Practice Exam
Taxes
-Direct federal debt, such as a Treasury note, is subject to federal income tax but exempt from state tax. -FNMA bonds are subject to federal, state, and local taxes. -State and city bonds, being municipals, are exempt from federal income tax.
6 Year Records
-General Ledger -Blotter -Customer Account Records -Stock Ledger -Designated Principals -Customer Ledger
Benefits of REITs
-High dividends -Professional management of real estate -Liquidity -Diversification
A customer has a margin account that shows a market value of $190,000 and a debit balance of $90,000. In addition, the account has special memorandum account of $5,000. The long market value at maintenance is
$120,000 Long market value at maintenance is the point to where an account must fall (in market value) to reach minimum maintenance (25% of market value). To compute, divide the debit balance by 0.75 ($90,000 / 0.75 = $120,000). If the market value were to fall to $120,000, the account would look like this: $120,000 − $90,000 = $30,000 (25%) (MV − DB = EQ).
Annual Gift Tax Exclusion
$15,000
An investor places an order to sell short ABC at the open. The opening bid of $15.25 is the same as the prior day's close. At what price may the investor sell short at the open?
$15.25 Short sales can occur any time during the trading day, including the opening and the close. In this case, the sale would take place at the best bid, which is $15.25.
A customer buys 100 shares of HEX at 52, and at the same time, sells a HEX call for a premium of 4. What is his margin call deposit?
$2,200 52 * 100 = 5200/2 = 2600 and this is reduced by the sale of the call ($400) for a net of $2,200. margin call options= purchase price /2 - premiums
Paying a premium of $10 per bond, Tracey bought 10 municipal bonds with 20 years to maturity. Ten years later, she sold the bonds for 103. For tax purposes, she has
$250 gain. The cost per bond is $1,010. The amortization amount each year is 10/20 years, which equals $0.50 per year. $0.50 per year × 10 years = $5 per bond. After 10 years, the adjusted cost basis is $1,005 per bond. She sells the bonds for $1,030 per bond. $1,030 − $1,005 = $25 per bond 25 × 10 = $250 gain.
An investor opens the following position: Write 1 CDE Oct 30 call at 3.30 Buy 1 CDE Oct 40 call at .10 The maximum gain is
$320. (3.30 − 0.10 = 3.20 × 100 shares = $320).
On Friday, September 15, an investor goes long 1 OEX Dec 575 call at 7 when the index is at 581.96. At expiration, the investor closes out the long position at intrinsic value when the index is at 580. What amount of money will be deposited in the investor's account on the following Monday, and what will the profit or loss be to the investor?
$500/$200 loss Index options settle in cash on the next business day. Each point in an index option is valued at $100. On settlement, the investor will receive the difference between 580 and 575 (5 × 100), or $500. With a cost of 7 ($700), this will create a $200 loss.
Tax Treatment of MF Dividends
- Qualified dividends: LTCG -Non-qualified dividends: taxed as ordinary income
What is included In the agreement among Underwriters??
- concession -takedown
DPP Disadvantages
- liquidity risk -legislative risk (tax laws change) -leverage risk (borrowed $) -risk of audit -depreciation recapture
Determining which shares to sell from a tax standpoint:
- not always about the amount of loss, examine S/T or L/T. Anything L/T is more favorable from tax standpoint.
Lifetime Records
- stock certificate book - Partnership Agreements our Articles of Incorporation - Minutes of Board or Partnership Meetings
3 year records
- virtually all other records -FOCUS reports -trial balances -form U4 & U5 -fingerprint cards -confirmation of trades -order tickets -security & cash loan records -fail to receive and failed to deliver records -long and short securities difference
Pricing of Open End (Mutual Funds)
-Buy (POP) = NAV + Sales charge -no secondary trading -price = NAV -mkt closes at 4pm
Hedge Funds
-do NOT register with SEC -adopt riskier strategies; arbitrage strategies, use of leverage and derivatives -info found in private placement memorandum -aim to reduce volatility/risk while preserving capital and always generating positive returns -alternative investments -high management fees; 2 and 20 (2% MF, 20$ return) -usually organized as a Limited Partnership -limited to institutional clients and wealthy individuals (accredited investors) -hedge fund mutual funds available **most are organized as limited partnerships with the portfolio managers investing along with the investors**
DPP Advantages
-investment mgmt by others -flow through of income & certain expenses - limited liability
Risk of REITS
-investor doesn't have direct control -greater price volatility than owning real estate -greater suitability for unlisted REITs -problem loans
What is Included In the Official Statement?
-legal opinion -appointment of the bond counsel
FINRA Rules for DPP Rollup:
-member firms may not solicit votes from limited partners unless the compensation is 2% or less. -The 10% limitation is the maximum compensation in the sale of a DPP -The 15% limitation is the maximum percentage of the gross proceeds of a DPP that may be used for the organization and offering expenses
Pricing of Closed End (Publicly Traded Funds)
-price independent of NAV -can buy & sell in secondary market (exchanges/ OTC)
Risk concern to an investor in an oil and gas DPP
-risk of IRS audit -lack of liquidity -legislative risk
Relevant factors considered by FINRA in determining the fairness of underwriting compensation
-size of the offering (total dollar amount) -the type of commitment (firm commitment or best efforts) -the type of securities (i.e., stocks or bonds) -the form of compensation (i.e., cash or stock) -the total value of all forms of compensation, -the underwriter's relationship to the issuer -and any form of potential conflicts of interest.
Important facts about REITs
-undivided interest -liquid -not investment comp (MF) -no flow through of losses (not DPPs) -subchapter M -Dividends non-qualified (taxed as ordinary income)
A foreign currency investor is long 40,000 Swiss francs at $0.81. If the investor buys 4 Jul 80 SF puts at 1.25 to hedge, the breakeven point is
0.8225 When hedging with puts, the breakeven point is the cost of the underlying investment plus premium paid ($0.81 plus $0.0125 equals $0.8225, or 82.25 cents).
2 Things used to analyze municipal securities
1- The Bond Buyer 2- Thomson Muni Market Monitor (secondary mkt)
Exception Registered Principal Approving communication:
1. Another member firm has filed it with FINRA 2. Using reliance upon the letter not materially altered 3. post interactive electronic form
5 Primary Unsystematic Risk
1. Business 2. Financial 3. Liquidity 4. Political 5. Regulatory
Any retail communication concerning CMOs:
1. Can't compare CMOs to other investment vehicles 2. must disclose (if applicable) govt agency backing applies to face value of CMO not to premiums 3. Must disclose CMo yield and avg life will fluctuate depending on prepayment & IR
How do you measure economic soundness/ viability?
1. Cash flow analysis 2. internal rate of return
3 Definitions of Communication with the Public
1. Correspondence: <25 2. Retail Communication: 25+ 3. Institutional Communication: institutional investors *w/in 30 day calendar period, current or prospective clients
estate and gift taxes
1. Estate Taxes -imposed on transfer of substantial amounts of property at death -unlimited amount allowed for spouses-MARITAL DEDUCTION -unlimited amount allowed to eligible charities -tax credit will offset up to $5MM TOTAL for other heirs -Calculate gross estate (all property owned at TOD), deduct expenses (funeral, charity, debts) for adjusted gross estate (AGE), deduct unlimited martial/charity for total taxable estate -Estate may be valued 6 months later, taxes due 9 months after death (form 706) 2. Gift Taxes -imposed on transfer of property during lifetime -5.25MM of lifetime gifts and 14 K/yr allowed before taxes set in (28K for couples) -Spouses usually unlimited, except when spouse is noncitizen -filed on FORM 709 and due with income tax return
Options Advertising Is limited to:
1. General description of security 2. description nature & function of the options mkt 3. name & address of the person at the member firm
Required Approvals of Public Communication
1. Institutions - no preapproval 2. Retail- preapproval 3. Correspondence- Pre/post approval 4. Public Appearance- Preapproval (not mandated) 5. Independently Prepared Reprints- Preapproval 6. Research Reports-Preapproval 7. Electronic Communication- Website (preapproval), electronic bulletin board (approval), emails & IMs (depends), Generic Advertising (preapproval)
Fall outside of research reports:
1. discussion broad- based indices 2. Commentaries on economic, political, or mkt conditions 3. technical analyses concerning demand & supply for a sector, index or industry based on trading vol & price 4. statistical summaries of multiple comp. fin'l data 5. notices of ratings or price target Chang's
3 types of investment companies
1. face amount certificate company, 2. the unit investment trust, 3.the management investment company (closed-end and open-end).
Recording keeping Periods:
1. lifetime records 2. 6 Year Records 3. 3 Year Records
3 Primary Systematic Risk
1. market risk 2. interest rate risk 3. inflation/ purchasing power
3 Specific Obligations under Rule 2111
1. reasonable-basis suitability, 2. customer-specific suitability, 3. quantitative suitability. Complying with the first of the three means the registered representative has to have a reasonable basis to believe that a recommendation is suitable for at least some investors. Control relationships must always be disclosed, but that is not part of the three obligations. Compensation may have to be disclosed, but, once again, that is not part of the three obligations. Be sure to focus on answering the question being asked.
An investor purchases five Mount Vernon Port Authority J & J 1 bonds in a regular way transaction on Wednesday, October 18. How many days of accrued interest are added to the bond's price?
109 (settlement date - 1) Interest accrues on municipal bonds on a 360-day-year basis, with all months having 30 days. This bond pays interest on January and July 1 (J & J 1). Therefore, July, August, and September each have 30 days of accrued interest, and October has 19 days of accrued interest; this totals 109 days. Settlement date is Friday, October 20.
Listed options expire at
11:59 pm ET on the third Friday of the expiration month.
Cement Mixer Corporation has 1 million shares of convertible preferred stock and 2 million shares of common outstanding. Each share of preferred can be converted into half a share of common. The preferred stock is selling at $17.50, and the common stock is selling at $35.75. If all preferred shares were converted, how many shares of common stock would be outstanding after conversion?
2,500,000 One million shares of preferred, each converted to half a share of common, is 500,000 common shares, and 500,000 shares after conversion, added to 2 million shares of common previously outstanding, equals 2.5 million common shares.
An investor owns $100,000 of convertible bonds with a conversion price of $50. By depositing these bonds into her account, how many covered calls could she write?
20 A covered call means that the seller of the options has 100 shares of stock to cover each call. These bonds are convertible into 20 shares for each $1,000, making a total of 2,000 shares. At 100 shares per contract, that's enough stock to cover 20 calls.
Which of the following ratios is normally considered adequate coverage of interest and principal charges for a municipal revenue bond?
2:1 $2 of revenue is collected for every $1 of debt service.
Listed stock options expire:
3rd Friday Of the month at 11:59 pm ET
The latest time to turn in option exercise notice
5:30 pm ET
A corporate bond pays interest on a J/J 15 schedule. An investor purchasing these bonds on Friday, April 17, would pay accrued interest for
96 days. Accrued interest on a corporate (or municipal) bond is based on each month containing 30 days. As with all bonds, the accrued interest is paid up to, but not including the settlement date. A trade made on Friday settles the following Tuesday (T+2), April 21. That means 3 months at 30 days each (90 days) plus 6 additional days (we don't count the settlement date) for a total of 96 days. One way to set this up is: 4/21 - 1/15 = 3 months and 6 days = 90 + 6.
Option Trading Times
9:30 - 4pm (4:15 broad based index options)
If the analyst expects a breakout through resistance,
A buy stop order is placed above a resistance level. It is triggered if and when the stock trades at or above the stop price. This allows an investor to participate in a bullish breakout through resistance.
Special Situation funds
A company reelecting the existing board of directors is not sending a message of something special going on.
Postfiling
After 1st yr of operation, firm may file w/in 10 business days AFTER first use.
exchange or conversion privileges
Allow an investor to convert an investment in one fund for an equal investment in another fund in the same family, often without incurring an additional sale charge. This exchange is considered a taxable event, and there may be tax consequences
The Conduit Theory
An IRS Rule that avoids triple taxation by allowing qualified Investment Companies to pass income (without taxation) directly to investors, who are taxed as individuals subchapter M, must distribute 90% of its NII to S/H. The fund then pays taxes only on the undistributed amount.
What can be rolled over into an IRA?
Assets from any qualified corporate plan or from another IRA may be rolled over into an IRA.
The alternative minimum tax (AMT) is designed to present an alternative tax computation that disallows deductions for certain tax preference items and includes certain nontaxable income. Which of the following is not a tax preference item? A) Local income and property taxes B) Interest received on corporate bonds C) Tax-exempt interest received on private purpose bonds D) Certain costs associated with an oil and gas drilling program
B) Interest received on corporate bonds (There is a list?)
The writer of an in-the-money put will receive the upcoming dividend from the underlying issuer if the contract is exercised
C) before the ex-date. When assigned, the put writer is obligated to purchase the stock. Provided the stock is purchased before the ex-date, its buyer becomes the owner of record on or before the record date and is therefore entitled to the dividend. This is no different from anyone else purchasing before the ex-date.
FINRA 2341
Can't assess a sales charge In excess of 8.5% of POP on purchase of open-end investments NAV/ (100-sales charge) = POP
Quiet Period
Can't publish research or make a public appearance 49 days following IPO, or 10 days following an additional issue offering date of offering = later of effective date of reg stmt or 1st date send were bona fide
All of the following are characteristics of 529 plans except A) there is no age limit on the beneficiary. B) an official statement (OS) must be provided to any prospective purchaser. C) the assets can be transferred to a family member if not used by the original beneficiary. D) donor income limits apply.
D) donor income limits apply. Unlike the Coverdell ESA, there are no donor income limits with a 529 plan. All of the other statements are true as to 529 plans.
Which of the following customer accounts requires the sending of monthly customer statements? A) An options account B) A margin account C) A discretionary account D) An account containing penny stocks
D) An account containing penny stocks It is the account containing penny stocks where the customer must receive a monthly statement. In all other cases, the required frequency is not less than quarterly.
The only U.S. agency whose securities are considered direct obligations of the U.S. government
Government National Mortgage Association.
A customer opens a margin account by purchasing 300 shares of XYZ at $60 and deposits the required margin. The stock rises to $70 on the following day. On the third day, after the release of a disappointing earnings report, the stock falls to $50. Which of the following describes the account after the changes in market value?
Equity of $6,000; special memorandum account (SMA) of $1,500 The account starts out as follows: $18,000 − $9,000 = $9,000 (LMV − DB = EQ). After the stock rises to 70, the account looks like this: $21,000 − $9,000 = $12,000; SMA = $1,500. For every $1 increase in market value, 50 cents of SMA is created. After the stock falls to 50, the account looks like this: $15,000 − $9,000 = $6,000; SMA = $1,500. An increase in market value creates SMA but a subsequent decline has no effect.
Prefiling
During 1st year of operations, new members of FINRA, must file ANY RETAIL COMMUNICATION w/ FINRA at least 10 business days BEFORE first use
Registered Option Principal (ROP) (Series 4)
Review & approve options communication
A customer sells 1 ABC Corporation put for 2 on February 22, 2019, with a strike price of 50 and an expiration date of March 16, 2019. On March 15, 2019, ABC is put to the customer. Which of the following statements about this transaction is correct?
He has an acquisition cost of $4,800 and a date of acquisition of March 15, 2019. When a put is exercised, the cost of acquisition is the cost that the writer has to pay (strike price) less the amount of premium the writer originally received. The date of acquisition is the trade date in exercising the option. Let's do the math. The sale of the put brings in a credit of $200. Almost one month later, the seller of the put receives an exercise notice. This means the seller is obligated to purchase 100 shares at the strike price of $50. That is a cost of $5,000. For tax purposes, the cost of $5,000 is reduced by the $200 premium received making the acquisition cost, $4,800. The date of acquisition (the date the holding period begins) is the date the option is exercised (March 15, 2019).
What describes the investment characteristics of a high-quality long-term municipal bond?
High inflation risk, low default risk A longer term bond will be subject to more inflation risk. Because the quality of the bond is high, the level of default risk should be low.
Diagonal Spread
If the strike prices and/or the expiration months of the options are different
The fourth market
Institution-to-institution trading to avoid the use of broker-dealers.
LMV at Maintenance
LMV / .75
A client purchases 1,000 shares of the XYZ Value Fund when the NAV is $18.75 and the POP is $19.74. Five years later, the client makes a gift to her daughter when NAV is $24.50 and POP is $25.79. The daughter elects to receive all distributions in cash. Two years after the gift, she sells all shares when the NAV is $34.25 and POP is $36.05. What are the tax consequences of this sale?
Long-term capital gain of $14.510 In the case of a gift of securities, the donee acquires the donor's cost basis—$19.74 per share. Sale (redemption) takes place at the NAV ($34.25) for a profit of $14.51 per share (times 1,000 shares = $14,510.00).
General Securities Principal (Series 24)
May review and or approve communication for ALL securities EXCEPT options
Limited Securities Principals (Series 26)
May review and or approve communication for Investment company products
How can you tell if something is an open=end investment company by its NAV and asking price?
Open-end investment companies are always priced at net asset value (NAV) plus sales charge (if any). Remembering that makes any choice with an ask price below the NAV an obvious incorrect answer. There is another requirement and that is a maximum sales charge of 8.5% of the ask or public offering price. (ASK - NAV/ ASK)
What is & isnt included in soft-dollar compensation under safe harbor provisions of Section 28(e)?
Payment for travel expenses, furniture, or equipment is not allowable under Section 28(e) of the Securities Exchange Act of 1934. Payment for seminars, research, and financial planning software are permissible under the safe harbor provisions of Section 28(e).
If securities are not in good deliverable form, but are accepted by the broker-dealer representing the buyer, What do you do?
Reclamation
SMV at Maintenance
SMV/ 1.3
The 5% markup policy applies to:
Secondary market transactions in nonexempt securities (ex. agency, riskless principal, proceed transactions)
If a customer fails to meet a Reg T margin call
Securities valued at twice the Regulation T cash call must be sold out
KPT, Inc., is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income? Tax rate Cash dividend Allowance for bad debts Retained earnings
Tax Rate & Allowance for Bad Debts Higher taxes mean less net income. The allowance for bad debts is an expense item, and increasing it lowers operating income. Dividends are paid out of retained earnings, which have no effect on the net income the company reports.
If LMN, Inc., has filed for bankruptcy, in what order would interested parties be paid? ISUG Sub PC
The liquidation order is as follows: the IRS (and other government agencies), secured debt holders, unsecured debt holders and general creditors, holders of subordinated debt, preferred stockholders, and common stockholders.
Which of the following events will cause the special memorandum account (SMA) to decrease? -An increase in the short market value (SMV) -A decrease in the long market value (LMV) -The purchase of long securities on margin -The short sale of securities
The purchase of long securities on margin, the short sale of securities ** SMA, once created, does not go away until used. Using the SMA to buy more securities or sell more securities short will decrease the amount of SMA.
Other Communication: Public Appearance
Unscripted & could not classify as other forms of comm ex) seminar, webinar, radio or tv interview (+ scripts, slides, handouts used in connection w/ public appearance) if seen by 25+ investors in 30 days considered retail communication & need preapproval from principal -if assoc person recomm. A sec. must have reasonable basis and disclose conflicts of interest (not required when MF or VA)
Regulation T requirement for margin accounts.
When selling stock short in a new account, an investor must meet the minimum requirement of $2,000 for any short sales of $4,000 or less. Above $4,000, the deposit is 50% of the short market value.
A customer shorts 1 OEX (S&P 100) 935 call at 7. If the customer is assigned an exercise notice on the call when the OEX closes at 944, the customer realizes
a $200 loss. The call is in the money by 9 (944 − 935). The writer must deliver cash to the buyer equal to the intrinsic value. To determine the investor's profit or loss, the intrinsic value is reduced by the premium paid (9 − 7 = 2). Because each index point is worth $100, the investor has a loss of $200 because the money paid on exercise exceeded the premium received.
Prudent Investor Rule
applies to all fiduciary accounts ex) Trustee, Executor, Custodian, Registered representative who has been granted discretionary authority
Municipal bonds—known as dollar bonds—are generally quoted
as a percentage of par. Although municipal bonds are usually quoted on a yield basis, actively traded bonds known as dollar bonds are often quoted as a percentage of par (price). The term dollar bond comes from the quote being made in dollars. Remember that a percentage of par value ($1,000) equals a dollar price.
Double-Barreled Bonds
backed by both a source of revenue and the taxing ability of the issuer
Basis Points
each point is worth $10 one basis point represents 0.01%
electronic bulletin board
internet forum that allows users to post and read messages on a specific topic but Registered Rep need not identify himself as registered person
Bond Buyer's Revenue Index
is an average yield of 25 revenue bonds with 30 years to maturity.
The pink market
is part of the OTC Markets Group and does not handle issues with regulatory problems.
The third market
is the trading of listed securities OTC
With regard to a variable annuity, all of the following may vary except A) value of accumulation units. B) number of accumulation units. C) value of annuity units. D) number of annuity units.
number of annuity units. During the accumulation phase, the number of accumulation units will increase as additional money is invested. When the contract is annuitized, the annuitant is credited with a fixed number of annuity units. Once annuitized, the number of annuity units does not vary. The value of accumulation and annuity units varies with the investment performance of the separate account.
Interest on Treasury bills, notes and bonds is taxable as:
ordinary income at the federal level. It is exempt from state and local taxation.
Revenue Bonds
paid for by the users of the facility, not the taxing power of the municipality. NOT backed by the full faith and credit of the City or State
You have a high net worth client who is interested in investing in a hedge fund. Details of the offering would be found in the fund's
private offering memorandum. Hedge funds do not register with the SEC, so there is no registration statement. However, the management does prepare an offering document. It could be called the private placement memorandum, the offering circular, or even the prospectus on the exam. The statement of additional information (SAI) is limited to registered management investment companies (open- and closed-ends) and ETFs.
Advantages of a real estate investment trust (REIT):
professional management, liquidity, diversification IRS does NOT permit tax deferrals on REITs
The ABC Insurance Company is advertising its variable annuity product as "ABC Lifetime Income—income generated from mutual fund returns." This advertisement is
prohibited because it implies returns from mutual funds.
A registered representative would recommend a customer establish a short straddle on T-bonds when interest rates are expected to
remain unchanged. Any straddle writer is always looking for a stable market. Volatility is the biggest enemy of the writer. Because this question is referring to debt options, their price movements are based upon changes in interest rates. No fluctuations in interest rates means no price changes.
A firm underwriting of a municipal bond issue usually has a number of different broker-dealers involved. Those who earn the total takedown on each sale they make are performing in the role of
selling syndicate member Selling syndicate members have a commitment to sell the bonds allocated to them. On each bond the member sells, the total takedown (the takedown plus the additional takedown) is earned. Selling group members earn the concession. The syndicate manager earns the entire spread on any bonds it sells.
For even stock splits -
the number of contracts owned will increase proportionately. The number of shares per contract will remain unchanged, and the strike price will decrease proportionately.
The most stringent test of a corporation's ability to meet its current obligations is
the quick ratio. The quick ratio, sometimes called the acid-test ratio, is a more stringent test than the current ratio because it excludes inventory. The debt-to-equity ratio deals with long-term debt rather than current liabilities. The price-to-earnings (P/E) ratio does not deal with assets and liabilities.
When an investor opens a new account at a member firm, FINRA rules require
the signature of the principal signifying that the account has been accepted. The only signature required on the new account form for an individual client is the signature of the partner, officer, or manager (a registered principal) denoting that the account has been accepted in accordance with the member's policies and procedures for acceptance of accounts. It is the customer identification program (CIP) that requires the date of birth and Social Security or tax ID number. All FINRA requires is a statement that the applicant is of legal age. FINRA states that each member shall also make reasonable efforts to obtain, prior to the settlement of the initial transaction in the account, the applicant's Social Security or tax ID number. Please notice that the question is differentiating between what is "need to know" and what is "nice to know."
Most mutual funds operate as regulated investment companies. This means that:
they qualify for special tax treatment under Subchapter M of the Internal Revenue Code. Triple taxation of investment income can be avoided if the mutual fund qualifies under Subchapter M of the IRC. To avoid taxation under Subchapter M, a fund must distribute at least 90% of its net investment income to shareholders. The fund then pays taxes only on the undistributed amount. This rule applies to management companies (open-end and closed-end) and UITs. That means ETFs are also included. Although not investment companies registered under the Investment Company Act of 1940, REITs can also take advantage of Subchapter M's tax benefits.