trading at 24, and the investor immediately sells the stock in the market, what is the investor's profit or loss? A) $150 loss B) $50 loss C) $150 profit D) $50 profit

D- $50 profit

Your customer, age 46, has been investing money in a variable annuity for several years. He plans to stop the deposits to meet current financial obligations, but he does not intend to withdraw any of the funds already invested until retirement, which is still several years away. Until the withdrawals are made, the client will be holding A) accumulation shares. B) deferred units. C) annuity units. D) accumulation units.

D- Accumulation Units

A customer of a broker-dealer has a portfolio of investments where expected payments from mortgages back the securities via a process known as securitization. These securities are best described as A) commodity options. B) high-yield bond options. C) stock rights. D) asset-backed securities.

D- Asset-backed securities.

While looking at a report of trades that had been executed for your customers in the secondary market, you would not see included A) American depositary receipts (ADRs). B) agency securities. C) municipal bonds. D) mutual fund shares.

D- Mutual Fund Shares

A customer interested in a collateralized mortgage obligation (CMO) might look to which of the following for historical data or projections regarding mortgage prepayments? A) FINRA B) DEA C) Bond Buyer D) PSA

D- PSA *The Public Securities Association (PSA) uses historical data and projections of mortgage prepayments to estimate yield and maturity of different CMO tranches.

Your customer wrote a September 918 index call at 4.15 five months ago. The option expired, and the customer received no assignment notice. For tax purposes, it should be taxed and reported as A) ordinary income of $9,180. B) ordinary income of $415. C) a $41.50 short-term capital loss. D) a $415 short-term capital gain.

D- Short term gain of $415

Regarding convertible debentures, one characteristic of which your clients should be aware of is that A) although they trade in line with the issuer's common stock, they are less volatile than the common shares. B) it is generally best to convert when the common stock is selling below its parity price. C) they generally pay a higher interest rate than nonconvertible debentures. D) the conversion feature protects against an early call.

A) although they trade in line with the issuer's common stock, they are less volatile than the common shares.

A debt securities analyst is examining a municipality's statutory debt limit, which he knows can limit the issuer from A) issuing general obligation bonds. B) limiting or capping property taxes. C) raising property taxes. D) issuing revenue bonds.

A) issuing general obligation bonds.

With the underlying stock at $37, an ABC Jan 35 call is trading at $2. All of the following statements regarding the option are true except A) it is in the money. B) it has time value. C) it is at parity. D) it is trading at breakeven.

A) it is in the money.

A violation of MSRB rules would occur if A) a representative gave a gift to an associated person of another broker-dealer that was valued just under $250. B) a representative made a recommendation to a customer after gathering information about the customer's financial status, tax status, investment objectives, and other holdings. C) a registered representative (RR) recommended geographic diversification to limit risk. D) an associated person held a joint account with a spouse.

A) representative gave a gift to an associated person of another broker-dealer that was valued just under $250. *$100 is the max allowed.

An investor is long 300 shares of CTS stock and short 30 CTS May calls. This position can best be described as A) a credit spread with a limited gain potential. B) a ratio spread with an unlimited loss potential. C) a debit spread with no gain potential. D) a long stock, short call hedge with a limited loss potential.

B) a ratio spread with an unlimited loss potential.

A registered representative (RR) correctly explains to a new customer who wants to learn about the tax and risk characteristics of collateralized mortgage obligations (CMOs) that the securities are A) taxable only in the state where the mortgages originated from and are backed by the federal government. B) tax exempt in the states where the mortgages originated from and they subject holders to prepayment risk. C) taxable at all levels and subject the holders to prepayment risk. D) tax exempt at the federal level and do not have fixed maturity dates.

C) taxable at all levels and subject the holders to prepayment risk.

Which of the following collateralized mortgage obligation (CMO) tranches tends to have low extension and reinvestment risk? A) Z-tranche B) Companion C) PACs D) TACs

C- PACS

A registered representative (RR) at a broker-dealer mentions continuity of life as it pertains to limited partnerships (LPs). The reference can best be explained by which of the following statements? A) LPs will exist until the last partner is deceased. B) Continuity of life is a characteristic of LPs because they are scheduled to end on a predetermined date. C) LPs do not have continuity of life because unlike corporations, a limited partnership will end on a predetermined date. D) LPs have continuity of life, which means they will exist in perpetuity.

C-LPs do not have continuity of life because unlike corporations, a limited partnership will end on a predetermined date.

Certain account types must be opened as cash accounts, including IRAs and A) partnership accounts. B) corporate investment accounts. C) individual investment accounts. D) custodial accounts.

D- custodial accounts.

An investor writes 1 XYZ 180 call at 6.65. If the investor makes a closing purchase at the call's intrinsic value when the stock is at $184.75, he realizes a gain of?

+$190 *$665 profit for writing call. -$475 loss when contact is exercised. +190 profit.

An investor purchased 200 shares of DCAST common stock at $200 per share. What is the adjusted cost basis per share of this position after the company pays a 100% stock dividend? A) $400 B) $50 C) $100 D) $200

-$100

The following information has been reported for ABC stock: -Annual dividend = $2 -PE ratio = 20 -Closing price = $100 What is the dividend payout ratio?

-40% *P/E= MP/ EPS. *100/5= 20. $5 per share earnings. $2/$5 = 40%.

Even in the best firms, there are times when a customer files a complaint. FINRA recordkeeping requirements for those complaints is A) two years. B) three years. C) four years. D) six years.

-Four years

With respect to elective deferrals, a 403(b) plan must meet the requirements of the universal availability rule. Under this rule, if any employee of the employer maintaining the 403(b) may participate, then all of the employer's employees must be given the opportunity to participate. Certain employees may be excluded, including A) employees who normally work less than 1,200 hours per year. B) employees who normally work less than 20 hours per week. C) any substitute teacher. D) individuals not contributing to an IRA.

B) employees who normally work less than 20 hours per week.

An associate of a broker-dealer engaged in municipal securities activities such as soliciting municipal bond business but is not involved in retail sales A) is required to be an elected official of a municipality. B) is known as a municipal finance professional (MFP). C) is required to be employed by the MSRB. D) may sell municipal bonds to professional bond traders only.

B) is known as a municipal finance professional (MFP).

A 50-year-old investor purchases a single payment deferred variable annuity with a premium of $50,000. Five years later, the value of the account is $45,000, and the investor makes a $10,000 withdrawal. The tax consequences of this action would be A) ordinary income on the $5,000 difference between the purchase price and the current value plus a penalty of 10% because the investor is only 55 years old. B) ordinary income on the entire $10,000 withdrawn plus a penalty of 10% because the investor is only 55 years old. C) ordinary income on the $5,000 difference between the purchase price and the current value. D) no tax is due.

B) ordinary income on the entire $10,000 withdrawn plus a penalty of 10% because the investor is only 55 years old.

Because of their unlimited potential loss, short positions A) must be approved by a designated principal before execution. B) require a higher initial margin deposit. C) can only be taken by those who are accredited investors. D) are marked to the market at the close of each day.

B) require a higher initial margin deposit.

A client, age 52, wants to know if there are any circumstances that will allow withdrawals from her IRA without having to pay the 10% penalty. One example you could give is A) education expenses for one of her grandchildren. B) up to $10,000 annually for the first-time purchase of a principal residence. C) premiums for medical insurance in excess of defined adjusted gross income (AGI) limits. D) housing expenses while she is unemployed.

B- up to $10,000 annually for the first-time purchase of a principal residence.

Your customer has just signed a limited partnership subscription agreement. Regarding the signing of this agreement, it is important for the customer to know that A) a copy of the agreement signed by all partners must be filed with the SEC. B) the customer will be considered a limited partner only after the subscription agreement has been signed by the general partner. C) a new agreement is required anytime assets in the partnership are bought or sold. D) the registered representative (RR) and general partner are required to sign before the customer can become a limited partner.

B-the customer will be considered a limited partner only after the subscription agreement has been signed by the general partner.

You are asked to read the preliminary prospectus for a new issue of common stock for a client. You would expect the preliminary prospectus to include A) the effective date of the offering and the final offering price. B) an overview and history of the issuer's business and the final offering price. C) an overview and history of the issuer's business and any risks associated with the offering. D) the effective date of the offering and the risks associated with the offering.

C) an overview and history of the issuer's business and any risks associated with the offering.

The manager of an equity fund wishes to hedge the fund's portfolio against a possible market decline. Of the strategies listed, to provide the best protection, the manager would buy A) narrow-based index calls. B) broad-based index calls. C) broad-based index puts. D) narrow-based index puts.

C) broad-based index puts.

To achieve its goals, an inverse ETF uses A) arbitrage. B) short selling. C) derivatives and debt. D) preemptive rights.

C) derivatives and debt.

You overhear the phone conversation of another registered representative discussing the purchase of exchange-traded fund (ETF) shares as opposed to mutual fund shares with a customer. The registered representative makes several statements, but one of them is incorrect. Which of the following is false? A) "Remember that you can't buy mutual fund shares on margin, but you can for ETF shares." B) "Unless an ETF makes a capital gains distribution, you don't have to be concerned with tax consequences until you sell your shares." C) "I know that you like to sell short sometimes, which you can do with ETF shares." D) "Just like mutual funds, ETFs use forward pricing, so when you place an order, it will be executed at the next calculated NAV for the fund."

D) "Just like mutual funds, ETFs use forward pricing, so when you place an order, it will be executed at the next calculated NAV for the fund."

You are listening to another registered representative (RR) speak about Rule 147 offerings and recognize that one of his statements is incorrect. Which of these is not correct? A) Stock sold under Rule 147 is sold in an exempt transaction. B) Rule 147 applies to intrastate stock offerings. C) Under one Rule 147 provision that can be met, an issuer must derive 80% or more of its revenue from the state in which its principal office is located. D) Buyers of stock issued under Rule 147 are subject to a one-year holding period before selling to a nonresident.

D) Buyers of stock issued under Rule 147 are subject to a one-year holding period before selling to a nonresident. *The holding requirement is 6-months

Which of the following statements regarding the sale of restricted stock under Rule 144 is true? A) Form 144 must be filed with the SEC within 10 days of the date of sale. B) Affiliates are not subject to volume restrictions on stock held for more than six months. C) Affiliates are never subject to holding periods or volume restrictions. D) Nonaffiliates are not subject to volume restrictions on stock held for more than six months.

D) Nonaffiliates are not subject to volume restrictions on stock held for more than six months.

The possibility of losing all or part of a person's invested principal in a debt security because of the issuer's failure best describes A) market risk. B) business risk. C) inflation risk. D) credit risk.

D- Credit Risk

When investing in a direct participation program (DPP), an investor should know that some asset types cannot be depreciated or depleted. One example of such an asset would be A) buildings. B) gas. C) oil. D) crops.

D- Crops.

Which of the following does the capital asset pricing model (CAPM) assume? A) Investors are comfortable with risk and believe that diversification can be used to reduce risk. B) Investors are averse to risk and believe that no type of risk can be diversified away. C) Investors are comfortable with risk because they do not believe that it can be diversified away. D) Investors are averse to risk and believe that diversification can be used to reduce risk.

D- Investors are averse to risk and believe that diversification can be used to reduce risk.

A registered representative (RR) is recommending to his client a newly issued debt security backed by the U.S. government with a maturity of eight years. This security is most likely A) a GNMA pass-through security. B) a Treasury bond. C) a guaranteed note. D) a Treasury note.

D- Treasury Note

A customer opens a new margin account and immediately purchases 200 shares of XYZ stock, which is trading at $9 per share. The customer must deposit A) $900. B) $450. C) $2,000. D) $1,800.

-$1,800

Which items would change if a company buys equipment for cash? 1. The working capital 2. The total assets 3. The total liabilities 4. The shareholders' equity

-1 & 2

To meet the initial Regulation T call in a margin account, a customer could deposit A) 200% of the call in fully paid-for marginable securities. B) 50% of the call in fully paid-for marginable securities. C) 100% of the call in fully paid-for marginable securities. D) 50% of the call in cash.

A) 200% of the call in fully paid-for marginable securities.

A corporation has issued debt securities backed by the securities of other companies that it holds in its corporate investment portfolio. These debt securities are known as A) collateral trust bonds. B) subordinated debentures. C) mortgage bonds. D) equipment trust certificates.

A- Collateral Trust Bonds

FINRA's Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for A) trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor. B) brokers acting as agents in all order execution scenarios. C) brokers executing orders as agents in an auction market on any exchange trading floors. D) trades in NYSE-listed securities occurring on the NYSE.

A- trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor.

A 2X leveraged inverse ETF tracks an index that has recently fallen 2%. If the ETF was priced at $25 per share before the drop in the indices price, where should the ETF be priced now, assuming the ETF portfolio performed as intended? A) Up $1 per share B) Down $1 per share C) Up $4 per share D) Down $2 per share

A- up $1 per share.

An affiliate of the issuer has held 150,000 shares of restricted stock for 18 months. There are 12.5 million shares outstanding, and, on average, 30,000 shares have traded each week over the past four weeks. Under Rule 144, the maximum number of shares the affiliate may sell over the next three months is A) 150,000. B) 125,000. C) 30,000. D) 0.

B) 125,000. *1% of shares outstanding OR 4-week trading average, whichever is greater.

Your client, age 52, is considering taking distributions from her qualified retirement plan. A portion of her contributions were made with after-tax dollars. Which of these is correct? A) Distributions of earnings are 100% taxable, and a 10% penalty will be applied to the distributions. B) Distributions of cost basis is 100% taxable, and a 10% penalty will be applied to the distributions. C) Distributions of earnings are tax free, and there will not be a penalty applied to the distributions. D) Distributions of earnings are tax free, but a 10% penalty will be applied to the distributions.

B- Distributions of cost basis is 100% taxable, and a 10% penalty will be applied to the distributions.

A bond is being issued to build a toll road. It has been identified that the state does not own all of the property that the road is going to be built upon. This would most likely be disclosed in A) the qualified legal opinion. B) the trust indenture. C) the bond resolution. D) the prospectus.

C- Bond Resolution

Which of the following types of risk cannot be eliminated through diversification under the modern portfolio theory? A) Business risk B) Liquidity risk C) Systematic risk D) Interest rate risk

C- Systematic

A registered representative (RR) has prepared a sales piece for one of his retail customers demonstrating a trading strategy. Regarding the piece, which of the following statements is true? A) The piece will be regulated as correspondence. B) The piece will be regulated as a retail communication with the public. C) The piece must be approved by a principal before being sent to the customer. D) All material sent to individual clients must be submitted to FINRA before use.

C- The piece must be approved by a principal before being sent to the customer.

A municipality wants to issue industrial revenue bonds to benefit a local company who employs hundreds of the municipality's residents. Regarding these bonds, which of the following is true? A) The issuance of these bonds would require voter approval. B) Because these bonds are used for a nonpublic purpose, the interest income will not be subject to the alternative minimum tax. C) Interest is paid from revenues collected through property assessments and taxes. D) The credit rating of the bonds is dependent on the credit rating of the company, not the municipality.

D) The credit rating of the bonds is dependent on the credit rating of the company, not the municipality.

Approval of a new options account by a principal may occur before A) the new account form has been completed. B) the customer has provided essential suitability information. C) the customer has verified information on the new account form. D) the customer has been furnished an options disclosure document.

D) the customer has been furnished an options disclosure document.

An investor's margin account has a short market value of $9,000 and a credit balance of $13,000. Assuming Regulation T is 50%, a maintenance call will be triggered if the short market value increases above A) $9,000. B) $13,000. C) $11,000. D) $10,000.

D- $10,000 *To find short market value at maintenance, divide the credit balance of $13,000 by 1.3 ($10,000).

Your customer purchases FYZ 4% convertible preferred stock at $60 per share. The conversion price is $10. With the common stock now trading 1 point below parity, you know that the common shares of FYZ are trading at A) $24. B) $6. C) $10. D) $5.

D- $5 *$60/$10 =6. *6-1= $5.

After providing a firm quote to another broker-dealer, an OTC market maker then refuses to honor the bid price quoted. The market maker has committed a violation known as A) trading away. B) interpositioning. C) freeriding. D) backing away.

D- Backing away

A U.S. importer orders computer components from a Japanese manufacturer with payment to be made in yen upon delivery. To hedge against the dollar weakening against the yen before payment is due, the importer should A) sell yen calls. B) buy yen puts. C) sell yen puts. D) buy yen calls.

D- Buy YEN calls

An investor wishes to invest in a limited partnership participation. Listing an investment objective of capital appreciation without producing currently taxable income, which of the following choices would be most suitable regarding the investor's criteria? A) Low-income housing B) Equipment leasing C) Oil and gas income program D) Raw land

D- Raw Land *Explanation: Raw land will satisfy an investor's need for an investment that has the potential for capital appreciation without producing currently taxable income. However, raw land is not eligible for depreciation deductions or tax credits. Due to the limited benefits, an investment in raw land is considered speculative.

Having been a customer of a broker-dealer for over 10 years, currently holding equity positions and cash in his account, Daryl Smith wants to purchase 1,000 shares of a penny stock. Smith is A) exempt from the disclosure requirement but must receive a suitability statement. B) exempt from both the requirement to receive a suitability statement and the disclosure requirement. C) required to receive both the suitability statement and the disclosure. D) exempt from the requirement to receive a suitability statement but subject to the disclosure requirement.

D- exempt from the requirement to receive a suitability statement but subject to the disclosure requirement.

A bond is quoted as QRS Zr 39. This quote tells an investor that the bond A) pays interest semiannually. B) is backed by the U.S. government. C) pays interest annually. D) pays no interest until maturity.

D- pays no interest until maturity. *"Zr" = Zero Coupon.

An immediate dilution to earnings per share (EPS) would be least likely to occur from A) conversion of debentures. B) refunding a bond at par. C) a 2:1 stock split. D) a 10% stock dividend.

-Conversion of debentures *Debentures are a type of bond, they are basically unsecured bonds. In this case, some debentures are convertible into stocks and when this happens, earnings per share will be diluted immediately. Diluted earnings per share is basically what earnings per share would be if all the convertible stock options, bonds, etc., would converted into common stocks.

One of your customers is exploring the possibility of investing in a limited partnership (LP). To start the conversation, you think it would be wise to caution about what is generally considered to be one of the biggest disadvantages, which is? A) the flow-through of certain expenses and losses. B) lack of liquidity. C) the flow-through of income. Therefore, investors owning units in the limited partnership may not be able to locate buyers. D) having an investment managed by general partners.

-Lack of liquidity

A customer asks if there are any debt instruments providing income that might at least keep pace with inflation and offer some tax advantages. What suitable recommendation could be made that would meet the customer's criteria? A) ADRs B) U.S. T-bills C) GNMAs D) TIPS

-TIPS

One of your clients is an executive with a corporation that covers him under a qualified defined benefit pension plan. In addition, the client has maxed out his IRA contributions. With retirement coming up in about a decade, he decides to make a $100,000 lump sum deposit to a single premium deferred annuity. Then, he will begin monthly investments of $5,000 into a periodic payment deferred annuity. He does not plan to annuitize. Instead, he will withdraw funds from the annuities as needed. When those withdrawals are made, how will they be taxed?

-The earnings will be taxed as ordinary income and will be withdrawn first using LIFO.

A registered representative is the subject of a disciplinary action that results in a fine and a 60-day suspension of registration. During the 60-day suspension period, the registered representative may A) be paid for business that they refer to other registered representatives while serving the suspension. B) only perform clerical or administrative functions for the member. C) only perform investment advisory services. D) be paid for business generated before the suspension date.

-be paid for business generated before the suspension date.

The item that is not true when you read a bond quote of 6.5s of 29 at 99 is A) the bond is trading at a 1-point discount. B) if the price quote was changed to a basis quote, the yield would be less than 6.5%. C) if traded at this price, the yield to maturity rather than the yield to call would be shown on the confirmation. D) the bond matures in 2029.

-if the price quote was changed to a basis quote, the yield would be less than 6.5%. *The bond would have to be trading at premium, there fore the coupon yield would be less than 6.5%.

A customer has substantial passive income from a real estate investment. Which of the following limited partnership (LP) programs is most suitable for this customer if he wishes to offset this income? A) An oil and gas exploratory program B) An oil and gas income program C) A government-assisted housing program D) An equipment leasing program

A) An oil and gas exploratory program

For margin purposes, valuing a short position by marking to market will occur how often? A) At the close of each business day B) No more than once per month C) At the end of business each week on Friday D) Only in months when margin activity in the account will generate a statement to the customer

A) At the close of each business day

Section 28(e) of the Securities Exchange Act provides a safe harbor for certain soft dollar compensation extended from broker-dealers to investment advisers. Which of the following is most likely to be included in that safe harbor? A) Customized software designed to give clients access to asset allocation programs B) Meal expenses to attend an investment seminar sponsored by the broker-dealer C) Desks remaining after the broker-dealer redesigned its office D) Use of vacant office space in the broker-dealer's facilities

A) Customized software designed to give clients access to asset allocation programs

A registered representative (RR) is explaining characteristics of equity-linked notes (ELNs) and exchange-traded funds (ETFs) to a new client. All of the following statements are true except A) ELNs can be traded OTC or on a listed exchange. B) ETFs trade on listed exchanges much like stocks. C) ELNs are equity instruments. D) ETFs can hold assets like stocks, bonds, or commodities, or can track an index.

A) ELNs can be traded OTC or on a listed exchange.

An individual is covered under his employer's 401(k) plan. The plan provides for 100% employer matching of the first 3% of the employee's contribution. The employee decides to contribute 7% of his pay to the plan. Under ERISA, which of the following statements is correct? A) Only the 7% contributed by the employee is immediately vested. B) Only the 3% employee contribution being matched by the employer is immediately vested. C) Only the 4% employee contribution in excess of the employer's match is immediately vested. D) Only the 3% employer contribution is immediately vested.

A) Only the 7% contributed by the employee is immediately vested.

A customer calls you and excitedly tells you that she just had her first child. She says her mother-in-law gifted $20,000 to them in honor of the birth. She wants to invest it to have funds available for the child's higher education in 18 years. She wants assurance that the principal will grow, regardless of market conditions. Which of the following would be the most appropriate recommendation? A) U.S. Treasury STRIPS maturing in 18 years B) AAA rated municipal bonds maturing in 18 years C) U.S. Treasury bonds with 18 years to maturity date D) Blue-chip stocks

A) U.S. Treasury STRIPS maturing in 18 years

A website maintained by a fund company shows that one of the company's mutual funds currently has a NAV of $9.50 and a public offering price (POP) of $10 per share. Your client sees this information and enters an order to make a $10,000 purchase. He asks you to calculate the number of shares he will be able to buy with today's investment. You would respond that A) it cannot be determined until after the order is processed by the fund at the next calculated (forward) price. B) based on the $9.50 NAV, he will be receiving exactly 1,052.63 shares into his account at the end of the day. C) based on the 5% sales charge, he will be receiving exactly 950 shares into his account immediately. D) based on the $10 POP, he will be receiving exactly 1,000 shares into his account immediately.

A) it cannot be determined until after the order is processed by the fund at the next calculated (forward) price.

All of the following are accurate statements regarding communications filing requirements with FINRA except A) there are no requirements to file any sales or advertising piece with FINRA. B) retail communications can be subject to filing with FINRA. C) pieces intended for institutional customers need not be filed with FINRA. D) correspondence pieces are not subject to filing with FINRA.

A) there are no requirements to file any sales or advertising piece with FINRA.

In describing warrants to an investor who has just received them, you could characterize them in all of the following ways except A) they are short-term securities with a strike price less than the current market value of the stock. B) they do not represent ownership, so they do not offer voting rights to the holder. C) they are issued by the same corporation that issued the debt instrument they are attached to. D) they can be sold in the secondary market instead of being exercised.

A) they are short-term securities with a strike price less than the current market value of the stock.

Your customer has purchased a 5.8 % LMN corporate bond in a regular way transaction. Settlement for this bond trade is A) trade date plus two business days. B) trade date. C) trade date plus one business day. D) trade date plus four business days.

A) trade date plus two business days. *T+1: Options and U.S. Treasury Securities *T+2: Corporate stocks & bonds.

Your customer, having just received approval to open an options account, wants to clarify that she recognizes which options positions entail the most risk. She recalls three that have unlimited loss potential, but the fourth one she mentions has a limited loss potential and is not as risky. Which of these is correct? A) Credit put spread B) Short stock/short put hedge C) Short call D) Short straddle

A- Credit PUT Spread

A customer who is long 500 shares of XYZ writes 7 calls against the position. This is an example of A) a ratio write. B) a vertical spread. C) a long straddle. D) portfolio insurance.

A- ration write

For an oil and gas limited partnership (LP), allowances in the form of deductions are allowed by the IRS to be taken to compensate for a depleting resource. The allowance can be taken based on A) the amount of the natural resource sold. B) the condition or grade of the natural resource. C) the cost of moving the natural resource to refiners and distributors. D) the amount of the natural resource extracted.

A- the amount of the natural resource sold.

Your 66-year-old customer invested $35,000 in a nonqualified variable annuity. It now has a value of $55,000, and your customer wishes to make a random withdrawal of $30,000. What is the tax liability that results if the customer is in the 28% tax bracket? A) $2,800 B) $5,600 C) $7,600 D) $8,400

A-$2,800

Your client asks you to explain a not-held order. You could correctly explain that a not-held order A) must be executed immediately and in its entirety. B) gives time or price discretion to the floor broker. C) can only be done in a discretionary account. D) can be filled only on the last trade of the day.

B) gives time or price discretion to the floor broker. *An investor placing a not-held order is trusting that the floor trader can obtain a better market price than what the investor can get by accessing the market on their own.

A technical trader tells you that while looking at a chart, he sees a primary trend of higher highs and higher lows. What would this be an indication of, and according to what theory? A) Bullish market according to the odd-lot theory B) Bullish market according to the Dow theory C) Stagnant market according to the trendline theory D) Bearish market according to the short interest theory

B) Bullish market according to the Dow theory

Your customer contacts you proposing to invest a large sum of money in five different mutual fund families using Class A shares. Which of the following is correct and important to disclose to your customer regarding suitability and her proposal? A) She will not be able to achieve diversification this way. B) Your customer may not be able to receive sales breakpoints if she divides the investment among five different fund families. C) She should consider Class B shares only if investing a large sum to avoid paying the sales charge up front. D) She will not be able to switch between different funds within each family.

B) Your customer may not be able to receive sales breakpoints if she divides the investment among five different fund families.

A customer has $10,000 of capital losses and $2,000 of capital gains in her portfolio this year. The tax consequences would be A) a $8,000 loss deduction in the current year. B) a $3,000 loss deduction with a $5,000 loss carried forward. C) a $10,000 loss deduction in the current year. D) a $3,000 loss deduction with no loss carried forward.

B) a $3,000 loss deduction with a $5,000 loss carried forward

Your new customer directs you to open a cash account. He wants to give trading authorization to his brother but does not want his brother to have any other authority in the account. The two required documents needed by your firm to open the account as directed would be a new account form and A) a tenants in common agreement. B) a limited power of attorney. C) a durable power of attorney. D) a full power of attorney.

B) a limited power of attorney.

A customer is trying to understand any differences between a rollover and a trustee-to-trustee transfer as they relate to his qualified retirement plans. An accurate explanation would be that A) both rollovers and trustee-to-trustee transfers can occur as often as one wishes. B) a rollover can occur only once every 12-month period, but a trustee-to-trustee transfer can occur as often as one wishes. C) a rollover can occur as often as one wishes, but a trustee-to-trustee transfer can occur only once every 12-month period. D) both rollovers and trustee-to-trustee transfers can occur only once every 12-month period.

B) a rollover can occur only once every 12-month period, but a trustee-to-trustee transfer can occur as often as one wishes.

A broker-dealer that is a financial advisor to a municipal issuer A) can act as an underwriter of the issuer's bonds in a competitive bid underwriting only if they want to receive compensation for both services. B) cannot act as an underwriter of the issuer's bonds in a negotiated or competitive bid underwriting and receive compensation for both services. C) can act as an underwriter of the issuer's bonds in a negotiated underwriting only if they want to receive compensation for both services. D) can act as an underwriter of the issuer's bonds in a negotiated underwriting or competitive bid underwriting and receive compensation for both services.

B) cannot act as an underwriter of the issuer's bonds in a negotiated or competitive bid underwriting and receive compensation for both services. *Broker/dealers acting as financial advisors to a municipality regarding a municipal issue are prohibited by MSRB Rule G-23 to also act as underwriters for the same issue regardless of whether the underwriting process has been done by competitive bid or was negotiated.

All of the following statements regarding municipal advertising are true except A) it must be approved by a principal. B) copies must be kept for four years. C) copies must be sent to the Municipal Securities Rulemaking Board (MSRB). D) it must not be misleading.

B) copies must be kept for four years.

Upon assignment, the writer of an exchange listed equity call option must A) pay for the underlying stock to buy within one business day. B) deliver the underlying stock to sell within one business day. C) deliver the underlying stock to sell within two business days. D) pay for the underlying stock to buy within two business days.

B) deliver the underlying stock to sell within one business day.

Your customer, who lives in State A, is in the highest federal and state income tax bracket. She is considering purchasing some State B municipal bonds with an Aa rating for her portfolio. You correctly explain that municipal bonds generally pay A) higher interest rates than corporate issuers of the same quality and maturity, but this is offset by the more favorable tax treatment of the interest. B) lower interest rates than corporate issuers of the same quality and maturity because of the tax treatment of their interest. C) lower interest rates than corporate issuers of the same quality and maturity because of the tax treatment of their capital gains. D) lower interest rates than corporate issuers of the same quality and maturity because the interest is tax free on a state, local, and federal level.

B) lower interest rates than corporate issuers of the same quality and maturity because of the tax treatment of their interest.

A broker-dealer wants to reference its membership with FINRA on its website. Regarding the reference, all of the following are true except A) the FINRA reference is intended to demonstrate that the broker-dealer has the approval of FINRA in all of its business dealings. B) there is no requirement that any FINRA member broker-dealer shall reference FINRA by name or logo on its website. C) if the FINRA reference is made, a hyperlink to FINRA's website must be in close proximity to the reference. D) if the FINRA reference is made, a hyperlink to FINRA's website is mandated by FINRA.

B) there is no requirement that any FINRA member broker-dealer shall reference FINRA by name or logo on its website.

The IRS has determined that the NYNY real estate existing property limited partnership is abusive. The most likely reason would be because A) no net profit was generated after losses were taken. B) there was no viable profit motive. C) each partner received enough in losses to shelter all income. D) all of the assets were found to be rental properties.

B) there was no viable profit motive.

Your customer has established the following spread: Long 1 ABC Jan 60 call at 5 Short 1 ABC Jan 70 call at 2 The customer will realize a gain at expiration if the spread A) narrows to less than 3 points and ABC trades above 63. B) widens to more than 3 points and ABC trades above 63. C) narrows to less than 3 points and ABC trades below 63. D) widens to more than 3 points and ABC trades below 63.

B) widens to more than 3 points and ABC trades above 63.

Which of the following is an interest-bearing instrument? A) Treasury bill B) Jumbo CD C) Zero-coupon bond D) Commercial paper

B- Jumbo CD

XYZ, Inc., has 5 million shares outstanding and will issue 1 million shares of new stock through an upcoming rights offering. Regarding the rights offering, a registered representative (RR) should know that A) XYZ will issue 1 million rights. B) the exercise price is generally lower than the current market price at issuance. C) the value of the right will generally increase after the ex-date. D) a shareholder will generally have two to three weeks to exercise the rights.

B- the exercise price is generally lower than the current market price at issuance.

One of your clients has the opportunity to participate in his employer's employee stock purchase plan (ESPP). Before enrolling, he should be aware that funds will come out of his paycheck on A) a pretax basis, and those contributions are deductible on his tax return. B) an after-tax basis, and those contributions will be deductible on his tax return. C) an after-tax basis, and those contributions are not deductible on his tax return. D) a pretax basis, and those contributions are not deductible on his tax return.

C) an after-tax basis, and those contributions are not deductible on his tax return.

Under the Securities Act of 1933, SEC registration is required for A) a municipal revenue note offering of $4 million. B) a commercial paper offering of $30 million maturing in 180 days. C) an offering of $25 million of a corporate bank holding company. D) a private placement offering of $60 million by a brokerage firm.

C) an offering of $25 million of a corporate bank holding company.

During the onboarding process of a personal securities account for a 65-year-old investor, the registered representative (RR) attempts to obtain the name of a trusted contact person who will be notified if the firm suspects exploitation. However, the investor looking to open the account declines to provide a contact name and information of a trusted adult. What is the best course of action? A) Open the account, but place a dollar limit on disbursements from the account. B) The firm cannot open an account of someone age 65 or older without the name of a trusted contact person. C) Open the account, and place a notation in the customer's file indicating the refusal to provide a trusted contact person. D) Open the account, and inform the investor that disbursements from the account must be made on the extended disbursement form providing a detailed explanation of the disbursement.

C) Open the account, and place a notation in the customer's file indicating the refusal to provide a trusted contact person.

An investor is long stock at 80. The current market price of the stock is 93, and it is anticipated the stock will continue to rise. If the investor would like to generate income, but limit how much can be made if the stock continues to rise, which of the following contracts would do that? A) Buy a 95 call B) Buy a 90 put C) Sell a 95 call D) Sell a 90 put

C) Sell a 95 call

An investor has the following spread position: Long 1 July 40 call Short I July 50 call Regarding the position, which of the following is true? A) This is a credit spread, and maximum loss potential is unlimited. B) This is a debit spread, and loss is limited to the net premium received. C) This is a debit spread, and loss is limited to the net premium paid. D) This is a credit spread, and loss is limited to the net premium received.

C) This is a debit spread, and loss is limited to the net premium paid.

In what is commonly known as a proceeds transaction, one of your clients is using the proceeds from the liquidation of one stock to purchase another stock. In compliance with the 5% markup policy for these transactions, the markup will be computed based on A) the markdown or compensation to the dealer on the sale side of the transaction. B) the compensation to the dealer for each side of the transaction separately. C) a combination of both the buy side and the sell side compensation to the dealer. D) the markup or compensation to the dealer on the buy side of the transaction.

C) a combination of both the buy side and the sell side compensation to the dealer. *In a proceeds transaction (sell one position; take the proceeds and buy another), the 5% markup is computed by adding the compensation made by the dealer on the sell side to that made by the dealer on the buy side and applying the total to the inside market on the buy side.

Your customer wants you to recommend an option strategy that will prove profitable in a highly volatile stock, regardless of which direction the stock price moves. To suit the client's objective, you should recommend A) a credit call spread. B) a debit put spread. C) a long straddle. D) a short straddle.

C) a long straddle.

A new account is opened at your firm and you notice that there is a trusted contact person form attached to the documentation. You could safely surmise that this is an account for A) a corporation. B) a minor. C) a specified adult. D) a trust.

C) a specified adult.

A group of underwriters has agreed to engage in a mini-max underwriting for a new issue of equity securities with the issuer of those securities. Which of the following best describes this underwriting agreement? A) A mini-max agreement is a firm underwriting setting a maximum amount the underwriters are willing to purchase from the issuer in the event all shares cannot be sold and a minimum dollar amount of securities the issuer is willing to sell. B) A mini-max agreement is a firm underwriting setting a floor, or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell. C) A mini-max agreement is a best efforts underwriting setting a floor, or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell. D) A mini-max agreement is a best efforts underwriting, setting a maximum amount the underwriters are willing to purchase from the issuer in the event all shares cannot be sold and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell.

C) A mini-max agreement is a best-efforts underwriting setting a floor or minimum, which is the least amount the issuer needs to raise in order to move forward with the underwriting, and a ceiling or maximum on the dollar amount of securities the issuer is willing to sell.Mini-MaxiA mini-maxi is a type of best efforts underwriting that does not become effective until a minimum amount of the securities have been sold. Once the minimum has been met, the underwriter may then sell the securities up to the maximum amount specified under the terms of the offering.

A customer of your broker-dealer wants to grant his registered representative the right to make investment decisions for his account. This would be done by A) providing the registered representative with the prescribed discretionary authorization form not later than settlement date of the first discretionary trade. B) authorizing the registered representative to determine the price or time of the trade once the client has entered the order. C) providing FINRA with the prescribed discretionary authorization form before the first discretionary trade. D) providing the registered representative with the prescribed discretionary authorization form before the first discretionary trade.

C- providing FINRA with the prescribed discretionary authorization form before the first discretionary trade.

A customer has entered a day order to buy XYZ at 31.50. An hour before the market closes, she calls you and says that she is considering changing the order to a good-til-canceled (GTC) order. You tell her that A) the mandatory service charge for canceling and replacing imposed by all exchanges makes this order replacement strategy too costly to be of benefit. B) she should consider entering another day order tomorrow morning because day orders have preference in execution over GTC orders. C) she should consider leaving the day order entered for the remainder of the day, and if left unexecuted, should enter a GTC order in the morning so that her existing day order would not lose its priority before today's close. D) this is a good strategy, but order replacements must be verified in writing by the customer.

C- she should consider leaving the day order entered for the remainder of the day, and if left unexecuted, should enter a GTC order in the morning so that her existing day order would not lose its priority before today's close.

Which of the following is not a characteristic associated with auction rate securities (ARS)? A) Use a Dutch auction method to establish a new clearing rate B) Have the risk of failed auctions C) Are long-term securities that reset the rate paid at predetermined short-term intervals D) Are backed by the full faith and credit of the U.S. federal government

D) Are backed by the full faith and credit of the U.S. federal government

Your broker-dealer has received from the Automated Customer Account Transfer System (ACATS) a Transfer Initiation Form (TIF) instructing that one of your customers would like to have existing positions in her account transferred to her new broker-dealer. How long does your broker-dealer have to validate the positions listed on the form? A) Three business days B) No later than the end of business on the Friday of the week the TIF was received C) Seven calendar days from the time the TIF is received D) One business day

D) One business day

A toll road authority issues a revenue bond backed by the revenue stream from the tolls collected. In addition, the state has agreed to cover any shortfall. This bond is categorized as A) an industrial revenue bond. B) an overlapping debt issue. C) a double-barreled bond. D) a moral obligation bond.

D) a moral obligation bond. *A moral obligation bond is a type of revenue bond issued by a municipality or similar government body. A moral obligation bond not only gives investors the tax exemption benefits inherent in a municipal bond, but also provides an additional moral pledge of commitment against default.

An investor wishes to save for her retirement. She arranges to have $250 per month withdrawn from her account to be invested into a commodity fund. This type of savings plan is called A) a monthly investment plan (MIP). B) a constant ratio plan. C) a constant dollar plan. D) dollar cost averaging (DCA).

D) dollar cost averaging (DCA).

If a municipal bond has a call provision, this will tend to A) have no effect on the price. B) make the bond more attractive to investors because most bonds are called at a premium. C) place a floor on how low the price will decline. D) make the bond less attractive to investors because a call would terminate the interest payments.

D) make the bond less attractive to investors because a call would terminate the interest payments.

A registered representative (RR) recommends an AAA-rated municipal general obligation bond for the investment account of one of his clients. The client profile shows the customer is 25 years old, is in a low-income tax bracket, and has an aggressive long-term growth objective. This recommendation is A) suitable because these bonds will pay this customer tax-free interest payments with a high degree of safety. B) not suitable because a client with an aggressive long-term growth objective should invest bonds with lower ratings than AAA. C) suitable because municipal bonds provide portfolio diversification in any investment account. D) not suitable because municipal bonds do not align with the client's objective and profile.

D) not suitable because municipal bonds do not align with the client's objective and profile.

You believe XYZ stock will be rising and want to recommend a spread position to your client that would be profitable if it does. Of the positions listed, you would recommend that the client go A) short 1 XYZ Jan 30 call and long 1 XYZ Jan 50 call. B) long 1 XYZ Jan 30 put and short 1 XYZ Jan 40 put. C) long 1 XYZ Jan 40 call and short 1 XYZ Jan 30 call. D) short 1 XYZ Jan 40 put and long 1 XYZ Jan 50 put.

D) short 1 XYZ Jan 40 put and long 1 XYZ Jan 50 put.

An hour ago, you entered a sell limit order for your customer in XYZ stock. Looking at a current quote, you could expect the order to have been executed if A) the bid price for XYZ is higher than your customer's sell limit, and the last reported price in the stock is below the sell limit price. B) the offer or ask price for XYZ is lower than your customer's sell limit, and the last reported price in the stock is above the sell limit price. C) the offer or ask price for XYZ is lower than your customer's sell limit, and the last reported price in the stock is below the sell limit price. D) the bid price for XYZ is higher than your customer's sell limit, and the last reported price in the stock is above the sell limit price.

D) the bid price for XYZ is higher than your customer's sell limit, and the last reported price in the stock is above the sell limit price.

A customer's confirmation of a municipal securities transaction must include A) the highest potential yield the customer may receive and information regarding the catastrophic call provision. B) the lowest potential yield the customer may receive and information regarding the catastrophic call provision. C) the highest potential yield the customer may receive and the amount of markup or markdown in a principal transaction. D) the lowest potential yield the customer may receive and whether the bond is taxable or subject to the alternative minimum tax.

D) the lowest potential yield the customer may receive and whether the bond is taxable or subject to the alternative minimum tax.

In an existing margin account with no SMA, if a customer buys 300 ABC at 40 and simultaneously buys 3 ABC OCT 40 puts at 2.50, the customer must deposit A) $6,100. B) $6,375. C) $5,250. D) $6,750.

D- $6,750 *Buying 300 shares at 40 ($12,000) requires a deposit of $6,000. In addition, the customer is purchasing 3 puts with a total premium of $750 (3 × 2½). Most options have no loan value and must be paid in full. Adding $6,000 and $750 results in a deposit of $6,750.