Practice Test 6

An investor with no other positions buys 1 DWQ May 75 call at 6.50. If the investor exercises the call when the stock is trading at 77 and immediately sells the stock in the market, what is the investor's profit or loss? A) $450 loss. B) $350 loss. C) $450 profit. D) $350 profit.

A) $450 loss. The investor exercised the right to buy the stock for 75 and can sell the stock in the market for 77, for a gain of 2. The investor paid a premium of 6.50 minus the gain of 2, which gives the investor a loss of 4.50 (4.50 × 100 = $450).

A customer enters an order to purchase 1000 shares of XYZ common stock at the market when the quote is 18.22 bid, 18.30 ask. If the transaction is executed at the market and the broker charges a $.10 mark-up how will the price be reported to the consolidated tape system? A) 18.30 B) 18.32 C) 18.40 D) 18.22

A) 18.30 When transaction prices are reported to the consolidated tape system they do not include the amount of any commission, mark-up or mark-down. In this instance 1000 shares were purchased at the market meaning the buyer paid the ask price of 18.30. This is the price that would be reported to the consolidated tape system (CTS).

A customer wishes to buy 1 XYZ Jan 40 call and write 1 XYZ Jan 45 call. At the time the order is placed, the options are trading as follows: Jan. 40 calls - 4.30 bid, 4.35 ask Jan. 45 calls - 2.25 bid, 2.30 ask If the transaction is effected at the market, the spread will be established at a: A) 2.10 debit. B) 1.75 debit. C) 1.85 debit. D) 1.50 debit.

A) 2.10 debit. The investor establishes a debit spread by purchasing the 40 call at the ask price of 4.35 and selling the 45 call at the bid price of 2.25; the difference is 2.10.

The computation for accrued interest on corporate and municipal debt obligations is based on a(n): A) 30-day month and a 360-day year. B) actual-day month and a 360-day year. C) 30-day month and an actual-day year. D) actual-day month and an actual-day year.

A) 30-day month and a 360-day year Accrued interest on corporate and municipal bonds is computed on a 30-day month and a 360-day year.

While looking at a stock listing in the financial section of your local newspaper, you notice that the dividend is indicated by the notation ".15q." If you owned 1,000 shares, you could anticipate annual dividends of: A) 600. B) 150. C) 60. D) 15.

A) 600. The notation .15q indicates a quarterly dividend of $.15. Therefore, the annual dividend is $.60 per share. 1,000 shares × .60 = the annual dividend of $600.

Which of the following capital structures would be considered the most highly leveraged? A) A large value of bonds and a small value of common stock. B) A large value of common stock and a small value of bonds. C) Equal values of common stock and bonds. D) Common stock only.

A) A large value of bonds and a small value of common stock. Leverage is using other people's money to enhance equity value. In this case, borrowing at a fixed-rate of payment enhances cash flow, giving the company extra money to invest in its operations. Just as individuals, a company has to be careful not to borrow more than they can afford.

The syndicate manager takes which of the following actions in a divided municipal syndicate that does not sell out? A) Confirms the bonds to the member that did not sell its share. B) Returns the bonds to the issuer. C) Holds an auction. D) Prorates the bonds according to syndicate participation.

A) Confirms the bonds to the member that did not sell its share. Because this offer is a divided, or Western, syndicate, each member is responsible for selling a specific number of securities. If a member does not sell its share, it receives the bonds for its inventory.

If a high-income customer is subject to AMT, which of the following preference items must be added to adjusted gross income to calculate his tax liability? A) Interest on a private purpose municipal bond. B) Distributions from a corporate bond mutual fund. C) Income from a municipal security issued to finance parking garages. D) Interest on a municipal bond issued to finance highway construction.

A) Interest on a private purpose municipal bond. If more than 10% of a bond's proceeds go to private entities, the interest on the bond is a tax preference item for alternative minimum tax purposes.

Which of the following orders on the order book will NOT be filled if the stock rises? A) Sell stop. B) Sell limit. C) Buy stop limit. D) Buy stop.

A) Sell stop. Those orders on the book which are above the current market will be executed if the stock rises. Those open orders above the current market are buy stops (including buy stop limits) and sell limits.

Which of the following are funded by general tax receipts? A) Tax anticipation notes (TANs). B) Bond anticipation notes (BANs). C) Hospital revenue bonds. D) Revenue anticipation notes (RANs).

A) Tax anticipation notes (TANs). Municipalities issue TANs to raise funds immediately. The community expects general tax revenues to generate the necessary funds to pay off the notes. RANs are eventually funded by revenues other than tax receipts, and BANs are eventually funded through the sale of bonds.

Your client wishes to convert a 401k plan administered by your broker/dealer into a Roth 401k plan. Which of the following statements regarding a 401k conversion is TRUE? A) Taxes will be due on the funds when the rollover takes place. B) In the new Roth 401k the funds will grow tax deferred. C) Taxes are due on the funds rolled over when distributions from the new Roth 401k are made. D) All taxes are waived by the IRS at the time of conversion.

A) Taxes will be due on the funds when the rollover takes place. Like a traditional IRA to Roth IRA conversion, 401(k) account holders pay the taxes on the funds when they are rolled over into the Roth 401(k). There is no waiver from the IRS. In the Roth 401(k), the funds now grow tax free and they can be withdrawn without tax liability in the future.

John is the annuitant in a variable plan, and Sue is the beneficiary. Upon John's death during the accumulation period, Sue takes a lump-sum payment. What is her total tax liability? A) The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. B) The ordinary income on the proceeds over the cost basis plus 10% of the net gain (if any) if Sue is younger than 59-½ years old. C) None, because it is the proceeds from a life insurance company. D) The entire amount is taxed as ordinary income, because it is not life insurance.

A) The proceeds minus John's cost basis taxed as ordinary income at Sue's tax rate. Annuity death benefits are generally paid in a lump sum. The beneficiary is taxed at ordinary income rates during the year the lump sum is received. The amount taxed is the amount of the lump-sum payment minus the deceased's cost basis in the investment.

If an agent is assigned to an account previously handled by an agent who has since left the firm, which of the following actions should the agent take first? A) Verify the account information. B) Suggest the customer buy one of the stocks the firm is currently recommending. C) Liquidate the portfolio for immediate reinvestment in stocks the firm is currently recommending. D) Require the customer to sign a trading authorization naming the agent as the party with authority

A) Verify the account information The agent must verify and update client information before recommending trades. Without knowledge of the client's needs and financial profile, the agent cannot make suitable recommendations.

Which of the following strategies is considered most risky in a strong bull market? A) Writing naked calls. B) Writing naked puts. C) Buying a put spread. D) Buying calls.

A) Writing naked calls. Writing naked calls gives unlimited risk. If the market rises, naked puts expire. In the latter case, the writer profits from the premiums.

Under Regulation T, action by the broker/dealer is NOT required when the: A) amount due does not exceed $1,000. B) total amount of the transaction does not exceed $1,000. C) amount due does not exceed $200. D) amount due does not exceed $100.

A) amount due does not exceed $1,000. Regulation T permits a broker/dealer to disregard any amounts due less than $1,000.

If a married couple with a long-term growth objective is considering a mutual fund and they are concerned about the fund's annual expenses, they should select a: A) common stock fund with a low portfolio turnover. B) long-term corporate bond fund. C) preferred stock fund. D) common stock fund with a high portfolio turnover.

A) common stock fund with a low portfolio turnover. Of the choices given, common stock is the only vehicle capable of providing long-term growth. Preferred stock will provide dividends, but it will not provide much growth as it trades like a bond in line with interest rate changes. Of the two common stock funds, the one with the lower portfolio turnover will have lower annual expenses.

With regard to a variable annuity, all of the following may vary EXCEPT: A) number of annuity units. B) value of accumulation units. C) value of annuity units. D) number of accumulation units.

A) number of annuity units. During the accumulation phase, the number of accumulation units will increase as additional money is invested. When the contract is annuitized, the annuitant is credited with a fixed number of annuity units. Once annuitized, the number of annuity units does not vary. The value of accumulation and annuity units varies with the investment performance of the separate account.

Inverse exchange-traded funds (ETFs), also known as reverse or short funds, are managed to A) perform contrary to a benchmark market index such as the S&P 500 B) be profitable only when interest rates are rising C) outperform a benchmark market index such as the S&P 500 D) be used only by professional traders and market makers

A) perform contrary to a benchmark market index such as the S&P 500 Inverse funds, which are also commonly referred to as "short" funds, try to deliver returns that are the opposite of the benchmark index they are tracking. When they are exchange traded, they can be bought on margin and are priced throughout the trading day like other exchange-traded products. They are available to individual public investors and firm proprietary traders as well.

A home builder has issued a collateralized mortgage obligation (CMO) using government agency mortgage pass-through securities, mortgage loans and letters of credit as collateral. This would be known as what type of CMO? A) private-label B) inverse floater C) agency-issued D) agency-backed

A) private-label When private institutions such as finance agencies, investment banks or home builders issue CMOs they are known as "private-label" CMOs. They are the sole obligation of their issuer and often have as collateral non-agency issued securities such as letters of credit and mortgage loans or pools of mortgage loans.

All of the following may occur during the mandatory 20-day cooling-off period EXCEPT: A) soliciting transactions for the security. B) publishing a tombstone ad. C) the performance of due diligence by the underwriters. D) forwarding a preliminary prospectus to a customer.

A) soliciting transactions for the security. During the 20-day cooling-off period, only unsolicited requests for information may be honored. Soliciting sales is prohibited.

On January 1, an investor buys 1 FLB Apr 50 call at 4 and 1 FLB Apr 50 put at 2.50. If both options expire unexercised, what are the tax consequences for the investor? A) $400 gain on the call, $250 gain on the put. B) $400 loss on the call, $250 loss on the put. C) $150 net capital loss. D) $150 net capital gain.

B) $400 loss on the call, $250 loss on the put. In a straddle the options are treated separately for tax purposes. The investor has a $400 capital loss on the call and a $250 capital loss on the put. Both are short-term losses.

Jerry Avery bought 100 shares of DMF at 30 and two weeks later bought a 9-month DMF put at 4. The put expired. What was Jerry's tax consequence? A) None, the cost of the put is added to the cost of the stock. B) $400 short-term loss. C) $2,600 loss. D) $400 long-term loss.

B) $400 short-term loss. When the put expired worthless, Jerry had a short-term loss of $400. Because the put was bought two weeks after the stock it is not considered a "married put" for tax purposes. Married put scenario's have their own unique tax consequences.

Which of the following acts requires publicly traded corporations to issue annual reports? A) Trust Indenture Act of 1939. B) Securities Exchange Act of 1934. C) Investment Company Act of 1940. D) Securities Act of 1933.

B) Securities Exchange Act of 1934. The Securities Exchange Act of 1934 mandates that public issuers file annual and quarterly reports with the SEC.

A customer bought a 10% interest in a real estate limited partnership by investing $100,000. The partnership buys a $4 million property with the funds, making a down payment of $800,000 and financing the balance with a nonrecourse mortgage of $3.2 million. Subsequently, the partnership cannot meet the mortgage payment; the lender forecloses when the remaining mortgage balance is $3 million, auctioning off the property for $1 million. How much of the investment will the customer recover? A) 10,000. B) 0. C) 100,000. D) 32,000.

B) 0. The real estate limited partnership raised only $1,000,000 (10% interest equals $100,000). The partnership incurred excess liabilities. While the customer isn't liable for any of the excess liabilities, as a limited partner the customer is liable for the entire $100,000 invested. Because the customer is liable for the entire $100,000 invested, none of it will be recovered.

On February 13, your customer buys an 8% Treasury bond maturing in 2009 for settlement on February 14. If the bonds pay interest on January 1 and July 1, how many days of accrued interest are added to the buyer's price? A) 14. B) 44. C) 45. D) 43.

B) 44. Accrued interest for government bonds is figured on an actual-days-elapsed basis. The number of days begins with the previous coupon date and continues up to, but not including, the settlement date. The bonds pay interest on January 1. There are 31 days of accrued interest for January. The bonds settle February 14. There are 13 days of accrued interest for February. Do not count the settlement date (31 + 13 = 44 days).

A customer buys 10 ABC Jul 25 calls at 4.50. What is the total premium paid for the position? A) 29500. B) 4500. C) 20500. D) 450.

B) 4500. A premium of 4.50 multiplied by 100 shares per contract, multiplied by 10 contracts equals $4,500.

An investor establishes the following position: Long 1 XYZ Jan 50 put at 2 The maximum potential gain on the position is A) 200. B) 4800. C) 0. D) unlimited.

B) 4800. The maximum gain is calculated by subtracting the premium from the strike price (50 − 2 = 48 per share). One contract represents 100 shares, so the buyer's maximum gain is $4,800 (this occurs if the stock becomes worthless).

Your client has entered a limit order to buy 600 shares of DMF at $50 per share. DMF declares a 10% stock dividend. How would this order be adjusted on the ex-date? A) 660 shares at $46.37. B) 600 shares at $45.45. C) 660 shares at $46.50. D) 600 shares at $50.

B) 600 shares at $45.45. In this example, adjust only the share price: $50 ÷ (1 + .10) = $45.45. The number of shares in the order is not adjusted unless the shares can be increased by a full round lot (100 shares).

For a trust account not seeking appreciation, which of the following would be recommended? A) Common stock in small, highly profitable companies. B) Highly-rated, fixed-income securities. C) Common stock, preferred stock, and debentures. D) Large-cap common and preferred stocks.

B) Highly-rated, fixed-income securities. The only choice that is prudent and does not have a goal of appreciation is the purchase of highly rated, fixed-income securities.

Which of the following real estate limited partnerships allows tax credits to the investor? A) Raw land. B) Historic rehabilitation. C) New construction. D) Existing property.

B) Historic rehabilitation. Raw land partnerships seek appreciation. Existing property and new construction partnerships seek passive income and tax deductions from business operations. Historic rehabilitation partnerships allow not just deductions but actual tax credits.

Which of the following mandates the creation of an information barrier to thwart the flow of sensitive or non public information between departments within a broker dealer? A) Securities Act of 1933 B) Insider Trading and Securities Fraud Enforcement Act of 1988 C) Securities Exchange Act of 1934 D) U.S.A. PATRIOT Act

B) Insider Trading and Securities Fraud Enforcement Act of 1988 The Insider Trading and Securities Fraud Enforcement Act of 1988 requires firms to create information barriers between departments so that sensitive or non public information does not flow between them. Typically this is required between departments handling mergers and acquisitions or IPOs, and retail or market making departments.

Which of the following statements regarding the third market is TRUE? A) It is composed only of unlisted securities. B) It is composed of listed securities traded OTC. C) It refers to the block trading of unlisted securities. D) The services of a brokerage firm are not used.

B) It is composed of listed securities traded OTC. The third market refers to the trading of listed securities in the over-the-counter market.

For a client to get immediate execution on an order, it should be placed as which of the following? A) Stop. B) Market. C) Good-till-canceled. D) All-or-none.

B) Market. A market order is executed immediately at the best available market price.

Which of the following is an equity security? A) Mortgage-secured bond. B) Real estate investment trust share. C) Collateralized mortgage obligation. D) Government National Mortgage Association pass-through certificate.

B) Real estate investment trust share. A REIT share is an equity security that represents undivided ownership in a portfolio of real estate investments. The other choices are debt securities.

A city's day-to-day operational expenses may be met by the issuance of: A) BANs. B) TANs. C) GANs. D) CLNs.

B) TANs. When a city needs short-term cash flow to meet ordinary operating expenses (e.g., to meet the payroll for city employees), it issues TANs. These notes are paid off when the city collects the expected tax revenues.

The securities of KLC Corporation are listed on a national exchange. Which of the following details must it provide in regular reports? A) Proposed changes in the duties of the board of directors. B) The firm's financial status. C) Proposed changes in the organization of the workforce. D) Total domestic market share of each of its products.

B) The firm's financial status. Publicly traded issuers must report their financial status to the SEC annually on Form 10K and quarterly on Form 10Q. The SEC has no interest in the company's organization or market share.

If a member firm acting as a proxy solicitor for LRK Corporation is given a shareholder list by LRK, which of the following statements is TRUE? A) The member can use the list only to solicit new business with the written consent of LRK. B) The member firm cannot use the list for any purpose other than to solicit proxies. C) The member firm can use the list to solicit new business. D) The member can use the list only to solicit new business with the written consent of FINRA.

B) The member firm cannot use the list for any purpose other than to solicit proxies. A member given a shareholder list can use the list only to solicit proxies. It can be used for no other purpose.

Your customer wishes to lock in a long-term yield with minimal risk and is not interested in regular income. Which of the following securities should you recommend? A) Treasury Bill. B) Treasury STRIPS. C) Corporate A-rated zero coupon bond. D) Treasury Bond.

B) Treasury STRIPS. The Treasury STRIPS is long-term, no-interim income, and has a locked-in yield since it is purchased at a discount from par. The T-bill is short term, the T-bond provides semiannual interest, and the corporate zero is riskier than the STRIPS.

Which one of the following best describes a debenture? A) An investment in the debt of another corporate party. B) Unsecured corporate debt. C) A long-term corporate debt obligation with a claim against securities rather than against physical assets. D) A corporate debt obligation that allows the holder to purchase shares of the company's common stock at specified dates before maturity.

B) Unsecured corporate debt. A debenture is unsecured corporate debt.

Under the Uniform Gift to Minors Act (UGMA), the custodian must be: A) court appointed. B) an adult. C) bonded. D) a member of the minor's family.

B) an adult. Under UGMA, the custodian must be an adult. The custodian does not need to be bonded, a member of the minor's family, or appointed by a court.

A customer places an order to buy 300 DWQ at 140 stop, but not over 140.25. This is a: A) market not held order. B) buy stop limit order. C) buy stop order. D) buy limit order.

B) buy stop limit order. The customer has entered a stop limit order. If the stock rises to the stop price of $140, the order is elected then becomes a buy limit order at 140.25, meaning an order to buy at 140.25 or lower.

A company has paid a dividend every quarter for the past 20 years. If the stock's price has fallen dramatically over the past quarter, but the dividend has remained the same, it may be concluded that: A) dividend yield to maturity has decreased. B) current dividend yield has increased. C) current dividend yield has decreased. D) current dividend yield has remained the same.

B) current dividend yield has increased. Current dividend yield is income dividend divided by price. If the price of a stock decreases and the dividend remains the same, dividend yield will increase.

For the underwriting of a municipal bond issue, competitive bids are submitted by underwriters as a: A) all or none commitment. B) firm commitment. C) standby underwriting commitment. D) best efforts underwriting commitment.

B) firm commitment For new municipal bond issues underwriters must submit bids for the entire bond offering; a firm commitment. Standby commitments are used only for corporate stock rights offerings. Best efforts commitments are used for corporate securities and an all or none commitment is a type of best efforts commitment.

Continuing commissions in connection with the sale of investment company securities: A) must be paid by a member whether or not the person receiving the commissions is a registered representative of a member. B) may be paid to a retired employee provided a bona fide contract calling for such payment was entered into by the registered representative while employed by a member. C) are a form of deferred compensation; therefore, when a registered representative resigns, the registered representative must be paid all commissions due. D) is illegal.

B) may be paid to a retired employee provided a bona fide contract calling for such payment was entered into by the registered representative while employed by a member. FINRA rules permit the payment of continuing commissions to retired registered representatives in connection with the sale of investment company securities if a bona fide contract to do so exists between the firm and the registered representative.

An investor with no other positions buys 1 CDE May 65 put at 3.50. If the investor buys the stock at 63.50 and exercises the put, what is the investor's profit or loss? A) $350 loss. B) $200 profit. C) $200 loss. D) $350 profit.

C) $200 loss. The investor has the right to sell the stock for 65 when it is currently worth 63.50 for a gain of 1.50. The investor paid a premium of 3.50 minus the gain of 1.50 for a loss of 2 (2 × 100 = $200).

XYZ Corp. owns 18% of the voting common stock of ABCD Enterprises. In the current tax year, XYZ receives $250,000 in dividend income from its investment in ABCD. If XYZ has a marginal tax rate of 34%, what is its tax liability on the dividend income received? A) $0. B) $42,500. C) $25,500. D) $85,000.

C) $25,500. Under the inter-corporate dividend exclusion rule, if a corporation owns stock in another corporation, 70% of the dividends received is excluded from taxation. Therefore, only 30% of the $250,000 received is subject to tax (30% × $250,000 = $75,000). Applying a tax rate of 34% to $75,000 results in a tax liability of $25,500.

Under the provisions of Rule 144, what percentage of outstanding stock may a control person sell every 90 days? A) 0.05. B) 0.03. C) 0.01. D) 0.04.

C) 0.01. Rule 144 (sale of restricted or control stock) allows for the sale of 1% of the outstanding shares or the weekly average of the last 4 weeks' trading volume (whichever is greater), every 90 days.

A member of a $5 million Eastern account that has a $500,000 participation fails to sell $200,000 of bonds. At the close of the offering, if $1 million of bonds remains unsold, the member must take down: A) 500000. B) 300000. C) 100000. D) 200000.

C) 100000 In an undivided (Eastern) syndicate, each member is responsible for its portion of the offering regardless of how many bonds it has already placed. If the member was liable for 10% of the issue's original dollar value, it is committed to take down 10% of any bonds remaining unsold (10% of $1 million equals $100,000).

Your customer has purchased $40,000 of stock in a new margin account and deposits the required Regulation T amount into the account. At the end of the month, the broker/dealer charges the client interest on the monies borrowed in the amount of $133.00. At the end of the month, the value of the stock drops to $36,000. The month end statement for this client will show a debit balance of: A) 18867. B) 16133. C) 20133. D) 15867.

C) 20133. A decrease in the value of the position will not affect the client's debit balance. The margin call on this account would be the Regulation T requirement of 50% of the purchase price. Any interest charges will be added to the client's debit balance.

If all of the following bonds mature on September 1, 2020, which would have the highest price? A) 5-¾% coupon at 5.85 B) 5-½% coupon at 5.50 C) 6-1/4% coupon at 6.10 D) 6-¾% coupon at 6.80

C) 6-1/4% coupon at 6.10 A bond that is trading at a premium has a yield to maturity that is lower than its coupon rate. Of the choices given, only the 6-1/4% coupon with a 6.10 yield to maturity is trading at a premium. The other bonds shown are either trading at a discount (their yield to maturity is higher than the coupon rate) or at par (their yield to maturity is equal to the coupon rate).

If an XYZ Aug 80 put is trading at 2, at which price would the option be at parity with the stock? A) 80. B) 82. C) 78. D) Any of the above.

C) 78. The term "at parity" means the premium equals the intrinsic value that occurs for an in-the-money option prior to expiration when the time value has eroded. An 80 put is in-the-money by 2 points (the premium) when the underlying stock is trading at 78.

Minority stockholders are more likely to be able to elect directors through which form of voting? A) Statutory. B) Progressive. C) Cumulative. D) Regular.

C) Cumulative. Minority stockholders are more likely to be able to elect representatives to the board of directors through cumulative voting. Small stockholders may cast all of their votes on 1 position rather than spread them out and thus dilute them over 2 or 3 positions.

All of the following statements regarding the Federal National Mortgage Association (FNMA) are true EXCEPT A) FNMA is a publicly held corporation B) interest on FNMA certificates is taxable at all levels C) FNMA is owned by the U.S. government D) FNMA pass-through certificates are not guaranteed by the U.S. government

C) FNMA is owned by the U.S. government FNMA is a publicly held corporation. The interest income on all mortgage-backed securities is fully taxable. Though a government agency, FNMA pass through certificates are not guaranteed by the US government. The only U.S. agency whose securities are considered direct obligations of the U.S. government is the Government National Mortgage Association (GNMA).

Of the following customer services, which must a broker dealer provide with no service charge? A) Collection of customer's interest or dividends B) Loans made to customers C) Forwarding of proxy material to the customer D) Safekeeping of customer's securities, exchanges, or transfer

C) Forwarding of proxy material to the customer The Conduct Rules permit FINRA members to charge reasonable fees to their customers for a variety of services. Included in chargeable services are the collection of interest and dividends, finding a buyer for a client who wishes to sell a relatively illiquid investment, and holding customers' securities in safekeeping. Members may also charge interest on loans made to customers. However, the expenses associated with sending proxy statements to customers whose securities are being held in trust by the member cannot be charged to the customer. Instead, the member may seek (and receive) reimbursement from the issuer for these expenses, since the issuer would have incurred these expenses had the customer/shareholder been holding the securities directly.

Which of the following must be included on a municipal securities order ticket? A) Statement that time of settlement will be given on request. B) Statement that the name of the contra party will be given on request. C) Indication of whether the order is solicited, unsolicited, or discretionary. D) Broker/dealer firm's capacity.

C) Indication of whether the order is solicited, unsolicited, or discretionary. Whether the trade is solicited, unsolicited, or discretionary on the order ticket. The other items, which may not be known yet, go on the confirmation.

All of the following statements regarding PAC CMOs are true EXCEPT: A) PACs have companion tranches. B) PACs have a more certain maturity date than comparable TACs. C) PACs have higher yields than comparable TACs. D) PACs have a lower than average prepayment risk.

C) PACs have higher yields than comparable TACs. PACs have two companion tranches; one to absorb prepayments and one to buffer against extension risk. Because there is less risk and a more certain maturity date, PACs tend to have lower yields than comparable TACs.

Which of the following securities underlies a yield-based option? A) Revenue bonds. B) Debentures C) Treasury securities. D) Income bonds.

C) Treasury securities. Yield-based interest rate options are based on the yields of Treasury bills, notes, and bonds.

In its attempt to increase the money supply, the Federal Open Market Committee (FOMC) buys T-bills. This action should cause the yield on T-bills to: A) increase. B) fluctuate. C) decrease. D) stabilize.

C) decrease. The FOMC purchase is meant to increase the attractiveness (market price) of T-bills. Because the price will be driven up by an increased market demand and a decreased supply, yields should decrease.

The terms of municipal general obligation (GO) and revenue bond offerings may be set by the issuer as: A) neither competitive bid or negotiated underwritings. B) negotiated underwriting arrangements only. C) either competitive bid or negotiated underwritings. D) competitive bid underwriting arrangements only.

C) either competitive bid or negotiated underwritings. Municipal bond underwriting terms may be set by the issuer as either competitive bid or negotiated for both GO and revenue bond issues.

A municipal securities principal must approve all of the following EXCEPT: A) the handling of written customer complaints. B) each transaction in municipal securities. C) legal opinions. D) the opening of new customer accounts.

C) legal opinions. Municipal securities principals are required to approve all new customer accounts, all municipal transactions, and the handling of customer complaints. Legal opinions are prepared by bond counsel to determine the authority of an issuer and tax treatment of new municipal issues.

A direct participation program shows the following operations results: Revenues: $3 million. Operating expense: $1 million. Interest expense: $200,000. Management fees: $200,000. Depreciation: $3 million. Profit or loss for the year is: A) income $2.7 million. B) income $1.6 million. C) loss $1.4 million. D) loss $3 million.

C) loss $1.4 million. Taxable income for a partnership is determined as follows: Gross revenue $3 million. Less operating expense -$1.2 million. Net revenue $1.8 million. Less interest -$200,000. Less depreciation $3 million. Taxable loss = $1.4 million.

Any branch office employee who refers customers to municipal securities registered representatives and is compensated for any transactions that result must be a: A) municipal securities dealer employee. B) general securities principal. C) registered representative. D) financial and operations principal.

C) registered representative. An employee who receives compensation based on sales must be registered as a sales representative.

Registered corporations are required to file certain reports with the SEC. All of the following statements regarding those reports are true EXCEPT: A) copies of the annual report must be sent to shareholders of record. B) the annual report contains both a balance sheet and income statement. C) the audit may be performed by the corporation's Chief Financial Officer. D) the financial statements must be audited.

C) the audit may be performed by the corporation's Chief Financial Officer. An independent auditor must perform the audit.

Revenue bonds may be called for all of the following reasons EXCEPT: A) the facility has been destroyed. B) interest rates have fallen. C) the issuer has reached a statutory debt limit. D) a provision in a sinking fund agreement calling for a partial call.

C) the issuer has reached a statutory debt limit. Statutory debt limits only apply to general obligation bonds.

All of the following are true of REITs EXCEPT: A) they must invest at least 75% of their assets in real estate-related activities. B) they must to qualify under Subchapter M, distribute at least 90% of their net investment income. C) they must pass along losses to shareholders. D) shares are publicly traded.

C) they must pass along losses to shareholders REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their net investment income to their shareholders. While they can pass through income, they cannot pass through any losses; they are not DPPs.

A registered representative opens a new account for an investment club. His spouse is a member of the club and owns 15% of the club's assets. The registered representative wants to sell shares of a common stock IPO to the investment club. This is allowed: A) only if the IPO is suitable for the investment club. B) with written principal approval. C) under no circumstances. D) with written notice to the SEC.

C) under no circumstances. Rules prohibit member firms from selling common stock IPOs to restricted persons. Under the rules the account would not be restricted if the assets owned by the spouse composed less than 10% of the club's assets. Because the registered representative's spouse is a member of the investment club and owns more than 10% of the club's assets, the registered representative cannot sell shares of the IPO to the club.

The manager of ABC Municipal Securities is interested in bidding on some general obligation bond issues that will be available in the coming months. Where would the manager find information about these forthcoming issues? A) "Standard & Poor's Bond Guide". B) "Electronic Municipal Market Access (EMMA)". C) "The Washington Post". D) "The Bond Buyer".

D) "The Bond Buyer". Municipalities publish their official notices of sale soliciting bids from interested parties in the "Bond Buyer". The notice gives the details of the bonds put up for bid and how to bid on the issue. The "S&P Bond Guide" gives details of outstanding issues and their ratings. The "Electronic Municipal Market Access" (EMMA) is an online site primarily for retail, non-professional investors.

When disseminating information about transactions of OTC equity securities, 1 share equals 1 round lot for stocks trading at or above: A) $200 per share. B) $125 per share. C) $150 per share. D) $175 per share.

D) $175 per share. In instances where OTC stocks are trading at or above $175 per share, 1 share equals 1 round lot. In all other cases, similar to listed equity securities, 100 shares equals 1 round lot for OTC equity securities.

Which of the following is the most stringent test of liquidity? A) Assets / current liabilities. B) (Current assets - inventory) / current liabilities. C) Current assets / current liabilities. D) (Cash + cash equivalents) / current liabilities.

D) (Cash + cash equivalents) / current liabilities. Of the answers given, the cash assets ratio is the most stringent because it excludes inventories and accounts receivable.

ALFA closed at 37.50, the ALFA Jan 35 calls closed at 3.50, and ALFA Feb 35 calls closed at 4.60. What is the difference in the time values between the two options? A) 37.5. B) 35 C) 2.5. D) 1.1.

D) 1.1. The January premium is 3.50 and the February premium is 4.60 (the difference is 1.10). Each option is in the money by 2.50.

Your 65-year-old client owns a nonqualified variable annuity. He originally invested $29,000 4 years ago; it now has a value of $39,000. If your client, who is in the 28% tax bracket, makes a lump-sum withdrawal of $15,000, what tax liability results from the withdrawal? A) 3800. B) 0. C) 4200 D) 2800.

D) 2800. This annuity is nonqualified, which means the client has paid for it with after-tax dollars and has a basis equal to the original $29,000 investment. Consequently, the client pays taxes only on the growth portion of the withdrawal ($10,000). The tax on this is $2,800 ($10,000 x 28%). Because the client is older than age 59-½, he does not pay 10% premature distribution penalty tax.

An individual, age 40, at a median income level and covered by an employer sponsored retirement plan wants to save more for retirement. Which of the following is the most suitable recommendation? A) A hedge fund utilizing high risk, high potential yield strategies B) A traditional IRA as there will be no limit to the amount of the contribution that can be deducted C) An investment account utilizing only tax-free municipal bond mutual funds D) A Roth IRA, as long as the individual's income level does not exceed the maximum allowed to make a contribution (phase-out schedule)

D) A Roth IRA, as long as the individual's income level does not exceed the maximum allowed to make a contribution (phase-out schedule) Given the limited information the Roth IRA is the most suitable as long as the investor's income level does not limit via the phase-out schedule what can be contributed to the IRA. Dollars invested will grow and distributions will be tax free as long as the dollars have been in the account for five years once the IRA owner has reached age 59 1/2. Because the individual is covered by an employer-sponsored plan we know that the contribution to a traditional IRA may not be fully tax-deductible if at all and the earnings would be taxable when distributed. Growth in an investment account would be taxable and and the utilization of tax-free municipal bonds with low yields are unlikely to accommodate saving for retirement. Hedge funds utilizing high risk investment strategies are inappropriate for retirement saving.

Which of the following would NOT be considered institutional communications with the public? A) A communication with an individual designated to act on behalf of your institutional customer B) A letter to another broker/dealer C) A letter to a municipality offering your firm's services as an underwriter D) An internal memo promoting a new product that will be offered to your firm's institutional customers only

D) An internal memo promoting a new product that will be offered to your firm's institutional customers only Institution communications specifically exclude internal communications. Communications with another member firm, a government entity, such as a municipality or with someone designated to act on behalf of one of your firm's institutional customers, would all fall within the definition of institutional communications.

An unfunded pension liability is generally associated with which type of corporate retirement plan? A) 401(k). B) Profit sharing. C) Defined contribution. D) Defined benefit.

D) Defined benefit. An unfunded liability is one that has been incurred but does not have to be paid until a future date, and for which sufficient money to meet the obligation has not been set aside. Defined benefit plans guarantee a specific payout in the future and require an actuary to determine the monies that must be set aside today to meet this future obligation. If sufficient monies are not set aside or if poor investment performance wipes out a portion of these funds, an unfunded liability results.

A customer is long 650 shares of DEF stock trading at $32 per share in a margin account, and the debit balance in the account is $9,200. If DEF pays a 10% stock dividend, what will the effect be on the customer's account? A) The debit balance will be reduced. B) Equity will increase. C) Market value will increase. D) Equity will remain the same.

D) Equity will remain the same. Even though the investor receives more shares, the price per share falls; there is no effect on the market value of the customer's holdings.

Through its open market operations, the Federal Reserve trades all of the following EXCEPT: A) Treasury notes. B) Ginnie Maes. C) Treasury bills. D) Grant anticipation notes.

D) Grant anticipation notes. The Federal Open Market Committee (FOMC) trades U.S. government and agency securities in the secondary market. Grant anticipation notes (GANs) are municipal securities.

If trading is halted in a listed stock, what happens to the trading in the stock's listed options? A) It is restricted to closing transactions. B) It continues to trade. C) It increases. D) It is halted.

D) It is halted. Options trading is always halted when the trading of the underlying security is halted. Options rely primarily on the underlying market value for premium determination.

An investor who is long TCB stock for 6 months buys 1 call on TCB. If the call expires in 8 months and the investor sells the stock 3 months after the call expires, what does he realize on the stock? A) Long-term gain or short-term loss. B) Short-term gain or loss. C) Short-term gain or long-term loss. D) Long-term gain or loss.

D) Long-term gain or loss. The purchase of a call has no effect on a long stock position's holding period. The call only allows more stock to be purchased; it does not allow the stock to be sold. The investor held the stock for 17 months, exceeding the holding period required for long-term capital gains treatment (more than 1 year).

Which of the following is a leading indicator of the economic future? A) The Gross National Product. B) The Consumer Price Index. C) Unemployment statistics. D) Machine tool orders.

D) Machine tool orders. Machine tool orders anticipate the business cycle, because they come first in the manufacturing process.

If an employee of an NYSE member wants to take a second job, which of the following statements is TRUE? A) Prior written notice to the member firm and prior written permission to the employee is required B) Prior notice to the NYSE is required C) Prior permission of the NYSE is required D) Prior written notice to the member firm is required

D) Prior written notice to the member firm is required Prior written notice to the member firm from the employee is required. While no prior written permission of the firm is required, the member firm does have the right to reject or restrict and outside affiliations if they feel a conflict of interest exists.

Which of the following best describes the disciplinary actions a self regulatory organization (SRO) such as FINRA or an exchange can impose upon a registered representative who has violated its rules? A) The SRO has full authority to impose a jail sentence if warranted. B) The SRO must coordinate all disciplinary actions with the employing member firm who must then impose them on the registered representative. C) The SRO can only recommend disciplinary actions that must then be imposed by the SEC. D) The SRO has authority to censure, fine, or expel the registered representative.

D) The SRO has authority to censure, fine, or expel the registered representative. A self regulatory organization (SRO) such as FINRA or an exchange may censor, fine, or expel a representative directly, but it cannot impose a jail sentence.

A 3× leveraged inverse exchange-traded fund means: A) The fund shares cannot be purchased on margin by investors. B) There is no risk if the targeted index rises. C) The fund may not use more than 3 leverage producing derivative products within its fund portfolio like options or futures. D) The goal of the fund is to have the shares go up by 3 times the amount that the targeted index falls.

D) The goal of the fund is to have the shares go up by 3 times the amount that the targeted index falls. A leveraged inverse fund attempts to produce returns opposite of the targeted index in the amount designated by the leverage multiplier; in this case, three times. If the targeted index rose, the inverse fund would fall by the leverage multiplier and in that regard substantial risk must be recognized due to the leverage. Leveraged funds will utilize derivative products like options and futures to help meet the desired goal and can use investment strategies such as margin to purchase securities for the fund portfolio as well. Lastly, because the fund shares are exchange-traded, they can be purchased on margin by investors.

If a customer believes the Swiss franc will depreciate against the U.S. dollar, which of the following option strategies may best take advantage of the expected depreciation? A) Uncovered put writing. B) Credit put spread. C) Debit call spread. D) Uncovered call writing.

D) Uncovered call writing. Call writing is bearish, while credit put spreads, debit call spreads, and uncovered put writing are bullish.

A municipal finance professional (MFP) is A) an employee of the MSRB specializing in seeing that broker/dealers adhere to the MSRB rules and regulations regarding the sales of municipal bonds to retail customers B) an elected official of a municipality having some decision-making authority regarding new municipal bond issues C) employed by a municipality to oversee the issuance of municipal bonds D) an employee of a broker/dealer engaged in municipal security representative activities other than retail sales or who solicits municipal securities business for the broker/dealer

D) an employee of a broker/dealer engaged in municipal security representative activities other than retail sales or who solicits municipal securities business for the broker/dealer As per the Municipal Securities Rulemaking Board (MSRB) a municipal finance professional (MFP) is an associated person of a broker/dealer who is primarily engaged in municipal securities representative activities other than retail sales to individuals, who solicits municipal securities business for the broker/dealer, or who is in the supervisory chain above MFPs as described.

Each of the following individuals is eligible to participate in a Keogh plan EXCEPT: A) a securities analyst employed by a major research organization who makes $2,000 giving lectures in his spare time. B) an engineer employed by a corporation who earns $5,000 making public speeches in her spare time. C) a self-employed doctor in private practice. D) an executive of a corporation who receives $5,000 in stock options from his company.

D) an executive of a corporation who receives $5,000 in stock options from his company. Individuals with income from self-employment may participate in Keogh plans. Stock options, capital gains, dividends, and interest are not considered income earned from self-employment.

When calculating net investment income, an investment company includes: A) only dividends. B) just dividends plus interest. C) only interest. D) dividends plus interest, minus operating expenses.

D) dividends plus interest, minus operating expenses. Net investment income equals gross investment income minus operating expenses. Gross investment income is interest and dividends received from securities in the investment company's portfolio.

The difference between the syndicate bid and the reoffering price on a competitive bid of a new municipal underwriting is the: A) scale. B) discount. C) selling concession. D) spread.

D) spread. The spread, or underwriter's compensation, on a competitive bid underwriting is the difference between the bid to the issuer and the dollar price at which the underwriter reoffers the bonds to the public.

If a customer does not pay for securities purchased within 2 business days of regular way settlement date, the broker/dealer may request a time extension from: A) the Philadelphia Stock Exchange. B) the Chicago Stock Exchange. C) FINRA. D) its designated examining authority.

D) its designated examining authority. A time extension may be requested from the broker/dealer's designated examining authority (DEA), which could be FINRA or one of the exchanges.

A broker's broker does all of the following EXCEPT: A) conceals the identity of the principals. B) assists in placing securities. C) acts as agent for dealers. D) makes a market in securities.

D) makes a market in securities. A broker's broker acts as agent in transactions by facilitating the movement of blocks of bonds. The broker's broker is allowed to conceal the identities of the contra-parties, thus protecting investment strategies. A broker's broker does not make a market in securities.

All of the following orders could be placed on the specialist (designated market maker) order display book EXCEPT: A) stop orders. B) stop limit orders. C) limit orders. D) market orders.

D) market orders. Market orders are executed immediately. The order display book is for orders that are away from the current market, such as stop and limit orders.

If a person wishes to enter orders in his spouse's account, he: A) needs verbal permission from his spouse. B) is free to do so. C) could never be permitted to do so as there is no provision that would allow for it to occur. D) needs written permission from his spouse via a power of attorney.

D) needs written permission from his spouse via a power of attorney. The only persons permitted to enter orders in an account are the account owners. For a person to enter orders in his spouse's account, the spouse who's name is on the account must sign a power of attorney.

Stock prices in the over-the-counter market are determined by: A) open outcry for the securities at a central marketplace. B) the 5% markup policy. C) buyers and sellers bidding directly against each other in a double auction market. D) negotiation between buyers and sellers.

D) negotiation between buyers and sellers. The OTC market is a negotiated market (not an auction market as is the case with an exchange) in which dealers negotiate stock trades with each other.

A confirmation of each customer trade must be given or sent: A) before the settlement date. B) on the trade date. C) before the trade date. D) on or before the settlement date.

D) on or before the settlement date. A confirmation must be sent to a customer on or before the completion of the transaction (the settlement date).

All of the following are TRUE of the limit up/limit down rule EXCEPT A) it utilizes specified price bands which prevent trades in stocks from occurring outside of those bands B) the mechanism employs trading pauses or halts for prolonged price movements C) it is a rule designed to address severe and sudden price movements D) price band parameters are the same from the opening through the close of the trading day

D) price band parameters are the same from the opening through the close of the trading day The limit up/limit down rule is designed to address severe and sudden price movements. It utilizes specified price bands (expressed as percentages depending on the current price of the stock) which prevent trades in stocks from occurring outside of those bands and employs trading pauses or halts for prolonged price movements. To account for increased volatility during market openings and closings the percentage parameters governing the price bands are doubled during those times.

All of the following qualified plans are covered by ERISA guidelines EXCEPT: A) profit-sharing plans. B) private sector plans. C) 401(k) plans. D) public sector plans.

D) public sector plans. Public sector plans are not covered by ERISA guidelines. Corporate and certain union retirement plans are subject to ERISA guidelines.

Whether funds should be allocated to support the debt service on a moral obligation bond in default is usually determined by the: A) trustee. B) state governor. C) courts. D) state legislature.

D) state legislature. Legislation authorizing the issuance of moral obligation securities usually grants the state legislature the authority to apportion money to support debt service payments on such securities but does not legally require the legislature to do so. This is called legislative apportionment.

A discussion referring to blue-sky laws would include all of the following EXCEPT: A) a state securities law that grants state securities Administrators the power to deny or revoke a broker/dealer's or an agent's registration within its state. B) forms requiring issuers selling securities in the state to comply with state securities laws. C) state laws that are designed to protect the public against fraud in securities sales within a state. D) the Securities Act of 1933 and Securities Exchange Act of 1934.

D) the Securities Act of 1933 and Securities Exchange Act of 1934. Blue-sky laws are state securities laws. The Securities Act of 1933 and the Securities Exchange Act of 1934 are federal securities laws.

All of the following can be advantages of buying an option contract EXCEPT A) to position against a written option B) leverage C) to limit risk D) time value dissipation

D) time value dissipation The purchase of an option allows an investor to speculate and fully participate in the price movement of the underlying security at a fraction of the cost of the shares involved, thus leveraging his investment. When used to position against a written option (a spread), the purchase of an option will reduce the risk of loss involved with a single written option. Used in conjunction with a securities position, the purchase of an option can act as an insurance policy to reduce the risk of loss (hedging); therefore, options offer all of these advantages but only for a limited period of time. As the contract gets nearer to expiration its time value dissipates. This is not considered an advantage of owning options contracts.

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

D) trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor FINRA's Trade Reporting Facility (TRF) is an automated electronic system that facilitates the reporting of data for transactions that occur in Nasdaq-listed stocks or in exchange-listed stocks when they occur off of the exchange trading floor. It is used for transactions that are negotiated between brokers, therefore acting as a dealer, rather than as an agent.

If a customer wishes to purchase a nonexempt security in a cash account, Regulation T requires a broker/dealer to receive payment in full: A) before the purchase. B) within 10 business days. C) within 3 business days. D) within 5 business days.

D) within 5 business days. Regulation T requires that a broker/dealer receive payment in full, from a customer making a purchase of this type in a cash account, no later than 5 business days after the trade date.

Which of the following affects the holding period of XYZ stock, a position that has been held for 6 months? I. Buying an in-the-money put II. Buy an out-of-the-money put III. Writing an in-the-money call IV. Writing an out-of-the-money call.

I and II Buying a put (in or out-of-the-money) on a stock held short term (one year or less) stops the holding period until the put is disposed of.

A customer would diversify his portfolio geographically to avoid which of the following risks? I. Adverse economic conditions in a particular region. II. Legislative changes by a state. III. Decreasing bond prices. IV. Decreasing stock prices.

I and II Geographic diversification can be used to avoid such risks as economic declines in various regions and changes in legislation at the state level.

Which of the following are required to be given to retail customers at settlement in municipal new issue transactions? I. Confirmation showing the purchase price. II. Official statement. III. Names of syndicate members with their participation amounts. IV. Copy of the agreement among underwriters.

I and II MSRB rules state that a confirmation and an official statement must be sent to the investor no later than at settlement.

Which of the following is applicable to the NASDAQ OMX PHLX? I. Regional exchange operated by Nasdaq II. Offers trading in equity securities and options contracts III. Is a completely electronic exchange with no physical trading floor IV. Regional exchange operated by FINRA for the execution of OTC stocks only

I and II The OMX PHLX is a regional exchange operated by Nasdaq where equity securities and options contracts are traded both electronically and on floor.

If one of your clients dies, on notification of death you should immediately: I. mark the account "deceased" until proper documents are received. II. cancel all GTC orders for the account. III. obtain a letter from the attorney representing the estate with instructions for transfer. IV. obtain the names and addresses of the beneficiaries of the estate.

I and II The account's registered representative must cancel all open orders and mark the account "deceased." The firm must not permit any trades until proper documents are received from the estate representative. It is not the responsibility of the firm to contact the decedent's attorney or the beneficiaries.

A 52-year-old dentist has a balance of $150,000 in his Keogh plan, composed of $100,000 of contributions and $50,000 of earnings. If the dentist withdrew $100,000 from the Keogh plan, which of the following statements are TRUE? I. The entire withdrawal is taxable. II. The entire withdrawal is not taxable. III. The entire withdrawal is subject to a 10% penalty tax. IV. Only the portion of the withdrawal representing earnings ($50,000) is subject to a 10% penalty.

I and III Contributions to qualified plans are made with pretax dollars and earnings grow on a tax-deferred basis, so the cost basis is zero. Therefore, any distributions will be taxed as ordinary income. In addition, there is a 10% penalty on withdrawals made prior to reaching age 59-½.

An investor wants to purchase fixed-income securities (bonds) as a safe haven because he is uncomfortable with risk associated with stock volatility currently in the market. Before making a suitable recommendation, a registered representative should advise that I. bonds are interest rate sensitive in all environments II. bond prices are always stable when equities are volatile III. bond prices can rise sharply when interest rates rise IV. bond prices may fall as interest rates begin to rise

I and IV Bonds are interest rate sensitive in all environments. Their prices have an inverse relationship to interest rate movements. Therefore, if interest rates begin to rise, bond prices will fall, exposing investors who sought them out as a safe haven to risk they might not have been aware of.

A registered representative is opening both cash and margin accounts for a corporation. Which of the following documents will he need? I. The corporation's charter, account resolution, and bylaws. II. A copy of the corporation's most recent balance sheet. III. The corporation's last 3 profit and loss statements. IV. The name(s) of natural persons authorized to trade the account.

I and IV Corporate accounts are generally those established by the officers of a corporation. Such accounts require a copy of the corporate resolution naming the authorized person(s) and account trading limits (if any). If it is to be a margin account, a copy of the corporate charter and a signed margin agreement are also required.

In a bull call spread, an investor: I. buys the lower exercise price and sells the higher exercise price. II. buys the higher exercise price and sells the lower exercise price. III. anticipates the spread will narrow. IV. anticipates the spread will widen.

I and IV In a bull call spread (debit spread), a call with a lower strike price is purchased and a call with a higher strike price is sold. Because the long call has a lower strike price than the short call, it is more expensive, resulting in a net debit. In a bull call spread, the investor hopes the market prices rise. Maximum profit occurs if both calls are exercised, and because this is a debit spread, the spread is profitable if it widens.

A customer purchases 2 QRS Jul 30 calls at 2 and 2 QRS Jul 30 puts at 2.50. She will break even when the price of the underlying stock is: I. 25.50. II. 27.50. III. 32. IV. 34.50.

I and IV The customer has bought calls and puts with the same strike price and expiration date, so the position is a long straddle. Straddles have two breakeven points: the strike price plus, and minus, the sum of the two premiums. The customer profits in a long straddle when the stock price is outside the breakeven points (i.e., higher than 34.50 or lower than 25.50).

The transfer agent of a mutual fund: I. redeems shares. II. sells shares. III. holds custody of fund securities. IV. handles name changes of mutual fund ownership.

I and IV The transfer agent redeems shares of a mutual fund at the price calculated after receiving a request for redemption. The transfer agent also handles the transfer of account ownership for such transactions as an inheritance or gift.

Which of the following trades settle next business day? I. U.S. government debt. II. U.S. government agency debt. III. Municipal bonds. IV. Listed options.

I and IV U.S. government debt and listed options settle next day; government agency debt and municipal bonds are subject to regular way settlement of T + 3.

At expiration, if the market price of the underlying stock is the same as the strike price, which of the following positions would be profitable? I. Short call II. Long straddle III. Long call IV. Short put

I and IV Writers of option contracts are profitable if an option expires worthless because they keep the premiums received. If the strike price and the market price are the same at expiration, an option contract will not be exercised by the contract owner (buyer). This leaves the writer with the premiums received when the contract expires and thus profitable by that amount.

Which of the following statements about municipal original issue premium bonds are TRUE? I. The original issue premium must be amortized. II. If the bond is held to maturity, there will be no capital loss reportable. III. The cost basis of the bond is adjusted downward by the amortized amount.

I, II, and III Original issue premium municipal bonds (as well as those purchased in the secondary market) must be amortized by an amount each year so that, if held to maturity, there is no reported capital loss.

From first to last, in what order would claimants receive payment in the event of bankruptcy? I. Holders of secured debt. II. Holders of subordinated debentures. III. General creditors. IV. Preferred stockholders.

I, III, II, IV The liquidation order is as follows: wages, taxes, secured debt holders, unsecured debt holders (including general creditors), holders of subordinated bonds, preferred stockholders, and common stockholders.

According to MSRB rules, if a customer purchases a municipal bond from your firm, the confirmation must disclose I. where your firm acquired the bonds. II. whether your firm acted as agent or principal. III. your firm's address. IV. the price your firm paid for the bonds.

II and III Customer trade confirmations must make explicit disclosures regarding the terms of the transaction and the parties involved. The broker/dealer must always disclose the capacity in which it acted (i.e., principal or agent.) The confirmation must show the name of the person for whom the trade was executed (i.e., the customer). The name, address, and telephone number of the broker/dealer must be shown so a customer may contact the firm easily. The settlement date is also required, but the broker/dealer is not required to disclose where it acquired the bonds or the price it paid.

If a company has filed a registration statement for an initial public offering of its common stock with the SEC, as a registered representative you may take which of the following actions? I. Send out a research report on the company to your customers. II. Take indications of interest from your customers. III. Send a preliminary prospectus to each of your customers. IV. Take orders for the stock from customers in cash accounts only.

II and III New issues may be sold only by prospectus. Indications of interest may be taken when the issue is in registration. During the registration period, only the preliminary prospectus may be sent to clients. Sales literature, such as research reports, may not be distributed while the IPO is in registration, nor may orders be taken.

Smith and Company, a FINRA member firm, is preparing to underwrite securities to be issued by KLC Corporation for a new business venture. For which of the following will Smith and Company be responsible? I. Filing the registration statement with the SEC and state regulatory bodies. II. Providing advice on the type of security to be issued. III. Distributing the security to the public. IV. Providing advice on how KLC can best utilize the funds raised.

II and III The issuer is ultimately responsible for filing registration statements with federal and state regulatory bodies and has already determined how the money will be used. The underwriter confines his activities and advice to the type and sale of the securities.

When Auction Rate Securities reset the yield to be paid in the upcoming period the process used: I. is a stop loss system. II. is a Dutch auction. III. establishes a "clearing rate". IV. guarantees that every bidder will have their order filled.

II and III The process used to reset the interest rate each period for ARSs is called a Dutch auction which is the lowest bid rate at which all of the bonds can be reset, or sold for new issues, at par. This newly established rate is known as the "clearing rate" and bidders who bid at or below the clearing rate will now pay that rate. This means that those who bid above the established "clearing rate" will have their orders go unfilled.

Unrealized gain in a mutual fund portfolio does which of the following? I. Increases the dividends paid to shareholders. II. Represents the undistributed income and the growth in market value of securities held in the portfolio. III. Is realized by shareholders only when they redeem their shares. IV. Has no effect on shareholders until the annual long-term capital gains distribution is paid.

II and III Unrealized gains result from asset appreciation and undistributed income. This increase in value is reflected in an appreciation of the mutual fund shares. Investors realize this appreciation only by selling their shares.

Which of the following accurately depicts communications with the public designated as correspondence? I. Review by a principal must occur before use II. Review by a principal can occur either before or after use in accordance with the firm's written procedures III. Filing with FINRA is required IV. Filing with FINRA is not required

II and IV Correspondence review by a principal can occur either before or after use in accordance with the firm's written procedures. Filing of correspondence with FINRA is not required.

Which of the following statements regarding recruiting advertising by FINRA member firms are TRUE? I. It must include the name of the broker/dealer. II. It may not contain exaggerated claims about opportunities in the securities business. III. Principal approval is not required. IV. During a firm's first year of business, it must be filed with FINRA.

II and IV Recruitment advertising is treated as a form of retail communication. A firm in its first year of business must prefile all of its retail communications with FINRA. Furthermore, all retail communications must be approved by a principal before use. Recruitment advertisements may be placed as blind advertisements (i.e., without the name of the broker/dealer), but they may not contain exaggerated claims.

The interest from which of the following bonds is subject to federal income tax? I. State of Nebraska. II. City of Duluth. III. Treasury notes. IV. FNMA.

III and IV Direct federal debt, such as a Treasury note, is subject to federal income tax but exempt from state tax. FNMA bonds are subject to federal, state, and local taxes. State and city bonds, being municipals, are exempt from federal income tax.

In a municipal offering, which of the following would ordinarily be found in the agreement among underwriters? I. The legal opinion II. The appointment of the bond counsel III. The concession IV. The takedown

III and IV Of the four answer choices only the concession and the takedown would generally be found in the agreement among underwriters which is found in the syndicate agreement. The agreement among underwriters does not include the legal opinion or the appointment of the bond counsel. The legal opinion and the appointment of the bond counsel would be found in the official statement.

Which of the following provisions govern the offering of restricted shares to the public without filing a Form 144? I. The dollar amount is $1 million or less. II. 100,000 shares or fewer are sold. III. 5,000 shares or fewer are sold. IV. The dollar amount is $50,000 or less.

III and IV Under Rule 144, Form 144 need not be filed if 5,000 or fewer shares are sold and the dollar amount is $50,000 or less. This de minimis rule applies to sales in any 90-day period.