Practice Exams 2

Coverdell Maximum Contribution is

$2,000

A client recently sold a straddle with a strike price of $60. If the call has a premium of $5 and the put has a premium of $6, what is (are) the breakeven price(s) for the position?

$71 and $49

A corporation is about to go public and its shares will be quoted on an over-the-counter (OTC) market. A broker-dealer that sells the securities in the aftermarket is required to deliver a prospectus to purchasers for how many days following the effective date of registration?

90 A dealer that sells securities in the secondary market must provide prospectuses to customers if new securities of that class were recently sold by the issuer under a registration statement. In the case of issuers with publicly traded securities already outstanding (i.e., for follow-on offerings), prospectuses must be delivered for 40 days after the effective date. However, for IPOs of issuers whose securities will not be listed on an exchange, prospectuses must be delivered for 90 days (as is the case in this question).

An investor who sells a July 50 put and buys a July 60 put on the same stock is establishing a:

A bear spread always involves buying the higher exercise price and selling the lower exercise price. This applies to both call spreads and put spreads. A bull spread always involves buying the lower exercise price and selling the higher exercise price. This applies to both call spreads and put spreads

An issuing company has hired an investment banking firm to act as an agent in its initial public offering. Subject to certain terms and conditions, the investment banking firm has agreed to sell a minimum of 3,000,000 shares up to a maximum of 4,000,000 shares on a best-efforts basis. Which of the following statements is TRUE?

A broker-dealer that manages any offering being sold on a contingency basis (e.g., all-or-none or mini-maxi) must promptly deposit the funds in a separate bank account. In contingency underwritings, the payment of sales commissions and underwriting expenses occur after the deal closes. Any release of funds to the underwriters earlier than the closing date of the offering is a violation of SEC rules. These rules were created to ensure that investors are refunded their entire subscription funds in the event the offering is unsuccessful. In this example, the investment banking firm needs to receive subscriptions (sales) based on the minimum of 3,000,000 shares, but may sell up to a maximum of 4,000,000 shares.

A business development company (BDC) is MOST suitable for which of the following investors?

A business development company (BDC) raises capital by selling securities to investors, has a structure that is similar to a closed-end investment company, and provides the investor with access to their capital (liquidity). A BDC will use the money it raises to invest in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. Since some of the funds are invested in the equity of non-public companies, purchasing shares of a BDC is similar to buying a publicly traded investment in a private equity firm. Due to the speculative nature of BDC investments, RR's should inform investors of all of the potential risks before making the investment.

A corporation wishes to open a cash account. Which of the following documents is required?

A corporate resolution authorizing a person to trade for the account is necessary to open a corporate cash account. A risk disclosure document may be required but only if options or penny stocks are going to be traded in the account. A hypothecation agreement and corporate charter are required to open a margin account.

If the auction for auction rate securities fails, the current holder will:

A failed auction occurs when there are an insufficient number of bids to cover the amount of auction rate securities being sold. If this happens, the holders will continue to hold the securities and the interest rate will be set to the maximum rate allowed in the plan documents. This rate is normally higher than the rate that would have cleared a successful auction.

Which of the following statements concerning a fund of funds is TRUE?

A fund of funds is a fund that invests in a portfolio of hedge funds. These funds do not always offer superior investment returns, and they typically carry higher than average expense ratios. Although these funds are NOT classified as diversified investment companies under the Investment Company Act of 1940, they ARE subject to SEC registration. Funds of funds are typically used to increase diversification in a portfolio of stocks and bonds.

Which of the following statements regarding secondary market municipal joint accounts is NOT TRUE?

A good faith deposit is a sum of money given to the issuer of a new municipal bond issue along with a syndicate's bid and is not required in secondary-market transactions. A secondary market joint account exists when two or more dealers form an account to jointly offer a block of bonds in the secondary market. As with a new issue, there may be an order period as well as a takedown (member's discount). MSRB rules prohibit members of the account from offering the bonds at different prices.

A customer's margin account has a current market value of $10,000, a debit balance of $8,000, and SMA of $1,000. The customer could meet a maintenance call with:

A long margin account must maintain equity equal to 25% of the market value. The account is $500 below the minimum ($2,500 required minus $2,000 equity). Using SMA will increase the debit balance and, therefore, may not be used to meet a maintenance call.

A margin disclosure document must be provided to customers:

A margin disclosure document describes the different types of risks facing margin customers. This document must be provided at the time the account is opened and annually thereafter.

A broker-dealer that is an MSRB member firm sells bonds to one of its customers. If the broker-dealer is a member of the syndicate, the firm is entitled to the:

A member of the syndicate is entitled to the additional takedown plus the concession, which is also known as the total takedown. Only the syndicate manager is entitled to the management fee. A broker-dealer that is not a member of the syndicate selling part of a new issue of municipal bonds is entitled to the concession.

A municipality borrowing for a short-term period to finance a capital project would issue:

A municipality borrowing for a short-term period to finance a capital project would issue bond anticipation notes. Commercial paper is primarily issued by corporations and some municipalities to raise short-term funds for working capital, but not to finance capital projects. Tax anticipation notes are used to meet operational expenditures.

Regarding communications, which of the following statements is TRUE concerning the responsibilities of a principal of a broker-dealer?

A principal must approve retail communications prior to use. However, institutional communications and correspondence are subject to review and supervision by a principal, but not pre-approval.

An investor bought 5 NJF June 45 puts for a premium of 3 points per contract. For these options to have intrinsic value, the market price of NJF needs to be:

A put will have intrinsic value, also known as being in-the-money, when the market price of the underlying security is less than the strike price. In this example, the option gains intrinsic value below $45.

A customer sells short 1,000 shares of DT at $60 a share on Monday, October 14 and deposits the Regulation T margin requirement. If on October 23 the stock is trading at $75 a share, which of the following statements is TRUE?

A short margin account is marked to the market once a day (daily) to make sure the account is above the maintenance requirement. The initial Regulation T margin requirement is 50% of $60,000, or $30,000. If the market value increases to $75 a share, the equity in the account will decline to $15,000. The current equity in the account is 20% of the short market value ($15,000 / $75,000), which is below the required 30% and, therefore, a margin maintenance call will be issued.

An individual purchased 100 shares of stock at $35 per share. The stock is now trading at $44 per share and the issuer decides to split the stock 2-for-1. After the split, the individual's cost basis per share will be:

A stock split or dividend results in an adjustment in the number of outstanding shares. As a result, the current market value is adjusted to reflect the increase or decrease in shares. The same change would be made to the cost basis of all positions held by investors. A 2-for-1 stock split results in twice as many shares, with the values being adjusted to 1/2 of what they were before the split. The individual's stock would have an adjusted cost basis of $17.50 = $35 x 1/2.

A customer is seeking a high risk, high reward investment. Given this objective, which of the following is the MOST appropriate?

A stock with no dividend and a beta of greater than 2.0 Beta is a measure of a stock's (or portfolio's) volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If a portfolio's beta is 1.5, this means that the portfolio's price will change 1 1/2 times as much as the market. The term high beta is usually associated with a beta of greater than 2.0 and offers a customer a high risk, high reward investment.

Which of the following choices represent a profitable strategy for a technical analyst?

A technical analyst believes that if a stock's price breaks through a resistance level (ceiling), it will continue to rise until it reaches the next resistance level. The analyst will purchase calls if the stock's price breaks through a resistance level. The analyst will buy puts if the stock's price breaks through a support level (floor), since the analyst believes the stock's price will continue to decline until it reaches the next support level. Earnings per share (EPS) and the price-to-earnings (P/E) ratio are both used by fundamental, not technical, analysts.

Which investment company does NOT charge a management fee?

A unit investment trust does not charge a management fee. The portfolio is fixed and there is no investment adviser since unit investment trusts are supervised, not managed.

Accrued interest for municipal bonds is computed on:

Accrued interest for municipal bonds is computed in the same manner as for corporate bonds, which is based on a 30-day month and a 360-day year. Accrued interest for U.S. government bonds is figured on a 365-day year counting actual days elapsed. Accrued interest on all bonds is calculated from the last interest payment, up to but not including the settlement date.

A new municipal bond issue has a dated date of January 1 and pays interest each April 1 and Oct. 1. An investor purchased bonds from the issuer with a Thursday, January 31 settlement date. How many days of accrued interest does the investor owe?

Accrued interest on a new municipal issue is calculated from the dated date up to, but not including the settlement date. Since the investor's settlement date was January 31, he owes accrued interest from January 1 to January 30 (30 days). The buyer of a new issue must pay the issuer interest that accrues between the dated date and the settlement date, in addition to the principal amount purchased.

The breadth of the market is indicated best by the:

Advance-decline information indicates the number of stocks that increased versus the number of stocks that decreased during a particular trading day. When used in conjunction with stock averages or indexes, the advance-decline figures will show whether a market movement has breadth (i.e., whether it is broad-based or just limited to the stocks in the index or average).

Securities purchased under a Rule 147 exemption may be sold to an out-of-state resident:

After six months SEC Rule 147 and Rule 147A of the Securities Act of 1933 provides an exemption from registration for securities being sold on an intrastate basis. If securities are sold only to residents of a state by an issuer that is also a resident of the same state, the securities are exempt from both the registration and prospectus requirements of the Act. A resident of a state who acquires securities under Rule 147 is not allowed to sell the securities to a nonresident of the state for a period of six months following the last date of sale by the issuer. If an individual intends to sell the securities prior to six months, he may do so only to a resident of the same state.

A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered were at 18.60, 18.25, 18.38, 18.50, and 18.63. The execution price is:

After the order was activated by the round-lot sale of 18.25 (which is at or lower than 18.50), the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is the first price that meets this requirement and is the execution price.

A registered representative enters an order for a client. In error, the registered representative (RR) purchases shares of the wrong security. Which of the following statements is TRUE?

All broker-dealers are required to maintain an error account. It is used by a broker-dealer if the firm or an RR executes a trade in error (e.g., the wrong security or the wrong side of the market). RRs do not have an error account. It is maintained by the firm. The firm should execute the original order immediately and maintain a record of the error. The firm is not required to notify the market where the order entered in error was executed.

Retail communications that pertain to mutual fund shares must be:

All retail communications pertaining to mutual funds must be filed with FINRA within 10 business days of first use or publication.

A municipal bond that was issued at par is purchased by an individual in the secondary market at a price of 90. What is the tax consequence if the bond is held to maturity?

An investor purchasing a secondary market discount municipal bond will have ordinary income if the bond is held to maturity. Since the bond was purchased at 90 ($900) and held to maturity when the investor receives par ($1,000), the investor will have a $100 gain, which is reported as ordinary income

If a mutual fund changes or adds a portfolio manager, the greatest effect would be on the fund's:

Alpha is a measure of an investment's performance on a risk-adjusted basis. The excess return of the investment relative to the return of the benchmark index is its alpha. Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. On the other hand, beta is a measure of the volatility of a security or a portfolio in comparison to the market as a whole. In other words, it is the tendency of an investment's return to respond to swings in the market (i.e., the S&P 500 Index). Essentially, the market has a beta of 1.0 and security and portfolio values are measured based on how they deviate from the market.

When buying listed put options compared to selling the underlying stock short, which of the following choices is NOT an advantage?

Although puts do have time value which dissipates as it gets closer to maturity, this is not an advantage for the buyer of a put; instead, it's a disadvantage. An options premium may consist of intrinsic value and/or time value. The portion of the premium that's represented as time value declines over time. For example, when XYZ is trading at $47, if an investor buys an XYZ July 50 put for $5, the intrinsic value (in-the-money value) is $3 and the time value is $2. As the put nears expiration, the time value gradually dissipates, which is a disadvantage to the buyer. All of the other statements are advantages of buying a put compared to selling the stock short. The premium of a put is substantially less than the Regulation T margin requirement for a short sale. In a put purchase, the potential loss is limited to the premium, while the potential loss on a short sale of stock is unlimited. The purchase of puts is not subject to the borrowing requirements of Regulation SHO.

A client wants to invest $250 per month and have broad exposure to the U.S. equity market. Which of the following recommendations is the MOST suitable for this client?

An S&P 500 Index mutual fund Although each of these investments are suitable for a client who's seeking broad exposure to the U.S. equity market, the mutual fund is the most cost-effective method. The closed-end fund shares are purchased on an exchange and the client pays the current market price plus a commission. Exchange-traded funds (ETFs) also trade on an exchange. While most broker-dealers are not charging a commission on ETF trades, some still do charge a commission. Index mutual funds don't assess front-end or back-end sales charges (i.e., they're no-load funds).

Which of the following investors would be LEAST suitable for an oil and gas direct participation program (DPP)?

An investment in an oil and gas limited partnership may have excess depletion and depreciation as well as excess intangible drilling costs. These are tax preference items and may result in an investor being subject to the alternative minimum tax (AMT). The other investors may or may not be suitable for an oil and gas DPP. It would depend on many other factors. However, an investor concerned about the AMT would not want to invest in a security that normally has tax preference items.

Series K preferred stock is suitable for which of the following investors?

An investor who is seeking a high fixed dividend for a period of time followed by a floating rate dividend Series K preferred stock has the following characteristics: It's issued by a financial service company. It has no maturity date. It pays a fixed rate for a period and then switches to a floating rate (usually based on the Secured Overnight Financing Rate, or SOFR). Its dividend is non-cumulative and it may not carry voting rights. It's callable at the option of the issuer. Series K preferred stock is suitable for an investor who's seeking a high fixed dividend for a period followed by a floating rate dividend. An investor who's seeking capital appreciation based on the increasing value of the common stock should consider convertible preferred stock, not K shares.

Which of the following statements is NOT TRUE concerning VIX options?

An investor will buy VIX puts if he expects an increase in the volatility of the S&P 500 Index The VIX (volatility index) measures the implied volatility of S&P 500 options. Although implied volatility is calculated using S&P 500 options, the VIX actually predicts how much the S&P 500 index will fluctuate in the next 30 days. Because the VIX is a way to predict market declines, some investors call the VIX the fear index. The implied volatility of options, as well as the VIX itself, will increase when the S&P Index decreases in value (i.e., an inverse relationship). Investors can buy VIX calls to hedge against a downturn in the S&P 500.

If a customer places an order to buy bonds at 104 net, it indicates that the customer:

An order to buy at 104 net indicates the customer wants to pay a total of 104 including any markup or commission.

An individual purchases two BP (British pound) 150 calls @ 7.50. The contract size is 10,000 BP. The total cost for the contracts is:

British pound option premiums are quoted in cents per unit. To convert to dollars, the decimal point must be moved two places to the left. The total cost is calculated by multiplying the contract size (10,000) by the premium expressed in dollars ($0.0750), yielding $750.00 per contract. Since the individual purchased two contracts, the total cost is $1,500.00.

On behalf of her firm, a registered representative is holding a seminar and the audience will consist of registered representatives from other member firms. This type of communication is considered:

Any communication that is directed only to registered representatives is defined as institutional communication. As it relates to communication, the definition of an institutional investor includes a FINRA member firm and its registered persons. On the other hand, if the audience consisted of only employees of the member firm that is providing the seminar, it would be considered internal communication.

If the purchaser of a non-qualified annuity dies at the age of 56, which of the following BEST describes the tax impact?

As a general rule, if an annuitant withdraws the proceeds of his variable annuity prior to age 59 1/2, a 10% tax penalty applies. However, this penalty is waived if the annuitant dies or becomes disabled. Although there is no penalty, the difference between the amount invested and the death benefit is taxable at ordinary income tax rates.

If a company pays a cash dividend, which of the following is TRUE?

As it relates to the payment of a dividend, the funds being paid out come from the corporation's cash (a current asset). It is important to distinguish the difference in the treatment of a dividend being declared compared to a dividend being paid. When a company declares a cash dividend, dividends payable (a current liability) will be increased by the amount of the announced dividend and the retained earnings (part of shareholders' equity) will be reduced. Regardless of the specific corporate transaction, the balance sheet must remain balanced

A Swiss company that is expecting payment from a customer in U.S. dollars is concerned that the dollar will decline in value. To hedge against a decline in the U.S. dollar, the Swiss company should:

Buy Swiss franc calls If the value of the U.S. dollar declines, the value of the Swiss franc will increase. The company should buy Swiss franc calls since it will profit on the calls if the U.S. dollar declines, leading to a Swiss franc increase. The profit on the call could help to offset the loss on the U.S. dollars it is expecting to receive as payment.

Treasury arbitrage restrictions generally prohibit issuers of municipal securities from:

Because of the tax exemption allowed on municipal bond interest, municipalities are normally able to issue bonds with coupon rates below those of Treasury securities. This presents an excellent arbitrage opportunity. A municipality can borrow at a low rate of interest and invest the money in higher-yielding risk-free Treasury securities. Congress has enacted laws, known as Treasury arbitrage restrictions, that prevent state and local governments from misusing the tax exemption.

An equity security that is distributed under the provisions of Regulation S may be resold in U.S. markets:

Before a security that is sold under the provisions of Regulation S may be resold in the U.S., there is a distribution compliance period (waiting period) that must be satisfied. For debt securities, the waiting period is 40 days, but for equity securities (as referenced in this question), the waiting period is one year. However, if an overseas investor acquires securities through a Regulation S offering, she may immediately sell the securities overseas through a designated offshore securities market.

A due bill is used if a trade occurs:

Before the ex-dividend date, with delivery made after the record date

A mutual fund that invests primarily in small-cap and micro-cap stocks is most likely to have a beta that's:

Beta measures the volatility of a stock (or a portfolio of stocks) compared to the market as a whole, which is typically represented by a broad-based index (e.g., the S&P 500). Small-cap and micro-cap stocks are considerably more volatile than average; therefore, their betas will be greater than 1. This means that they'll increase in value more than the average stock in a bull market, but suffer larger losses in a bear market.

A customer wishes to establish a tax loss and sells 100 shares of XYZ Corporation. The loss would not be allowed if the customer, within 30 days:

Bought an XYZ Corporation call The IRS will not allow the loss if the same security or any security convertible into the same security is repurchased within 30 days of the sale. The customer must wait until the 31st day to buy back the security or its equivalent. In this example, the only choice given that could be converted into 100 shares of XYZ Corporation would be a call on XYZ Corporation. The loss would not be allowed if the customer, within 30 days, bought an XYZ Corporation call. This is known as a wash sale.

Buy-stop orders or sell-stop orders can provide all the following features, EXCEPT:

Buy-stop or sell-stop orders do not give a broker discretion when the order is activated. When activated, the order becomes a market order and should be executed immediately. All of the other choices are correct.

A brokerage client bought stock 15 years ago. While the client held the long position, it has appreciated a significant amount. Which of the following option positions will allow the client to protect the unrealized gain on the stock position?

Collars are created when an investor owns stock and then sells a covered call and also buys a protective put. The put purchase will protect the stock position if the stock's price falls, while the premium received on the covered call will reduce or even offset the price of hedging (i.e., the put's premium). As is true for any covered call, if the market rises dramatically and the call is exercised, the investor may be forced to sell his shares when the call is exercised.

A level debt service bond issue is one in which:

Combined annual interest and principal payments are equal

Which option position is the most conservative for a senior investor who's looking for a way to generate income?

Covered calls are a conservative way of generating income. Covered calls are created when an investor is long a stock and writes (sells) calls on the same stock. The premium received on the sale of the call represents the income generated on the position. If the call is exercised and the investor is obligated to sell the stock, she's able to simply deliver the stock she already owns, thereby minimizing the risk of having sold the call.

An account has $140,000 in fully paid marginable securities, $50,000 in non-marginable securities, and $80,000 of cash. What's the total amount of stock that can be purchased on margin?

Customers can buy two times the amount of cash they have in their account (e.g., Buy $160,000 stock, pay cash for $80,000 and create a debit of $80,000 in margin account). Marginable securities have a loan value of 50%, which means the customer can use 50% of the marginable securities' market value instead of a cash deposit. This means a customer could use 100% of the marginable securities' value to buy another stock on margin. For example, a customer could buy $140,000 of XYZ stock on margin; using $140,000 of marginable ABC stock. The customer would get credit for 50% of ABC's market value for $70,000 (i.e., $140,000 ABC x 50% loan value). The customer could then borrow the remaining $70,000 and increase their debit balance to acquire the $140,000 of XYZ stock. In this question the customer could buy a total of $300,000 on margin ($160,000 using cash + $140,000 loan value from marginable securities). Non-marginable securities don't provide customers with any loan value.

An investor has an investment portfolio with 40% invested in U.S. equities, 20% invested in equities in emerging markets, 30% invested in high-grade corporate bonds, and 10% in money market securities. Since the investor is concerned about the overall risk in the portfolio, he decides to decrease the emerging market equity holdings to 10% of the portfolio and increase the high-grade corporate bond holdings to 40% of the portfolio. What risks have increased or decreased after the reallocation?

Emerging market equities have more political risk than U.S. corporate bonds. By decreasing emerging market holdings in exchange for U.S. corporate debt, the political risk decreases. However, increasing bond investments will increase the level of credit risk.

Which of the following choices BEST describes Eurodollars?

Eurodollars are defined as U.S. dollars on deposit in foreign banks, not just in Europe.

With whom must retail communication be filed with in regard to mutual fund shares at least 10 business days prior to use?

FINRA

What information is NOT found on a municipal bond confirmation?

For trades involving municipal securities, confirmations must be sent to customers at or before the completion of the transactions (usually by the settlement date). A confirmation must include the following information: Trade date and settlement date Description of the securities, par value, the name of the issuer, interest rate, maturity, type of bond (if not a GO bond), and pertinent call features Price and yield Amount of accrued interest, principal, and total for the transaction The capacity in which the broker-dealer acted (agent or principal) For agency trades, the amount of all remuneration (commission and concession) must be disclosed. Whether the bonds are subject to state income tax is not included on a customer's confirmation

A GNMA pass-through is quoted 98.10 to 98.18. This quote represents a spread per $1,000 face value of:

GNMA pass-through certificates (as well as T-notes and T-bonds) are quoted in 32nds of a point. The spread of .08 represents 8/32 or 1/4 (.25) of a point. One point (1%) for a bond is equal to $10 ($1,000 x 1%); therefore, 1/4 of a point is equal to $2.50 per $1,000.

A block of bonds is offered firm by Dealer A to Dealer B for one hour with a five-minute recall. Dealer A calls Dealer B and says, fill or kill. Dealer B:

Has five minutes to take the bonds When bonds are offered firm for one hour with a five-minute recall, the offering Dealer A cannot sell the bonds to anyone but Dealer B without giving Dealer B the first opportunity to take the bonds. When Dealer A called Dealer B and said, fill or kill, Dealer A was invoking the five minute recall. Dealer B would now have five-minutes to take the bonds or else Dealer A would be free to sell the bonds to someone else.

A customer writes an IBM October 120 call, receiving a $4 premium, and buys an IBM October 100 call, paying a $12 premium. IBM is currently selling at $108. If he exercises the IBM October 100 call just prior to expiration, what should the stock be selling at in order for the customer to break even?

IBM should be selling at $108 at expiration for the customer to break even. The customer will call away the stock at the $100 strike price, but receive stock worth $108, for an $8 profit. However, to create the spread, it cost the customer $8 ($12 to buy the October 100 call minus the $4 he received on the sale of the October 120 call). Therefore, when the stock is at $108, the customer will break even. The profit on exercising the option is offset by the cost of creating the spread position.

An investor purchases a British pound 160 put at 4 when the British pound is at 157. The intrinsic value of the option is:

Intrinsic value is defined as the in-the-money amount of the contract. A foreign currency put option is in-the-money when the spot price is less than the strike price. Since the spot price (157) is less than the strike price (160), the contract is in-the-money by 3 points.

Aglet International, Inc. has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability?

If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 50% of the dividends it receives on stock that it owns (remaining 50% is excluded). The company would need to add $50,000 (50% of $100,000) to its taxable income. The total taxable income, therefore, is $2,050,000. The tax liability is $697,000 ($2,050,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 35% of the dividends would be taxable (65% is excluded).

A customer purchases a municipal security in the secondary market at a discount. At maturity the customer will:

If a municipal bond is purchased at a discount in the secondary market and held to maturity, there will be reportable taxable income. The discount is taxed as ordinary income, not a capital gain. The investor may pay the tax each year or elect to report the entire amount at maturity. If a municipal bond is purchased at an original issue discount and held to maturity, there will be no federal tax liability.

A company that manufactures solar panels has approached an investment banker for help in raising capital for its new manufacturing plant in Colorado. The firm wants to raise capital in a private placement and the CFO of the company wants to know the difference between convertible debt and debt with warrants attached. Which of the following statements is TRUE?

If convertible bonds are exchanged for common stock, the debt will no longer be part of the company's capital structure A convertible bond allows an investor to convert their bond into the company's common stock. If the bond is converted into common stock, the debt will no longer be part of the company's capital structure (i.e., bond is retired). However, since the investor is not required to pay anything to convert the bond, no additional capital is raised. If the bond is issued with warrants attached and the warrants are exercised, the debt remains outstanding. However, investors who exercise warrants are required to pay for the stock at the warrant's subscription price and the company will raise additional capital. The exercise of a warrant or conversion of a bond will dilute the ownership of the company's existing shareholders since additional shares of stock are being created in both cases

Once an Automated Customer Account Transfer Service (ACATS) transfer request has been validated, depository-eligible securities should be transferred within:

If notified of a customer's intent to transfer an account through ACATS, the carrying firm must either validate or reject the request for a valid reason within one business day. If the account is validated, the transfer of depository-eligible securities should be completed within three business days.

An American business is exporting goods to Japan. Which option position would BEST hedge the firm's currency risk?

If the yen falls against the U.S. dollar, American exporters will receive less for their exports. As a result, the best hedge is to buy yen put options. If the yen falls, the puts will become profitable and offset the exporter's reduced revenue from exporting. Selling options is not an effective hedge since the maximum gain is limited to the premium and that amount is unlikely to offset all of the exporter's falling revenue. Remember, there are no U.S. dollar calls and/or puts available for U.S. investors.

A customer opens a margin account and signs the basic customer margin agreement, which consists of a credit agreement, loan consent agreement, and hypothecation agreement. If the customer's initial transaction in the account is to buy 100 shares of XYZ stock at a price of $36, the customer:

In a margin account, customer securities are always held in street name so that the broker-dealer is able to liquidate shares if necessary. By completing the hypothecation agreement, the customer agrees to pledge the securities to the broker-dealer as collateral for the loan. As for the other parts of the margin agreement, the loan consent agreement permits the firm to lend the securities to other customers or other broker-dealers. The credit agreement establishes the customer's responsibility to pay interest on the debit balance. For a new account, the minimum initial margin requirement is $2,000 or 100% of the purchase, whichever is less. Since the initial trade was for $3,600, the customer is required to deposit $2,000 which means that he can borrow $1,600.

On June 5, 2021, an investor purchased 100 shares of ABC at $20. On November 10, 2021, he purchased an additional 100 shares of ABC at $12. On January 20, 2022, he sold 100 shares of ABC at $15. For tax purposes, he will report a:

In this question, the investor has two positions in ABC stock. Each was purchased at different times and at different prices. When selling a portion of his holdings, unless the investor identifies (on the order ticket) the specific shares that he's selling, the IRS requires the use of the first-in, first-out (FIFO) method. Since the investor did not identify the shares being sold, it's assumed that the first shares purchased (in June of 2021 at $20) were the shares sold. Therefore, the investor will report a loss of $500 in 2022.

An individual purchased an index call option that's now in-the-money. If exercised, the investor will receive:

Index options are cash settled, which means that the in-the-money difference between the market price and the strike price is paid to the owner in cash. With index options, there's no physical delivery of securities.

An individual has been purchasing shares of a mutual fund and has chosen to reinvest all distributions rather than take the payments. If the individual chooses to sell the shares purchased through these reinvestments, the cost basis will be:

Investors must report all distributions from a mutual fund as taxable income, whether reinvested or not. When an individual chooses to reinvest the distributions, the cost basis is the purchase price of the shares.

A client is interested in buying 500,000 shares of ABC company, which has just declared a dividend. The declaration date of the dividend was Friday, March 17 and, on that date, the company announced that the record date will be Thursday, April 27. Ultimately, the dividend will be paid to the appropriate owners on Monday, May 1. For the registered representative of this client account, what should be recommended?

Investors who are interested in buying shares typically wait until the ex-dividend date to make their purchases. On the ex-date, the stock's price will be reduced by the amount of the dividend. This means that the investor will have a lower cost basis and pay more in capital gains when the shares are sold. If the purchase is made before the ex-date, the investor will need to pay taxes on the dividend in the current tax year. In other words, waiting to pay capital gains is better than immediately paying taxes on the dividend. There's no way to avoid a tax liability altogether

Which statement is NOT TRUE regarding the prospectus for a variable annuity contract?

It cannot be delivered electronically. Variable annuity products are subject to the provisions of the Securities Act of 1933 which requires the delivery of a prospectus to provide full and fair disclosure to investors. The prospectus details all of the material facts of the contract and is permitted to be delivered electronically. However, if a person requests a printed copy, then it must be delivered. The prospectus must also be filed with the SEC.

Which of the following descriptions regarding the Capital Asset Pricing Model (CAPM) is NOT TRUE?

It predicts future values for the stock CAPM does not establish a price objective for the stock. All of the other descriptions listed are correct.

The IPO of a new start-up company was registered on July 1, 20XX. If the co-manager of the offering wants to publish a research report on the issuing company, what's the earliest date on which it could publish the report?

July 12, 20XX FINRA's quiet period rules are as follows: 10 calendar days following the effective date for an initial public offering, which applies to any syndicate member or dealer Three calendar days following the effective date for a secondary offering, which only applies to managers or co-managers. Please note, when determining the earliest date that a research report may be published, the effective date is NOT counted. For example, if an IPO is registered on the 1st day of the month, the 10-calendar-day period is from the 2nd through the 11th, thereby making the 12th as the earliest date for publishing a report. If a secondary offering is registered on the 1st day of the month, the three-calendar-day period is from the 2nd through the 4th, thereby making the 5th as the earliest date for publishing a report. (19883)

What is the SRO maintenance requirement on a $1 million purchase of a 2x Long Gold Index ETF?

Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25% on long positions and 30% on short positions. The process for determining the margin requirement on these securities uses the standard SRO maintenance requirement and multiplies by the portfolio leverage factor. In this case, the standard long requirement is 25% which is multiplied by a factor of 2; therefore, the client must maintain a 50% margin. $1,000,000 x 25% = $250,000. $250,000 x 2 = $500,000.

Listed equity options cease trading at:

Listed equity options cease trading at 4:00 p.m. Eastern Time on the expiration date. The expiration date for listed equity options is the third Friday of the expiration month, at 11:59 p.m. Eastern Time.

A call notice is likely to be issued on a long-term CD if:

Long-term CDs, also referred to as brokered CDs, are issued by banks and can be sold through broker-dealers. These CDs can be callable and will most likely be called if they're trading at a premium to their call price. The most likely reason for the CDs to be trading at a premium is because interest rates have fallen, which makes the call feature more attractive to the issuer.

A customer has purchased a new municipal issue during the underwriting period. According to MSRB rules, the customer must receive which TWO documents?

MSRB rules require that a copy of the official statement (if prepared) be sent to each purchaser of a new issue. A confirmation must be sent on every transaction regardless of whether it's a new issue or a secondary market trade. A copy of the indenture and a list of the syndicate members are not required to be sent.

For a new municipal issue, which of the following choices is the responsibility of the underwriting syndicate?

Municipal securities are exempt from the registration and filing requirements of the SEC. However, the underwriting syndicate must submit the official statement to the MSRB's Electronic Municipal Market Access (EMMA) system and must also provide the official statement to customers. It is the responsibility of the issuer to hire the bond counsel.

Municipal serial bonds are priced on the basis of:

Municipal serial bonds are quoted on a yield-to-maturity basis. Municipal term bonds are quoted on the basis of a dollar price.

A client is interested in obtaining the expense ratio of a mutual fund recommended by the RR. Which of the following actions would be BEST for the RR to take?

Mutual funds are required to disclose in the front of a prospectus a standardized fee table of all its fees. The fee table must include the expense ratio, which is the percentage of a fund's assets that is used to pay its operating costs. It is determined by dividing total expenses by the average net assets in the portfolio.

OTCQX companies have all of the following characteristics, EXCEPT:

OTCQX is an over-the-counter marketplace for both U.S. and foreign issuers. In order to trade on the OTCQX, an issuer must be an SEC-reporting company and have audited financial statements. In addition, the issuer must be introduced by a financial institution, such as an investment bank or similar firm. The companies are not required to be listed on another exchange.

A conservative investor has a long-term time horizon. He wants an investment that will provide him with long-term capital appreciation, and will not be too volatile. Which of the following funds would be the MOST suitable for him?

Of the choices given, a value fund would be the best option for the investor. As with a growth fund, the main objective of a value fund is long-term capital appreciation. Value funds are usually considered less volatile than growth funds, since they invest in companies that are priced low in relation to their earnings. They also tend to invest in more mature companies that are more likely to pay regular dividends than pure growth funds. Both a fund of funds and an emerging markets fund would be too risky for him.

Which of the following new bond issues will MOST likely be purchased through competitive bidding?

Of the choices given, the issues that will most likely be purchased through competitive bidding are general obligation bonds. This is usually the method by which most general obligation bonds are sold. Corporate, revenue, and high-yield bonds are usually sold on a negotiated basis

An individual has annuitized her variable annuity contract and has begun receiving payments. She decides she would rather start a withdrawal program, no longer annuitizing the contract. As her registered representative, you may inform her that:

Once a variable annuity has been annuitized, changes are not permitted. A 1035 exchange is switching from one annuity to another during the accumulation period.

Regulation NMS applies to which of the following choices?

One of the provisions of Regulation NMS (National Market System) requires a broker-dealer to provide its clients with the best price available for listed equity trades available for electronic execution. The best price is defined as the highest bid or lowest offer (inside market) from all available market centers. Reg NMS doesn't apply to securities that are subject to manual execution, or to debt or over-the-counter equities regardless of whether they're electronically or manually executed.

When do American-style option trades settle?

Option trades involving both American and European-style options settle one business day after the trade date (i.e., T+1). However, if an American-style option is exercised, the settlement occurs two business days after the trade date (i.e., T+2). The rationale is that American-style (listed equity) options require the delivery of shares of the underlying stock. In other words, the exercise of an American-style option is the same as the settlement of a stock trade. European-style options have cash settlement and don't require the delivery of stock. As a result, the exercise of a European-style option results in a settlement of one business day after exercise (i.e., T+1).

At what price will a sell stop order be executed?

Sell stop orders are triggered or activated if the stock's market price falls to or below the order's stop price. Once activated, a sell stop order becomes a market order. Market orders will be executed immediately at the first available price.

Upon the death of the insured, the proceeds of a variable life policy:

Policy proceeds pass to the beneficiary free from federal income tax upon death of the insured. However, proceeds are included in the policy owner's estate for estate tax purposes.

Before accepting a delivery versus payment (DVP) order from a customer, a broker-dealer must:

Prior to accepting a DVP (Delivery versus Payment) or RVP (Receipt versus Payment) order from a customer, a broker-dealer must receive the name of the customer's agent and the customer's account number. The order ticket must be marked DVP or RVP.

Before a broker-dealer may offer a portfolio margin program to its clients, the firm must obtain approval from:

Prior to establishing a portfolio margin program for its clients, a broker-dealer is required to obtain approval from FINRA. With a portfolio margin program, a broker-dealer is able to offer larger loans to its clients; however, this will also create greater risk of the firm going bankrupt. The reason for requiring approval is that FINRA wants the opportunity to analyze whether the broker-dealer is capable of handling the potential risks that portfolio margin accounts create.

Which of the following choices is considered a qualified retirement plan?

Qualified is an ERISA term associated with certain work sponsored retirement plans. Typically, these qualified plans grow tax-deferred and are funded with pretax dollars through employee and/or employer contributions. Traditional IRAs, Roth IRAs, and 529 plans are individually funded vehicles that have nothing to do with the client's employer or ERISA.

Regulation SHO requires which of the following actions?

Regulation SHO requires a broker-dealer to make a notation on every sell order ticket to indicate whether the transaction is a long sale or a short sale. A long sale is when the customer is selling stock that he owns and is not required to borrow the security to make delivery. With a short sale, the broker-dealer (not the customer) must be able to borrow the security to make delivery. There's no requirement for a broker-dealer to become a market maker in order for its customers to execute short sales. The margin requirement on short sales is 50%.

When purchasing a new issue of stock in a cash account, when must payment be made under Reg. T?

Regulation T states that payment for a new issue in a cash account is due within two business days following the settlement date of the transaction. When buying shares of a new issue, an investor will receive a when-issued confirmation. Payment is due two business days following the date that the securities are ready for delivery.

A registered representative (RR) sent promotional material to 20 prospective retail clients using a social media site. Then, 20 days later, the RR sends the same material to 30 institutional investors that are not existing clients of the broker-dealer. Under FINRA rules, the promotional material is:

Retail communication is promotional material that's sent to more than 25 retail investors in a 30-calendar-day period. Any material that's sent to 25 or fewer retail investors is considered correspondence. Since the RR only sent the communication to 20 retail investors, it's considered correspondence. In order for communication to be classified as institutional communication, it can only be sent to institutions. Material that's sent to both retail and institutional investors is either considered correspondence or retail communication based on the number of retail investors to which it's sent.

How can an individual move the securities from a retirement account to a regular brokerage account at the same broker-dealer?

Retirement account assets can be moved into traditional brokerage accounts through a rollover or transfer. In many situations, the investor will owe taxes at the time of the rollover. Most account transfers between broker-dealers are done using the Automated Customer Account Transfer Service (ACATS). However, in order to use ACATS, a financial institution must enroll in the program. For transfers to or from non-ACATS firms, a non-ACATS transfer can be done, but they typically take longer. Section 1035 exchanges are a way to transfer assets from an insurance policy or annuity without being taxed immediately; therefore, it doesn't fit in this situation.

SEC Rule 144A applies to:

Rule 144A allows restricted securities to be sold without being subject to the limitations that are imposed by Rule 144. The ability to avoid these restrictions is based on the fact that sales are only made to qualified institutional buyers (QIB). There's a three-part test to determine whether an entity is a QIB: (1) the investor must be an institution, (2) the buyer must be purchasing for its own account or for the account of another QIB, and (3) the buyer must own and invest at least $100 million of securities of issuers that are not affiliated with the buyer.

Under Regulation T, which of the following securities is NOT marginable?

Securities that are quoted on the Pink Open Market The Pink Open Market is an over-the-counter (OTC) market. OTC equity securities (i.e., those that are not listed on a national securities exchange such as the NYSE or Nasdaq) are not marginable. Although Regulation T considers mutual fund shares marginable securities, the Securities Exchange Act of 1934 prohibits mutual fund dealers from extending credit on mutual fund share purchases until 30 days after their purchase.

Which of the following securities does NOT trade with accrued interest?

Securities that pay interest periodically or have a stated rate of interest (such as Treasury bonds, municipal bonds, corporate bonds, and certificates of deposit) trade with accrued interest. However, many money-market securities such as Treasury bills and bankers' acceptances trade at a discount and are, therefore, purchased without paying accrued interest. Zero-coupon bonds (e.g., Treasury STRIPS) do not pay periodic interest and are traded without accrued interest.

An investor selling a combination will profit if the price of the underlying security is:

Selling a call and a put on the same security with different strike prices, or different expiration dates, is a short combination. The client expects the underlying security to trade within a narrow range or be neutral.

If a company declares a cash dividend, which of the following is TRUE?

Shareholders' equity decreases It is important to note that this question refers to the declaration of a cash dividend, not the payment of a cash dividend. If a company declares a cash dividend, dividends payable (a current liability) will increase by the amount of the announced dividend and the retained earnings (part of shareholders' equity) will be reduced. The announcement has no impact on the assets of the company; however, assets will be reduced once the company actually pays the cash dividend. Regardless of the specific corporate transaction, the balance sheet must remain balanced.

An investor writes an XYZ October 70 call at 3 and an XYZ October 70 put at 1. This strategy is known as a:

Short straddle A long straddle consists of purchasing a put and a call, on the same underlying security, with the same strike price and same expiration. A short straddle consists of selling a put and a call, on the same underlying security, with the same strike price and expiration.

An 80-year-old client has several long positions in large-cap stocks. If she wants to use options to increase her portfolio's yield, which position would be the MOST suitable for this client?

Since the investor already owns shares, selling calls against those shares is the best recommendation (i.e., creating a covered call). The premium received from the sale of the calls will generate income and increase her return. Since the investor already owns the shares, the short call is a relatively conservative position. Buying a put would protect the investor against the price of her shares falling. However, since a long put requires the payment of a premium, the portfolio's return will decrease.

A customer is moderately aggressive and has a long-term investment horizon. If the customer is also looking for tax-advantaged savings, in what should she invest?

Since the investor has a long-time horizon, moderate risk tolerance, and wants a tax-advantaged account, a variable annuity is the most suitable investment. Treasury securities provide income, but are probably too conservative for this investor. Mutual funds and hedge funds would provide a better rate of return, but don't provide for the tax-deferral earnings like an annuity.

On the NYSE, an investor enters an order to buy 400 shares of HRJ at $56 per share. Which of the following statements is TRUE regarding this order?

Since the order specifies a price, it's a limit order. A limit order may be executed at the limit price or better. In this question, the investor wants to buy HRJ at $56 or lower (i.e., the order is not required to be executed at exactly the limit price). Since the order doesn't indicate an all-or-none (AON) qualifier, a portion of the order may be filled. Also, since the order doesn't indicate an immediate-or-cancel (IOC) qualifier, it's not required to be executed immediately. As for the remaining choice (an order must be executed at $56 before this order can be executed), an order is not required to be executed at $56 for this order to receive execution.

An option trader has the following two positions: She bought an XYZ January 30 put for a premium of $2 and wrote an XYZ Jan 30 call for a premium of $3. With the market price of XYZ at $24, if the call expires and the put is exercised, what's the investor's per share gain or loss for tax purposes?

Since the trader is exercising the put, she's required to buy XYZ shares at the market price of $24 and will then sell them at the put's strike price of $30, for a gain of $6 per share. However, the trader also initially paid $2 for the put and received $3 on the sale of the call, which increases the overall gain by the $1 per share. Therefore, the trader's net result is a gain of $7 per share ($6 gain per share from stock - $2 put premium + $3 call premium).

A customer who's in his early 50s recently received a sizeable bonus and his investment objective is to maximize his tax-free income. He has two children who are already attending college. Which of the following choices is the BEST method of investing the funds?

Since this customer is seeking to maximize his tax-free income, he needs to invest in different types of municipal securities. A portfolio of 30% general obligation bonds, 20% high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10% housing revenue bonds is suitable for this investor. There's no reason to be overly concerned with having a small percentage (20%) invested in high-yield municipal bonds. Equities, corporate bonds, Treasury Bonds, and Treasury Inflation-Protected Securities (TIPS) are all taxable fixed income securities that will not maximize tax-free income. Since the customer's children are already attending college, the tax-free growth that's available with a 529 plan wouldn't be advantageous or a suitable investment when seeking tax-exempt income.

An investor is long 200 shares of ABC stock at $58 and short 1 ABC May 60 call at 2. What is his breakeven point?

Since this is a position that involves a stock position PLUS an option position, using the phrase "call up and put down" will not work to calculate breakeven. For positions like this, the first step in determining the breakeven point is to calculate the investor's net investment amount. In this question, the investor paid out a total of $11,600 (200 shares x $58 per share), but received $200 in premium on the sale of the call. Therefore, the investor's net investment amount is $11,400. The second step is to recognize that since the investor has a 200 share position, the $11,400 must be divided by 200 to determine the breakeven point of $57. Theoretically, if ABC stock is trading at $57, the investor would lose 1-point per share for each 100 share position ($200 total loss); however, since the call option is out-of-the-money and expires worthless, the investor would keep the $200 premium. The $200 loss in the stock is offset by the $200 received in option premium and the investor will break even.

An issuer currently has an S&P A- rating. If the ratings service notifies the firm that it has been upgraded by two notches, its new rating would be:

Standard & Poor's highest rating is AAA and its lowest rating is D. The company also uses a (+) or (-) to further distinguish between ratings. Each upgrade or downgrade is referred to as a notch. If an issuer currently has an A- rating, one notch above would be A and two notches above would be an A+ rating.

Which of the following positions/strategies is NOT bullish?

Straddle writers expect a neutral market and obtain the maximum gain if each option expires. Each of the other choices has an opportunity for a profit if the underlying security rises in value.Straddle writers expect a neutral market and obtain the maximum gain if each option expires. Each of the other choices has an opportunity for a profit if the underlying security rises in value.

Which of the following statements is NOT TRUE concerning a structured product offered by an RR?

Structured products may be linked to individual securities, commodities, foreign currencies, or indexes. These products are underwritten by most major financial services institutions and are usually registered as securities with the SEC. Structured products are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed by an RR when offering this product to clients.

Which action is NOT taken by the receiving firm when processing an Automated Customer Account Transfer Service (ACATS) request?

Submission of the asset input data When transferring an account using ACATS, the receiving firm will submit the TIF data, and if there are no exceptions, will review the asset input data that was supplied by the carrying firm and accept the transfer. If there is an issue, the carrying firm will reject the transfer request and the receiving firm will update the TIF data within 24 hours. The carrying firm submits the asset input data since it holds the customer's assets.

Which of the following is considered a TRACE-eligible security?

TRACE-eligible securities include U.S. dollar denominated foreign and U.S. corporate bonds, debt securities issued by the U.S. government and U.S. government-sponsored enterprises (GSE). Foreign government securities, municipal securities and corporate money-market instruments are not TRACE-eligible.

A client buys a security and receives a trade confirmation showing a price of $11.20 net. What does this mean?

That the broker-dealer sold this security to the client in a dealer capacity and the $11.20 includes a markup When a trade confirmation includes the net or net price, the broker-dealer has either bought a security from, or sold a security to, a customer in a dealer or principal capacity and the price includes a markup or markdown. On the other hand, if the gross price is shown and a commission is added to (for a buying customer) or subtracted from (for a selling customer) the price, the broker-dealer acted in an agency capacity. After receiving an order to buy from a customer, if a broker-dealer purchases the security and then sells the security to the customer at the same price with a commission or markup included, it has effected a riskless principal transaction. Conversely, if the price at which the broker-dealer sold the security to the customer is different than the price at which it purchased the security, it has effected a net basis trade. The execution of net basis trades requires prior customer approval.

Which of the following choices gives the best indication of current interest rates on revenue bonds?

The Bond Buyer computes the Revenue Bond Index which is the average yield of 25 revenue bonds with 30-year maturities.

Define CAPM.

The Capital Asset Pricing Model (CAPM) is a model that predicts an investment's expected return. CAPM uses an investment's historical non-diversifiable (systematic) risk, which is measured by Beta.

What system allows investors to hold securities in book-entry form?

The Direct Registration System (DRS) allows investors to hold securities in book-entry form. The TRF is used to report equity trades, while the RTRS is used to report municipal trades. EMMA is the MSRB's database for municipal disclosures and is similar to the SEC's EDGAR database for corporate filings.

A municipal bond is currently trading at 92 and is callable in 10 years at par. What is the effective yield that must be disclosed on a customer's confirmation?

The MSRB regulates the yield that must be disclosed on a client's confirmation. The yield disclosed is the lower of the yield to maturity or yield to call. In other words, the yield to worst. If a bond is callable and trading at a discount, the lower of the two would be the yield to maturity.

An investor who expects an increase in volatility in the equity markets will MOST likely adopt which of the following strategies?

The VIX is the CBOE's Volatility Market Index option. It is a broad-based index option and is calculated using the S&P 500 Index option bid and ask quotes. The VIX (volatility index) is often referred to as the "fear index" since it is a gauge of investors' fears of volatility. The index increases or decreases based on the expected volatility of the market. If an investor expects volatility to rise, she is bullish on the VIX. A bullish option strategy, such as long calls, put credit spreads (executed for a net credit), or call debit spreads (executed for a net debit) will enable the investor to profit if the VIX increases. Many investors buy VIX call options as a hedge against a possible decline in the market since the VIX usually moves in an inverse direction to the equity market.

Which of the following bonds has the most interest-rate risk?

The bond with the most interest-rate risk or price volatility is the bond with the longest maturity and the lowest coupon. This price sensitivity is based on the concept of duration. The first step is to identify the bond or bonds that have the longest maturity. In this question, there are two bonds with 30-year maturities, which eliminates the possibility of the three-month and five-year bonds as the answer. The second step is to find the long-term bond that offers the lowest coupon rate. Since a T-STRIP is a form of zero-coupon bond, it clearly has more interest-rate risk than another long-term bond that offers a 6% coupon. Remember, the greatest price sensitivity based on interest rate fluctuation is a long-term bond with a low coupon.

A registered representative receives a sell order from his customer. When he submits the order, he accidentally transposes two of the digits in the account number and the order is processed under the wrong account. This problem is rectified:

The branch office manager will rectify this error by correcting the account number and crediting the sale in the proper account. The order is not placed in the error file since it was properly executed, but in the wrong account. The registered representative doesn't rectify these types of problems. The wrong account will not be responsible for anything related to the incorrect order.

Mr. Jones purchases a Canadian dollar September 85 call option for a premium of .82. At what price (spot rate) would the Canadian dollar need to be trading in order for Mr. Jones to exercise the option and break even? (Assume 10,000 Canadian dollars per contract.)

The breakeven formula for call buyers is the strike price plus the premium. The strike price is 85 (0.8500) and the premium is .82 ($0.0082). Therefore, the spot rate for the Canadian dollar would need to be $0.8582 for Mr. Jones to break even.

All of the following information must be disclosed to a customer on a confirmation, EXCEPT:

The customer confirmation must disclose the date and time of the transaction (or the fact that the time of the transaction will be furnished upon written request to such customer), the identity, price, and number of shares or units of such security purchased or sold by such customer; and whether the broker or dealer is acting as agent for the customer, as agent for some other person, as agent for both the customer and some other person, or as principal for its own account. If the broker or dealer is acting as principal, it must disclose whether it is a market maker in the security. The fee must be disclosed if acting as agent, riskless principal, or principal for an NMS security. Whether the order was solicited or unsolicited would be on an order ticket, rather than a confirmation.

The Founders Income Fund has declared a dividend that is payable to stockholders of record on Thursday, May 29. This mutual fund's ex-dividend will typically be on:

The date that is set by the fund or its principal underwriter (sponsor) Mutual fund shares do not trade on exchanges and do not have a fixed settlement date. For this reason, the ex-dividend date for a mutual fund will not automatically be one day before the record date, as it is for common stock. Instead, a mutual fund's ex-dividend date is on a date that is determined by the fund or its principal underwriter (sponsor). In practice, mutual funds will often use the day after the record date as the ex-dividend date.

Which statements are TRUE regarding a variable life policy?

The death benefits, which vary with the performance of the separate account, are calculated annually. If an investor chooses to take a loan against the accumulated value, interest is charged.

The record date of a company's cash dividend is Thursday, October 7. Before what date must a customer purchase this company's stock to be entitled to receive the dividend?

The ex-dividend date (the ex-date) is the first day on which a stock begins to trade without its dividend. It is typically one business day prior to the record date, which in this question, would be Wednesday, October 6. For a buyer to receive the dividend, the transaction must settle on or before the record date of Thursday, October 7. Therefore, if a person purchases the stock on or after the ex-dividend date, he is not entitled to the dividend since regular-way settlement takes two business days for the trade to settle. In order to be entitled to the cash dividend, the purchaser must buy the stock prior to the ex-date of Wednesday, October 6. Please note that the question is not asking by what date an investor must purchase the stock to be entitled to the dividend; instead, it is asking before what date must the purchase be made.

An exchange-listed corporation has recently paid $2.50 per share to each of its 1.5 million preferred shares. The corporation also has net income of $29 million and 20 million shares of common stock outstanding. If the corporation also pays a $0.25 quarterly dividend, what's the corporation's dividend payout ratio?

The formula for calculating the dividend payout ratio is the common dividend divided by earnings per share (Common Dividend ÷ EPS). The formula for calculating earnings per shares (EPS) is the net income, less preferred dividends, divided by the number of common shares outstanding. The corporation has $29 million in net income and paid out $3.75 million in preferred dividends ($2.50 x 1.5 million shares); therefore, the corporation has $25.25 million available to pay its common shareholders. Since the corporation has 20 million common shares, its EPS is $1.26, ($25.25 ÷ 20 million common shares). The quarterly dividend paid to common shares is $0.25, which means the annual dividend is $1.00 ($0.25 x 4 quarters). As a result, the dividend payout ratio is 79.37% ($1.00 annual dividend ÷ $1.26 EPS). Common Dividend / earnings per share EPS = (net income - preferred dividends) / common shares outstanding

When reading a research report on an automobile company, a registered representative's use of fundamental analysis determines that the stock is a good investment. When attempting to determine the best time to execute orders to buy the stock, the registered representative could refer to:

The fundamental analyst will use the balance sheets and income statements of companies to determine which security to purchase but may use technical analysis (i.e., reviewing the chart pattern of the stock's market price) to assist in determining when to make a purchase (timing).

The interest paid on special assessment bonds is derived from:

The interest paid by the issuer to holders of special assessment bonds is derived from charges made to the users of the benefitted property. These bonds are issued to finance the construction of water and sewer systems, sidewalks, and streets.

In August, an investor sells an uncovered listed option and receives a $1,100 premium. The following February, the customer makes a closing purchase transaction at 3. The result of the transactions is:

The investor made an $800 profit on the closing transaction (sale at $1,100 and purchase at $300). The profit is treated as a short-term capital gain in the year in which the transaction is closed out. Although short-term capital gains are taxed at the same rate as the investor's ordinary income, they're not considered ordinary income. Ordinary income typically includes a person's salary, wages, tips, bonuses, commission, or income earned from self-employment.

A revenue bond is backed by a pledge of net revenues. This indicates that:

The issue requires that operation and maintenance expenses are paid first from gross revenues. Gross revenues minus operating and maintenance expenses leaves net revenues. Debt service (also called bond service) would then be the first item paid from net revenues.

A client buys 100 shares of MTB at $58 per share and writes 2 MTB October 60 calls at 3. Which of the following statements is TRUE?

The maximum loss is unlimited This position, which is referred to as ratio writing or a variable hedge, has an objective to increase the income from writing more calls than stock owned. However, this is an extremely risky position and the client's maximum loss is unlimited since two calls were written against a long stock position of only 100 shares. This client is covered on one short call, but uncovered on the second short call, which results in the maximum loss being unlimited. If the market price trades at or below $60 and the options expire, the client will have a $600 profit since two calls were written. The breakeven point is found by taking the purchase price of $58 and subtracting the total premiums of 6, which equals $52. The maximum profit is $800, which is found by taking the difference between the purchase price and the strike price and adding the premiums received from writing the call options (60 - 58 + 3 + 3). A popular answer choice is a maximum loss of $5,200, since students simply subtract the total premiums received ($600) from the total cost of the stock ($5,800). It is important in these questions to examine the entire position and to remember that the maximum loss on an uncovered call is unlimited.

In which of the following documents are bid limitations for a new municipal bond issue found?

The notice of sale is published by the issuer. It announces the issuer's intention to sell an issue and invites securities firms to compete for the issue. All information pertaining to the bidding would be contained in the notice of sale.

As far as variable annuities are concerned, which of the following statements is TRUE?

The only true statement listed concerning variable annuities is variable annuity nonqualified separate accounts (the mutual fund portion) are registered under the Investment Company Act of 1940. The investment risk (fluctuation in the market value of the separate account) is borne by the annuity owner, not by the insurance company as in the case of a fixed annuity. Payments of a variable annuity cannot be decreased because of an increase in the expenses of the insurance company. RRs selling variable annuities are required to register with the SEC and FINRA

A customer purchased an initial public offering of stock at $38 a share. The current market price is $24 and the EPS is 19 cents. If the company has no plans to pay a cash dividend, what is the price/earnings ratio of the company?

The price/earnings ratio is found by dividing the current market price of $24 by the earnings per share of 19 cents. This equals a price/earnings ratio of 126.3 ($24 / $.19). The IPO price and the amount of the dividend are not relevant in calculating the price/earnings ratio.

George has the following position in his account: Long 1 XYZ Nov 45 call By adding which of the following positions creates a combination?

The purchase of a call and put on the same stock, with different expirations and/or strike prices, is a long combination. If the expirations and strike prices are the same, the purchases create a long straddle. To create a combination from the choices given, George needs to add 1 long XYZ Nov 40 put to his account.

Mr. Smith sells short 100 shares of MNP @ 39 and also purchases 1 MNP May 40 call @ 3. Mr. Smith's breakeven is:

The purchase of a call will provide protection against a price increase in the short stock. If the stock price increases, the holder can exercise the call and buy the stock at the strike price. This limits Mr. Smith's loss. The breakeven is the short sale proceeds minus the premium paid for the call. This would equal 36 (39 - 3). If the stock price declines to 36, the 3-point profit on the short sale will be offset by the 3-point loss on the expiring call.

The settlement date between the Options Clearing Corporation and the clearing firm for options transactions is:

The settlement date for options transactions between the Options Clearing Corporation and a clearing member is one business day from the trade date.

The spot prices of foreign currencies are determined:

The spot prices for foreign currencies are determined in the Interbank market, which consists of commercial banks trading currencies.

The ABC Growth Fund has been in existence for eight years. If the fund uses an advertisement that refers to its ranking based on total return, what total return time periods must be used?

The standards set forth by the SEC and FINRA regarding mutual fund communications (advertising) are that performance statistics should cover 1-, 5- and 10-year periods. If the fund has not been in existence for 10 years, then it must display the total return for the lifetime of the fund (e.g., eight years in this question). In addition, the total return exhibited and the specific ranking must be determined by the same ranking entity.

An individual owns shares of a mutual fund and wants to switch to an ETF because of potential tax advantages provided by ETFs. Which of the following statements is TRUE regarding the taxation of ETFs?

The tax advantage that ETFs have over mutual funds is the fact that the investor controls the timing of the sale of shares, thereby determining when a capital gain or loss may be realized. Since ETFs are typically linked to indexes, the managers seldom trade their portfolios and therefore don't generate capital gains that need to be distributed. On the other hand, mutual fund managers trade shares within their portfolios on a regular basis and any realized gains are taxable in the year in which they're received by the shareholders (regardless of whether the funds are reinvested). As with other stocks, ETF dividends may be considered qualified and taxed at the same rate as long-term capital gains if the ETF shares are held for more than 60 days. - investor determines the timing of when the shares are so when a capital gain or loss may be realized - mutual fund managers trade in a regular basis and realized gains are taxable by the actions of the manager, not the investor

An employee in the operations department of a broker-dealer asks an Operations Professional what is meant by the term, covered XAM put. The BEST answer would be if it includes a position in which a customer is:

The writer (seller) of a put option is obligated to purchase stock if the buyer of the put option exercises the contract. If a customer is short stock and is short a put, she is said to be covered on the transaction since she is already required to purchase the shares to cover the short sale transaction.

All of the following information is found in a municipal revenue bond resolution, EXCEPT:

The yields to maturity of the bonds The indenture or resolution is basically the contract between the issuer and the bondholder. It will specify the rights of the bondholders and the provisions to protect the bondholders' interest. One of the provisions included is a rate covenant in which the issuer pledges to charge rates that are sufficient to cover expenses and debt service. An additional bonds test is included that sets requirements that must be met before additional bonds can be issued. The method of funding and the operation of the sinking fund (used to retire some bonds prior to maturity) are also included. Another important provision is flow of funds, which states how the income generated by the project will be used.

Which of the following statements is NOT TRUE regarding the purchaser of a put option?

There is more than one way the investor could profit. The investor could profit by either exercising or liquidating the put. The other choices are true statements. The purchaser of a put has a right to sell stock. The maximum loss that a purchaser of an option (put or call) can sustain is the amount of the premium paid. The purchaser of a put can profit if the underlying stock declines in value.

All of the following are characteristics of interval funds, EXCEPT:

They're only required to calculate their net asset value when investors redeems their shares. Interval funds have an ongoing requirement to calculate their net asset value. An interval fund is classified as a type of closed-end fund that continuously offers shares to investors. Interval fund shares don't trade in the secondary market on an exchange; instead, investors are allowed to sell a portion of their shares back to the fund at the current net asset value only at a preset interval (e.g., monthly, quarterly, semiannually). Since shareholders are only able to exit these funds at intervals that are stated in the fund's prospectus, they're illiquid investments. Due to their limited liquidity, interval funds are most suitable for long-term investors, those seeking income-producing investments, and those seeking to diversify their portfolios. These funds can provide individual investors with access to alternative investments (e.g., private equity and certain commercial real estate investments) that are typically limited to accredited and institutional investors. Another issue for investors to understand about interval funds is that their fees and expenses tend to be much higher than other closed-end funds and mutual fund

An investor places an order to buy shares of a mutual fund after that investment company has determined its net asset value for the day. The RR instructs the fund company to purchase the shares at that day's NAV for the investor. Which of the following statements concerning this potential trade is TRUE?

This activity would constitute a sales practice known as late trading, which is prohibited under federal securities laws. According to securities law, orders placed after the close of trading for the day (and after the determination of the closing NAV) must be filled at the next calculated NAV, which is usually the price at the end of the next business day. Investors placing orders after the close of the market (based on information that they have learned after the close), and seeking to purchase shares at prices determined before the close, are engaging in late trading, which clearly places other investors in that mutual fund at a clear disadvantage. The investor must receive the price as calculated by the fund company at the NAV on the following day.

A registered representative is sending out electronic communication that was prepared by her firm to 75 of her existing retail customers. The communication explains to the customers that their account statements are now available online. Which of the following statements is TRUE?

This electronic communication is considered retail communication since the registered representative is distributing it to more than 25 retail customers. Retail communication is any written or electronic communication that's distributed to more than 25 retail investors within a 30-calendar-day period. If the communication is directed to 25 or fewer individuals, it's considered correspondence. If the retail communication does not make a financial recommendation or does not promote a product or service of the firm (e.g., the RR's communication in this question), prior principal approval is not required. However, this activity should still be reviewed and supervised by the broker-dealer.

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. The individual's maximum loss is:

This is a debit spread since the investor is paying more (4) for the purchased call than he receives (2) for the call that was written. The maximum loss for a debit spread is the amount of the debit. A simple way to look at a debit spread is to focus in on the buy side of the spread. This is the more valuable option contract and, therefore, defines the investment strategy. Approach the questions as if the investor purchased the 90 call at the net debit of 2 ($2,000 for 10 contracts). The maximum loss when purchasing an option is the premium (net premium).

Ms. Green buys 300 shares of RSW at $15 per share. She then writes 3 RSW July 20 calls at 1 and writes 3 RSW July 10 puts at 50 cents. Ms. Green's maximum potential loss on the entire position is:

This is a tricky and involved question in which Ms. Green has written three covered calls and three uncovered puts. In both cases, the maximum loss occurs if the underlying stock (RSW) becomes worthless. If the market price of RSW is zero, the three covered calls will result in a $4,200 loss (300 shares x $15 purchase price minus the $300 premium received). The three uncovered puts will be exercised if the stock declines to zero, which is the worst case scenario. The maximum loss on an uncovered put is the total or aggregate value of the option less the premium received. The aggregate strike price of $3,000 ($10 x 100 shares x 3 contracts) minus the premium of $150 ($.50 x 100 shares x 3 contracts) equals $2,850. Therefore, the total loss is $7,050 ($4,200 + $2,850). A popular answer is a loss of $4,050 (the $4,200 loss - $150 premium received); however, this answer disregards the investor being exercised against on the short puts. Also, students often arrive at a loss of $4,950 by adding the cost of the stock ($4,500), plus the premium received from the sale of the calls ($300), plus the premium received from the sale of the puts ($150). Keep in mind, when an investor is long stock, losses will be realized by the stock declining in value. The answer of $7,050 was determined by assuming that the stock becomes worthless.

A client with an options account takes the following position: Long GHI Nov 65 puts and Short GHI Nov 55 puts. Which of the following statements is TRUE regarding this position?

This position will be profitable if the market price of the security declines. This position is referred to as a debit put spread. It's a debit because the cost to purchase a put with a higher strike price will be more than the amount received for selling a put with a lower strike price. The investor will make money if the stock declines (bearish) in value since the long put will be exercised first (it has a higher strike price and thereby more intrinsic value). The fact that the premiums are not given is irrelevant since the cost of a put with the higher strike price will always be more valuable that a put with a lower strike price (if given the same expiration month). The position may be profitable if the stock price was trading between 65 and 55, but will also be profitable if the stock is trading below 55.

An open-end investment company with a NAV of $22.20 and a sales charge of 8% would have an offer price of what amount?

To find the asked price, divide the net asset value by the complement of the sales charge, as follows. NAV / (100% - sales charge) = $22.20 / (100% - 8%) = $22.20 / 92% = $22.20 / .92 = $24.13 The asked price is also referred to as the public offering price (POP).

To be considered a regulated investment company, a mutual fund must:

To qualify as a regulated investment company, the company must distribute a minimum of 90% of its investment income to its shareholders. Meeting this requirement allows the investment company to pass on distributions to shareholders without the company having to first pay taxes on the income distributed.

The BG mutual fund has an NAV of $11.72 and a maximum offering price of $12.67. Based on these details, what's the maximum sales charge for the BG fund's shares?

Under SRO requirements, the maximum sales charge for mutual fund shares is 8.5%; however, as long as they don't exceed this percentage, funds can set their own maximum. Since this question indicates that the fund's NAV is $11.72 and it has a maximum offering price of $12.67, the maximum sales charge is calculated by determining the $0.95 difference between these two values ($12.67 - $11.72) and dividing by the maximum offering price of $12.67. Therefore, the maximum sales charge for shares of the BG fund is 7 1/2% ($0.95 divided by $12.67).

A customer contends that his registered representative made unauthorized trades in his account and will take this matter to an arbitration panel. Regarding the makeup of this panel, which of the following statements is TRUE?

Under the Code of Arbitration, if a public customer takes a member firm to arbitration to resolve a dispute, the majority of the panel must come from outside the securities industry, unless the customer requests a panel with a majority of industry arbitrators. Neither the broker-dealer nor the customer may actually pick the arbitrators and arbitrators do not need to be attorneys.

Which of the following issuers is able to seek a registration exemption under Regulation A?

Under the Regulation A exemption, there are two tiers which represent the maximum amount of the offering. Under Tier 1, the maximum offering size is an aggregate of $20 million, of which no more than $6 million of the offering may be sold on behalf of existing shareholders (i.e., 30% of the offering). Under Tier 2, the maximum offering size is an aggregate of $75 million, of which no more than $22.5 million of the offering being sold on behalf of existing shareholders (i.e.,30% of the offering). The only issuer that's able to take advantage of the Regulation A exemption is the issuer conducting an aggregate offering of $45 million, of which only $12.5 million is on behalf of its selling shareholders. in this case, $12.5 million is approximately 28% of the offering size (i.e., not more than 30%).

Which of the following best represents the definition of a wash sale?

Wash sales involve the repurchase of securities that were originally sold for a loss. The IRS will disallow a loss (i.e., it cannot be used as a deduction) if an investor buys a security within 30 days of selling the security for a loss. A tax swap is defined as the sale of a security for a loss followed by the repurchase of a slightly different security. The IRS does allow losses to be claimed for tax swaps since a different security is repurchased.

A corporation purchases new machinery using cash. Which of the following choices are results of this transaction?

When a corporation purchases machinery with cash, current assets (cash) are reduced and fixed assets (machinery) are increased by the same amount. Overall, total assets remain unchanged. Working capital (Current Assets - Current Liabilities) is reduced since cash (a current asset) is reduced.

An individual purchased a 10-year municipal bond at a cost of $1,050. If the individual sells the bond in five years at its amortized value, the tax consequence will be:

When a municipal bond is purchased at a premium, the premium must be amortized over the life of the bond. When asked to amortize, the individual would use straight-line to calculate the amount. In this question, the $50 premium would be amortized equally over the 10 years at $5/year. After five years, $25 would be amortized and the adjusted cost basis would be $1,025

On September 1, an underwriter offers stock that has been registered with the SEC. This is the first offering of stock made by the issuing company. The issue will be listed on the New York Stock Exchange. A dealer that subsequently sells the stock in the secondary market will be required to furnish a prospectus:

When a new issue is sold to the public, a prospectus must be given to all potential purchasers. In addition, dealers who sell the security in the aftermarket, even if they were not involved in the original distribution, are required to provide a copy of the prospectus. This lasts for a period of 25 days following the initial offering for issues to be listed on an exchange (including Nasdaq). If the offer is an IPO and the securities are not listed on an exchange, the prospectus must be provided for 90 days. If the issue is not an IPO, and the securities will not be listed on an exchange, dealers must deliver prospectuses for 40 days after the offering date.

A customer owns an AMF October 30 call option. If AMF should split 2 for 1, the customer will own:

When a stock splits 2 for 1 (an even split), the number of contracts increases and the strike price is reduced proportionately. The number of shares representing each listed option remains at 100 shares. The customer will now have 2 calls for 100 shares each at the adjusted strike price of $15 or 2 AMF October 15 calls for 100 shares each of AMF. Listed options are adjusted for stock splits, stock dividends, and rights offerings, but are not adjusted for cash dividends.

If an equity option is exercised, when is the settlement date for the stock transaction?

When an equity (stock) option is exercised, delivery of the underlying stock and payment for the stock is expected within 2 business days (regular-way settlement for stock).

An investor has made the following purchases of XAM stock: Shares bought at $39 in May 2020 Shares bought at $56 in September 2020 Shares bought at $36 in January 2021 Shares bought at $36 in June 2021 The investor sells some of his XAM shares in February 2022 at $51. Based on the various purchases, which shares may be sold to result in the greatest gain with the lowest tax liability?

When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. To find which shares should be sold to generate the largest gain with the lowest tax liability, let's consider each possibility separately. Selling from the shares that were purchased in May 2020 results in a 12-point long-term gain. Selling from the shares that were purchased in September 2020 results in a long-term loss, not a gain. Selling from the shares that were purchased in January 2021 results in a 15-point long-term gain. Selling from the shares that were purchased in June 2021 results in a 15-point short-term gain (due to the shares having been held for one year or less). Since the tax rate on long-term gains (20%) is lower than the tax rate on short-term gains (as ordinary income), selling the shares that were held the longest is the best option. Although the sale of shares that were purchased in January 2021 will result in the same gain as the sale of shares that were purchased in June 2021, the tax liability will be lower. - long-term gains are taxed at lower rate than ordinary income

When may a new issue become marginable?

When approved for margin trading by the FRB, a new issue becomes marginable 30 days from the effective date of the offering.

When an option contract is assigned, the writer:

When assigned an exercise notice for an option, the writer must fulfill the obligation by delivering the underlying instrument for the exercise of a call, or cash for the exercise of a put

Four municipal bonds have the same maturity date. Which of the following bonds will cost an investor the greatest dollar amount when purchased?

When bonds are purchased at a discount (below the $1,000 par value) the yield to maturity (basis) will be greater than the coupon rate (nominal yield). This is the case in all of the choices listed except where the coupon rate of 5 1/4% is greater than the yield to maturity of 5%. This would mean that an investor purchased the bond at a premium (above the $1,000 par value) and paid the greatest dollar amount. (72690)

An individual purchased stock for $10,000 and has written calls against the stock over a two-year period. She received premiums totaling $1,500 in the first year and $2,000 in the second year, with all of the options expiring. What's her total cost basis on the stock after the second year?

When covered calls expire (as in this question), the premium will be realized as a short-term capital gain and the cost basis for the stock will generally remain the same. If the options were closed out prior to expiration, the result is either a capital gain or loss based on the difference in premiums. If an option was exercised, the premium would be added to the option's strike price to determine the sales proceeds and the gain/loss would be either short-term or long-term based on how long the stock had been held prior to its sale. Keep in mind, to find the breakeven point on a covered call, the premium received is subtracted from the cost to purchase the stock.

A client has reached retirement age and decides to annuitize her nonqualified variable annuity. What amount of the payments made to her would be considered her cost basis?

When purchasing a nonqualified variable annuity, the purchases made by the individual are in after-tax dollars and thus, the cost basis. Reinvestment of distributions is automatic and done in pretax dollars.

A customer asks an RR for a recommendation as to how to invest a $150,000 inheritance. The customer would like to use the funds to start a new business within the next year. Which of the following would be the LEAST suitable recommendation for this customer?

While all of these funds are somewhat conservative, the balanced fund will contain some equity investments, which will expose the customer to market risk. Given the customer's short time horizon and objective of preservation of capital, the balanced fund would be the least suitable of the choices listed.

A type of security that is issued in the U.S. by foreign governments and corporations, trades in U.S. markets, and is denominated in U.S. dollars is called a:

Yankee bonds are issued in the U.S. by foreign corporations and governments, are dollar-denominated securities, and trade in U.S. markets. Yankee bonds are normally issued by foreign entities when conditions in the U.S. are better than in the foreign country. Eurodollar bonds are issued by U.S. companies and sold to investors overseas and pay their interest in Eurodollars (dollars on deposit in banks outside the U.S.). Since Eurodollar bonds are not initially offered to investors in the U.S., they are exempt from SEC registration.

Two close friends have individual brokerage accounts that they use to trade options. Both individuals have given their friend discretionary authorization in each other's brokerage accounts because they use similar trading strategies. Recently, they have purchased call options on the same security. In one account, 150,000 contracts were purchased, while the other account purchased 170,000 contracts. If the options exchange has a 250,000 position limit on that call option contract, have the friends violated the position limit?

Yes, since the two friends have discretionary authority over each other's account which means that they're acting in concert. The Options Clearing Corporation (OCC) and options exchanges have position limits on contracts that are on the same side of the market (i.e., bullish positions are on one side, while bearish positions are on the other). An individual or group of individuals who are acting in concert cannot acquire positions on the same side of the market that exceed the position limit. In this question, the friends have discretionary authority in each other's accounts and are therefore acting in concert. Since the aggregate positions in both accounts exceed the limit, they're in violation of the rule.

If a portfolio manager is rebalancing a client's assets on a quarterly basis, this would be considered:

allocation intact. A tactical asset allocation strategy is more dynamic and attempts to exploit inefficiencies in the markets by rebalancing the portfolio frequently in response to changes in economic and market conditions.

a nonnegotiable security is one that

cannot be sold in the secondary market ex: savings bonds

Which of the following risk factors is the MOST important for purchasers of long-term, high-grade bonds?

ong-term, high-grade bonds are relatively safe investments, but do have purchasing-power risk. Because the amount of interest income is fixed, the purchasing power of the interest income may decline over the long term because of inflation. A rise in inflation reduces the amount of goods and services that can be purchased with the fixed amount of dollars.

Initial short sale margin requirement vs purchase margin requirement

sale: the greater of $2000 or 100% of the short sale amount purchase: the lesser of $2000 or 100% of the purchase amount

Total equity includes

the market value of securities in a cash account and the cash itself