Series 7 Closed Book Exams 10-12

What is the maximum underwriting compensation for a limited partnership?

10% of the gross proceeds of the offering

What is the qualifications for the intrastate exemption of Rule 147

80% of its assets are located in the state, or 80% of its revenues are derived from the state, or 80% of the proceeds from the sale are used in the state All purchasers must be in the state

According to technical analysis, a head and shoulders top formation indicates a trend that is: Bearish Bullish Neutral Highly unpredictable

A A head and shoulders chart formation is one of the classical patterns agreed upon by technical analysts or chartists as being a reversal of a trend in the price of a stock. If the head and shoulders pattern appears at the top of an upward trend (head and shoulders top), as in this example, it indicates the reversal of an upward trend (bearish indicator). If the head and shoulders pattern appeared at the bottom of a downward trend (head and shoulders bottom), it indicates a reversal of a downward trend in the price movement of a particular stock (bullish indicator).

A variable annuity application sent by a FINRA member does not include a principal's approval. The insurance company: Must reject the application Can process the application Must notify FINRA before processing Can only process the application after contacting the client

A Annuity suitability rules require that contracts sold through FINRA members be forwarded to the representative's OSJ and be approved by a principal within 7 business days of receipt before being sent to the insurance company. If a principal does not approve the application, it must be rejected.

Which TWO of the following are suitable for an aggressive investor who wants a non-traditional investment as well as access to his capital? A business development company A hedge fund A liquid alternative investment A private equity fund I and III I and IV II and III II and IV

A Both a business development company and a liquid alternative investment are non-traditional investments that are suitable for an aggressive investor. A business development company (BDC) raises capital by selling securities to investors, has a structure that is similar to a closed-end investment company, and provides an investor with access to his capital (liquidity). A BDC will use the money it raises to invest in private companies, small and developing businesses, as well as financially troubled companies that have difficulty raising capital in public markets. Since some of the funds are invested in the equity of non-public companies, purchasing shares of a BDC is similar to buying a publicly traded investment in a private equity firm. The term alternative investments refers to non-traditional strategies, such as short selling, using derivatives, long/short trading or neutral strategies, trading in distressed securities or currencies, and arbitrage. These strategies differ from simply buying, holding, and selling securities and are often referred to as a way to diversify a portfolio through the use of securities other than equities and bonds. These are the types of strategies are used by hedge funds and private equity funds. One of the disadvantages of both hedge funds and private equity funds is their lack of liquidly. A liquid alternative investment combines the structure of an SEC-registered mutual fund (which is liquid) with a non-traditional or alternative investment.

An investor buys T-bonds on Friday, January 16 for cash settlement. This transaction will settle on: January 16 January 17 January 19 January 20

A Cash settlement for all securities takes place on the trade date.

Interest rates had been very high. During the past three years rates have decreased dramatically, reaching historically normal level. The present yield curve would most likely be: Ascending Inverted Positive sloping Negative sloping I and III I and IV II and III II and IV

A If rates have declined for the past three years and reached a normal level, the present yield curve would most likely be ascending, which is also referred to as positive or upward sloping. This type of curve would have short-term rates lower than long-term rates, which is the way interest rates usually are. It is also referred to as a normal yield curve.

A customer has purchased a new municipal issue during the underwriting period. According to MSRB rules, the customer must receive which TWO of the following documents? The final confirmation showing the aggregate price A copy of the notice of sale A copy of the official statement, if prepared A list of syndicate members I and III I and IV II and III II and IV

A MSRB rules require that a copy of the official statement be sent to each purchaser of a new issue. A confirmation must be sent on every transaction, whether a new issue or a secondary market trade. A copy of the indenture and a list of the syndicate members do not need to be sent.

SEC regulations state that a brokerage firm must provide a current financial statement (balance sheet) to: A customer when requested by the customer A noncustomer who requests it Both of the above Neither of the above

A SEC regulations states that a brokerage firm must provide a current financial statement (balance sheet with net capital computation) to a customer upon request. The customer has the right to know the financial condition of the company with which she is doing business.

A customer has a long margin account with a market value of $30,000 and a debit balance of $20,000. His short margin account has a $7,000 market value and a $10,000 credit balance. The FRB margin requirement is 50%. How much cash may the customer withdraw from the account? 0 $10,000 $17,000 $23,000

A The long account is restricted because the equity of $10,000 is less than the initial FRB requirement ($30,000 market value times 50% FRB requirement equals $15,000 required equity). There is no excess equity in the short account since the equity of $3,000 ($10,000 credit balance minus $7,000 market value) is less than the FRB requirement of $3,500 (50% of $7,000 market value).

A high put/call ratio would MOST likely be associated with a(n): Bullish indicator Bearish indicator Indicator that the market will trade within a narrow range Indicator that the trading volume will be increasing

A The put/call ratio is a technical market indicator and is found by dividing the volume of all put transactions by the volume of all call transactions on a daily basis. Technical analysts view the put/call ratio as a contrarian indicator. The higher the ratio, the more oversold the market, and the higher the probability that the market will reverse course and turn bullish. The opposite is true for a low put/call ratio, which is viewed as a bearish indicator.

When raising capital, which TWO of the following securities are required to be registered with the SEC under the Securities Act of 1933? Common stock in a software company that will be listed on Nasdaq Debentures issued by a finance company sold only to qualified institutional buyers An American Depositary Receipt issued by a European company A revenue bond issued to finance a stadium I and III I and IV II and III II and IV

A There is no specific exemption under the registration provisions of the Securities Act of 1933 for ADRs or shares of a software company that will be listed on Nasdaq. Both securities, if sold to the public in the U.S., require SEC registration. A security sold only to qualified institutional buyers (QIBs) is exempt and may be resold under a 144A exemption. Also exempt are municipal securities, which include both revenue bonds and general obligation bonds.

Currency values in a floating-rate system are established by: Supply and demand for the currency Government regulations The World Bank The International Monetary Market

A Under a floating-rate system, currency values are established by supply and demand for the currency. Supply and demand for a currency may be influenced by the country's rate of inflation, level of interest rates, gold reserves, and trade deficit. The opposite of a floating-rate system is a fixed-rate system whereby countries agree to a currency exchange rate that will not fluctuate.

Eliminating a bond issuer's responsibility to pay back bondholders from an offering, and also relieving their obligation to bondholder's rights, is referred to as: Defeasance Refunding A sinking fund A put provision

A When a bond is prerefunded, (advance refunded), the proceeds from a new bond offering are invested and the securities are placed in escrow. If these funds will be used only to retire the outstanding issue, that issue is considered to be defeased. The responsibility to pay the interest and principal on the outstanding issue is now of the escrow account. In addition the bondholder's rights as described in the indenture agreement from the prerefunded issue, are eliminated.

CDO (collateralized debt obligation)

A sophisticated financial instrument that begins with an individual loan (such as a mortgage or corporate debt). These loans are placed in a pool, and investors then purchase a security (like a bond, tranche, or slice) that represents an interest in that pool. Each of these securities has a different maturity and credit risk, depending on the nature of the collateral behind it. They are not suitable for retail investors.

ETN

A type of unsecured debt security. Their creditworthiness is tied to the financial institution backing the note. They do not pay interest - their returns are linked to the performance of an index, currency, or comodity.

Which of the following investments will permit a customer to purchase publicly traded shares of a company that is MOST similar to a private equity fund? An exchange-traded fund A business development company An exchange-traded note A real estate investment trust

B A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. A BDC will use the money it raises to invest mostly in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm.

A registered representative writes a letter to see if his clients have any interest in trading options. The letter is generic and simply describes the advantages and disadvantages of options trading. This letter: Must be approved prior to use by a ROP Need not be approved prior to use as long as it does not contain recommendations Must be accompanied by a risk disclosure document Need not be accompanied by a risk disclosure document I and III only I and IV only II and III only II and IV only

B All retail communications concerning options must be approved by an ROP prior to being sent to customers. Since there are no specific recommendations being made, the OCC disclosure document does not need to precede or accompany the letter. However, the customer must receive the risk disclosure document at or before the account is approved for option trading.

Ms. Thomas calls her registered representative with an order to buy up to 2,000 shares of XYZ at $35 per share right now and do not leave the unexecuted portion as a day or open order. Ms. Thomas has entered a(n): Order that may not be accepted Immediate-or-cancel order Limit order Day order

B An order that dictates to fill as much of the order as you can right now and cancel the rest is called an immediate-or-cancel order. Limit orders are placed as either day or GTC orders and the unexecuted portions are placed on the designated market maker's book.

Suitability in variable annuity transactions does not apply in which of the following situations? A purchase of a new variable annuity An employee's contribution to his 403(b) plan A 1035 exchange from one variable annuity to another The allocation of funds to the subaccount products within a variable annuity

B FINRA focuses on the suitability of annuity transactions in the purchase of new contracts, exchanges, and the allocation of funds to the subaccount products within the annuity. Annuity transactions in tax-qualified, employer-sponsored annuity programs (e.g., 403(b) plans) is not subject to FINRA's rules. However, the allocation of funds to the various subaccount products within the qualified plans is covered.

What information is NOT found on a municipal bond confirmation? The amount of accrued interest Whether the bonds are subject to state income tax The call features The fact that the broker-dealer acted in a principal capacity

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

An investor who owns 1,000 shares of ABC informs you that he wants to sell short against the box. Which of the following statements is TRUE? This type of transaction is only permitted by institutional investors This type of transaction is permitted if the order ticket is marked short This type of transaction is permitted if the order ticket is marked long This type of transaction is only permitted in a cash account

B In certain instances, a client (institutional or retail) that is long a security may want to sell the stock, but not deliver his long position. The client must borrow the security to effect delivery, requiring the order ticket to be marked short. This type of transaction is called selling short against the box. The term box is an old industry term referring to a safe deposit box. Short sales are permitted to be executed only in a margin account.

Which TWO of the following statements are normally TRUE regarding the pricing of municipal bonds? Serial bonds are priced on a yield-to-maturity basis Serial bonds are priced on a dollar basis Term bonds are priced on a yield-to-maturity basis Term bonds are priced on a dollar basis I and III I and IV II and III II and IV

B Normally, traders quote municipal bonds issued in a serial maturity on a yield basis, where the yield quoted is the lower of yield to call or yield to maturity. Term bonds are normally quoted using the dollar pricing (percentage of par) method and are sometimes referred to as dollar bonds. For example, a trader may quote a serial bond at a basis price of 5.35, which means a yield to maturity of 5.35%. A term bond would be quoted at a price of 98, which means that the bond is quoted at 98% of par value, or $980 ($1,000 par x 98%).

Which TWO of the following investment companies are NOT open-end? NAV Offered I. $8.00 $ 7.00 II. $9.20 $10.00 III. $7.00 $ 7.00 IV. $8.00 $10.00 I and II I and IV II and III II and IV

B Open-end companies are not offered below their current net asset value. According to the Conduct Rules, the maximum sales charge permitted for an open-end company is 8 1/2%. Choices (I) and (IV) must be closed-end companies. Choice (I) is a closed-end company because it is offered below its net asset value. Choice (IV) must be a closed-end company because when doing the sales charge calculation (sales charge divided by offering price), the result is a 20% sales charge, which is above the allowable maximum. Therefore, choice (IV) is a closed-end fund trading at a 25% premium to NAV.

Which of the following statements is TRUE concerning the responsibilities of a principal at a broker-dealer? The principal must approve all trades prior to their being entered The principal must approve retail communications prior to use The principal must approve retail communications within 10 days of use The principal must approve all outside employment by an RR

B Principal approval is required for retail communications prior to use, not within 10 days of use. All trades must be reviewed by a principal promptly. Any RR who has outside employment must notify his employer, but principal approval is not required.

What is meant by 4.50% less 3/4 for a municipal bond selling in the secondary market? $1,000 bond at 4.50 yield - $0.75 $1,000 bond at 4.50 yield - $7.50 $5,000 bond at 4.50 yield - $0.75 $5,000 bond at 4.50 yield - $7.75

B Quotes for serial municipal bonds are usually per $1,000 and on a yield-to-maturity basis. The less 3/4 represents the concession or discount offered to another dealer. 3/4 point = $7.50.

A brokerage firm accepted delivery of securities on settlement. Upon further inspection of the securities, the brokerage firm discovers a problem and wishes to return the securities to the selling dealer. The process of returning securities that have previously been accepted is known as: Reallowance Reclamation Rejection Recapture

B Reclamation is the process of returning securities that were previously accepted on the settlement date. Rejection is when the brokerage firm refuses delivery of the securities on the settlement date.

Structured products may: Offer returns linked to equity securities Not offer returns linked to commodities Not offer returns linked to interest rates Be formulated to provide principal protection I and III I and IV II and III II and IV

B Structured products are prepackaged securities that often combine securities, such as a bond with a derivative. The structured security may be linked to equity securities, commodities, or interest rates. The products may also be structured to provide principal protection. Structured products are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed by an RR when offering this product to clients.

Settlement through DTCC is on the buyer or seller's premises?

Buyers

Advertising for municipal fund securities investments must be approved prior to its official use by: The Municipal Securities Rulemaking Board The state sponsoring the municipal fund securities investment program A principal of the firm who is selling the program The portfolio manager of the municipal fund security investment

C A 529 College Savings Plan is a type of municipal fund security. All advertising regarding municipal securities and municipal fund securities must be approved by a municipal securities principal of the firm prior to its initial use.

If a self-employed individual wants to establish a Simplified Employee Pension (SEP) plan, which TWO of the following statements are TRUE? The plan requires a fixed contribution The plan allows for a flexible contribution The maximum annual deductible contribution is 20% of self-employment income up to a certain dollar amount The maximum annual deductible contribution is the lesser of $5,500 or 100% of self-employment income I and III I and IV II and III II and IV

C A Simplified Employee Pension (SEP) allows for flexible annual contributions which benefits an employer with uncertain cash flows. In a SEP plan, a self-employed individual may make a maximum annual deductible contribution of 20% of self-employed income up to a certain dollar amount.

Within how many days of receipt must a principal approve or disapprove an application to purchase a variable annuity? 3 business days 5 business days 7 business days 10 business days

C An application to purchase a variable annuity received by a broker-dealer must be approved or disapproved by a principal no later than 7 business days after receipt. Should an insurance company receive an application without a principal's approval, the application must be rejected.

A FINRA member subscribing to CQS, calls a market maker displaying a quote on the system and executes a trade. This transaction is considered to have occurred in the: Primary market Private market Third market Fourth market

C CQS displays quotations by members for NYSE and NYSE MKT (formerly NYSE Amex) listed securities. Transactions in listed securities between FINRA members in the over-the-counter market are considered third-market transactions. Although executed in the over-the-counter market, such transactions must still be reported to the Tape.

During periods of deflation, which of the following investments tends to perform the best? Common stock Treasury inflation-protected securities Long-term debt Short-term debt

C During deflationary periods, interest rates and the price of goods will be declining, which generally has a negative impact on the stock market. The consumer price index (CPI), to which the principal on TIPS is linked, declines in value during periods of deflation resulting in decreasing principal on TIPS. The fixed interest on TIPS would also decline. Bonds perform better when interest rates decrease, with long-term debt appreciating more than short-term debt. Long-term zeros would tend to perform best during deflationary periods.

A client is seeking a mutual fund that will maximize its return by limiting expenses. As a result, he wants to invest in a portfolio that is passively managed. Which TWO of the following choices will help achieve this goal? A portfolio that invests only in fixed income securities An exchange-traded fund based on the Nasdaq 100 Index A mutual fund that tracks the S&P 500 Index An account managed by an investment adviser I and III I and IV II and III II and IV

C Passive investing or management is designed to minimize transaction costs and capital gains. This is accomplished by a portfolio manager trying to mirror an index, not outperfom an index. An exchange-traded fund or mutual fund that follows and is designed to replicate an index such as the S&P 500 or the Nasdaq 100 will accomplish this objective. Active management is a situation where the portfolio manager frequently trades the securities in a portfolio to achieve results that will outperform an index. The portfolio could be invested in equity or fixed-income securities.

A customer wants preservation of capital and safety of income. Which of the following securities would best meet the customer's objectives? Income bonds Debentures Several municipal bonds rated AA or better One AAA-rated municipal bond

C Purchasing several AA- or better-rated municipal bonds with various maturity dates is more advantageous than purchasing just one municipal bond. The investor is diversifying his portfolio. If the investor purchased one bond and it were to default, he would no longer receive interest payments. The market value of the bond would decline considerably, causing a severe loss for the investor. Income bonds and debentures are not as safe as municipal bonds.

Which of the following choices is NOT a reason for a broker-dealer to reject the delivery of a municipal bearer bond? A mutilated coupon Lack of a legal opinion Lack of endorsement by the owner Bonds not being in the proper denomination

C Since bearer bonds do not have registered owners, a municipal bearer bond is not required to have the endorsement (signature) of the owner.

A customer may make a single, lump-sum contribution of which of the following amounts to a 529 college savings plan without incurring any taxes? An unlimited amount The annual gift tax exclusion Five times the annual gift tax exclusion Ten times the annual gift tax exclusion

C States that offer 529 plans determine the specific plan rules such as allowable contributions, investment options (e.g., mutual funds), and deductibility of contributions for state tax purposes. A person may contribute to a 529 college savings plan up to the federal annual gift tax exclusion ($14,000) without paying a gift tax, or the contributor may make a single, lump-sum gift of up to the five-year cumulative limit ($70,000) for tax-free gifting.

The 5% Markup Policy applies to: A primary distribution (new issue) A registered secondary distribution requiring a prospectus Securities quoted on Nasdaq Municipal securities

C The 5% Markup Policy does not apply when a security is being issued with a prospectus or for municipal securities. In this example, a prospectus would be required for a primary distribution as well as a registered secondary distribution. Securities quoted on Nasdaq would be the only choice given for which the 5% guideline would apply.

Which TWO of the following choices are types of securities that are issued by the Federal Home Loan Bank? Discount notes with maturities that range between two and 10 years Discount notes with maturities of one year or less Consolidated bonds with maturities of up to 30 years Consolidated bonds with maturities that range from 20 to 40 years I and III I and IV II and III II and IV

C The Federal Home Loan Bank issues two types of securities to raise capital—discount notes with maturities of one year or less and consolidated bonds with maturities of up to 30 years. These funds that are raised are used to provide funds to FHLB member banks that, in turn, lend these funds to their customers.

Mrs. Smith is short 100 shares of DEF stock. She is concerned that the stock is going to increase in price temporarily, but does not want to cover the short position. Which option position gives Mrs. Smith the BEST protection? Long 1 DEF put Short 1 DEF put Long 1 DEF call Short 1 DEF call

C The best possible upside protection can be accomplished with the purchase of 1 DEF call. If Mrs. Smith is long a call, this allows her to buy the stock from the writer if the stock goes up, thus protecting the short position.

A registered representative is opening a joint account for two business partners. Each partner will contribute equally to the account, but each partner wants his portion of the account to pass to his own estate in the event of death. Which TWO of the following statements are TRUE? The account should be established as Joint Tenants with Right of Survivorship The account should be established as Tenants in Common All dividends and capital gains in the account will be reported by the brokerage firm under one Social Security number All dividends and capital gains in the account will be reported by the brokerage firm on a percentage-of-ownership basis I and III I and IV II and III II and IV

C The partners should open a Tenants in Common account if each partner wants his portion of the account to transfer to his estate upon death. All joint accounts use only one Social Security number for tax reporting purposes. Each owner is required to indicate the percentage of dividends, bond interest, and capital gains for which he is responsible on his individual tax return. If a Joint Tenants with Right of Survivorship account is used, all of the assets pass to the surviving owner upon the death of one of the owners.

A corporation has $7,000,000 in income after paying preferred dividends of $500,000. The company has 1,000,000 shares of common stock outstanding. The market price of the stock is $56. What is the price-earnings ratio? 6.5 times 7.5 times 8 times 8.6 times

C The price-earnings ratio is the market price ($56) of the stock divided by the earnings per share ($7), which equals 8 times. The earnings per share of $7.00 is found by dividing the $7,000,000 of available income to the common stockholders by the 1,000,000 shares of common stock outstanding.

Rockland County has issued industrial development revenue bonds for the benefit of the Hudson Nail and Screw Co. In evaluating the credit quality of these bonds, an investor should look primarily at: -The tax collection ratio of Rockland County -The general credit of Rockland County -The revenue stream of Hudson Nail and Screw that will be committed to meet the lease payment obligation to Rockland County -The yield differential between Rockland County Revenue bonds and Hudson Nail and Screw unsubordinated debentures

C The security backing the industrial development revenue bond is the lease payment made by the corporation. An investor must assess whether Hudson Nail and Screw can meet this obligation by generating sufficient revenues from its primary business

A customer sold short 1,000 shares of XYZ Corporation that is presently selling at $2 per share. Industry rules require a minimum maintenance margin of: $0.33 per share $2.00 per share $2.50 per share $2,000

C When a stock that has been sold short has a market value of less than $5, industry rules require a minimum maintenance margin of $2.50 per share or 100% of the value of the securities, whichever is greater. In this example, $2.50 per share is greater and the customer would have to deposit $2,500 in the account to meet the requirement.

When may a new issue become marginable? 3 days from the effective date 5 days from the effective date 30 days from the effective date 40 days from the effective date

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

Which of the following corporations will be LEAST affected by an increase in interest rates? A manufacturing company A utility company A cosmetics company An automotive company

C When interest rates are rising, industrial corporations that market big-ticket items as well as utilities that are heavy borrowers will be adversely affected. Cosmetic companies, due to the nature of the business and the low cost of their products, are not affected as much by rising interest rates.

Who is entitled to participate in a rights offering?

Common Stockholders Not preferred.

A bond counsel will issue an unqualified legal opinion for a municipal bond issue to state that: The issuer has defaulted on previous issues of bonds The official statement has not been filed with the SEC The bonds are very risky and are not a qualified investment for some investors There are no limitations or pending lawsuits that hinder the issuance of the bonds

D A bond counsel renders an unqualified legal opinion if there are no situations in existence that could adversely affect the legality of the issue.

Which of the following items is NOT approved by a municipal securities principal? A research report sent to a customer regarding municipal securities Each account engaging in municipal securities transactions All advertising relating to municipal securities All orders to buy municipal bond funds

D A municipal securities principal must promptly approve (i.e., initial) all transactions for municipal securities, except municipal bond funds because they are not defined as municipal securities. Municipal bond funds require approval by a different category of principal. A municipal securities principal is also required to approve municipal advertising and the opening of each customer account related to municipal securities. Research reports are considered advertising.

A 7% convertible bond has a conversion ratio of 40. The bond has a nondilutive feature and the common is selling at $43 a share. If the company distributes a 10% stock dividend, which of the following statements is TRUE regarding the convertible bond? The conversion ratio remains at 40, but the conversion price is reduced The conversion ratio increases to 45.50 and the conversion price remains constant The conversion price decreases to $22.73 and the conversion ratio remains the same The conversion price decreases to $22.73 and the conversion ratio increases to 44

D A nondilutive feature requires that the conversion features be adjusted should there be a stock split or stock dividend. The conversion ratio will be increased and the conversion price will be reduced. The new conversion ratio will be 44 [the old ratio (40) plus the old ratio times the percentage dividend (40 x 10% = 4)]. The new conversion price will be the par value of the bond divided by the new conversion ratio ($1,000 divided by 44 equals $22.73).

Which of the following services does NOT rate fixed-income securities? Moody's Standard & Poor's Fitch AMBAC

D AMBAC insures new municipal bond issues. Moody's, Standard & Poor's, and Fitch are credit rating services.

Which of the following municipal securities are MOST likely to be backed by ad valorem taxes? Special assessment bonds State general obligation bonds Certificates of participation School district bonds

D Ad valorem tax is a tax whose amount is based on the value of property (i.e., property tax is a form of ad valorem tax). Local governments, such as school districts, secure their general obligation bonds by ad valorem taxes. On the other hand, state G.O. bonds are secured by forms of taxes other than property taxes (e.g., income and sales tax). Special assessment bonds are revenue bonds that are backed by assessments that are made on those who directly benefit from the facilities, such as developing or improving water and sewer systems, sidewalks, and streets. Certificates of participation (COPs) are lease financing agreements which are typically issued in the form of tax-exempt or municipal revenue bonds.

Which TWO of the following statements are TRUE concerning an institutional communication? A principal is required to approve the communication prior to use The communication should be reviewed, but is not required to be approved by a principal The communication must be filed with FINRA The communication does not need to be filed with FINRA I and III I and IV II and III II and IV

D An institutional communication is defined as any written or electronic communication that is distributed or made available only to institutional investors. Each broker-dealer is required to establish written policies and procedures to review institutional communications, but principal approval is not required. In addition, an institutional communication is not required to be filed with FINRA.

Which TWO of the following statements are TRUE regarding an international fund? It will invest in U.S. and non-U.S. companies It will invest in only non-U.S. companies There is no currency risk since it is issued by a U.S. mutual fund family There is currency risk since the portfolio has international exposure I and III I and IV II and III II and IV

D An international fund is one that invests exclusively in non-U.S. companies. This is in contrast to a global fund, which invests in U.S. and non-U.S. companies. Since the international fund will hold securities issued by companies in various countries, currency fluctuations could damage the value of the securities within the portfolio (currency risk).

To which of the following customers would a registered representative be LEAST likely to recommend an exchange-traded note (ETN)? A customer seeking to benefit if an index increases A customer seeking to benefit if an index decreases A customer seeking capital appreciation A customer seeking income on a regular basis

D Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. These securities are not like traditional fixed-income securities since they typically do not make interest payments to investors. An investor seeking income on a regular basis would not be a suitable candidate for an ETN. The returns are linked to the performance of an index, currency, or commodity and would be suitable for investors who want to speculate on the value of an index. Most ETNs are traded on a national exchange (e.g., NYSE) which has the feature of liquidity. Therefore, an investor seeking capital appreciation has the ability to sell when advantageous.

According to current regulations, if a client redeems his mutual fund shares, the fund company must send the payment within: 3 days 5 days 10 days 7 days

D Federal regulations require that funds send payment for the redemption of mutual fund shares within seven days.

Which of the following choices is NOT a characteristic of a HOLDR? Diversification The right to vote The ability to control when distributions are taxed Once-a-day pricing

D Holding Company Depository Receipts (HOLDRs) are created by depositing securities of a certain sector (e.g., biotech, internet, retail) into a trust and selling interests in the trust to investors. HOLDRs offer investors a level of diversification that is similar to an exchange-traded fund (ETF). Unlike ETFs, the owner of a HOLDR has an ownership interest in the shares of the companies in which the HOLDR is invested and retains the right to vote. Once the portfolio has been created, the composition of the portfolio will typically not change. However, if a company that is included in the portfolio goes bankrupt or merges with another company, the makeup of the HOLDR may be altered.

Which TWO of the following securities would be MOST suitable if interest rates are expected to rise? Collateralized Mortgage Obligations A bond with short-term maturities Preferred stock with a fixed dividend Adjustable-rate preferred stock I and III I and IV II and III II and IV

D If interest rates are expected to rise, the most suitable investments would be those that can be reinvested quickly to take advantage of rising rates, or variable or adjustable-rate securities. Bonds with short-term maturities can be reinvested in bonds quickly with higher rates, and the dividend on adjustment-rate preferred stock would increase since the dividend paid is based on LIBOR or another rate that quickly reacts to changing interest rates.

Which TWO of the following statements are TRUE concerning long-term (brokered) CDs? They are considered highly liquid Investors may be subject to interest-rate risk The total amount of the investment will be FDIC-insured They may be callable I and III I and IV II and III II and IV

D Long-term brokered CDs are not considered highly liquid since there is no active secondary market. Like most fixed-income securities they are subject to interest-rate risk. In addition, they may be callable and have other features such as floating rates. FDIC insurance may not apply to long-term CDs sold by broker-dealers if the face amount exceeds $250,000.

Under Regulation T, which of the following securities is NOT marginable? Mutual fund shares held for more than 30 days Securities listed on the NYSE Nasdaq securities Securities quoted on the OTCBB

D OTC equity securities, which are not listed on a national securities exchange such as the NYSE or Nasdaq, are not marginable. While Regulation T considers mutual funds marginable securities, the Securities Exchange Act of 1934 prohibits mutual fund dealers from extending credit on mutual fund shares until 30 days after their purchase.

An investor shorts a stock at $6 per share. What is the SRO minimum maintenance requirement for this position? $1.50 per share $1.80 per share $3.00 per share $5.00 per share

D The SRO minimum maintenance requirement for a stock sold short at $5 per share or above is $5 per share or 30% of the market value, whichever is greater.

Foremost Corporation has declared a quarterly dividend of 25 cents payable to stockholders of record on Friday, December 1. The dividend will be paid to all stockholders whose names appear on the record books of Foremost Corporation on: November 28 November 29 November 30 December 1

D The dividend will be paid to all stockholders whose names appear on the record books of Foremost Corporation on the record date, which is given in this example as December 1.

An individual has an IRA account. He is 75 years old, but has not withdrawn funds from the plan. What is the penalty that the individual will be subject to for not withdrawing funds from the plan? No penalty will be levied 6% penalty on the actuarial amount 10% penalty on the actuarial amount 50% penalty on the actuarial amount

D The individual will be subject to a penalty of 50% of the actuarial amount (the amount specified by the IRS that should have been withdrawn). This is the penalty for not making withdrawals from the plan. Distributions must start after the planholder reaches age 70 1/2.

Which of the following choices represents the percentage of new municipal issues brought to market during a particular week that has already been sold? The Bond Buyer Index The Blue List The Visible Supply The Placement Ratio

D The placement ratio represents the percentage of new municipal bond issues of $5,000,000 or more that has been sold in a particular week. The Bond Buyer compiles this ratio.

Interest received from which of the following securities may be taxable at the state and local level? U.S. government Federal Home Loan Bank Commonwealth of Puerto Rico State of Hawaii

D The securities of the state of Hawaii are not exempt from state and local taxes unless the investor is a resident of Hawaii. Interest received on the other securities listed is exempt from state and local taxes. The interest is exempt from federal taxes because Hawaii is a state, but not exempt from state and local taxes. The securities issued by the federal government are exempt from state and local taxes. The interest received from securities issued by the Federal Home Loan Bank (FHLB) are taxable at the federal level but exempt from state and local taxes. Securities issued by Puerto Rico, through a special Act of Congress, are exempt from federal, state, and local taxes (triple-tax-exempt).

According to FINRA, the maximum sales charge on a variable annuity contract is: 0% 5% 8.5% An amount that is fair and reasonable

D There is no statutory maximum sales charge on variable annuities or variable life insurance policies. The sales charges must be fair and reasonable.

What is a client's maximum loss if he is short KNP stock and short a KNP put? The difference between the market price and the strike price plus the premium The market price plus the premium The market price minus the premium Unlimited

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

How far may a letter of intent be backdated?

It may be backdated up to 90 days.

How are qualified dividends from a mutual fund taxed?

Qualified dividends from a mutual fund are taxed at a maximum rate of 20%. Nonqualified dividends are taxed as ordinary income

What happens if a customer has sold stock but has failed to complete the transaction by delivering the securities?

The brokerage firm must buy in the securities within 10 business days from settlement.