Series 7

A certificate of deposit that changes the rate of interest based on the prevailing market interest rate is known as a: A. Market rate CD B. Step-up / Step-down CD C. Negotiable CD D. Renewable CD

B

A customer buys 100 shares of XYZ at 87 and buys 1 XYZ Jan 90 Put @ $8. Just prior to expiration, the stock is trading at $87. The customer closes the option position at a premium of $3. One week later, the stock moves to $93 and the customer sells the stock position in the market. The net gain or loss on all transactions is: A. $100 loss B. $100 gain C. $600 loss D. $600 gain

B

A customer buys an ABC Apr 50 Put and sells an ABC Mar 50 Put. The customer profits if: A the spread narrows B the spread widens C the market price moves up sharply D both contracts expire

B

A customer, age 50, invests $50,000 in a variable annuity. The account has grown in value to $60,000 and at age 55, the customer takes a lump sum withdrawal of $15,000. Which statement is TRUE about the taxation of the withdrawal? A. The entire $15,000 withdrawal is subject to regular income tax plus a 10% penalty tax B. $10,000 of the withdrawal is subject to regular income tax plus a 10% penalty tax; $5,000 of the withdrawal is not taxable C. $10,000 of the withdrawal is subject to regular income tax only; $5,000 of the withdrawal is not taxable D. The entire $15,000 withdrawal is not taxable

B

The manager of a mutual fund is known as the: A. Sponsor B. Investment Adviser C. Custodian D. Underwriter

B

The person who shares in selling responsibility and liability, but who does not have decision making authority in a new issue syndicate, is known as the: A. managing underwriter B. syndicate member C. selling group member D. broker's broker

B

What is the size of the current market?

The "size" of the market refers to the highest bid and lowest ask currently on the book. The highest bid is 36.05, with 300 shares offered (300 from DB); the lowest ask is 36.08, with 200 shares offered (from GS). The size of the market is 300 bid at 36.05 by 200 asked at 36.08.

Under Rule 144, no filing is required if the sale amount every 90 days is for no more than 5,000 shares, worth no more than: A $50,000 B $100,000 C $500,000 D $1,000,000

B

Which bond portfolio construction is based on a phase-in of purchases in installments over time? A. Ladder B. Bullet C. Barbell D. Balloon

B

A 25-year old single client has just started his own small business and is not covered by a retirement plan. He has $5,000 to invest and currently has a low level of income. He wishes to start saving for retirement. The BEST recommendation is a: A. Roth IRA B. SIMPLE IRA C. Traditional IRA D. Roth 401(k)

A

A customer has a margin account at a failed broker-dealer. The securities were purchased for $50,000. As of the date that SIPC filed in court to be the trustee in the bankruptcy, the securities were worth $30,000. The account has a debit balance of $10,000. SIPC coverage will be: A. $20,000 B. $30,000 C. $40,000 D. $50,000

A

In a best efforts underwriting, the underwriter is acting as a(n): A. agent B. principal C. dealer D. specialist (DMM)

A

On Tuesday, May 14th, a registered representative receives an order to sell 100 shares of ABC stock that has been "transferred and shipped" to the customer. Before executing the order, the registered representative must make sure the securities can be delivered by: A. Thursday, May 16th B. Friday, May 17th C. Monday, May 20th D. Tuesday, May 21st

A

Primary offerings of agency securities are made at: A. par B. par plus a commission C. par plus a mark-up D. par plus a selling concession

A

SEC Regulation SP covers: A. notification to customers of a member firm's privacy policies and practices B. selective disclosure of material non-public information by issuers C. standardization of disclosure of financial and non-financial information by issuers D. registration filings with the SEC by small business issuers

A

The discount on original issue discount corporate and government bonds: A. must be amortized annually B. may be amortized annually C. must be accreted annually D. may be accreted annually

A

Which Collateralized Mortgage Obligation tranche has the MOST certain repayment date? A. Planned Amortization Class B. Targeted Amortization Class C. Plain Vanilla Tranche D. Zero Tranche

A

Which of the following describes a position trade? A. Buying a security into inventory directly from a customer with a mark-down B. After receiving a buy order from a customer, the dealer then purchases the stock into inventory and resells it to the customer C. Simultaneously buying and selling short the same or equivalent security D. Selling stock at the direction of a customer and using the proceeds to buy another stock for that customer

A

Which of the following can initiate repurchase agreements with government and agency securities as collateral? I Federal Home Loan Banks II Commercial banks III Federal Reserve Banks IV Government securities dealers A. II, III, IV B. I, II, III C. I, III, IV D. I, II, III, IV

A Government securities dealers, Commercial banks, and the Federal Reserve through its open market trading desk, all initiate repurchase agreements. Federal Home Loan Banks sell bonds to obtain funding. With the funds, it buys mortgages from Savings and Loans, making a secondary mortgage market and injecting fresh funds into the S&L's.

A market or limited price order which is to be executed in its entirety or not at all, but is not treated as canceled if not executed as soon as it is represented to the Trading Crowd, is a(n): A. All or None B. Fill or Kill C. Immediate or Cancel D. Not Held

A An "all or none" order requires the trader to execute the order in full on the floor of the exchange, however, if execution cannot be performed, the trader may attempt to fill the order at a later time. This contrasts to a "fill or kill" order, which also requires that the order be executed in full on the exchange floor, but if execution cannot be performed, the order is canceled. Additional execution attempts cannot be made. Finally, an "immediate or cancel" order requires the trader to execute the order in part or in full in one attempt, with the unexecuted portion of the order (if any) canceled. No additional execution attempts are allowed.

If the Federal Reserve Board tightens credit via open market operations, which of the following will also increase? I Discount Rate II Treasury Bill Discount Rate III Passbook Savings Rate IV Lending levels at financial institutions A. I and II B. III and IV C. II and III D. II and IV

A If the Federal Reserve tightens credit via open market operations (to do this, it would use reverse repurchase agreements), then the Fed Funds rate would increase. Since the Discount Rate is set by the Federal Reserve at 50 basis points over the Fed Funds rate, this rate increases as well. The effect of increased rates then ripples through all of the other money rates. If interest rates rise, lending levels should fall. The passbook savings rate would be unaffected since banks set these rates fairly low and don't change them.

(Refer to the exhibit window to answer the following question) A customer who is long 1 OEX May 315 Call exercises the contract on this day. The customer will receive: (315.58) A. $58.00 B. $162.50 C. $558.00 D. $662.50

A Index options settle in cash, with the writer paying the holder the "in the money" amount. On this day, the OEX index closed at 315.58. An OEX 315 call is "in the money" by .58 x multiplier of 100 = $58.00 per contract.

The last time to trade expiring equity options is: I 4:00 PM EST II 11:59 PM EST III on the third Friday of the month IV on the Saturday following the third Friday of the month A. I and III B. I and IV C. II and III D. II and IV

A Listed equity options trade until 4:00 PM Eastern Standard Time on the third Friday of the expiration month.The contracts expire at 11:59 PM Eastern Standard Time, on the third Friday of the month.

Which securities will trade with accrued interest? A. Negotiable Certificates of Deposit B. Treasury Bills C. Banker's Acceptances D. Treasury Receipts

A Negotiable CDs that mature in 1 year or less are issued at par and mature with accrued interest. Those issued for longer periods pay interest semi-annually and trade with accrued interest. The other choices are all original issue discount obligations, which trade flat.

A customer owns 100 shares of an NYSE listed preferred stock and notices that the typical daily trading volume in the issue is less than 1,000 shares. The customer wants to sell the stock and asks his broker what will happen if there is no ready buyer for the stock. The broker should respond that the Specialist (DMM) on the NYSE floor: A. is obligated to buy the stock at the current market B. is obligated to buy the stock at the limit price, if one is specified by the customer C. must look for a buyer for the shares on the NYSE floor D. is not obligated to buy the stock at the market

A Specialist/DMMs (Designated Market Makers) are obligated, under NYSE rules, to make a continuous market in the assigned stock. Thus, on the NYSE floor, a customer is always assured that the trade will be executed - however the price at which the trade is executed is always subject to market conditions.

A customer sells short 100 shares of ABC stock at $40 and buys 1 ABC Mar 40 Call @ $5. The maximum potential loss is: A. $500 B. $3,500 C. $4,500 D. unlimited

A The long call limits loss on the short stock position in a rising market. The stock was sold for $40 and can be bought back at $40 by exercising the call. The only loss to the customer is the premium paid of 5 points or $500.

A customer has a tax shelter unit with an adjusted cost basis of 0 and has $3,000 of unused passive losses. The customer sells the unit for $3,000. What is the capital gain or loss? A. $0 B. $3,000 loss C. $3,000 gain D. $6,000 loss

A The tax treatment of unused passive losses when a partnership interest is sold, is to add them to the cost basis. In this example, the customer has a partnership basis of $0 and $3,000 of unused passive losses, for an adjusted cost basis of $3,000. Since the sale proceeds from disposing of the partnership interest are $3,000, the customer has no capital gain or loss.

Which statement is TRUE about agency transactions? A. In an agency transaction, a commission is charged B. In an agency transaction, a mark-up or mark-down is charged C. In an agency transaction, both a commission and a mark-up or mark-down are charged D. In an agency transaction, neither a commission, nor a mark-up nor mark-down are charged

A. In an agency transaction, a commission is charged

Which of the following are standardized for listed option contracts? I Contract size II Expiration date III Strike price interval IV Expiration time

All

Accretion of the discount on a municipal bond is an accounting process that increases the security's: A par value B book value C cost value D appraised value

B

All of the following information is found in the Official Notice of Sale EXCEPT: A. maturities of the bonds B. interest rate on the bonds C. dated date on the bonds D. award date of the bonds

B

All of the following will affect the reported net income per share of a corporation EXCEPT: A. discontinuance of operations of an operating division B. declaration of a common dividend C. decrease in the number of common shares outstanding D. change in accounting method for valuing inventories

B

Call loans made by banks to broker-dealers are secured by: A fully paid securities held in margin accounts for customers of the broker-dealer B partially paid securities held in margin accounts for customers of the broker-dealer C fully paid securities held in cash accounts for customers of the broker-dealer D any security position held in the broker-dealer's inventory or held in a customer account

B

In corporate underwritings, if there are unfilled orders placed by a syndicate member that has completed its participation; and securities remain unsold in the syndicate account; then these orders will be filled and the syndicate member placing the order will earn the: A management fee B selling concession C underwriter's concession D spread

B

Payments made on a fixed annuity contract are withdrawn from the: A. broker-dealer net capital account B. insurance company general account C. state insurance fund D. insurance company separate account

B

Your customer, age 68, that has an IRA account at your firm valued at $500,000, passes away. The customer leaves the account to his wife, age 48, who does not work. She needs current income and wishes to know her best option to minimize taxes. You should advise the spouse to: A. roll the funds over into a new IRA in the spouse's name B. transfer the IRA funds to a beneficiary distribution account C. cash out the inherited IRA account D. disclaim or give away the inherited IRA account

B

A customer must sign and return which of the following documents within 15 days after opening an options account? A. Options Disclosure Document B. Options Agreement C. New Account Form D. Loan Consent Agreement

B A copy of the options new account form is part of the Options Agreement that is sent to the customer, to be signed and returned within 15 days of account opening. The Options Agreement is a recap of the customer new account profile including the suitability determination and it qualifies the customer for a level of options trading, detailing which options transactions are permitted. If the agreement is not returned, the registered representative is prohibited from accepting new opening trades - only closing transactions are allowed.

A structured product that invests in tranches of private label subprime mortgages is a: A. CMO B. CDO C. CMB D. CAB

B CDOs - Collateralized Debt Obligations - are structured products that invest in CMO tranches (and they can also invest in other debt obligations that provide cash flows). They are used to create tranches with different risk/return characteristics - so a CDO will have higher risk tranches holding lower quality collateral and lower risk tranches holding higher quality collateral.

Which statements are TRUE? I Quotes for NYSE listed issues, regardless of the market venue where the quote originates, are found on CQS II Quotes for NYSE listed issues, regardless of the market venue where the quote originates, are found on the UQDF III Quotes for NASDAQ listed issues, regardless of the market venue where the quote originates, are found on CQS IV Quotes for NASDAQ listed issues, regardless of the market venue where the quote originates, are found on the UQDF A. I and III B. I and IV C. II and III D. II and IV

B CQS (Consolidated Quotations Service) aggregates and displays quotes for all market makers in exchange listed issues - both NYSE and NYSE American (AMEX) listed. These market makers are exchange Specialists/DMMs and Third Market Makers (OTC firms that make markets in exchange listed issues). The UQDF (UTP Quote Data Feed) aggregates and displays quotes for all market makers in NASDAQ issues. UTP stands for "Unlisted Trading Privileges." Not only do NASDAQ Market makers quote and trade NASDAQ stocks, but exchange Specialists (DMMs) are now permitted to compete and trade NASDAQ stocks under a "UTP" plan.

Which of the following ratings is applicable to commercial paper? A. MIG-1 B. P-1 C. BBB D. AAA

B Commercial paper is rated on a P-1,2,3, and NP ("Not Prime") scale by Moody's or an A-1,2,3 scale by Standard & Poor's. MIG ratings are assigned by Moody's to short-term municipal notes. "ABC" ratings are used by both Moody's and Standard and Poor's for long-term corporates and municipals.

A customer has $24,000 to invest in mutual fund shares. The registered representative advises the customer to invest $8,000 on ABCD fund; $8,000 in DEFF fund; and $8,000 in XYZZ fund; to give the customer complete diversification and reduce risk. These 3 funds all have different sponsors. This action is: A. appropriate for the customer B. a violation known as a breakpoint sale C. a violation known as spinning D. a violation known as interpositioning

B Dividing customer purchase amounts will deny the customer the benefit of the breakpoint. This is a violation known as a breakpoint sale. The entire amount should be invested in one fund or one fund family to give the customer the lowest possible sales charge. Since mutual funds hold diversified portfolios, the argument that splitting the purchases further increases diversification, and thus will reduce risk, is dubious.

A facility built with a revenue bond issue has been condemned. Which of the protective covenants found in the trust indenture would be activated? A. defeasance covenant B. catastrophe call covenant C. maintenance covenant D. sinking fund covenant

B If a facility is condemned, it can no longer generate revenues. Though the question is not clear as to why it was condemned, the best choice is that a catastrophe call provision would be activated. This requires the issuer to call in the bonds, repaying the bondholders if a disaster occurs. Of the other choices, sinking fund covenants and defeasance covenants have no bearing. A maintenance covenant requires the issuer to maintain the facility in good repair. This covenant is not "activated" by a condemnation, as is a catastrophe call covenant.

An order is placed on the NYSE to buy 100 ABC shares at $50 Day. If the order is not executed on that day, who cancels the order? A. the customer B. the Specialist (DMM) C. the registered representative D. ABC corporation

B It is the responsibility of the Specialist (now renamed the DMM - Designated Market Maker) to cancel any "Day" orders at the end of the day that have not been filled.

A customer buys 1 Swiss Franc October 90 Put @ 6 when the Franc is trading at 85. The contract is: A. trading at parity B. "in the money" C. "out the money" D. "at the money"

B Puts go "in the money" when the market price falls below the strike price. Since the market price is 85 (cents) while the contract allows the customer to sell at a strike price of 90 (cents), the put is "in the money" by 5 cents.

General creditor status in the liquidation is given to any customer claims that are: A. below Securities Investor Protection Corporation coverage limits B. above Securities Investor Protection Corporation coverage limits C. for securities held in margins accounts that had a debit balance D. for cash balances below $250,000

B Securities Investor Protection Corporation provides protection on customer securities up to $500,000 in total cash and securities, but only covers cash balances for $250,000 included within the $500,000 limit. For any uncovered claim amounts above these limits, the customer becomes a general creditor of the failed broker-dealer. Coverage limits apply to both cash and margin accounts.

ABC Corporation has declared a rights offering to stockholders of record on Friday, December 10th. Under the offer, shareholders need 10 rights to subscribe to 1 new share at a price of $19. Fractional shares can be rounded up to purchase 1 full share. As of Wednesday, December 1st, the stock is trading at $24.50. The value of the right is: A. $.45 B. $.50 C. $.55 D. $1.00

B Since the record date is Friday, December 10th, a customer buying on Wednesday, December 1st would settle on Friday, December 3rd (2 business days later) and would be on the record books for the distribution. Therefore, the stock is trading cum rights. The value of a right "cum rights" is: $24.5 - $19 10 + 1 = $5.50 11 = $.50 Value "Cum Rights"

Under the "penny stock rule," a customer is considered to be "established" and does not have to sign a suitability statement to buy a penny stock if that customer has bought how many penny stock issues previously from that broker-dealer? A. 2 B. 3 C. 5 D. 10

B Suitability statements are not required under the "penny stock rule" for so called "established customers." These are customers who have either had cash or securities in custody of that broker-dealer for at least 1 year; or customers who have bought 3 or more "penny stock" issues previously from that broker-dealer.

A customer sells short 1,000 shares of XYZ at $60 in a margin account, regular way settlement. Two days after the trade, XYZ has dropped to $40. The minimum maintenance margin requirement is: A. $10,000 B. $12,000 C. $15,000 D. $18,000

B The minimum maintenance margin requirement for short stock positions is 30% of the current market value = 30% of $40,000 = $12,000. Note that minimum margins are based on the closing market value each day.

(Refer to the exhibit window to answer the following question) To be entitled to the dividend declared June 20th, a purchaser must show on the record books of the company on: A. June 20th B. July 17th C. July 19th D. July 31st

C

A customer has a discretionary account at a brokerage firm. The customer calls the registered representative handling the account and states "Buy $50,000 of investment grade corporate bonds" with at least 5 years to maturity and a minimum 8% yield. To comply with the customer's instructions, the registered representative must choose bonds that are rated, at a minimum: A Aaa B A C Baa D B

C

A divorced woman with 2 young children has a small trust fund that gives her $2,500 a year in income. She collects another $2,500 per year in alimony payments. The woman wishes to make a contribution to an Individual Retirement Account this year. Which statement is TRUE? A No contribution can be made because the woman received alimony payments B A contribution can be made based only on the income received from the trust fund C A contribution can be made based only on the alimony payments received D A contribution can be made based on both the income received from the trust fund and the alimony payments received

C

All of the following statements are true regarding CMOs EXCEPT: A. CMOs are available in $1,000 denominations B. CMOs make payments to holders monthly C. CMOs are subject to a higher level of prepayment risk than a pass through certificate D. CMOs receive the same credit rating as the underlying pass-through securities held in trust

C

All of the following will affect the counting of the holding period of ABC stock EXCEPT: A. selling ABC "short against the box" after the position has been held for 6 months B. buying an ABC put contract after the position has been held for 9 months C. selling an ABC put contract after the position has been held for 9 months D. selling ABC "short against the box" after the position has been held for 9 months

C

Client A's portfolio consists of the following: Equities: 85% Fixed Income: 10% Cash: 5% The breakdown of these holdings is: Equities 35% DEFF Total Market Index Fund 30% 2,100 shares of ABCD 25% 3,100 shares of XYZZ 10% PDQQ International Small Cap Growth Fund Fixed Income: 75% Investment Grade 25% Speculative Cash: 100% Money Market Fund Client A is 55 years old, single with no children. He is beginning to think about retirement and wishes to modify his portfolio so that he can start receiving an assured income stream starting at age 65. Which recommendation would be the BEST choice to meet the customer's changed investment objective? A. The ABCD and XYZZ stock holdings should be liquidated in full immediately, with the proceeds invested in 10 year income bonds of companies in special situations B. The DEFF Total Market Index Fund holding should be liquidated in full immediately, with the proceeds invested in 10-30 year Treasury bonds C. The customer should set minimum and maximum threshold prices at which the ABCD and XYZZ stock positions are to be liquidated; and if this occurs, the proceeds should be invested in 10-30 year maturity Treasuries D. The customer should liquidate the ABCD and XYZZ stock holding to purchase 10, 15 and 20 years STRIPs that will mature in even installments

C

The yield to maturity for a premium bond is: A. stated interest rate - annual capital loss / bond par value B. stated interest rate + annual capital gain / bond par value C. stated interest rate - annual capital loss / bond average value D. stated interest rate + annual capital gain / bond average value

C

Under Regulation D, all of the following are accredited investors EXCEPT a(n): A. investment company B. trust with assets in excess of $5,000,000 whose purchase is directed by a sophisticated person C. partnership with assets in excess of $5,000,000 formed for the specific purpose of acquiring the securities offered D. savings and loan institution

C

Under Regulation T, an extension for payment may FIRST be requested, under extraordinary circumstances, on the: A. 2nd business day after trade date B. 3rd business day after trade date C. 4th business day after trade date D. 5th business day after trade date

C

In a period of deflation, all of the following statements about fixed income securities are true EXCEPT: A. holders receive payments on fixed income securities that buy more in real terms B. holders are likely to realize capital appreciation on fixed income securities that are not close to maturity C. issuers are less likely to sell fixed income securities because interest rates will rise D. issuers are likely to sell non-callable issues

C In a deflationary period, prices fall. Therefore, money buys "more" in real terms. As deflation occurs, interest rates will drop, causing long term debt prices to rise. Because interest rates will be lower, issuers are more likely to sell fixed income securities - it costs them less to finance. Issuers are likely to sell non-callable issues because interest rates are low, and there is no need to call in such issues when the financing rates are so favorable. Callable issues are generally sold in periods of high interest rates, so the issuer can call in the securities if interest rates fall subsequently.

Specific compliance approval is needed for a registered representative to send out all of the following to 40 retail customers EXCEPT: A. 3rd party research report on a stock not followed by the firm obtained by the representative B. photocopy of a newspaper article about good stock picks C. existing research report prepared by that firm D. research report prepared by that representative about stocks that she likes

C The best answer is C. A communication to more than 25 existing or prospective retail clients is a "retail communication" that requires prior principal approval before distribution. The key to this question is that an existing research report prepared by that firm would be "already approved" (approvals from the Supervisory Analyst and a principal) and does not need an additional approval to be sent out. The other 3 choices are communications prepared by either the representative or someone outside that firm. They would all require prior principal approval. Furthermore, the research reports would require approval of a Supervisory Analyst at that firm.

All of the following statements are true regarding mutual funds that have adopted "12b-1" plans EXCEPT: A. plan adoption requires majority vote of the outstanding shares; the Board of Directors; and its disinterested members B. discontinuance of the plan requires majority vote of the outstanding shares or the disinterested members of the Board C. mailings to existing shareholders of the fund are an acceptable "12b-1" charge D. expense ratios for funds that have adopted 12b-1 plans can be expected to be higher than for similar funds without 12b-1 fees

C 12b-1 plans allow a mutual fund to charge, as an expense to the existing shareholders, the cost of advertising and soliciting for new customers. The theory behind such plans is that the advertising will attract more assets to the fund (more shareholders), and as the fund's size increases, the expense ratio (ratio of all fund expenses to total net assets) should decrease for all shareholders. The reality is that, for most funds which have adopted 12b-1 plans, expenses have risen faster (due to the selling expense costs charged to shareholders) than asset size, and expense ratios have increased. To adopt such a plan, majority vote of the outstanding shares; the Fund's Board of Directors; and the disinterested members of the Board is required. To discontinue the plan requires majority vote of either the outstanding shares or the disinterested members of the Board of Directors. Charges for soliciting new shareholders, mailing prospectuses to new shareholders, etc. are allowed 12b-1 charges. Charges for soliciting existing shareholders, mailing prospectuses to existing shareholders, etc. are not allowed as 12b-1 charges.

A double barreled municipal bond is one that is backed by: A. 2 separate sources of revenue B. 2 separate sources of taxing power C. a pledge of revenues and the backing of that municipality's ad valorem taxing power D. a pledge of revenues and the unconditional guarantee of the U.S. Government

C A double barreled bond is one backed by a defined source of revenue (other than taxes) plus the full faith and credit of an issuer that has taxing powers. The term is occasionally, but erroneously, used to describe bonds backed by 2 sources of revenue or a bond backed by a revenue pledge that additionally, has the guarantee of the U.S. Government.

A municipality would defease its debt with all of the following EXCEPT: A. U.S. Government securities B. U.S. Government agency securities C. AAA Municipal securities D. Bank certificates of deposit

C A municipality will defease its debt with securities of the highest credit rating, that provide the highest interest income to the municipality (since this interest income will be used to pay the interest expenses on the municipality's outstanding bonds that have been defeased). Acceptable securities to the bondholders are U.S. Governments, Agencies, and sometimes (rarely) bank certificates of deposit. AAA municipals would not be used because their yield is lower than governments (since the interest is exempt from Federal income tax, while the others are taxable).

If a customer buys a fully-paid security that is enrolled in DTC's DRS system, the customer will receive a(n): A. physical certificate B. escrow receipt C. statement of ownership D. depository receipt

C DTC (Depository Trust Corporation) has a relatively new "book entry" registration system for stocks, where there are no more physical certificates issued (saves time and money). This is called "DRS" - the Direct Registration System. Instead of getting physical certificates, the customer gets a "statement of ownership" - essentially an account statement.

During prolonged periods of economic expansion all of the following will occur EXCEPT: A. interest rates can be expected to rise B. the Federal Reserve will begin to tighten credit C. inflationary pressures will decrease D. business activity will increase

C During prolonged periods of economic expansion, business activity is increasing, also increasing inflationary pressures. To stop inflation from accelerating, the Federal Reserve begins to tighten credit, raising interest rates to keep the economy from growing too fast.

A limited partnership is formed between two individuals - one acting as the general partner; the other as the limited partner. The general partner wants the limited partner to help manage the venture. This action by the limited partner would: A. be permitted as long as any compensation to be received is stated in the partnership agreement B. be permitted without restriction C. cause the limited partner to be viewed as a general partner - and this individual would assume unlimited liability D. cause the revocation of the Certificate of Limited Partnership

C If a limited partner takes any role in participating in the running of the business, he or she is viewed as a general partner and assumes unlimited liability. To retain limited liability, the limited partner must remain a passive investor.

Customers A, B, C and D have their portfolio assets allocated as follows: A B C D Money Markets 15% 5% 5% 0% Treasury Bonds 40% 10% 20% 20% Speculative Bonds 10% 30% 10% 30% Blue Chip Equities 15% 15% 20% 10% Small Cap. Equities 10% 10% 30% 5% Emerging Markets 10% 20% 10% 30% REITs 0% 10% 5% 5% Which customer's portfolio is MOST susceptible to a cyclical economic downturn?

C In a cyclical economic downturn, the hardest hit asset group is stocks. Since earnings fall greatly in a downturn, so do stock prices. Also hard hit are speculative grade bonds, which can default. Portfolio C is the one that is most heavily invested in equities, so it would suffer the most in an economic downturn.

Under MSRB rules for new issues, the dealer: I must disclose the underwriter's spread to customers in a competitive bid issue II does not have to disclose the underwriter's spread to customers in a competitive bid issue III must disclose the underwriter's spread to customers in a negotiated offering IV does not have to disclose the underwriter's spread to customers in a negotiated offering A. I and III B. I and IV C. II and III D. II and IV

C MSRB rules requires that the underwriter's spread be disclosed to customers in negotiated underwritings only. There is no requirement to disclose to a customer the underwriter's spread in a competitive bid issue, since this is typically very thin.

Which of the following securities are redeemable? I Open-end funds II Closed-end funds III Corporate debentures IV Series EE bonds A. I and II only B. III and IV only C. I and IV only D. II and III only

C Open end funds are mutual funds. These are redeemable securities which do not trade. Closed end funds have a one time stock issuance and then are publicly traded. These are negotiable securities. They cannot be redeemed with the issuer. To "cash out," an investor simply sells them in the market like any other security. Corporate debentures are also negotiable - they cannot be redeemed with the issuer. Savings bonds (Series EE and HH) sold by the U.S. Government are redeemable securities. There is no trading in these issues. To "cash out," they are redeemed with an agent for the Government - a bank or savings and loan.

Which rollover would result in a tax event? A. Exchange of one variable annuity contract for another variable annuity contract B. Exchange of a life insurance contract for a variable annuity contract C. Exchange of a variable annuity contract for a life insurance contract D. Exchange of a life insurance contract for another life insurance contract

C Section 1035 "tax-free" exchanges permit "like-for-like" exchanges without tax due. Thus, Choices A and D are tax free. It also permits a life insurance policy to be exchanged for a variable annuity without tax due, making Choice B tax-free. This is allowed because an individual might no longer need the death benefit and has a policy with built up cash value. This can be converted into a fixed or variable annuity, with payments to continue for life, without tax due upon conversion. Of course, the IRS is happy about this because the taxable annuity payments will start earlier than the payment of the taxable death benefit. If a variable annuity is exchanged for any insurance policy, this is NOT a like-kind exchange, and tax will be due on any appreciation in the separate account. The stance of the IRS is that the individual is only doing this to delay receipt of payments that are taxable (because the variable annuity payments would have been received earlier than the taxable death benefit.)

In a deflationary period, which security would be most negatively affected? A. Long-term bond B. Intermediate-term bond C. Common stock D. Preferred stock

C In a deflationary period, interest rates will fall, raising the prices of fixed income securities. Thus, fixed income securities are defensive securities in times of deflation. Remember that preferred stock, which pays a fixed dividend rate, is a fixed income security. In contrast, common stock price movements will depend on the state of the economy at the time deflation occurs, and thus would not be defensive during deflationary periods.

A corporation can pay a dividend in all of the following fashions EXCEPT: A. making a cash distribution to shareholders B. making a stock distribution to shareholders C. distributing the stock of another company to shareholders D. distributing tax credits to shareholders

D

A registered representative has a customer, age 50, in the 35% tax bracket, who just sold his house for a 1-time gain. The customer intends to downsize, and after buying a smaller home, will have $400,000 to invest. The customer intends to retire in 15 years. The registered representative could recommend that the customer purchase a variable annuity separate account with a growth objective because: A once the customer reaches retirement age, there is no tax due on distributions taken B a variable annuity investment held long term will always outperform a fixed annuity contract C the contribution will be tax deductible, giving the customer a substantial 1-time tax savings D the earnings build tax-deferred during the 15 year period until retirement

D

A registered representative wishes to appear in a television commercial about options strategies. Which statement is TRUE? A No approval is required B The commercial must be approved in advance by the Branch Manager C The commercial must be approved in advance by the General Principal D The commercial must be approved in advance by the designated Registered Options Principal

D

All of the following statements are true regarding municipal new issue Group orders EXCEPT: A. the identity of the account for whom the order is placed must be disclosed B. Group orders generally have priority over Designated or Member orders C. the syndicate account receives credit for the order D. the manager must fill each Group order for the entire amount submitted

D

In a new issue underwriting, which of the following is typically the smallest? A Underwriter's Concession B Selling Concession C Spread D Management Fee

D

Last sale information is available for which of the following? I NYSE listed issues II NASDAQ listed issues III Pink Sheet issues IV CBOE listed issues A. I only B. II and III only C. I, II, and IV only D. I, II, III, IV

D

Under NYSE rules, every "responsible broker or dealer" who communicates bids and offers on the exchange floor (also known as "addressing the crowd") must comply with all of the following rules EXCEPT: A. any bid or offer must be for at least the normal trading unit in that security B. the highest bid and the lowest offer have precedence in all cases C. bids and offers must be publicly announced D. if two bids (or offers) are made at the same time and price, the smaller order has precedence

D

Which of the following annuity payment options will pay the estate of the annuitant if the full value of the account was not received? A. Life Annuity B. Life Annuity with Period Certain C. Joint and Last Survivor Annuity D. Unit Refund Annuity

D If the holder of a unit refund annuity dies before receiving the full investment value from the separate account, his or her estate gets a "refund" of the remaining value.

In 2018, a customer earns $400,000 as a self-employed doctor, and contributes the maximum permitted amount to a Keogh plan. The doctor has a full time nurse earning $40,000 per year. The contribution to be made for the nurse is: A. $0 B. $2,500 C. $3,000 D. $10,000

D The best answer is D. If an employer earns $275,000 or more and contributes the maximum of $55,000 to a Keogh in 2018, then 25% of "after Keogh earnings" is used to compute the percentage to be contributed for employees. If the employer earns $400,000 and contributes $55,000 to the Keogh, the "after Keogh earnings" are based on the "cap" income amount of $275,000. $275,000 - $55,000 = $220,000 of "after Keogh deduction" income. $55,000/$220,000 = 25%. Thus, for the nurse, $40,000 of income x 25% = $10,000 contribution.

Customer Name: Charlie Customer Age: 69 Marital Status: Single - Widowed Dependents: None Occupation: Retired Household Income: $31,000 (Social Security and Pension) Net Worth: $130,000 (excluding residence) Own Home: Yes $220,000 Value, No Mortgage Investment Objective: Current Income Risk Tolerance: Low Investment Time Horizon: 20 years Investment Experience: 0 years Current Portfolio Composition: Cash in Bank: $130,000 After reviewing this customer's profile sheet, which recommendation would be most appropriate? A. The customer should take at least $100,000 of cash from the bank and invest the proceeds in 20-year TIPS to meet the customer's desire for current income and his low risk tolerance requirements B. The customer should take at least $100,000 of cash from the bank and invest the proceeds in 20-year STRIPS to meet the customer's desire for current income and his low risk tolerance requirements C. The customer should mortgage his house for $100,000 at current market interest rates and use the proceeds to buy 20 year income bonds to provide current income D. The customer should take at least $100,000 of cash from the bank and invest the proceeds in 20-year Treasury Bonds to meet the customer's desire for current income and his low risk tolerance requirements

D The best answer is D. This customer is age 69, with no current investments or investment experience. The customer has a fairly low retirement income and needs additional current income to live comfortably. This customer really only has 2 assets to tap for potential current income. He owns a fully paid house worth $220,000; and has $130,000 of cash in the bank. One way to supplement income is for the customer to get a reverse mortgage on the house, but this is not a banking exam, so we will not go near that possibility! The other way to supplement income is to invest the cash in the bank in an investment that is safe and that gives current income. Treasury Bonds pay interest semi-annually at a higher rate than that earned on bank deposits, and are really safe, so these would be the best recommendation. STRIPS do not provide current income since they are a zero-coupon Treasury obligation so these will not work. TIPS give a lower current interest rate than regular Treasury bonds, in return for protecting the investor against inflation - however the inflation protection is not "paid" until maturity, so again, these will not give the greatest additional current income.

Under Regulation SHO, a "threshold" security is one that: I is easy to borrow II is hard to borrow III cannot be sold short under any circumstances, but can be sold long IV if sold short and not delivered within 13 consecutive settlement days, it must be bought-in A. I and III B. I and IV C. II and III D. II and IV

D The best answer is D. Threshold securities are those that are "hard to borrow" and the SEC does not want large outstanding short positions that are uncovered to build in these securities. Customer short sales of threshold list securities not resulting in delivery must be bought-in under the rule. If the security was on the exchange's threshold list as of trade date and remains on that list for "13 consecutive settlement days" (counting from trade date), then mandatory buy-in in required.

All of the following would be found in a municipal bond resolution EXCEPT: A. the issuer's duties to the bondholders B. the nature of the obligation C. any restrictive covenants to which the issuer must adhere D. any costs to be paid by the issuer in connection with issuing the bonds

D The bond resolution (or bond contract) is the contract between the issuer and the bondholder. It spells out the nature of the obligation; the issuer's duties to the bondholders; and any restrictive covenants to which the issuer must adhere. Any costs that the issuer incurs to sell the bonds has no bearing on the bond contract, since the bondholder is not involved in these expenses - they are solely the responsibility of the issuer.

Which statement is TRUE? A. The Discount Rate is higher than the Prime Rate B. The Fed Funds Rate is higher than the Call Loan Rate C. The Fed Funds Rate is higher than the Discount Rate D. The Prime Rate is higher than the Fed Funds Rate

D The major interest rates in the economy, from lowest to highest, are: Fed Funds Rate (Overnight loans of reserves from bank to bank) Discount Rate (Overnight loans of reserves from Fed to bank) Call Loan Rate (Interest rate from bank to broker where securities are collateral) Prime Rate (Interest rate from banks to best commercial customers)

Which of the following are primary purchasers of Treasury securities? I Investment companies II Broker-dealers III Federal Reserve Banks IV Commercial banks

I, II, IV

Which of the following must be disclosed to customers in negotiated municipal underwritings? I Spread II Initial offering price of each maturity III Participation amount of each underwriter IV Names of the Underwriters

I and II only

A Series 7 licensed individual wishes to sell "wrap" accounts. Which statements are TRUE? I This individual must be State-registered II This individual must be Federal-registered III This individual must pass either the Series 65 exam or the Series 66 exam IV This individual is not required to take any additional licensing exams A. I and III B. I and IV C. II and III D. II and IV

I and III A "wrap" account is not defined as a brokerage product. Any flat annual fee account is defined as an "advisory product" and the firm must be a registered investment adviser to sell them. The representative that sells them, in addition to being registered as an agent of the broker-dealer, must also register as an agent of the investment adviser firm. There is no Federal registration of investment adviser representatives. Only the investment adviser firm may be required to register with the SEC (and only if its assets under management exceed $100 million). Any investment adviser representative is State-registered and must pass either the Series 65 or Series 66 exam.

The manager of a pension plan would most likely invest in which of the following debt issues? I Corporate Bonds II Municipal Bonds III Government Bonds

I and III only

A customer that discovers an error on his or her account statement must report the error: I promptly II before the next account statement is generated III to the representative servicing the account IV to the member firm maintaining the account

I and IV

On the same day, a customer: Sells 1 ABC Jan 50 Call @ $3 Sells 1 ABC Jan 50 Put @ $5 At that time, the market price of ABC is $48. The breakeven points are: I $42 II $45 III $53 IV $58

I and IV

Which of the following statements are TRUE regarding new municipal offerings? I General obligation bonds are usually offered through competitive bid II General obligation bonds are usually offered through a negotiated offering III Revenue bonds are usually offered through competitive bid IV Revenue bonds are usually offered through a negotiated offering

I and IV

An officer of a company has been invited by a large mutual fund company to give a talk to the fund company's analysts about its business plans and prospects. At the talk, the officer inadvertently discloses material information that could affect the stock's price. Which statements are TRUE? I A public announcement of the news must be made within 24 hours II A public announcement of the news must be made within 10 business days III The company must file an 8K with the SEC disclosing the information to avoid insider trading liability IV The company must file a 10K with the SEC disclosing the information to avoid insider trading liability A. I or III B. I or IV C. II or III D. II or IV

I or III If an officer of a company makes an accidental disclosure of material non-public information at a presentation to analysts, Regulation FD considers the officer to be a tipper and the analysts to be tippees. To avoid insider trading liability, the company can either make an immediate public disclosure of the information (defined as public disclosure within 24 hours of the inadvertent disclosure) or can file an 8K report (a special report of significant events with the SEC, which makes the information public). A 10K is the corporation's annual audited financial statements and has nothing to do with Regulation FD.

Which of the following are included in the 10 leading economic indicators? I Standard and Poor's 500 Index II Supplier Delivery Delays III Consumer Price Index IV Initial Unemployment Claims A. I only B. II and III C. I, II, IV D. II, III, IV

I, II, IV Leading economic indicators include stock prices (as stock prices rise, people feel richer and spend more), supplier delivery delays (as capacity tightens, delays increase), and initial unemployment claims (high levels indicate future production cutbacks). The consumer price index is not a future indicator.

When comparing a margin account to a cash account, which of the following statements are TRUE? I Margin accounts have greater leverage than cash accounts II Margin accounts have the same leverage as cash accounts III Margin accounts have greater price volatility than cash accounts IV Margin accounts have the same price volatility as cash accounts

I, IV

A customer has the following investment mix: 25% Growth Stocks 25% U.S. Government Bonds 25% Investment Grade Corporate Bonds 25% Speculative Stocks Which asset classes have the greatest reinvestment risk? I Growth Stocks II U.S. Government Bonds III Investment Grade Corporate Bonds IV Speculative Stocks

II and III

The regular hours of operation of the NASDAQ system are: I from 9:00 AM ET II from 9:30 AM ET III until 4:00 PM ET IV until 6:30 PM ET

II and III

Which of the following statements are TRUE about a Regulation D private placement? I The offering may be made to a maximum of 35 accredited investors II The offering may be made to a maximum of 35 non-accredited investors III The offering may be made to an unlimited number of accredited investors IV The offering may be made to an unlimited number of non-accredited investors

II and III

Which of the following statements are TRUE about the Net Asset Value per share for a mutual fund? I If the securities in the portfolio make dividend distributions, the Net Asset Value per share will increase II If the securities in the portfolio make dividend distributions, the Net Asset Value per share is unaffected III If the mutual fund makes dividend distributions to shareholders, the Net Asset Value per share will decrease IV If the mutual fund makes dividend distributions to shareholders, the Net Asset Value per share is unaffected A. I and III B. I and IV C. II and III D. II and IV

II and III If a fund distributes a dividend to shareholders, the Fund shares are reduced by the value of the distribution. If the securities in the fund portfolio pay dividends, these are received by the Fund. The receipt of these monies into the Fund increases NAV per share. However, because the shares were reduced by the exchange for the dividend where they were traded on the ex date, the net effect of the dividend receipt to the fund is "0" (tricky, huh!).

Which of the following statements are TRUE about REITs? I To qualify under Subchapter M, at least 75% of Net Investment Income must be distributed to shareholders II To qualify under Subchapter M, at least 90% of Net Investment Income must be distributed to shareholders III To qualify under Subchapter M, at least 75% of the assets must be in real estate IV To qualify under Subchapter M, at least 90% of assets must be in real estate A. I and III B. I and IV C. II and III D. II and IV

II and III Real Estate Investment Trusts must distribute at least 90% of their Net Investment Income to shareholders; and invest at least 75% of their assets in real estate activities; to be regulated under Subchapter M.

When a firm "position trades," it: I trades on an agency basis for customers II trades on a dealer basis for its own account III takes inventory positions, both long and short IV interpositions itself between a customer and another dealer

II and III only

The last time to trade expiring equity options is: I 4:00 PM EST II 11:59 PM EST III on the third Friday of the month IV on the Saturday following the third Friday of the month

II, IV

Which of the following actions are likely to cause the value of the U.S. Dollar to rise? I The Federal Reserve lowers the discount rate II The Federal Reserve raises the discount rate III United States investors purchase foreign securities IV Foreign investors purchase U.S. securities

II, IV

Which of the following statements are TRUE about the acceptance of an "indication of interest" for a registered offering during the 20 day cooling off period? I The indication cannot be canceled by the customer II The indication cannot be canceled by the brokerage firm III The indication can be canceled by the customer IV The indication can be canceled by the brokerage firm

III and IV

Which of the following are functions of a corporation's Board of Directors? I Mailing dividend payments to shareholders II Canceling old shares and issuing new shares III Preparing and mailing proxies IV Setting the Declaration Date

IV only

A bank qualified municipal issue is one which: A. qualifies for an 80% deduction of its related interest carrying expenses by the bank B. has a qualified legal opinion rendered by a qualified bond counsel C. qualifies for the 80% dividend exclusion under IRS rules D. is eligible for bank trust department investment

The best answer is A. A "bank qualified" municipal issue is an issue of $10,000,000 or less that has been designated by the issuer as a "bank qualified issue." To be bank qualified, it must be a public purpose (not private purpose issue). Any bank that buys the issue receives a tax benefit that is not available on all other municipal investments. The bank can deduct 80% of the interest expense it incurs on deposits used to fund the purchase of the bonds, while the interest income from the municipal issue is not taxable to the bank. This is sometimes termed the 80/20 rule. If an issue is not bank qualified, then none of the interest expense that the bank incurs on deposits used to fund the purchase of the bonds can be deducted, which is logical since the interest income from the bonds is exempt from Federal taxation.

Which of the following statements are TRUE regarding International Bond Funds? I The fund will hold securities denominated in foreign currencies II The fund will hold securities denominated in U.S. dollars III The fund will have a currency exchange gain when the dollar falls in value IV The fund will have a currency exchange gain when the dollar rises in value A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. An international bond fund will have securities that are denominated in foreign currencies. (A Global fund would have both foreign and U.S. securities.) If the foreign currency value rises against the dollar, then when the fund's NAV is converted into dollars, proportionately more dollars will be created, since each unit of foreign currency buys more dollars. Similarly, if the U.S. Dollar drops against the foreign currency, when the fund's NAV is converted into dollars, proportionately more dollars will be created, since each unit of foreign currency buys more dollars.

Distributions after age 59 ½ from tax qualified retirement plans are: A. 100% taxable B. partial tax free return of capital and partial taxable income C. 100% tax free D. 100% tax deferred

The best answer is A. Contributions to tax qualified plans such as Keogh Plans are tax deductible. They are made with "before-tax" dollars, hence those funds were never taxed. Earnings accrue tax deferred. When distributions commence, since no tax was paid on the entire amount, the distribution is 100% taxable.

During the accumulation phase of a variable annuity contract, reinvested: I dividends and interest are tax deferred II capital gains are tax deferred III dividends and interest are taxable IV capital gains are taxable A. I and II only B. III and IV only C. I and IV only D. II and III only

The best answer is A. During the accumulation phase of a variable annuity contract, all dividends, interest and capital gains earned from the securities in the separate account must be reinvested and build tax deferred. The tax deferral of the build-up is the major benefit of buying a variable annuity.

A customer buys 100 shares of ABC stock at $10 as an initial transaction in a margin account. The customer must deposit: A. $1,000 B. $2,000 C. $2,500 D. $3,000

The best answer is A. Even though minimum equity to open a long margin account is $2,000, this does not apply if the securities in the account are fully paid. A customer cannot be asked to deposit more than 100% when buying since this is the maximum potential loss. The customer wants to buy $1,000 of stock, so 100% or $1,000 must be deposited.

A bond contract contains the following information: Issue Date: July 1, 2008 First Call Date: July 1, 2018 Date of Call Price 2018 105 2019 104 2020 103 2021 102 2022 and after 100 If the issuer calls the bonds at 105 in the year 2018, the issuer is making a(n): A. optional call B. extraordinary optional call C. mandatory call D. extraordinary mandatory call

The best answer is A. In the bond contract, the issuer may have the right to call in the entire issue at preset dates and prices (a normal call schedule, usually with at least 10 years of call protection given to the bondholder). The issuer has the option of calling in the bonds at those dates and prices; and will only do so if it is advantageous to the issuer (meaning that interest rates have dropped since the bonds were issued).

A corporation wishes to raise capital by issuing common stock to the public. The corporation would select which of the following to advise them on the stock issuance? A. Investment Adviser B. Investment Banker C. Broker Dealer D. Registered Representative

The best answer is B. Investment bankers help structure new securities offerings; decide the pricing of the issue based on market conditions; and underwrite the issue either as a principal (firm commitment) or as an agent (best efforts). Investment bankers also advise companies on mergers, acquisitions, divestitures and spin-offs.

An individual works in a small manufacturing business with fewer than 100 employees. The company does not offer a retirement plan. This individual has $5,000 of discretionary funds that she wishes to put away for retirement. The BEST recommendation for this individual is to make a $5,000 contribution to a(n): A. Traditional IRA B. 401(k) C. SEP IRA D. SIMPLE IRA

The best answer is A. SEP IRAs and SIMPLE IRAs are designed for small businesses, but the plans must be established by the corporate employer. Similarly, a 401(k) plan is established by the corporate employer - these plans are designed for larger businesses. The only retirement plans that can be set up by an individual are a Traditional IRA, a Roth IRA, or an annuity contract purchased from an insurance company.

The customer has decided to purchase a home instead of renting. The price of the home is $750,000 and the customer intends to put down 20% and obtain a mortgage for the balance. The customer explains that he will need the $150,000 down payment in 30 days. The best recommendation to the customer is to liquidate his: A. growth stocks and blue chip stocks immediately in the amount of $150,000 to obtain the necessary cash down payment B. growth stocks and blue chip stocks in 30 days in the amount of $150,000 to obtain the necessary cash down payment C. retirement accounts in the amount of $150,000 to obtain the necessary cash down payment D. Net Worth in the amount of $150,000 to obtain the necessary cash down payment

The best answer is A. Since this customer needs $150,000 in cash within 30 days for the down payment on the house, the best thing to do is to liquidate his stock positions now (not in 30 days) to get the funds for the down payment. If the customer waited 30 days, these stock positions could suffer a market loss, making it hard to fund the down payment. Liquidation of the pension assets makes no sense, since the customer is 41 years old and must pay regular income tax plus a 10% penalty tax on the liquidation. Net Worth cannot be "liquidated" - it is simply the value left over when all assets are subtracted from all liabilities.

For bonds trading at a discount, rank the yield measures from lowest to highest? A. Nominal; Current; Yield to Maturity; Yield to Call B. Yield to Call; Yield to Maturity; Current; Nominal C. Yield to Maturity; Nominal; Yield to Call; Current D. Current; Nominal; Yield to Call; Yield to Maturity

The best answer is A. When bonds are trading at a discount, the stated (nominal) yield will be lowest. The current yield will be higher, since it is based on the discounted market price - not par value. The yield to maturity will be the next highest, since it includes the portion of the discount earned annually as part of the annual return in addition to the interest received. Finally, yield to call will be highest, since the discount would be earned over a shorter period of time, increasing the annual yield on the security.

ABC 8% $100 par preferred is trading at $120 in the market. The current yield is: A. 6.7% B. 8.6% C. 10.6% D. 60.6%

The best answer is A. The formula for current yield is: $8 = 6.7% $120

Interest income from which of the following is SUBJECT to federal, state, and local taxes? I Federal National Mortgage Association issues II Government National Mortgage Association Issues III U.S. Treasury Bills IV Federal Intermediate Credit Bank issues A. I only B. I and II only C. III and IV only D. I, II, III, IV

The best answer is B. Both Fannie Mae and Ginnie Mae mortgage backed pass through certificates are fully taxable by both the Federal and State governments (Freddie Macs are fully taxable as well). Otherwise, as a general rule, interest earned on U.S. Government and agency obligations is subject to Federal income tax; but is exempt from state and local tax. (The states cannot tax Federal obligations; conversely the Feds cannot tax state obligations).

A customer, age 69, has never invested in securities. She is retired with no dependents, living on a fixed pension of $35,000 per year. She has a savings account with $160,000 and her home is fully paid. She desires to supplement her retirement income, assuming minimal risk. The BEST recommendation would be for the customer to invest $100,000 of her cash savings into a(n): A. variable annuity contract B. CMO planned amortization class tranche C. SPDR D. income (adjustment) bond

The best answer is B. CMO planned amortization classes give a good yield that is 50 or so basis points higher than equivalent maturity Treasuries and are extremely safe. These meet the customer's objective of additional income with low risk. Since this customer is only earning $35,000 per year, she is in a low tax bracket - making tax-deferred variable annuities unattractive. SPDRs - Standard and Poor's 500 Depository Receipts are an exchange traded fund that consists of equities - which don't provide much income. Income bonds only pay interest if the corporation has enough "income" - so these are not appropriate either.

Gross Domestic Product is: I the sum of all goods and services produced in the United States II the sum of all goods and services produced outside the United States III measured in inflated dollars IV measured in constant dollars A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Gross Domestic Product is the sum of all goods and services produced in this country. To make GDP comparisons valid, GDP is measured in constant dollars, using a GDP deflator.

A hedge fund manager has a large short position in 30-year Treasury Bonds. The manager is concerned that market interest rates are going to fall, causing Treasury Bond prices to rise. To hedge the short Treasury Bond position, the manager should: A. Buy TYX Calls B. Buy TYX Puts C. Sell TYX Calls D. Sell TYX Puts

The best answer is B. If market interest rates fall, bond prices rise. To hedge using an interest rate index option (here, the contract is the 30-year Treasury Bond yield index), the contract must offer an offsetting profit during a period of falling interest rates - so buy TYX puts. These give ever-increasing profit as market interest rates fall, offsetting the ever-increasing loss that would be incurred on the short Treasury Bond position rising in value as market interest rates keep falling. Note that selling TYX calls would also be profitable in a falling interest rate environment, because the calls would expire "out the money" and the premium would be earned. However, the premium earned is a fixed amount and if market interest rates fall steeply, this would not offset the loss due to rising prices experienced on the short Treasury Bond position. Finally, index options are "cash settled," so the hedge here is that any loss on the short Treasury Bond position would be offset by a corresponding gain on the long interest rate index put position.

Which of the following statements are TRUE about variable annuities? I Investment risk is carried by the issuer of the annuity II Salespeople must register with both FINRA and the State Insurance Commission III Annuity payments may be reduced because of increased expenses experienced by the insurance company IV Variable annuities are considered to be securities regulated by the Investment Company Act of 1940 A. I and III B. II and IV C. II, III, IV D. I, II, III, IV

The best answer is B. Investment risk in a variable annuity is carried by the purchaser, not the issuer of the contract. The issuer gives an expense guarantee, limiting the amount of expenses that the issuer can charge against the contract. To sell variable annuities, both an insurance and a securities registration are required. Variable annuities are considered to be securities because the purchaser bears the investment risk.

In the municipal trading market, a secondary market joint account could be formed for all of the following reasons EXCEPT to purchase: A. a block of bonds offered AON in Bloomberg B. securities offered in an Official Notice of Sale in the Daily Bond Buyer C. a block of bonds offered by a bank D. a block of bonds offered through another municipal trading firm

The best answer is B. Municipal secondary market joint accounts are formed by a number of municipal firms to either acquire or sell large blocks of bonds in the secondary (trading) market. These accounts do not operate in the primary market. To bid on new issues of bonds announced in the Daily Bond Buyer, municipal bond firms join into syndicates to bid.

Regulation T applies to which of the following: I U.S. Government bonds traded over-the-counter II Municipal bonds traded over-the-counter III Common stocks traded on exchanges IV Preferred stocks traded over-the-counter A. I and II B. III and IV C. III only D. I, II, III, IV

The best answer is B. Reg. T of the Federal Reserve Board only applies to non-exempt securities - these are the securities that are NOT exempt from the provisions of the Securities Act of 1933; and the Securities Exchange Act of 1934. Governments and municipals are exempt, so Reg. T does not apply. However, industry minimum margin rules still apply. Common stock and preferred stock are non-exempt. Therefore, Reg. T. applies; as well as industry minimum margin rules.

Regulation SHO is a body of rules covering: A. shorting against the box in an arbitrage account B. short sales of equities traded on an exchange or over-the-counter C. short term capital gains treatment on securities transactions D. shorting of naked options by retail customers

The best answer is B. Regulation SHO is an SEC rule intended to apply a uniform short sale rule to both exchange listed and OTC equity issues; and to stop the illegal practice of "naked" short selling (selling short a security without the intention to borrow and deliver the securities on settlement).

To sell short a listed stock in a margin account requires a deposit of: A. 25% of the price of the transaction B. 50% of the price of the transaction C. 25% of the closing price of the security that day D. 50% of the closing price of the security that day

The best answer is B. Regulation T requires that 50% of the sale amount, based on the price of the trade, be deposited to sell a stock short. The closing price has no effect on the deposit amount required.

A director of a publicly held company wants to sell 5,000 registered shares of that company's stock at $8 per share that she has held for 3 months. Does the Form 144 filing requirement apply to this sale? A. Yes, because any sale of shares by a director requires the filing of a Form 144 B. No, because the shares are being sold under a "de minimis" exemption C. Yes, because she has not held the shares for 6 months D. No, because the shares are not restricted

The best answer is B. Rule 144 includes a "de minimis" exemption, permitting the sale every 3 months of 5,000 shares or less, worth $50,000 or less, without having to file a Form 144. The transfer agent is authorized by the SEC to transfer the shares without a copy of the Form 144. Because this sale is 5,000 shares @ $8 = $40,000, it can be done under this exemption. Rule 144 applies to the public resale of restricted (unregistered private placement) stock and to the sale of registered control shares. Control shares are registered shares owned by a key officer or director. These do not have to complete the 6 month holding period requirement because they are registered, but to sell them, the officer must file a Form 144 Notice of Sale and is subject to the rule's volume restrictions.

If a municipal securities firm is subject to a 2-year ban under MSRB Rule G-37, it would be permitted to: A. act as a financial advisor to that municipality during the period of the ban B. place a bid for a competitive offer of general obligation bonds being sold at auction by that issuer C. negotiate with the issuer to be the underwriter on a revenue bond offering D. do none of the above

The best answer is B. The 2-year ban applies to engaging in municipal securities business with that issuer. Municipal securities business includes acting as a financial advisor to that issuer or performing negotiated underwritings for that issuer. It does not include competitive bid underwritings because "favoritism" does not decide the outcome of the auction. Rather, the lowest interest rate bidder wins.

The price of 1 AEP Nov 20 Put contract is: (.4) A. $4.00 B. $40.00 C. $400.00 D. $4,000.00

The best answer is B. The AEP Nov 20 Puts are quoted at .40, equals $.40 premium per share = $40 premium per 100 shares covered by a contract.

Which statements are TRUE about the VIX option? I High VIX levels are indicative of a volatile market II High VIX levels are indicative of a stable market III High VIX levels are generally bullish IV High VIX levels are generally bearish A. I and III ]B. I and IV C. II and III D. II and IV

The best answer is B. The VIX is a measure of market volatility - the higher the index value, the more volatile the market's price movements. Very volatile price movements are indicative of increased investor fear and are bearish.

During the accumulation phase of a variable annuity: I funds can be distributed to unit holders II funds cannot be distributed to unit holders III as interest, dividends, and capital gains are received, the investor has the option of reinvesting in more shares IV as interest, dividends, and capital gains are received, these must be reinvested in more accumulation units A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. As interest, dividends, and capital gains are realized from the securities held in the separate account during the accumulation phase, these must be automatically reinvested to buy more accumulation units for the contract holder. These cannot be distributed to the unit holders until the contract is annuitized. Thus, the accumulation phase allows payments to be made into the plan; requires that all dividends and capital gains be reinvested in the plan; and does not allow distributions to be taken out of the plan.

When the market price of ACME Common stock is at $45, which of the following actions, when completed by ACME Corporation, would raise additional capital? I Declaration of a 2 for 1 stock split II Announcement of a rights distribution, allowing existing shareholders to buy the stock at $35 per share III Announcement of a call of ACME $100 par convertible preferred at par, convertible at a 2.5:1 ratio IV Announcement of an offering of callable preferred stock A. I and II only B. II and IV only C. III and IV only D. I, II, III, IV

The best answer is B. The declaration of a stock split will not raise additional capital. Stock splits are typically declared when a company's stock price has risen too high for investors to easily trade 100 share units. By splitting the stock, the price is halved in the marketplace, making 100 share lots more affordable. A rights distribution will raise additional capital, since the existing shareholders are asked to "subscribe" and therefore, pay, for more shares. The call of a convertible security will either use the cash of the company if the security is handed in on the call notice; or will have no effect at all on the cash position of the company if the preferred stockholders convert to common stock. In this case, the issuer is doing a "forced conversion," because it makes sense for the preferred stockholders to convert to stock worth $45 per share in the market, rather than to tender their preferred shares at par, receiving $100 per preferred share/2.5 common shares per preferred shares = $40 equivalent price per share. Finally, the issuance of new preferred stock would raise new capital for the issuer.

All of the following statements about the Securities Exchange Act of 1934 are true EXCEPT the: A. general provisions of the Act apply to non-exempt securities B. general provisions of the Act apply to exempt securities C. anti-fraud provisions of the Act apply to non-exempt securities D. anti-fraud provisions of the Act apply to exempt securities

The best answer is B. The general provisions of the Securities Exchange Act of 1934 apply to non-exempt securities only. For example, holders of municipal bonds (an exempt security) cannot be considered to be "insiders" while a holder of corporate stock (a non-exempt security) can be an "insider." However, the anti-fraud provisions of the Act apply to both exempt and non-exempt securities. Thus, if a person fraudulently trades municipal bonds (an exempt security), this person is in violation of the Act.

A customer has $8,000 of capital losses and $3,000 of capital gains in a tax year. On that year's tax return, the investor has a(n): A. $3,000 capital loss deduction with no loss carryforward B. $3,000 capital loss deduction and a $2,000 loss carryforward C. $3,000 capital loss deduction and a $5,000 loss carryforward D. $8,000 capital loss deduction

The best answer is B. The tax law allows capital gains and losses to be netted each year. Net capital gains are fully taxable at the appropriate tax bracket. However, only $3,000 of net capital losses can be deducted in any year. Any losses above this amount can be carried forward to the next tax year. Here, the customer has a net capital loss of $5,000 of which $3,000 can be deducted this year with the unused $2,000 loss carried forward to the next tax year.

Which statements are TRUE regarding Treasury Inflation Protection securities? I In periods of deflation, the amount of each interest payment will decline II In periods of deflation, the amount of each interest payment is unchanged III In periods of deflation, the principal amount received at maturity will decline below par IV In periods of deflation, the principal amount received at maturity is unchanged at par A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. Treasury "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. When the bond matures, the holder receives the higher principal amount. In periods of deflation, the principal amount is adjusted downwards. Even though the interest rate is fixed, the holder receives a lower interest payment, due to the decreased principal amount. In this case, when the bond matures, the holder receives par - not the decreased principal amount.

When the general partner signs the subscription agreement, the: A. certificate of limited partnership is filed in the state B. limited partner is accepted into the partnership C. certificate of limited partnership is being amended D. limited partner forwards a certified check to the general partner for the initial investment

The best answer is B. When the general partner signs the subscription agreement, a limited partner is accepted into a partnership. The subscription agreement includes a full financial profile of the potential limited partner, so the general partner can determine if that investor is appropriate for the partnership being formed.

A 60-year old man is looking to create a portfolio that will provide current income and preservation of capital. Which of the following portfolios would be the BEST recommendation to the client? A. Long term corporate bonds rated AA or better, high yield corporate bonds and blue chip stocks B. Treasury bills, a money market mutual fund and bank certificates of deposit C. Treasury STRIPS, corporate income bonds and PO tranches D. Growth stocks, defensive stocks and foreign stocks

The best answer is B. This customer wants current income and preservation of capital. Choice A provides current income, but does not provide preservation of capital. Long term bonds are subject to loss of value if interest rates rise; high yield corporate bonds have this risk as well as higher default risk; and blue chip stocks also can lose substantial value in a bear market. Choice B meets both objectives. Treasury bills, money market funds and bank certificates of deposit all provide income (but not high levels of income) and safety of principal. Choice C consists of long term securities that do not provide income, and that also have high levels of interest rate risk. Treasury STRIPS are zero coupon Treasury obligations - they have high levels of interest rate risk and do not provide current income. Corporate income bonds only pay interest if the corporation has enough earnings. PO tranches are CMO tranches that pay "Principal Only." Because mortgage payments in the early years are mostly interest and in the later years are mostly principal, they pay very little in the early years and make most of their payments in their later years. Thus, they are most similar to a long-term zero coupon bond with high levels of interest rate risk. Choice D consists only of common stocks, which do not provide for preservation of capital.

The Firm Element component of the "Continuing Education" requirement: I is administered by FINRA II is administered by the FINRA-member employer III must be completed annually IV must be completed bi-annually A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. The Firm Element of the Continuing Education requirement obligates member firms to deliver annual training to all registered representatives on product, regulation, and compliance issues.

A customer is short 100 shares of DEF stock at $35 per share. The stock goes up to $50 and the customer covers the position. If, 30 days later, the customer decides to re-establish this short position when the market for DEF is $48, which statement is TRUE? A. The cost basis is $33 per share B. The cost basis is $48 per share C. The sale proceeds are $33 per share D. The sale proceeds are $63 per share

The best answer is C. In this transaction, the customer is attempting to take a loss and then reestablish the position. Under the "wash sale" rule, the loss deduction is disallowed if the position is reestablished within 30 days of the date the loss was generated. In this case the customer originally sold short the stock at $35. The stock was repurchased at $50, for a $15 loss per share ($1,500 loss on 100 shares). Then, the customer sold short another 100 shares 30 days later at $48 - exactly the 30 day limit set by the "wash sale" rule. Thus, the $1,500 loss is disallowed. (If the customer had waited for 31 days until reestablishing the short position, the rule would not apply!) The $15 per share loss will be deducted from the sale proceeds of $48, for a new sale proceeds of $33. In essence, this defers the taking of the loss until this short position is covered.

Under MSRB rules, all of the following are considered in determining a fair and reasonable commission in a municipal agency transaction EXCEPT: A. Availability of the security B. Expenses associated with the transaction C. Nature of the dealer's business D. Value of services rendered

The best answer is C. The MSRB Fair Pricing Rule states that the factors that should be considered when pricing a municipal bond for BOTH agency and principal transactions are the: best judgment of the fair market value of the security; expense of filling the order; fact that the firm is entitled to a profit; availability of the security; total dollar amount of the transaction - a larger dollar amount should result in a smaller mark-up percentage; and value of services rendered in effecting the trade The factors to be considered ONLY for principal transactions are the: yield should be comparable to other similar securities available in the market; maturity, rating and call features of the security; nature of the dealer's business; and existence of material information about the issuer. The factors to be considered that ONLY apply to agency trades are the: price of the transaction; value of any other compensation received in connection with this transaction (for example, a customer directs a municipal dealer to sell one bond and use the proceeds to buy another in a "bond swap." The dealer is performing 2 trades instead of 1, and so, should charge a bit less for each trade).

Covered call writing is an appropriate strategy in a: A. declining market B. rising market C. stable market D. fluctuating market

The best answer is C. A covered call writer owns the underlying stock position. The customer sells the call contract to generate extra income from the stock during periods when the market is expected to be stable. If the customer expects the market to rise, he or she would not write the call against the stock position because the stock will be "called away" in a rising market. If the customer expects the market to fall, he or she would sell the stock or buy a put as a hedge.

Which statement is TRUE about floating rate tranches? A. When interest rates rise, the price of the tranche rises B. When interest rates rise, the price of the tranche falls C. When interest rates rise, the interest rate on the tranche rises D. When interest rates rise, the interest rate on the tranche falls

The best answer is C. A floating rate CMO tranche has an interest rate that varies, tied to the movements of a recognized interest rate index, like LIBOR. Therefore, as interest rates move up, the interest rate paid on the tranche goes up as well; and when interest rates drop, the interest rate paid on the tranche goes down as well. There is usually a cap on how high the rate can go and a floor on how low the rate can drop. Because the interest rate moves with the market, the price stays close to par - as is the case with any variable rate security.

In 2018, a customer buys a 2% U.S. Government bond maturing in 2023 at 102-16. The customer elects to amortize the bond premium for tax purposes. If the bond is sold after 2 years, its cost basis at that time is: A. 102-8 B. 102 C. 101-16 D. 101-8

The best answer is C. Both Government and corporate bond premiums may be amortized, if elected by the owner - and this is the best choice for the owner because the annual amortization reduces the taxable interest income received from the bond. This Government bond cost 102-16, or 102 and 16/32nds = 102 1/2, so the premium is 2 1/2 points. Since the bond has 5 years to maturity, the annual amortization amount is 2 1/2 points divided by 5 years = 1/2 point per year. If the bond is sold after 2 years, 1 point of the premium will have been amortized. Thus, the bond's adjusted cost basis is 102 1/2 - 1 = 101 1/2. Converting to Government bond quotes (in 32nds), this equals 101-16.

Equity options for a given month expire at: I 4:00 PM EST II 11:59 PM EST III on the third Friday of the month IV on the Saturday following the third Friday of the month A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. Listed equity options trade until 4:00 PM Eastern Standard Time on the third Friday of the expiration month. The contracts expire at 11:59 PM Eastern Standard Time that same day - the third Friday of the month.

Long Margin Account Market Value: $200,000 Debit Balance: $80,000 If the debit balance in the account is reduced to $75,000, the market value where the account will be at minimum maintenance margin is: A. $25,000 B. $50,000 C. $100,000 D. $150,000

The best answer is C. The account will be at maintenance if equity equals 25% of long market value. Since long market value minus the debit equals equity in a long account, at maintenance, the debit must be 75% of market value. Thus, with a $75,000 debit, the account will be at maintenance when the market value falls to $75,000 / .75 = $100,000. At this point, equity will be $25,000 in the account and the margin percentage would be $25,000 equity / $100,000 market value = 25%.

Under FINRA rules, all of the following are "essential facts" needed to open a customer cash account EXCEPT: A. Customer citizenship B. Customer social security number C. Customer signature D. Customer date of birth

The best answer is C. There is no requirement for a customer signature to open a cash account (it is required for margin accounts, however). This gives firms the flexibility to open cash accounts over the phone or on-line. Customer date of birth, social security number and citizenship are all essential facts. (Also note that this is very much a "test world" question. In the real world, pretty much every brokerage firm, as part of the new account form, has an embedded arbitration agreement and has the customer sign it when opening the account. However, this is a firm requirement and not an SEC or FINRA legal requirement. If a brokerage firm wanted to open a customer cash account without the customer signing an arbitration agreement, it could.)

A 68-year old new customer has investment objectives of preservation of capital and income in retirement. The customer has a low risk tolerance and is in the 35% marginal federal tax bracket and is the 10% state tax bracket. Which investment recommendation would be most suitable for this client? A. Investment grade corporate bonds with long maturities B. Preferred stocks of blue chip companies C. Pre-refunded general obligation bonds D. General obligation bonds that have been escrowed to maturity

The best answer is C. This customer with a low risk tolerance is looking for preservation of capital and income in retirement. While long-term investment grade corporate bonds will give interest income, they are also highly susceptible to interest rate risk - if market interest rates go up, long time bond prices fall faster than short term bond prices - so this does not meet the customer's other objective of preservation of capital. (Preservation of capital means that the customer does not want to incur a capital loss, generally leading to investment choices of very safe, short-term fixed income securities like Treasury Bills.) Preferred stocks of blue chip companies will also provide dividend income that will be taxed at a preferential rate (15%) for this customer in a high federal tax bracket. However, preferred stock has no stated maturity, so it will pay for as long as the company is in business. This is the longest maturity, and as a fixed income security, it is subject to the highest level of interest rate risk. So this also does not meet the customer's objective of preservation of capital. Tax-free municipal bonds would be suitable for a customer is such a high tax bracket. Pre-refunded municipal bonds have been escrowed by the issuer with Treasury or Agency securities to be retired at the near-term call date. These are the safest municipal bonds (AAA rated) and also the shortest maturity of the choices offered. This meets the customer's 2 objectives - income and safety or principal, because the bond's life has been shortened to the nearest call date. In contrast, a municipal bond that has been escrowed to maturity with Treasury or Agency securities is safe (AAA rated), but it will be redeemed at maturity, not at an earlier call date. It will have a higher level of interest rate risk than a pre-refunded bond.

Under Regulation D, which of the following statements are TRUE? I A Prospectus must be delivered to all purchasers II An Offering Memorandum must be delivered to all purchasers III Full disclosure must be made to investors IV No disclosure is required to investors A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. Under Regulation D, purchasers of private placements must be given full disclosure about the issue, even though no prospectus is required (the issue is exempt). Disclosure is accomplished by providing the purchaser with a copy of an "Offering Circular," which for smaller private placements is called the "Offering Memorandum."

All of the following are considered in determining fair and reasonable compensation under the FINRA 5% Policy EXCEPT: A. Size of the transaction B. Level of service provided by the member firm C. Profit to the dealer on the transaction D. Total dollar amount of trade

The best answer is C. Under the FINRA 5% Policy, any dealer profit or loss on that transaction is not considered in determining fair and reasonable compensation for effecting an over-the-counter transaction. The size of the trade, total dollar amount, and level of service provided by the firm are all considered.

Variable annuity contracts: I have the issuer bear the investment risk II have the purchaser bear the investment risk III are non-exempt securities IV are exempt securities A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. Variable annuities differ from other products sold by insurance companies in that the purchaser bears the investment risk; as opposed to the insurance company bearing the investment risk. For example, if an insurance company achieves poor investment results, this does not affect the amount of death benefit that one gets from a traditional insurance policy; if the separate investment account funding a variable annuity achieves poor investment results, the annuity payment will drop. Because the purchaser bears the investment risk in a variable annuity contract, these are defined by the SEC as a non-exempt security that must be registered and sold with a prospectus.

A company's common stock is selling in the market at a "multiple of 20". If the market price of the common stock is currently $10, what is the earnings per share? A. $.02 B. $.20 C. $.50 D. $2.50

The best answer is C. When a stock is selling at a "multiple" of 20, this means that the market price is 20 times the current earnings per share. Since the market price is at $10 and the P/E ratio is 20, earnings per share is $.50.

A sewage treatment revenue bond issue is being underwritten on a negotiated basis. The offering consists of $50,000,000 par value of term bonds. The underwriter has agreed to a spread of $45.00 for each $5,000 bond. The manager has set the additional takedown at $20.00 per bond and the selling concession at $22.00 per bond. If a selling group member sells a $5,000 par value bond directly to the public, the selling group member earns: A. $5.00 B. $20.00 C. $22.00 D. $42.00

The best answer is C. When selling a bond directly to the public, a selling group member earns the selling concession of $22.00.

An open order is on the member firm's internal order entry system to sell 400 XYZ at 40 Stop GTC. The company has declared a 25% stock dividend. On the morning of the ex date, the order on the book will be: A. Sell 400 XYZ at 32 Stop GTC B. Sell 400 XYZ at 40 Stop GTC C. Sell 500 XYZ at 32 Stop GTC D. Sell 500 XYZ at 40 Stop GTC

The best answer is C. To adjust the order for the 25% stock dividend, the number of shares is multiplied by a factor of 1.25 (since there are 25% extra shares) while the order price is divided by a factor of 1.25. 400 shares x 1.25 = 500 shares on the adjusted order (this is a round lot) $40 price / 1.25 = $32 adjusted order price.

Notification to FINRA is required for all of the following EXCEPT: A. a written customer complaint is received about a registered employee misappropriating customer funds B. a registered representative is arrested for assault and battery C. a registered representative is committed to a mental institution D. a registered representative is indicted under the Securities Exchange Act of 1934 for "insider trading" violations

The best answer is C. If one goes insane, notification to FINRA is not required. (After all, how would that person know to notify FINRA - he's insane). However, FINRA does require prompt notification for a variety of reasons. If one is the subject of a written customer complaint involving theft or embezzlement; if one is arrested, arraigned, indicted, convicted, or pleads guilty to any criminal offense (except for minor traffic violations); or if one is sued under the Securities Acts; notification to FINRA is required. In addition, notification to FINRA is required if the registered representative is suspended or expelled by any other self-regulatory organization; is denied registration by another self-regulatory organization; or is the subject of a customer complaint that is settled for more than $15,000; or is the subject of disciplinary action by the member firm involving suspension, termination, or the withholding of commissions in excess of $2,500. When FINRA gets the report, they review it to see if they should do nothing, suspend the person's registration, or expel the registered representative.

A customer invests $1,000 in a money market fund. If the fund's assets appreciate by 10%, the customer will have: A. 100 shares @ $11.00 each B. 110 shares @ $10.00 each C. 1,000 shares @ $1.10 each D. 1,100 shares @ $1.00 each

The best answer is D. Money market funds are unusual in that the Net Asset Value per share is constant at $1.00. As the fund has earnings, and Total Assets increase, the shareholder receives more shares worth $1.00 each. For example, if an investor has 1,000 shares @ $1 ($1,000 total) in the fund, and the assets appreciate by 10%, then the customer will have 1,100 shares at $1 ($1,100 total).

Over-the counter traders perform which of the following functions? I Position trading for the firm's inventory account II Filling customer orders III Giving quotes to customers IV Setting the spread for each security traded A. I and IV only B. II and III only C. I, II, III D. I, II, III, IV

The best answer is D. OTC traders position trade (that is, trade for the firm's inventory account): fill customer orders to buy and sell; establish spreads (the difference between the bid and ask quote that is the profit for the dealer): and give quotes to customers. Clerical duties are handled by clerks.

Under Regulation SHO, a "threshold" security is one that: I is easy to borrow II is hard to borrow III cannot be sold short under any circumstances, but can be sold long IV if sold short and not delivered within 13 consecutive business days of the trade, must be bought-in A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Regulation SHO requires each exchange (NYSE, AMEX (NYSE American), and NASDAQ) to come up with a daily list of threshold securities. These are securities with large outstanding short positions that are "hard to borrow." If a security is on the threshold list as of trade date and it is sold short, then if the seller fails to deliver on settlement, it is mandatory that the security be bought in no later than "13 consecutive settlement days" after trade date

Which statements are TRUE? I Rule 144A issues trade on the NYSE, AMEX and NASDAQ II Rule 144A issues trade on PORTAL III The general public can trade Rule 144A issues IV Only QIBs can trade Rule 144A issues A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Rule 144A issues are private placement securities sold in minimum $500,000 blocks only to QIBs - Qualified Institutional Buyers (institutions with at least $100MM of assets available for investment). Whereas normal private placements cannot be traded, these can be traded from QIB to QIB. The market for this is PORTAL, but trading activity is thin in this market, especially as compared to the market for publicly traded securities.

U.S. Corporations issuing Eurodollar bonds are: I subject to foreign currency exchange risk II not subject to foreign currency exchange risk III subject to filing with the SEC IV not subject to filing with the SEC A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Since these bonds are denominated in U.S. Dollars and payable in dollars and not the currency of the country in which they are sold, Eurodollar bonds are not subject to foreign currency exchange risk. Thus, if the foreign currency appreciates, it has no effect on the issuer, who is obligated to pay in dollars (not the more expensive foreign currency). Also, since these bonds are issued outside the U.S., the issue does not have to be registered with the SEC.

A customer buys $10,000 of Government Bond Fund shares from Acme Investors, a fund sponsor and broker-dealer. Acme is the sponsor for a variety of funds within the Acme "family." The ACME family has an "exchange feature" at NAV. The customer decides to exchange his Government Bond Fund shares for Growth Fund shares within the same family. All of the following statements are true EXCEPT the: A. customer's yield will decrease B. customer will have greater capital appreciation potential C. customer will have a tax event D. customer will pay a sales charge

The best answer is D. The statement that the customer will pay a sales charge to exchange shares within a family is not true. This fund family has an "exchange feature" at NAV, which means that shares of one fund can be redeemed and reinvested in shares of another fund within the family without any sales charge. For the customer exchanging Government Bond Fund shares for Growth Fund shares, a tax event has occurred. It would be expected that the customer's yield will decrease but that capital gains will increase, since he or she is moving from an "income" fund to a "growth" fund.

Which of the following statements about Treasury STRIPS are TRUE? I Treasury STRIPS are suitable investments for individuals seeking a high level of safety II The interest income is accreted and taxed annually III At maturity, there is no capital gain IV The investor's interest rate is locked in at purchase, eliminating any reinvestment risk A. I and III only B. II and IV only C. I, III, IV D. I, II, III, IV

The best answer is D. Treasury STRIPS are government bonds that are "stripped" of coupons. They do not provide current income, but they do provide a high level of safety as the underlying securities are direct obligations of the U.S. Government. The discount on the bonds must be accredit annually, with the annual accretion amount being taxable as interest income. As the bond is accreted, its cost basis is adjusted upwards so that at maturity, the bond has an adjusted cost basis of par. Therefore, no taxable capital gain is realized at maturity. This is a zero coupon obligation with a "locked in" rate of return over the life of the bond (thus, it is not subject to reinvestment risk).

Growth in the separate account of a variable annuity is: I guaranteed as to minimum rate II not guaranteed as to minimum rate III capped as to maximum rate IV not capped as to maximum rate A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Variable annuity separate accounts are subject to investment risk - there is no minimum guaranteed growth rate and no cap on the growth rate. Also note that the insurance company selling the annuity can offer a rider called a GMIB - Guaranteed Minimum Income Benefit - that will give a minimum guaranteed growth rate for an additional cost. However, this is an optional feature, and is not part of the basic variable annuity contract.

A customer buys 1 ABC Jan 50 Call @ $3 when the market price is $51. The customer exercises the call when the market rises to $53. The tax consequence is: A. no gain or loss B. a $300 capital gain C. a cost basis in the stock of $5,000 D. a cost basis in the stock of $5,300

The best answer is D. When a call is exercised, the customer is buying the stock (no taxable event occurs until those shares are sold). The call premium paid is considered to be part of the acquisition cost of the stock. For tax purposes, the customer is buying the stock at the strike price + call premium paid ($50 + $3) with the stock's holding period commencing on the exercise date.

In January, 20XX a customer buys 100 shares of ABC stock at $30 per share and pays a $2 commission per share. The customer receives $1 in cash dividends during the year. The customer's cost basis in the stock is: A. $28 per share B. $30 per share C. $31 per share D. $32 per share

The best answer is D. When the stock is purchased, any commission paid is not deductible - it is part of the cost basis of the shares. Thus, the cost basis for tax purposes is $30 + $2 commission = $32 per share. The $1 dividend received is included in taxable income for this year, and is not part of the stock's cost basis.