Progress Exams

The current market value of a stock is below the strike price of a call option. This situation is referred to as:

Out-of-the-money

When transacting business for a discretionary account, the registered representative must have written power of attorney (POA) authorizing him to act for the customer. It does not need to be:

updated.

A customer writes an IBM October 120 call and receives a $4 premium and buys an IBM October 100 call and pays a $12 premium. IBM is currently selling at $108. Assume the customer later sells the IBM October 100 call for $20. The IBM October 120 call, which he initially sold expires. The customer will realize a:

$1,200 profit If the customer sold the call bought at $12 for $20, he will realize an $800 profit. If the call written for $4 expired, the $400 received will also be a profit. The customer will realize a $1,200 profit ($800 profit on the closing sale of the call + $400 from the call that expired = $1,200 profit).

A client purchased 300 shares of Emily Airlines common stock at $28 a share in July of 2011. In June of 2012, the client writes 2 October 35 calls at 5 against the stock position. If the market price of Emily Airlines is trading at $39 at expiration, what is the client's realized gain?

$2,400 The question is asking for the client's realized gain. The investor is long 300 shares, but is writing only 2 covered calls. Since the market price of Emily Airlines (39) is above the strike price (35) at expiration, the call options will be exercised against the writer. The client will be obligated to deliver or sell 200 shares at $35. The realized gain on the stock is $1,400 (200 shares purchased at $28, which is sold at $35). The client received $1,000 from writing two covered call options (2 calls @ 500). Therefore, the total realized gain is $2,400. The client will still own 100 shares at a cost basis of $28.

An investor writes an uncovered RST May 25 put for a premium of 4. The maximum profit the investor can realize is:

$400 The writer received the $400 premium. If the option expires, he will have no obligation, thereby recognizing the entire premium as profit. The premium represents the most that the writer can profit.

An investor purchased 100 shares of ABC at 62.25 and on the same day purchased an ABC Jan 60 put at 2.50. After the put expired, the investor sold the ABC stock at 68.75. The investor should report a profit of:

$400 When a married put (stock and put purchased on the same day) expires, the premium is added to the cost basis of the stock. The cost basis then becomes 64.75 (62.25 + 2.50). The sale at 68.75 results in a profit of $4 per share (68.75 - 64.75).

An investor purchased an S&P 100 (OEX) July 720 Call @ 6.50. He exercises the option when the index is at 731.26. The investor has a:

$476.00 gain When an index option is exercised, the writer pays the buyer the in-the-money amount (731.26 - 720 = 11.26) times the cash value of the index of 100 (11.26 x $100 = $1,126). To find the buyer's profit, subtract the premium of $650 from the cash received ($1,126 - $650 = $476).

Under FINRA rules regarding communications with the public, advertising and/or sales literature must be approved by a principal before being sent to the public. ___________________ is not covered by these rules.

A prospectus

In April, a customer purchased 1 ABC July 85 call for 5 and purchased 1 ABC July 90 put for 8. ABC stock is currently trading at $87. If both options are sold for the amount each is in-the-money, the investor will realize a(n):

$800 loss The call is in-the-money by $200 and the put is in-the-money by $300. If the call is sold for $200, the loss on the call would be $300. If the put is sold for $300, the loss would be $500.

A customer writes an ABCD October 220 call, receiving an $11 premium, and buys an ABCD October 235 call, paying a $3 premium. If both calls expire, the customer will realize a(n):

$800 profit The customer wrote (sold) an ABCD October 220 call and received $1,100. The customer bought an ABCD October 235 call and paid $300. The customer created a credit spread position. If both options expire, the net result is an $800 profit ($1,100 received for the call sold minus $300 paid for the call purchased equals $800).

Form 3 must be filed with the SEC within ______ days of the date on which a person becomes an insider.

10

An employee wants to invest funds into a 401(k) that is sponsored by his employer. Assuming the employee waits until he reaches the age of 60 to begin taking distributions from the plan, what is the tax treatment of these funds?

100% is taxable since the plan has a zero cost basis

A client purchased 1,000 shares of ABC Corporation preferred stock at $80 per share. The company is paying a quarterly dividend of $1.25 and the current market price is $90. The current yield is:

5.56%

Listed equity options cease trading at:

4:00 p.m. Eastern Time on the expiration date

What's the tax treatment of dividends if a corporation invests in the preferred or common shares of another corporation?

65% of the dividends are excluded if ownership exceeds 20%.

If a bond has a basis of 6.35 and a coupon rate of 6.15%, the bond is selling at:

A discount

A municipal tombstone advertisement must be approved by:

A municipal securities principal

An investor owns stock that has increased in value. Which of the following is the most suitable recommendation for an RR to make if the investor wants to protect her profit?

A sell stop order that's placed below the current market price or a long put position

What would be included in a subscription agreement for a direct participation program (DPP)?

A statement indicating the purchaser understands the risks of this investment A statement that attests to the investor's ability to meet the financial requirements of this investment

_______________________ is created by buying both or selling both a call or a put on the same underlying security, with the same expiration, and with the same strike price.

A straddle

is normally compensated by receiving a fee based on a percentage of the assets under management?

An investment adviser

Place the following ratings in the proper order from highest to lowest. A Aa Aaa Baa

Aaa Aa A Baa

An investor had purchased a municipal bond at a discount which is currently selling at a premium. This is an example of:

Appreciation

The balancing of asset classes according to an investor's financial objectives in order to maximize returns for a given level of risk is known as:

Asset allocation

How can a client minimize principal risk in bonds due to fluctuating interest rates?

Buy short-term maturities

A customer is considering writing an XYZ June 70 call for a $4 premium but is concerned about the risk of an unlimited loss. Which of the following positions, when added, provides the BEST protection?

Buying an XYZ June 75 call for a premium of 1 The short call position has unlimited risk since there is no limit to where the underlying stock can increase to. If, however, in addition, the customer buys an XYZ June 75 call for 1, it creates a credit spread. The maximum risk is reduced to $200, which is the difference between the strike prices 5 (75 - 70) and the net premium received 3

A customer is currently long an XYZ May 40 Put option. A straddle is created if she:

Buys an XYZ May 40 Call

SLK Corporation has approved a 1-for-10 reverse stock split. Which of the following statements is TRUE for all SLK equity options immediately after the split?

Outstanding SLK contracts will now have a contract size of 10 shares and an increase in the strike price

Which of the following documents is used to create a limited partnership?

Certificate of limited partnership

Warrants are most likely issued to:

Create an incentive to purchase a bond which is offering a lower interest rate

The primary purpose of an exchange is for:

Creating a marketplace that brings buyers and sellers together

_______________ relates to natural resources only (oil and gas, for example).

Depletion

A reverse convertible security would be most suitable for an investor who:

Desires higher yield and is anticipating the value of the underlying asset will remain stable

When the proceeds of a refunding issue are deposited into an account that will be used to pay the interest and principal on the issue being refunded to its maturity date, the outstanding bond is said to be:

Escrowed to maturity

Payments on a variable annuity are based on a:

Fixed number of units with a fluctuating value of securities

A registered representative invites 20 retail clients to a seminar and allows each client to bring one guest. The sales script that is used for the presentation is considered:

Retail communication

The member of a limited partnership who assumes liability for the debts of the entity and is usually concerned with its overall management is the:

General partner

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

Greater than 1 Small-cap and microcap stocks are considerably more volatile than average, so their betas would be greater than 1. This means they would increase in value more than the average stock in bull markets, but suffer larger losses in bear markets.

A customer is considering an investment in a hedge fund since many of his business associates have been receiving high returns over the last few years. A registered representative may make which of the following statements?

Hedge funds often use higher degrees of leverage than mutual funds

The custodian bank of a mutual fund:

Holds the fund's cash and securities and performs essential clerical functions but does not manage the fund

The factors that help determine a client's risk tolerance include:

Income Age Personality Net worth

An individual purchasing a U.S. Treasury bond would be most concerned with which two risks?

Interest-rate risk Timing risk

A person purchases a non-qualified variable annuity and dies at the age of 57. The tax implication is:

No penalty and the difference between the amount invested and the death benefit is taxable

For customers who are subject to the alternative minimum tax, a registered representative should understand the implications of investing in:

Limited partnerships

REIT shares may be traded either ___________ or ___________.

OTC or on an exchange.

According to anti-money laundering (AML) procedures, a member firm, when opening a new account for a non-U.S. citizen, is required to obtain a:

Passport number and country of issuance

Abigail is long 500 shares of GHI at $18 per share. In November, GHI is trading at $24 per share, but is expected to decrease in value over the next few months. Abigail wants to protect as much of her gain as possible and is willing to sacrifice upside potential to reduce her cost. Which of the following positions would you recommend to her to accomplish her goal?

Purchase 5 GHI Jan 25 puts and sell 5 GHI Jan 30 calls In order to protect some of the gain, Abigail will need to purchase 5 puts that expire in January. To reduce the cost of purchasing the 5 GHI Jan 25 puts, Abigail can sell 5 GHI Jan 30 calls to generate income from the premiums she receives and margin will not be required since Abigail owns 500 shares of GHI that could be called away should the short calls be exercised.

A corporation announced in an ad in The Wall Street Journal that it intends to call for the redemption of all its outstanding 7.25% callable bonds at 103 1/4 plus accrued interest. The market price of the bonds was 102 3/4 at the time of the announcement. What would be the most advantageous for an existing bondholder?

Redeem the bonds

A customer makes an initial $3,000 contribution into a variable annuity with his application, but decides five days later that he does not want the investment. The client surrenders the annuity. Under FINRA rules, the member firm must:

Return any commissions it earned to the insurance company within seven business days Under FINRA's Conduct Rules, dealer agreements must include a provision stating that commissions on variable products are to be returned by the broker-dealer to the insurance company if the variable contract is tendered for redemption within seven business days after the application is accepted. Some variable contracts may contain a free-look provision, but these clauses are typically included because of state insurance laws, not because they are mandated by FINRA.

________________________ are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates.

Reverse convertible securities

When liquidating a corporation's assets, in which order are claims satisfied?

Secured bondholders, general creditors, preferred stockholders, common stockholders

Joint account information is reported on one __________________.

Social Security number.

is the most important factor to consider when deciding to recommend a municipal bond unit investment trust to a client?

Tax bracket

A registered representative will be soliciting customers to purchase low-priced equity securities. A special disclosure document must be provided to customers if the securities are quoted on:

The OTC Pink Marketplace

is a method of calculating a tax return to ensure that a person is not able to avoid paying taxes altogether.

The alternative minimum tax (AMT)

When bonds are called for redemption, the bondholder can only redeem the bonds at the callable price or otherwise sell them in the market. The bondholder cannot continue to hold the bonds in anticipation of:

a better offer or until maturity.

When considering the credit strength of a municipal issuer, what are the most important factors?

The condition of the local economy The general capability of the fiscal officers of the municipality

In which the following situations would the NAV per share of a fund decline?

The fund pays a dividend and all shareholders choose to reinvest

The most significant factor affecting the net asset value of a mutual fund on a day-to-day basis is:

The market value of the portfolio

If an individual withdrawals money from an annuity during the accumulation period, what's the tax implication?

The withdrawal is considered income and taxable

A quote of 5.90 - 5.75 is a quote for which security?

Treasury bills

Investment companies with no management fee and low sales charges, that invest in a fixed portfolio of municipal or corporate bonds, are categorized as:

Unit investment trusts

What is a client's maximum loss if he is short KNP stock and short a KNP put?

Unlimited This is an example of a covered put (short stock + short put). The maximum loss is unlimited since there is no limit as to how high the stock price can rise. For example, if a client sells short at $46 and writes a $40 put for a premium of $3 and the put expires unexercised, the client will have a $3 profit. If the market price of KNP rises, the put option will expire unexercised but the client will still need to cover the short sale (short stock). The maximum loss on a short sale is unlimited, since there is no limit on how high the stock price may rise.

How long does a client have to convert a variable life contract into a whole life policy?

Up to 2 years

Preferred stock, unlike common stock, generally does NOT have voting rights. Common stockholders, therefore, control the corporation through the board of directors. Common stock generally provides an opportunity for an investment to appreciate, whereas preferred shares are more likely to receive income in the form of:

a dividend.

When it comes to ECNs, ff the system cannot match a buyer and seller, a client's order may have _____________________________.

a limited ability to be executed

Warrants are relatively long-term securities (sometimes perpetual) giving the holder the right to buy stock from the corporation at a fixed price. When issued, the subscription price is at ______________ to the stock's market price.

a premium

A registered representative wants to use a social networking site that permits real-time communication. This falls under the definition of:

a public appearance

While only the cash dividend is taxable when received, the receipt of stock dividends will require the investor to:

adjust her cost basis per share.

An increase in _____________________ would indicate that homes within the municipality are increasing in value, which will improve the municipality's credit.

assessed valuations

Government-Sponsored Enterprise (GSE) bonds, such as those issued by FNMA (Fannie Mae) or FHLMC (Freddie Mac) are not direct obligations of the U.S. government. As with most fixed-income securities, their value is highly dependent on ____________________, and they are suitable for investors seeking income.

current interest rates

As long as _________________________________, the account may be identified by number in all other broker-dealer records.

the customer's name is on file with the broker-dealer

Common and preferred stock are similar in that the dividends for both must be:

declared by the board of directors

Treasury stock does not have voting rights nor the right to receive _________________.

dividends.

Most prime brokers offer both ___________ and _____________ services to their customers.

execution and clearing

A registered investment adviser is a type of institutional customer, and any communication directed only to institutional customers does not need to be:

filed with FINRA.

In order for a 1035 exchange to be considered appropriate, the individual must benefit from the new contract, and the representative must sign off on its suitability. Exchanges made within 36 months of a previous exchange are generally considered:

inappropriate.

The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the __________________.

knock-in level.

Some ECNs will accept only certain types of orders, such as:

limit orders.

The alternative minimum tax (AMT) lists certain deductions and income as tax preference items that lose their benefits under normal tax filings. This has the greatest impact on a person who invests in

limited partnerships and certain municipal bonds

Stating or implying that past performance predicts future performance is considered:

misleading.

The net asset value (bid price) and offering price (asked price) of a _________________ are the same. There is no sales charge.

no-load fund

Performance information, such as the fund's total return for the past one-, five-, and ten-year periods, may be included in:

omitting prospectus ads and supplemental sales literature.

Two or more municipal securities dealers may form a joint account in order to purchase and distribute a large block of securities and spread the risk of the transaction in the secondary market. However, these dealers are only permitted to display:

one single quote on any position that they jointly hold.

Series K preferred stock dividend is:

payable begins at a fixed rate and switches to a floating rate non-cumulative

SEC registration statements (i.e., Form S-1 or S-3), ______________________, and other documents that are written by an issuer are not required to be kept on file by member firms.

prospectuses this includes red herrings

A Direct Pay Build America Bond may be used to raise capital for the same purposes as regular tax-exempt municipal debt, except for:

refundings, working capital, and private activity bonds.

An investor who buys euros would purchase a put to provide protection if the U.S. dollar strengthens (which would cause the euro to decrease). If the euro decline, the investor could exercise the put or sell the put at a profit. The investor will break even when the euro increases to a value equal to his cost (131) plus the premium paid (0.60). This makes the breakeven point 131.60 or $1.3160 (since strike prices and premiums for euro options are in cents per unit, the decimal must be moved two places to the left). The investor will have a profit if the euro _____________________.

rises above the breakeven point (131.60), which would occur if the U.S. dollar weakens

When stock is held in street name (i.e., in the name of the brokerage firm), the corporation sends the proxy to _____________________, which is the stockholder of record on the corporate books.

the brokerage firm The brokerage firm sends the proxy to the customer and the corporation then pays the additional expenses.

The official statement for a revenue bond issue states that the bonds are backed by a pledge of the project's net revenues. This means that the debt service is:

the first item paid after operating and maintenance expenses

Deferred compensation is actually a discriminatory type of benefit that's normally reserved for:

the upper management or large producers in a company.

According to FINRA rules, all retail communications, institutional communications, research reports, and correspondence (including e-mail and instant messages) that are used by a member firm must be kept on file for a minimum of ____________ years.

three

A person must file Form 4 with the SEC within __________ business days of the date on which an insider changes her ownership position (i.e., buys or sells).

two

Nonqualified deferred compensation plans are often ____________________, meaning the employer does not actually set aside money to fund the promised plan benefits.

unfunded

A deferred compensation plan is a form of non-qualified retirement plan. As such, it's not required to follow the ERISA standards for:

vesting, eligibility, or funding.