SERIES 7 MISSED QUESTIONS

A commercial office building is given an assessed value of $400,000 but has a market value of $850,000. What will the tax rate be if 3.5 mills are used? A. $1,400 B. $140,000 C. $29,750 D. $2,975

A. $1,400 Since this tax is based on the assessed value of the property, 3.5 mills will be multiplied by $1 for each $1,000 of assessed property value. Therefore the tax is 3.5 x $400 = $1,400.

Who is least likely to buy munis? A. A pension fund B. A mutual fund C. An insurance company D. A retail investor

A. A pension fund Recall that municipalities are able to offer their securities at lower interest rates because of the securities' tax-advantaged status. Pension funds are already tax-advantaged, and so have little reason to accept the lower interest rates offered by municipal securities.

· To qualify as a REIT, a company must do all of the following EXCEPT: A. Derive at least 90% of its gross income from its real estate sources B. Distribute at least 90% of its taxable income to shareholders annually in the form of dividends C. Invest at least 75% of its assets into real estate or cash Have a minimum of 100 shareholders after its first year of operation, and no

A. Derive at least 90% of its gross income from its real estate sources A Real Estate Investment Trust is a company that owns and operates income-producing real estate, such as office buildings, apartments, malls, hotels and resorts. They differ from other real estate companies in that they are required to operate the properties they develop after they have built them, rather than selling them off. Most REITs specialize in a single type of real estate.

STRIPS are issued by: A. Financial institutions B. GSEs C. The U.S. Treasury D. Municipalities

A. Financial institutions STRIPS are a Treasury bond or note that is broken down into separate securities with maturities that correspond to the timing of each interest payment. However, they are not issued by the Treasury. Financial institutions will buy a Treasury note or bond, and return it to the Treasury, which will create and register the stripped securities. The financial institution will then issue the STRIPS and present them to the market.

When discussing the "spread" relative to the issuance of municipal bonds, the "total takedown" is comprised of I. The selling concession II. Underwriting expense III. Manager's fee IV. Additional takedown A. I and IV B. III and IV C. II and IV D. I and III

A. I and IV The additional takedown and selling concession comprise the "total takedown."

For a revenue bond, what defines the legal terms and financing specifications of the bond? A. The Trust Indenture B. The Official Statement C. Syndicate Letter D. The Unqualified Legal Opinion

A. The Trust Indenture The trust indenture defines the legal terms and financing specifications of the bond. While a bond resolution remains a part of the bond documentation, it only attests to the issuer's approval and authorization of the execution of the indenture.

Options are issued and guaranteed by: A. The exchange where the option trades B. The OCC C. The CBOE D. Market makers

B. The OCC The Options Clearing Corporation issues options and guarantees them in the event a seller disappears. Most options are traded on the CBOE.

Rank the following categories of mutual funds in order of volatility, from highest to lowest. I. Growth and income II. Balanced III. Growth IV. Equity income A. III, I, II, IV B. III, II, I, IV C. III, I, IV, II D. I, III, II, IV

C. III, I, IV, II A straight growth fund will obviously occupy the top spot in the volatility sweepstakes. A growth and income fund will blend growth companies and dividend-producing companies. Equity income funds generally focus more closely on dividend-paying companies, and balanced funds will often own bonds.

Jessica has the following options: Long ABC Apr 30 call @ 4 Short ABC Apr 25 call @ 5 Which of the following is true of her position? A. She has a debit spread B. She will benefit when the values of her premiums widen C. She will benefit when the values of her premiums narrow D. Her maximum potential gain is $400

C. She will benefit when the values of her premiums narrow Jessica has a credit call spread. That is because her short call option has a higher premium than her long call option. A credit spread investor benefits when the value of her premiums narrows. When that occurs for a credit call spread, it means the value of the underlying security is not going up. A short call investor benefits when the value of the underlying security does not go up. When that occurs, the option is more likely to expire out of the money, and the investor will get to keep the premium she has initially received. The maximum potential gain for a credit call spread investor is the difference between the premiums. For Jessica that would be $100 ($5 - $4 = $1 x 100 shares in an options contract = $100).

Which legislation created the MSRB? A. The Dodd-Frank Wall Street Reform and Consumer Protection Act B. The Securities Act of 1933 C. The Securities Acts Amendments of 1975 D. The Securities Exchange Act of 1934

C. The Securities Acts Amendments of 1975 The Securities Acts Amendments of 1975 were passed to better regulate the municipal securities market. The Amendments created the Municipal Securities Rulemaking Board (MSRB) and required that broker-dealers and separate divisions or departments of banks that deal in municipal securities register as municipal securities dealers.

Open interest refers to: A. The number of options traded during a given day B. The number of options written during a given day C. The number of options open on a given day D. The number of options exercised during a given day

C. The number of options open on a given day Volume is the number of options contracts traded during any given day. Open interest is the total number of options contracts that are currently open on a given day. Neither volume nor open interest is an indicator of price direction, that is, whether investors are bullish or bearish on an option. What they measure is an option's liquidity: how actively a given option is being traded.

An investor would be most likely to profit from purchasing a leveraged ETF under which of the following circumstances? A. When the market is showing bearish trends B. When he intends to hold the ETF as a long-term investment C. When the market is showing bullish trends D. When the market is relatively stable

C. When the market is showing bullish trends A leveraged ETF uses derivatives to receive daily returns at two to three times above the returns of the index it is tracking. Leverage means geared up or magnified. Thus it would be beneficial to the investor if the market is performing well or showing bullish trends. An investor in an inverse ETF, which profits from a poorly-performing market index, would be wise to invest in a bearish market. Holding a leveraged ETF for the long term compounds its high level of riskiness, and following this course of action does not necessarily lead an investor to a high profit margin.

When a bond is selling at a discount, it will be quoted at A. yield-to-maturity B. current yield C. nominal yield D. yield-to-call

A. yield-to-maturity When a bond is selling at a discount, its quoted yield will always be priced to maturity. However, when a callable bond is selling at a premium, it will be quoted at yield-to-call because this quote will be lower than the yield-to-maturity. This is sometimes called yield-to-worst.

Mills shorts 7 of the following options: HSTY Apr 28 put @2.50 What is the maximum loss he could report on his tax form as a result of these options? A. $21,350 B. $2,550 C. There is no limit to Mills' potential losses D. $17,850

D. $17,850 Although Mills can lose a significant amount of money as a result of his short put, the amount of his potential loss is capped at the strike price minus the premium he receives. That means his maximum potential loss is $17,850 [($28 - $2.50) x 100 shares x 7 contracts = $17,850].

Lance goes long the following option: EPO Jul 30 put 2.5 EPO is trading at 25 when Lance decides to exercise his option. What is Lance's cost basis if he must purchase shares of EPO in order to exercise his option? A. $2,300 B. $2,250 C. $2,750 D. $2,500

D. $2,500 When the holder of a put option does not already own the shares and must buy the shares to exercise that option, the cost basis is the price of the underlying securities . Since Lance exercises his option by purchasing 100 shares of EPO when it is trading at $25 and selling them at $30, his cost basis is $2,500 ($25 x 100 = $2,500).

Takeo shorts the following positions: PRCE 40 call @3 PRCE 40 put @ 2.50 When the options expire, PRCE is trading at 35. Assuming Takeo buys and immediately sells shares of PRCE at expiration, what gain or loss should he report on his tax forms? A. $200 loss B. $300 gain C. $500 loss D. $50 gain

D. $50 gain

An investor's regular tax liability is $90,000 and her AMT tax liability is $70,000. If the investor's marginal tax rate is 25%, how much AMT bond interest can she earn without owing more tax? A. $20,000 B. $28,571 C. $ 6,300 D. $ 5,000

A. $20,000 An AMT bond is a municipal bond that pays interest that is exempt from regular income tax, but, unlike most municipal bonds it is not exempt from the alternative minimum tax (AMT). This means that exempt interest on AMT municipal bonds (also known as private activity bonds) must be added back to income when calculating alternative minimum taxable income. In this question then, the investor would be able to earn $20,000 in additional AMT bond interest ($90,000 - $70,000) without raising alternative minimum taxable income. The investor's marginal tax rate is irrelevant in this question.

An investor buys a $1,000 municipal bond with a 1% coupon rate at 105. When she purchased the bond, the bond has 10 years left until maturity. She then sells it seven years later at 103. If the customer amortizes the premium over the life of the bond, how much interest will the customer report each year? A. $5 B. $25 C. $10 D. $20

A. $5 One method of dealing with the tax consequences of a premium bond is to amortize the premium over the life of the bond. In this case, a portion of the premium is subtracted from the bond's annual taxable interest, resulting in reduced reported interest. The amortized amount is determined by dividing the premium by the number of years to maturity. $50/10 = $5. Here, that reduces the $10 annual interest by $5, resulting in an annual reported interest of $5. $10 - $5 = $5.

According to the Investment Company Act of 1940, which of the following is not a type of investment company? A. A brokerage firm B. A unit investment trust C. A management company D. A face-amount certificate company

A. A brokerage firm The Investment Company Act of 1940 regulates the activities of three types of investment company securities: face-amount certificates, unit investment trusts, and management companies (a category which includes mutual funds). Brokerage firms, as the name suggests, are intermediaries between buyers and sellers of securities. On the federal level, brokerage firms are regulated by multiple laws most notably the Securities Exchange of 1934.

A type of option that exercises automatically is: A. A capped index option B. A covered call C. All of the answers listed D. A FOREX option

A. A capped index option Capped index options exercise as soon as the underlying index hits the strike price.

Tax-exempt commercial paper is usually backed by: A. A line of credit with a bank B. The full faith and credit of the issuer C. Revenue D. Property taxes

A. A line of credit with a bank Tax-exempt commercial paper is a short-term promissory note issued by states and municipalities, usually backed by a line of credit with a bank. Their maturity ranges between 1 and 270 days. Issuers typically pay the principal on maturing commercial paper by issuing new commercial paper. Such rollovers effectively permit long term borrowing through the issuance of short-term loans.

Laura is a 65-year-old customer. She is hoping to retire within the next 2-3 years, and at that time she will begin taking distributions from her IRA. She's looking for an investment to help supplement her retirement income and is willing to take a moderate amount of risk. Which of the following is most suitable for her? A. A money market fund B. Long-term Equity Anticipation Securities (LEAPS) C. An equity-indexed annuity D. A growth fund

A. A money market fund Laura needs an investment that is low-risk, liquid, and provides income. Of the choices given, money market funds are the only type of investment that fits this description. A growth fund would be more suitable for an investor who has a longer time horizon than Laura and who is willing to take on more risk. Annuities come with surrender periods that are often as long as ten years, so an EIA would not be suitable for Laura. Finally, a LEAP, like any type of option, comes with a high level of risk. Thus, it would not be a suitable investment for Laura.

Which of the following refers to the FINRA system under which representative violations are handled? A. Code of Procedure B. FINRA Board of Rule Implementation C. Code of Conduct D. Standards and Ethics Committee

A. Code of Procedure The Code of Procedure refers to FINRA's protocol for handling disputes and disciplinary matters.

· According to FINRA rules, registered representatives must periodically complete a two-part training exercise to maintain their registration. The two components of this training exercise are called the regulatory element and the firm element. Which of the subjects below are the least likely topics to be covered in the firm element? Top of Form A. Current economic conditions B. Suitability and sales practices C. Investment features and their associated risk factors D. Applicable regulatory requirements

A. Current economic conditions Firm element training programs must be appropriate for the business of the member and, at a minimum must cover the following matters concerning securities products, services, and strategies offered by the member: (i) General investment features and associated risk factors;(ii) Suitability and sales practice considerations;(iii) Applicable regulatory requirements; Current economic conditions could be a topic in Firm Element, however, the question asks what is least likely and, as the rationale explains, there are three topics that are explicitly required, "at a minimum," per FINRA. Current economic conditions is not one of them. It may not be very satisfying, but anything related to FINRA rules is generally because 'they say it's so.'

When interest rates are falling, which of the following are generally true? A. Discount bonds are appreciating faster than premium bonds B. Discount bonds are depreciating faster than premium bonds C. Premium bonds are appreciating faster than discount bonds D. Premium bonds are depreciating faster than discount bonds

A. Discount bonds are appreciating faster than premium bonds When interest rates fall, the prices of all bonds increase, both discount bonds and premium bonds. Overall, the price of discount bonds tend to increase faster than premium bonds because because of reinvestment risk. The interest from a premium bond will need to be reinvested at a lower rate which makes premium bonds less desirable than discount bonds in falling interest rate environment. A second reason is that the change in value of the bond's price is a result of an increased "present value" of the remaining interest payments to be received. This increase in the "value" of the remaining interest payments is a larger percentage of a discount bond's price than of a premium bond's price. Thus, as interest rates drop, the prices of discount bonds rise faster than those of premium bonds. Note that this general principle is not always true and may not be true in the current market where interest rate are unusually low because of the government intervention in the credit markets.

In which market do institutional investors trade listed and unlisted securities through an ECN without a broker-dealer? A. Fourth market B. First market (auction market) C. Second market (negotiated market) D. Third market

A. Fourth market The fourth market is a negotiated market where institutional investors trade listed and unlisted securities without a broker-dealer. Institutional investors often choose the fourth market because they can get a better price on large orders than market makers can provide. It also allows them to avoid broker-dealer commissions. Institutional investors also use Electronic Communications Networks (ECNs) which match buy and sell orders 24 hours a day. For this reason, the fourth market is also called the ECN market.The first market is a auction market where securities are traded on an exchange floor. The second market includes both the Nasdaq exchange and the over the counter (OTC) market in unlisted securities. The third market is a negotiated OTC market that trades listed securities.

Jolene owns 500 shares of common stock in Good Guys, Inc. When she votes for the three open positions on the board of directors, she can vote a maximum of 500 shares per candidate. Which of the following is true? I. Jolene has statutory voting rights. II. Jolene has cumulative voting rights. III. This method of voting allows Jolene to have a greater influence on the makeup of the board. IV. This method of voting gives Jolene less influence on the makeup of the board. A. I and IV B. I and III C. II and IV D. II and III

A. I and IV Shareholders are allowed one vote per share. In votes to elect candidates for the board of directors, the right may come in one of two forms, as specified in a company's stockholder agreement. In statutory voting, shareholders may vote their shares for or against a candidate for each open position. In cumulative voting, shareholders may vote their total voting shares (number of shares times number of open positions) for a single candidate. Cumulative voting allows smaller shareholders to have a greater influence on the makeup of the board than statutory voting.

Which of the following is true of an investor who is short a call option? I Has the right to sell underlying securities to call holder at any time prior to expiration II Has the obligation to sell securities to call holder at any time prior to expiration III Potential loss is unlimited IV Potential loss is limited A. II, III B. I, IV C. II, IV D. I, III

A. II, III Buying means being long and if you buy a call option you have purchased the right to buy stock at a strike price, this is a right not an obligation. The seller or writer of an option has the obligation to exercise if the option holder (buyer) decides to exercise. The buyer (or long position) of a call option risks losing the premium paid for the option, nothing more. If the seller (or short position) of a call option, does not own the underlying stock then the potential loss is theoretically unlimited because there is no ceiling on the price of stock.

Which of the following duties does an issuing company typically expect a registrar to perform? I. Mail proxy materials on behalf of the issuer II. Record changes in stock ownership as they occur III. Monitor the transfer agent IV. Ensure that the company always has the proper number of shares outstanding A. III and IV B. I and IV C. II and III D. I and II

A. III and IV A registrar's main job is to monitor and audit the transfer agent. The registrar does so by making sure that the transfer agent cancels old stock certificates whenever it issues new ones so that the company will always have the proper number of shares outstanding. A transfer agent, and not a registrar, is responsible for recording changes in stock ownership as they occur and mailing proxy materials on behalf of the issuer.

Annually, a broker-dealer firm must provide customers with which of the following? A. Information about BrokerCheck and the FINRA website B. A plain English description of the customer pre-dispute arbitration agreement C. The firm's Statement of Financial Condition D. An extended hours trading risk disclosure statement

A. Information about BrokerCheck and the FINRA website Once every calendar year, each FINRA member firm must provide its customers in writing with the FINRA website address, FINRA's BrokerCheck Hotline number, and a statement as to the availability of an investor brochure that describes FINRA BrokerCheck. An extended hours trading risk disclosure document, as well as a statement about the customer pre-dispute arbitration agreement, must only be delivered once. The Statement of Financial Condition must be delivered to customers every six months (or upon request if it is also made available on the firm's website).

The market value of preferred stock is most heavily influenced by which of the following? A. Interest rates B. The issuing company's earnings C. The market value of the issuing company's common stock D. The stock's par value

A. Interest rates Fluctuations in the market value of preferred stock are most often caused by changing interest rates. This is different from changes in the market value of common stock, which are often caused by increases or decreases in the issuing company's earnings. Finally, while the par value of preferred stock is important when calculating the dividend it will pay out or determining the amount a preferred stockholder should receive when the issuing company liquidates, it has little or no bearing on the stock's market value.

An annuity is indexed to the NASDAQ Composite at a participation rate of 25%. If the NASDAQ Composite rises by 1%, what happens to the value of the indexed annuity? A. It rises by 0.25% B. It rises by 1% C. It remains the same D. It rises by 25%

A. It rises by 0.25% A participation rate of 25% means that the annuity will grew by one-quarter as much as the index grew. Therefore the annuity will grow by one-quarter of 1%.

Which of these is a representative not allowed to recommend until a principal researches it further and concludes that recommending it is reasonable? A. Most OTC securities B. REITs C. Bonds rated at the low end of investment grade D. Stocks not included in the S&P 500 or DJIA

A. Most OTC securities A member firm (or any of its associated persons) may not recommend an OTC stock, unless the company has designated a general securities principal or general securities sales principal to conduct a review of the issuer's current financial statement, as well as "current material business information about the issuer" and an inquiry into any late regulatory filings. Only if the principal concludes after such a review that recommending the stock is reasonable may the firm or its associated persons do so. This requirement does not apply to recommending a security that is exempt from registration under Regulation D.

In a limited partnership liquidation, the proceeds of the liquidation are distributed in what order? A. Secured lenders, other creditors, limited partners, general partners B. Secured lenders, general partners, limited partners, other creditors C. General partners, limited partners, secured lenders, other creditors D. General partners, secured lenders, other creditors, limited partners

A. Secured lenders, other creditors, limited partners, general partners When a limited partnership is liquidated, the proceeds of the liquidation are distributed in the following order of priority: secured lenders, other creditors, limited partners, general partners.

Consider the option: Long Sep '18 T-bond May 102 put. Which of the following options would enable the investor to create a debit spread? A. Short Sep '18 T-bond May 101 put. B. Long Sep '18 T-bond May 101 call. C. Short Sep '18 T-bond May 103 put. D. Long Sep '18 T-bond May 101 put.

A. Short Sep '18 T-bond May 101 put. For spreads, the type of option is the same, i.e., two calls or two puts. The debit spread means the investor pays more for the one than he receives for the other. The price of the 101 put will be less than the 102 put. Long the 102 put and short the 101 put creates the debit put spread.

Where are you most likely to find a list of protective covenants for a municipal bond? A. The bond indenture B. The flow of funds statement C. The feasibility study D. The bond resolution

A. The bond indenture The bond indenture is the legal document that specifies the scope and features of the revenue bond and holds the issuer to its terms. The issuer must appoint an independent trustee to protect the bondholders' rights as stated in the indenture. This third party trustee, usually a bank or trust company, is responsible for authenticating the bonds and assuring that the issuer complies with all of the covenants specified in the indenture.

Susan, a registered representative, has had her registration suspended by a state securities administrator. Her firm must inform FINRA of the suspension within: A. Thirty calendar days B. Ten calendar days C. Ten business days D. Five business days

A. Thirty calendar days A firm must notify FINRA within thirty calendar days of when a representative is suspended or has committed a violation.

Melissa, a registered rep, leaves Smith & Smith broker-dealer and receives her Form U5 from the firm. Shortly after that, she gets a job with Jumbo broker-dealer. Within how many business days must Melissa provide her new employer with her Form U5 if they request it? A. Two business days B. Five business days C. 10 business days D. 30 business days

A. Two business days If a registered person leaves a member firm and associates with another member firm, the employee must provide a copy of Form U5 to the new employer upon request. The Form U5 must be provided either within two business days if the employee has obtained the form from the ex-employer, or within two business days after receiving Form U5 from his ex-employer.

An issuer that registers securities on an automatic shelf registration statement must offer those securities to the public: A. Within 3 years from the initial effective date of the registration depending on the kind of offering B. Within 45 days of the effective date of the registration statement C. Within 1 year of the initial effective date of the registration D. Immediately

A. Within 3 years from the initial effective date of the registration depending on the kind of offering An issuer may file a shelf registration when the market conditions are not favorable for an initial public offering to occur. Using a shelf registration, an issuer may carry out all the necessary registration procedures ahead of time, and put them on a "shelf" until the market conditions become more favorable. A shelf registration is permitted under Rule 415. Under the Rule, an issuer must bring the shares to market within 3 years of the initial effective date of the shelf registration (2 years for securities issued through a business combination). S-3 filers can check a box on the form to file an automatic shelf registration, allowing an automatic three year shelf registration. A shelf registration can be used for both equity and debt securities.

Which of the following yields is a municipal bond most frequently quoted in? A. Yield to maturity B. Current yield C. Coupon rate D. Yield to worst

A. Yield to maturity Municipal bonds are most frequently quoted in terms of their yield to maturity because municipal bonds are typically issued under a serial maturity with different yields for different years. Less commonly, some long-maturity revenue bonds are quoted and traded like corporate bonds as a percentage of par. These are known as dollar bonds.

Short XOM July 65 call and long XOM June 60 call is a A. diagonal spread. B. price spread. C. vertical spread. D. horizontal spread.

A. diagonal spread. A spread position with different strike prices and different expiration dates is a diagonal spread.

Which of the following statements is not true regarding FINRA's annual compliance meeting requirements? A. the meeting must be at a central location and last at least 1 hour B. the meeting is mandatory for registered representatives and principals C. the meeting can cover other matters besides compliance D. registered representatives can have a meeting individually

A. the meeting must be at a central location and last at least 1 hour Rule 3110 states "The participation of each registered representative and registered principal either individually or collectively, no less than annually, in an interview or meeting conducted by persons designated by the member at which compliance matters relevant to the activities of the representative(s) and principal(s) are discussed. Such interview or meeting may occur in conjunction with the discussion of other matters and may be conducted at a central or regional location or at the representative's or principal's place of business." There is not a minimum time limit for the meeting.

Sean goes long the following option: ALDS Oct 35 call @ 2 What is Sean's cost basis if ALDS is selling at $38.50 when he decides to exercise the option? A. $3,850 B. $3,700 C. $3,300 D. $3,500

B. $3,700 The cost basis for an investor who is long a call option is the option's strike price plus its premium, times 100 shares. Thus Sean's cost basis is $3,700 ($35 + $2 x 100 = $3,700).

A customer opens a Roth IRA at age 54, contributing $1,000. By age 58, the account has earned $200. The customer decides to contribute another $2,000 that year. By age 60, the account has earned an additional $300. The customer wants to take a distribution from their account, but does not want to be taxed on the distribution. How much can the customer withdraw from the Roth IRA tax-free? A. $3,000 B. $3,500 C. $3,200 D. $1,000

B. $3,500 As long as it has been at least 5 years since the first contribution to the Roth IRA and the account owner is at least 59 1/2, the distributions from the account will be tax-free.

Jerry purchases 500 shares of XYZ for $10/share. Ten months later, when the shares are trading at $15/share, he donates them to Caring Trust, a qualified charity. Three months after the donation is made, Caring Trust sells the shares for $17.50/share. How much can Jerry deduct from his taxes as a result of his donation of XYZ shares? A. $8,750 B. $5,000 C. Since he did not hold the shares for at least a year, he cannot use the donation as a deduction on his taxes. D. $7,500

B. $5,000 When an investor donates securities to a qualified charity, the donor can deduct the fair market value of the securities at the time of the gift as a charitable donation, as long as the donor has held the securities for at least 12 months. If the securities have been held for less than a year, as is the case with Jerry's securities, the individual can only deduct the cost of the securities rather than the fair market value. Thus Jerry can deduct $5,000 from his taxes (500 shares x $10 = $5,000).

Sasha's net worth is $568,000. He receives $2,000 as an inheritance and decides to put that towards his house, in addition to his regular monthly payment, paying a total of $4,000 of mortgage this month. What is Sasha's net worth now? A. $540,000 B. $570,000 C. $520,000 D. $560,000

B. $570,000 An individual's net worth is equal to their total assets minus their total liabilities. Assets include cash, securities, and any property (house, car, possessions). Liabilities include mortgages, loans, or unpaid bills. Networth, assets, and liabilities appear on a client's balance sheet, which provides a snapshot in time of an individual's financial situation. Paying off a mortgage does not change an individual's net worth, as assets are used to pay a liability, decreasing both by the same amount. In this example, Sasha increases his assets by $2,000 of inheritance money. He then decreases his assets by $4,000 because he is using cash to pay the mortgage and he decreases his liabilities by $4,000 because he has paid off some of his mortgage: net worth = $568,000 + $2,000+ ($4,000 - $4,000) = $570,000.

John is planning for his son's college education. He invests $30,000 in STRIPS which are set to mature in 10 years at $50,000. He is in the 30% Federal tax bracket and the 5% state tax bracket. Assuming his tax rate stays the same over the 10 years, what amount will he be taxed each year on his investment? A. $0 B. $600 C. $500 D. $100

B. $600 John must pay taxes at the Federal, but not the state level on STRIPS. Even though he will not actually receive the money for 10 years, from the IRS's perspective, he is earning $20,000 in income over the 10 years time, or $2,000 each year. He must pay taxes each year on this $2,000—this is sometimes referred to as a phantom tax. So he will need to pay $600 per year ($2,000 x .30).

Given the following assumptions for stock ABC, what is its expected return using the Capital Asset Pricing Model (CAPM)? Risk Free Rate: 1%, Expected Return on general stock market: 7%, Beta: 1.5, Sharpe Ratio: 2. A. 15% B. 10% C. 11.5% D. 13%

B. 10% The formula for the Capital Asset Pricing Model (CAPM) is given by the following: Return on Stock = Risk Free Rate + Beta of Stock x (Return on Market - Risk Free Rate). Plugging in for Stock ABC gives Return on Stock ABC = 1% + 1.5 x (7% - 1%) = 10%. Note the Sharpe Ratio is not used in the CAPM formula.

Jenny lives in Minnesota. She is considering purchasing a Washington state municipal bond that pays 5%. She has a federal tax rate of 20% and a state rate of 4%. What yield will the corporate bond have to pay to be equivalent to the municipal bond? A. 6.58% B. 6.25% C. 4% D. 5%

B. 6.25% Because Jenny lives in Minnesota, the interest on her municipal bond will be tax-exempt at the federal level, but not at the state level. To calculate the tax-equivalent yield of a municipal bond, simply take the rate of the municipal bond and divide it by 1 minus the total tax rate to which the bond is exempt. In this case, that's just the 20% federal rate. So the tax equivalent yield = .05/(1-.20) = .0625 or 6.25%.

Debt that is owed by more than one municipality is known as ___________ debt: A. Double-barreled B. Overlapping C. Multi-sourced D. Coupled

B. Overlapping Debt that is owed by multiple municipalities, such as school districts, is known as overlapping debt. A double-barreled bond is a revenue bond that is backed by both a defined source of revenue and the taxing power of a municipality.

How much of a REIT's taxable income must be distributed to shareholders annually in the form of dividends? A. 75% B. 90% C. 95% D. 0%

B. 90% A Real Estate Investment Trust is a company that owns and operates income-producing real estate, such as office buildings, apartments, malls, hotels and resorts. They differ from other real estate companies in that they are required to operate the properties they develop after they have built them, rather than selling them off. Most REITs specialize in a single type of real estate.To qualify as a REIT, it must:1) Invest at least 75% of its assets into real estate or cash2) Distribute at least 90% of its taxable income to shareholders annually in the form of dividends3) Be a corporation, trust, or association that would be taxable as a domestic corporation except for its status as a REIT.4) Be managed by a board of directors and have 'unit' shares that are fully transferable5) Have a minimum of 100 shareholders after its first year of operation, and no more than 50% of its shares may be held by five or fewer individuals during the last half of any taxable year6) Derive at least 75% of its gross income from its real estate sources7) Derive at least 95% of its gross income from those real estate sources mentioned above and dividends and interest from other sources8) Have no more than 25% of its assets in securities of taxable REIT subsidiariesBy annually distributing at least 90% of taxable income to shareholders, REIT income is not taxed at the entity level. This is huge benefit to the REIT. However, because this income has never been taxed, dividend distributions to shareholders are not considered "qualified dividends," instead REIT dividends are generally taxed as ordinary income at the investor's top marginal rate.

A bond's credit spread measures the yield difference between: A. Two points in time (during a contraction vs. expansion) B. A bond and a low-risk benchmark C. A short-term and comparable long-term bond D. Junk bonds and Treasury bonds

B. A bond and a low-risk benchmark A bond's credit spread (also called yield spread) is the difference between the bond's yield and the yield of a low-risk benchmark, such as a Treasury bond. Investors expect to be paid to take risks, and credit spreads reflect the relative risks of bonds. For example, a below-grade junk bond will have a higher credit spread than a high-quality municipal bond. Spreads tend to widen during contractionary periods when investors are less willing to take on risk, and they narrow during periods of expansion when investors believe even junk bonds are unlikely to default.

When a municipal issuer selects an underwriter after distributing a request for proposals (RFP), the issuance is known as: A. A competitive bid underwriting B. A negotiated underwriting C. A firm commitment underwriting D. A best efforts commitment underwriting

B. A negotiated underwriting There are two ways in which a municipal issuer selects an underwriter for an offering. In a negotiated offering, the issuer or the issuer's municipal advisor publishes a request for proposal (RFP), and then chooses an underwriter based on the proposals submitted, sometimes negotiating the terms with an underwriter. In a competitive offering, the issuer solicits sealed bids for the offering, and chooses an underwriter primarily based on the net interest cost of the project.

Which of the following are permitted? A. An associate uses IM messaging with clients, and the messages are not being recorded by his firm B. An associate performs an outside securities transaction for no compensation, and provides notice, but does not receive approval from his firm C. A firm registers or maintains the registration of a person who is not currently working in the industry, but plans to work in the industry in the future, and doesn't want to have to retake a qualifying exam D. An issuer parks a registration at a broker dealer in order to be able to solicit investors and avoid utilizing an underwriter

B. An associate performs an outside securities transaction for no compensation, and provides notice, but does not receive approval from his firm Firms cannot park registrations for business purposes or for persons who are not actively working in the industry. They also cannot use IM messaging with clients if the messages are not being recorded by the firm. An associate is allowed to perform outside securities transaction for no compensation, if he provides notice. Approval from the firm is not required.

Which of the following is a customer NOT asked to sign when opening a margin account? A. Loan consent agreement B. Assignment agreement C. Credit agreement D. Hypothecation agreement

B. Assignment agreement In order to open a margin account, customers are required to sign a credit agreement and a hypothecation agreement. Although the customer is not REQUIRED to sign the loan consent, he is asked to, because a signed loan consent form permits the broker-dealer to lend his securities to customers wishing to execute short sales. "Assignment agreement" is a term that is generally unrelated to margin accounts.

According to Reg T, margin account customers must deposit: A. At least 30% of the market value of the transaction within 4 business days B. At least 50% of the market value of the transaction within 4 business days C. At least 50% of the market value of the transaction within 2 business days D. At least 30% of the market value of the transaction within 2 business days

B. At least 50% of the market value of the transaction within 4 business days "At least 50% of the market value of the transaction within 4 business days" is the correct minimum requirements for covering a margin purchase as specified by Reg T.

In which of the following forms of registration is a security registered on the issuer's books in the owner's name, and held in book entry form by the issuing company on the owner's behalf? A. Electronic registration B. Direct registration C. Physical certificate D. Street name registration

B. Direct registration In a direct registration a security is registered on an issuer's books in the owner's name, and either the company or its transfer agent holds the security in book-entry form on the owner's behalf. With a physical certificate a stock is registered in the owner's name on the issuer's books, and the stock certificate is delivered to the door of the owner or his broker. A street name registration occurs when a security is registered on the issuer's books in the name of the owner's brokerage firm, and the brokerage holds the security in book-entry form. The beneficial rights of ownership belong to the customer, not the brokerage firm. An electronic registration is not a term typically associated with modes of stock holding.

How can an investor reduce the cost of investing in mutual funds? A. Buy C shares. B. Draft a letter of intent. C. Dollar cost average. D. Buy a fund of funds.

B. Draft a letter of intent. A letter of intent allows a fund investor to take advantage of breakpoint fees, by committing to purchasing the amount of fund shares needed to reach the breakpoint over a 13-month period, instead of all at once. In other words, if a sales load drops from 5% to 4% when an investor buys $100,000 worth of shares, that investor can write a letter to the fund company saying that he/she intends to buy $100,000 worth of fund shares over a 13-month period in order to take advantage of the lower sales fee. Dollar cost averaging merely lowers the average cost of ongoing purchases, but it doesn't lower the cost of investing in mutual funds. C shares impose a level load over the life of the investment (very expensive to the investor) and a fund of funds not only charges a management fee for the fund, but it bears the costs of the underlying funds, generally raising the cost of investing in mutual funds.

Member firms may pay compensation, fees or commissions to non-registered broker-dealers if the non-registered member deals only in: A. Mutual funds B. Government securities C. Interstate commerce D. ADRs

B. Government securities Member firms may pay compensation, fees or commissions to non-member broker-dealers that are not required to be registered with the SEC. Non-members that are not required to be registered include those that deal exclusively in intrastate commerce and do not conduct any business on a national securities exchange. Broker-dealers who limit their business to the purchase or sale of exempt securities, such as U.S. Treasury and municipal securities, and of commercial paper are also exempt from registration.

Which of the following would have the most acceptable debt service coverage ratio? I. $7,000,000 operating income with $3,000,000 debt service II. $8,200,000 operating income with $5,000,000 debt service III. $3,500,000 operating income with $1,700,000 debt service IV. $6,000,000 operating income with $4,200,000 debt service A. II and III B. I and III C. I and II D. II and IV

B. I and III A debt service ratio is calculated by dividing the operating income by the debt service. A ratio of less than one indicates that cash flows are insufficient to pay for an issuer's annual principal and income payments. A ratio of two or above is generally considered acceptable for an issuer of a revenue bond.

A person can contribute to an IRA no more than the lesser of which of the following: I. $6,000 ($7,000 for persons age 50 or older) II. $7,000 ($6,000 for persons age 50 or older) III. 6% of annual taxable income IV. Annual taxable income A. II and IV B. I and IV C. II and III D. I and III

B. I and IV You can only contribute the lesser of $6,000 ($7,000 if you're 50 or older) or your taxable annual income per year to a traditional IRA. Assuming you are under the income limits for a Roth IRA, the same is true for a Roth IRA. If you make an "excess contribution" to a traditional or Roth IRA, the IRS kindly gives you until the end of the tax year to correct the error by withdrawing the excess contribution and any earnings on the excess contributions. If you don't withdraw the excess contributions and any earnings on the excess contribution, the IRS will levy a 6% tax on any excess contributions per year.

With regard to allocation priorities of municipal bonds, place the following in order from highest to lowest priority: I. Group II. Presale III. Designated IV. Member A. II, III, I, IV B. II, I, III, IV C. III, II, I, IV D. I, II, III, IV

B. II, I, III, IV The correct order is Presale, Group, Designated, Member. It is sometimes helpful to create a method to remember P, G, D, M. Here is one for your consideration: Pro Golfers Don't Miss. In some cases Group may be substituted with Syndicate or Syndicate Group. You may want to throw this in your memory bank as well: Please Sell Da Muni's.

Which of the following best describes the requirements regarding timeliness of information contained in a prospectus? A. If the prospectus is used more than 9 months after the effective date of the registration statement, the information must not be more than 12 months old B. If the prospectus is used more than 9 months after the effective date of the registration statement, the information must not be more than 16 months old C. All information contained in the prospectus must not be more than 12 months dated from the effective date of the registration statement D. All information contained in the prospectus must not be more than 9 months old, dated from the effective date of the registration statement

B. If the prospectus is used more than 9 months after the effective date of the registration statement, the information must not be more than 16 months old The Securities Act of 1933 states that if a prospectus is used more than 9 months after the effective date of registration, the information contained in the prospectus must not be more than 16 months old, dated from time of use.

Marge is a 71-year-old widow. She is retired and has moderate financial resources with no outside source of income. Which of the following investments would be most suitable for her? A. Large cap stocks and growth funds B. Investment-grade corporate bonds C. High-yield bonds D. Small cap stocks and growth funds

B. Investment-grade corporate bonds Marge is an investor whose primary concern is generating current income. This means she would be interested in regular returns in cash, which could come from interest, dividends, or some other type of distribution. Investment-grade corporate bonds, because they provide a fixed and regular interest payment, would be a suitable investment for her. Large- and small-cap bonds and funds, on the other hand, are suitable for an investor whose primary goal is capital growth. High-yield bonds are riskier investments, which makes them suitable for speculative investors.

XYZ security is trading at 33. A customer has the following position: Long XYZ Jan 30 call @ 5. Which of the following is true? A. It is bearish and out-of-the money B. It is bullish and in-the-money C. It is bearish and in-the-money D. It is bullish and out-of-the-money

B. It is bullish and in-the-money Long call positions are bullish. Because XYZ is trading at 33 which is the 3 over the strike price, it is in-the-money. Thus, this position is bullish and in-the-money.

Sampleville has decided to build a large municipal recreation complex in hopes of gaining the rights to host annual county and statewide athletic championships. It has decided to fund the project with a general obligation bond. Which of the following is Sampleville most likely to be required to do before the project can move forward? A. Oversee a negotiated bid authorization B. Oversee a competitive bid authorization C. Issue a request for proposal D. Conduct a feasibility study evaluating the project's viability

B. Oversee a competitive bid authorization Because general obligation bonds are backed by taxes, they often require voter approval. To convince voters that the municipality is receiving the best deal from its underwriter, the municipality must go through a competitive bid authorization process to choose the underwriter. Revenue bonds, which are not funded by taxpayer dollars, do not require the same authorization process, and typically the issuer and chosen underwriter will negotiate the terms of the underwriting. That process is known as a negotiated bid authorization. While feasibility studies, among other expert work products, are often beneficial in making a project more marketable, they are not required. A request for proposal is typically posted by an issuer seeking the services of an underwriter in a negotiated bid authorization for a revenue bond.

Which of the following government bonds cannot be purchased on the secondary market? A. Treasury notes B. Series EE bonds C. Treasury bills D. STRIPS

B. Series EE bonds Series EE bonds, Series HH bonds and I-Bonds cannot be purchased on the secondary market. These are called non-marketable or non-negotiable bonds. Treasury notes, treasury bills, treasury bonds, TIPS, and STRIPS can all be purchased on the secondary market. They are called marketable or negotiable bonds.

If an associated person of a broker-dealer discovers the firm has a conflict of interest that creates an incentive to put its interests above the interests of a retail customer when making a recommendation, which of the following is true? A. The firm can make the recommendation and does not need to offer disclosure unless the customer makes a transaction based on the recommendation. B. The firm must mitigate the conflict of interest and disclose it to the customer. C. The firm can make the recommendation as long as it offers proper disclosure. D. The firm must not make the recommendation.

B. The firm must mitigate the conflict of interest and disclose it to the customer. When a firm has a conflict of interest that might create an incentive for it to put its interests above a retail client's best interests, it must mitigate the conflict. It also must disclose the conflict of interest to the customer. The firm must perform both of these tasks before or by the time the recommendation is made.

For a variable annuity, the amount of the investor's monthly payment depends on the performance of what? A. Changes in interest rates B. The investments in the subaccounts C. The performance of the general account D. The performance of a separate account chosen by the issuer

B. The investments in the subaccounts The performance of an investor's variable annuity in the accumulation and annuizitaion phases, and hence the amount of the investor's monthly payment depends on the performance of the investments in the subaccounts.

Jon shorts 3 ABC Apr 50 calls at 3.50. He has no other positions in the stock. The stock is trading at 51. Which of the following is true? A. The time value of the options is 3.50 B. The time value of the options is 2.50 C. The intrinsic value of the option cannot be determined until the option is exercised D. The time value of the options is 1

B. The time value of the options is 2.50 For both long and short positions, call options are in-the-money when the market price is above the strike price. The intrinsic value is the amount that a stock is in-the-money. This is the difference between the market price and the strike price. In this case, it is $1 (51 - 50). The value of a premium is made up of a two components, intrinsic value and time value. Because the intrinsic value is 1, and the premium is 3.50, we know that the time value must be 2.50.

Which of the following securities can be purchased on margin? A. Open-end fund B. U.S. Treasuries C. IPOs D. Variable annuities

B. U.S. Treasuries Not all securities can be purchased on margin. NASDAQ and all exchange-listed securities are allowed, as are U.S. government and municipal bonds. Over-the-counter securities are allowed if they are listed on the Federal Reserve marginable securities list. However, new issues have to be publicly traded at least 30 days before they can be purchased on margin. Open-ended funds, more commonly known as mutual funds, are not eligible for trading on margin, but they can be used as collateral on a loan after 30 days. Penny stocks are not eligible, nor are OTC stocks that have fewer than four market makers regularly submitting bids and offers or that have fewer than 400,000 shares outstanding.

Which of the following are required on a customer's new account form? A. The customer's income and net worth B. Whether the customer is of legal age C. The customer's investment history D. The customer's signature

B. Whether the customer is of legal age To open a new account, broker-dealers must know the customer's identification and residence information, including whether the customer is of legal age. Accounts cannot be opened for minors or individuals who have been declared incompetent or who are dead. Broker-dealers must make reasonable efforts to obtain the remaining information requested on the customer form. In addition to the customer's information, a new account must include the name of the registered representative who will be in charge of the customer's account and the signature of the principal who approves it. Note that in addition to these FINRA requirements, the USA PATRIOT Act requires firms to use the name, address, date of birth, and Social Security number or tax identification number to independently verify the identity of the customer. As part of this verification, the customterm-0er will be required to show a current driver's license, passport, or another government-issued identification (a Social Security card is not acceptable).

Which of the following types of stocks would typically have high P/Es? A. defensive stocks B. growth stocks C. emerging market stocks D. value stocks

B. growth stocks Price to Earnings ratio (P/E) is a valuation measurement that is calculated by dividing a stock's earnings per share into its share price. A high P/E (compared to those of other companies or the stock's historical P/E) generally indicates that investors are expecting higher future earnings growth and are willing to pay more based on that expectation. Growth stocks generally have high P/E ratios. The P/Es of emerging market stocks vary considerably depending on the situation within a country.

A non-qualified retirement plan might be the most suitable choice for the business-owner looking for all the following in a retirement plan EXCEPT: A. the business-owner wants a plan that does not have to cover all employees B. the business-owner wants a plan with only after-tax Roth contributions C. the business-owner wants a deferred compensation plan D. the business-owner wants a plan not tied to ERISA regulations

B. the business-owner wants a plan with only after-tax Roth contributions Non-qualified retirement plans are generally used by employers for their personal benefit or to attract, motivate, and retain key employees. A deferred compensation program is an example of a non-qualified retirement plan. These plans are not subject to ERISA; therefore, they do not have to cover every employee, allowing the plan to discriminate and to be offered only to key personnel. Roth contributions are not a specific benefit of non-qualified plans.

Analysts study the official statement in order to determine: A. investor appropriateness B. the financial condition of the issuer C. none of the choices listed D. the probable return on capital

B. the financial condition of the issuer The financial condition of the issuer. The official statement will contain the issuer's cash flow and balance sheet information, which will show the issuer's overall financial condition.

An investor wants to buy class A shares of the Orange & Gray Fund, an open-end mutual fund that invests in the stocks of companies that have the colors orange and gray in their logos. If the NAV of the fund shares is $12.57 and the front-end load for the Class A shares is 3.5%, what is the POP? A. $12.13 B. $12.55 C. $13.03 D. $13.01

C. $13.03 Mutual fund A shares typically charge a front-end sales charge, also called a load, which is a percentage of the investment in the mutual fund. The front-end sales charge or load is included in the price per share an investor pays. The current share price of a mutual fund is referred to as the net asset value, or NAV. The share price including any sales charge is referred to as the public offering price, or POP. In this question, to calculate the POP, you divide the NAV by 1 minus the sales charge or $12.57/(1-.035) = $13.03.

Polly Newman has been trading left and right and inadvertently been categorized as a "pattern day trader". She currently has $8,000 equity in her account. How much more will she need to meet the minimum equity requirement? A. $2,000 B. $12,000 C. $17,000 D. $7,000

C. $17,000 The minimum equity requirement for a "pattern day trader" is $25,000

A customer is long 100 shares of XOM at 77 and goes long an XOM Jun 80 put @ 5. The maximum loss for this customer is A. $3/share B. $72/share C. $2/share D. $5/share

C. $2/share If the stock drops to zero, the customer will exercise the put and sell at $80 per share. He would then have spent $77 + $5 = $82 per share and taken in $80. His maximum loss would be $2 per share.

An investor purchases a 100M Atlanta Bond that matures in 10 years at 90, she holds it for 5 years and sell it for 98. Assuming the bond is accreted over time, what is the capital gain or loss? A. $2,000 loss B. $5,000 gain C. $3,000 gain D. $8,000 gain

C. $3,000 gain Step 1: Calculate how much the bond was purchased for. It was purchased at 90 bond points, so that means 90% of the par value. "M" here means 1,000. So 100M means a par value of $100,000. $100,000 x .90 = $90,000. So it was purchased for $90,000. Step 2: Calculate the discount to par. $100,000 - $90,000 = $10,000. This means the bond was bought at a discount of $10,000. Step 3: Calculate the amount that bond will accrete each year. To do this, divide the discounted amount by the number of years until maturity. $10,000 / 10 years = $1,000 per year. Step 4: Calculate the adjusted cost basis at sale. To do this, use the following formula: purchase price + (accreted amount x years owned bond). In this case, $90,000 + ($1,000 x 5) = $95,000. So the adjusted cost basis would be $95,000 at the time of sale. Step 5: Calculate the gain or loss. To do this, take the sale price and subtract the adjusted cost basis. The investor sold it at 98, which means 98% of par. So, $98,000. Gain or Loss = $98,000 - $95,000 = $3,000. This is a capital gain that taxes must be paid on in the year that the bond is sold.

Which of the following are not true of Treasury Receipts? A. They are purchased at a discount B. An investor must pay annual Federal taxes on them C. An investor must pay capital gains taxes on them at maturity D. They are not subject to reinvestment risk

C. An investor must pay capital gains taxes on them at maturity Treasury Receipts are a type of zero-coupon Government security sold by brokerage houses. STRIPS are the best example of Treasury Receipts. Treasury Receipts are sold at a discount to par and do not pay interest annually so they are not subject to reinvestment risk. The phantom interest (accreted amount) is subject to Federal taxes because they are U.S. government securities. At maturity, their adjusted cost basis will be par, so there will not be any gains for an investor to pay capital gains taxes on.

Which of the following is true of the difference between a bondholder and a preferred shareholder? A. A bondholder is paid before a common shareholder in the case the company goes bankrupt, while a preferred shareholder is paid after a common shareholder B. A bondholder has a specific value for his claim against the company if it goes bankrupt, while a preferred shareholder does not C. A bondholder will almost always get his initial investment back from the issuing company, while a preferred shareholder will not D. A preferred shareholder receives most of his profit based on a company's gains, while a bondholder receives most of his profit based on fixed payments

C. A bondholder will almost always get his initial investment back from the issuing company, while a preferred shareholder will not Unlike a bondholder, who receives the par value of his bond at maturity, a preferred shareholder has purchased ownership in the company, so he never gets his initial investment back. Instead, he is purchasing equity in the company and the right to receive dividends in perpetuity, that is, throughout the life of the corporation. Those dividends represent the preferred stockholder's profit from his investment, and since they are tied to some value that is not connected to the company's profitability a preferred shareholder does not directly profit as a result of the company's gains. Additionally, when the company goes bankrupt, a bondholder is paid before a preferred stockholder, but the preferred stockholder is paid before a common stockholder. Finally, a preferred shareholder has a specific value to his claim against the company in the event that it goes bankrupt. That value is the total par value of his shares. A bondholder also has a specific claim, the par value of his bond, against the company if it is forced to liquidate.

Jackson Broker-Dealer has moved from its old, ratty office building into a shiny, new office building. The transfer of records and personnel goes smoothly and the firm principals are happy with the move. Unfortunately, with the hubbub of moving and adjustment settling in afterwards, those principals were late updating the address on file with FINRA. FINRA may request that the member submit: A. An AWC B. A letter of correction C. A minor rules violation plan letter D. Form BD-W

C. A minor rules violation plan letter In the case of a minor rule violation that a member firm or associated person chooses not to dispute, the Department of Enforcement or Department of Market Regulation may propose and request that the respondent execute a minor rule violation plan (MRVP) letter. As with a letter of acceptance, waiver and consent, an MRVP letter accepts a finding of violation, consents to the imposition of sanctions and agrees to waive the right to a hearing and appeal. It, too, must describe the act or practice under complaint, the rule or regulation violated, and the sanctions to be imposed.If the member or associated person executes an MRVP letter, it will be submitted to the National Adjudicatory Council for approval. If the NAC accepts the letter, the respondent will be fined an amount not to exceed $2,500. The matter will be deemed final, and FINRA will report the violation to the SEC. If the letter is rejected, FINRA may take any other appropriate disciplinary action, which may include a formal hearing process. In no instance will the MRVP letter be introduced into evidence nor will it prejudice any other proceeding.In its rules FINRA has compiled a list of minor rule violations that may be settled by an MRVP letter. Some examples are: (1) failure to submit timely amendments to Form BD; (2) failure to report customer complaints within 15 days; (3) failure to properly display limit orders.Minor rules violations are not required to be disclosed on Form BD or Form U4.

Which of the following would likely attract foreign investors to a country? A. A trade deficit B. Inflation C. A trade surplus D. A change in political regime

C. A trade surplus Foreign investors are attracted to countries that have high interest rates and highly valued currency. Political stability and the health of a country's economy are also key. A trade surplus indicates a high demand for a country's goods and currency, leading to a higher valued currency, economic stimulation, and higher interest rates. Investors avoid countries with high inflation, as it tends to lower the value of a currency and investments.

· A portfolio has a beta of 1.0 and an actual return of 10%. Which of the following could be the alpha and expected return of the portfolio? A. Alpha: 2, expected return: 12% B. Alpha: 1.2, expected return: 10% C. Alpha: 2, expected return: 8% D. Alpha: 2, expected return: 10%

C. Alpha: 2, expected return: 8% Alpha is a measure of the return of a portfolio that cannot be explained by the portfolio's expected return. Alpha is often attributed to the skill (or lack thereof) of the portfolio manager. The alpha of the portfolio is equal to the actual return minus the expected return. The only option listed that this is true for is where there is an alpha of 2 and an expected return of 8%. 2% = 10% - 8%. Because the beta is equal to 1.0, the expected return will be equal to the market return.

Which of the following municipal bonds are always tax-exempt? A. Private activity bonds B. AMT Bonds C. Bank Qualified Bonds D. BABs

C. Bank Qualified Bonds When it comes to federal tax status, the two main, broad categories that municipals fall into are public purpose bonds and private activity bonds (PABs). Public purpose bonds enjoy the full extent of the federal tax-exempt status typically associated with munis. PABs, however, are usually taxable with some exceptions. Bank qualified (BQ) bonds are always tax-exempt at the federal level, because in order to qualify as BQ bonds, they must be public purpose bonds. AMT bonds are a special kind of PAB that are exempt from ordinary federal income tax, but are taxable under the alternative minimum tax (AMT). Therefore, AMT bonds are not federally tax-exempt for taxpayers who must pay the AMT. BABs are Build America Bonds, a special type of federally subsidized muni available from 2009-2010. They are not federally tax-exempt.

A customer has sold short 1000 shares of ABC Co. stock. The price of ABC's stock has fallen since she sold it. She wishes to benefit from further decreases in the stock's price, but also wants to protect her gains against the price of the stock rising. Which of the following best accomplishes her goals? A. Write 10 puts on ABC B. Write 10 calls on ABC C. Buy 10 calls on ABC D. Buy 10 puts on ABC

C. Buy 10 calls on ABC To hedge a short position, buy a call or write a put. The long call provides protection against the market price rising, allowing you to buy at the strike price. The short put generates income, but may require you to buy if the market price falls below the strike price.

How is buying power in a margin account related to the account's excess equity? A. Buying power is half of excess equity B. Buying power is four times excess equity C. Buying power is two times excess equity D. Buying power is equal to excess equity

C. Buying power is two times excess equity Excess equity in a margin account it put into a special memorandum account (SMA). Account owners can buy up to two times the amount in the SMA. The amount of new securities that can be purchased in a margin account is known as buying power. Thus buying power in a margin account is two times the account's excess equity.

All of the following statements are true regarding gift taxes EXCEPT: A. A person may gift up to $16,000 annually to a person before having to pay gift taxes. B. Gift taxes are paid by the person who is gifting to another person. C. Gift taxes are paid by the person who receives the gift. D. Spouses may gift to each other without having to pay gift taxes.

C. Gift taxes are paid by the person who receives the gift. Gifting is often used as an estate planning tool to get as much money out of an estate as possible to avoid having to pay estate taxes. There are, however, rules regarding gifting to which one must adhere. The person doing the gifting is responsible for paying gift taxes if it goes over the annual maximum gifting amount of $16,000 per person. However, the person receiving the gift is not responsible for any gift taxes.

In order for a registered representative's license to remain active he must do which two of the following? I. Complete a FINRA training session every year after his initial registration II. Complete a FINRA training session within 120 days of the second anniversary of his registration and every three years thereafter III. Receive his firm's annual training plan, which covers relevant compliance issues IV. Update his Form U4 at the end of each calendar year A. I and III B. II and IV C. II and III D. I and IV

C. II and III In order for a registered representative's license to remain active, he must participate in a continuing education program. The program has two components: a regulatory element and a firm element. The regulatory element requires that all registered persons complete a FINRA computer-based training session within 120 days of the person's second registration anniversary and every three years thereafter. The firm element requires member firms to prepare an annual training plan that covers relevant compliance issues, which must then be given to each registered employee. The registered representative's Form U4 must be updated whenever any information in that form changes; however, it does not normally need to be updated at the end of the year.

Concerning municipal bonds issued by the city of Baltimore, Maryland: A. If you live in the state of Maryland, you will pay state tax on the interest you earn B. If you live in the state of Virginia, you will not pay federal capital gains tax on any profits you realize when you sell the bonds C. If you live in the state of Maryland, you will pay federal capital gains tax on any profits you realize when you sell the bonds D. If you live in the state of Virginia, you will not pay state tax on the interest you earn

C. If you live in the state of Maryland, you will pay federal capital gains tax on any profits you realize when you sell the bonds Interest income earned on municipal bonds is not taxable at the federal level, and only taxable at the state level outside the state of their issuance. Capital gains realized upon the sale of such bonds are subject to capital gains tax regardless of the taxpayer's state of residence.

The Fed lowers reserve requirements. What effect will this typically have on interest rates? A. Interest rates will rise if they are already low or fall if they are already high B. Interest rates will not be affected C. Interest rates will fall D. Interest rates will rise

C. Interest rates will fall The Fed's reserve requirement is the amount of funds it requires depository institutions, such as banks, to hold in reserve against deposits made by their customers. If the Fed lowers reserve requirements, banks can lend dollars previously held in reserve. With more dollars available to be lent, borrowers can be more choosy and lenders less so. Lenders will typically offer lower interest rates in response.

Which of the following statements accurately describes the bank discount yield? The bank discount yield: A. Is the difference between the Federal funds rate and the discount window rate B. Is the yield of a Treasury note adjusted for the discount window rate C. Is an annualized ratio of a Treasury bill's discount to its face value D. Is the rate that banks charge each other to borrow funds overnight

C. Is an annualized ratio of a Treasury bill's discount to its face value The bank discount yield is an annualized ratio of a Treasury bill's discount to its face value. The calculation makes it easy to compare a Treasury bill with the yield of other bonds. It is designed to be easy to calculate. A 360-day year is one of its simplifying assumptions. It also applies a simple interest rate, and bases its calculation on the bond's face value. The rate that banks charge each other to borrow funds overnight is the Federal funds rate.

A rising interest rate would typically have which effect on the value of a money market fund? A. There is not enough information to answer this question B. It would cause it to decrease C. It would have no effect on the value D. It would cause it to increase

C. It would have no effect on the value While the interest offered by the money market securities that are part of the fund would be affected by the change in interest rates, the overall value of the fund itself would not change. That is because money market funds have a goal of keeping their NAV as close to $1 per share as possible.

What is a mutual fund's NAV per share? A. Its capital gains divided by the number of shares B. Its front-end load plus its 12b-1 fees C. Its book value divided by the number of shares D. Its expenses divided by the number of shares

C. Its book value divided by the number of shares The cost of a mutual fund is determined by the net asset value (NAV) of the fund. The NAV is the book value of the fund and is calculated by determining the fair market value of the securities in the fund and subtracting the fund's expenses (liabilities). The book value is then divided by the number of shares in the fund to yield the NAV per share.

Tom, an owner of a small golf pro shop, has started a SEP IRA for himself and his employees. Tom wants to make minimal contributions into his employee's SEP IRAs. If Tom uses the most restrictive requirements to determine eligible employees, which of the following employees may Tom consider ineligible for contributions? A. Mary, age 65, who has worked for Tom for 20 years and received $40,000 in compensation for the year. B. Laura, age 21, who has worked for Tom for 3 years and received $10,000 in compensation for the year. C. Mike, age 18, who has worked for Tom for 4 years and received $8,000 in compensation for the year. D. Jack, age 22 who has worked for Tom for 5 years and received $660 in compensation for the year.

C. Mike, age 18, who has worked for Tom for 4 years and received $8,000 in compensation for the year. According to the IRS, Mike may not be an eligible employee for a SEP IRA contribution. In order for an employee to be eligible, the employee must be at least 21 years old, worked for the employer at least 3 of the past 5 years, and received at least $550 in compensation from the employer for the year. Laura, Mary, and Jack all fulfill these requirements. While an employer may use less restrictive requirements to determine an eligible employee, an employee MUST be considered eligible if the previous provisions apply. An employer may choose to use the most restrictive requirements allowable if they are trying to minimize the amount of employee contributions.

Ralphy owns 200 shares of XYZ corp and has recently sold 2 calls of XYZ. What does Ralphy most likely expect the stock to do? A. Tank or Fly, it's hard to say, but most likely it'll be one of the two B. Soar, fly . . . this stock is going nowhere but up C. Probably remain about the same, but still looks good overall D. Tank, take a dive. . . this stock is going to hit rock bottom in no time

C. Probably remain about the same, but still looks good overall This strategy is known as a covered call and is typically used by investors to create additional income on a stock that still has good prospects, but they don't expect to move significantly in the short-term. If the stock was going to tank, he would most likely sell the stock. If the stock was going to soar, he would most likely buy more stock or buy a call. If the stock was going to tank or soar, it would be a good prospect for a long straddle.

Joe, a savvy investor, has his eye on the rapid rise of XYZ Corp stock. Analysts predict that XYZ Corp will continue to go up in price, but Joe is convinced that it will to decline in value soon. Which of the following should Joe buy? A. Rights B. Common stock C. Put option D. Call option

C. Put option Put options are the only kind of investment from the above list that go up in value when the price of the underlying asset goes down. A put option is the right to sell an asset at an agreed upon price called the strike price. If the market price declines below the strike price, the buyer of the put option can sell the asset at the strike price, profiting from the difference between the higher strike price and the lower market price. Since Joe believes the stock price is likely to go down soon, he should buy a put option on XYZ Corp. shares.

All of the following are true regarding closing an option position, except: A. The offsetting contract must have the same strike price and expiration date. B. The offsetting contract must be a call if the first contract was a call, or a put if it was a put. C. The offsetting contract must be long if the first contract was long, or short if it was short. D. The offsetting contract must have the same underlying asset.

C. The offsetting contract must be long if the first contract was long, or short if it was short. Closing a position occurs when a holder or writer of an option takes the opposite position on the same option contract, canceling out both contracts. The offsetting contract must be the same with regard to the underlying asset, strike price, expiration date, and whether it is a call or a put. It must be the opposite of the original contract with regard to whether it is long or short. For example, a short call closes out a long call. One important feature of the offsetting contract that is free to vary is the premium. The premium of the offsetting contract could be greater than, equal to, or less than that of the original contract. This is what dictates whether you gain or lose money from your involvement in the original contract.

Broker-dealer XYZ has a controlling interest in Outline Incorporated, a publicly traded company. One of XYZ's registered representatives (RR) is brokering a purchase of Outline's stock for his customer. Which of the following statements is true of the RR's disclosure requirements? A. Because the registered rep is acting in an agency capacity for his firm, he does not need to disclose the control relationship to his client B. The registered representative must disclose the control relationship in writing within ten days of completing the transaction C. The registered representative must disclose the control relationship in writing before completing the transaction D. The registered representative must disclose the control relationship in writing before initiating the transaction

C. The registered representative must disclose the control relationship in writing before completing the transaction Whenever a broker-dealer has any sort of controlling relationship with a securities issuer, a conflict of interest exists. As a result, FINRA requires the broker-dealer or one of its associated persons to disclose any control relationship it is in with the issuer of the security prior to entering into a contract with a customer for the purchase or sale of the issuer's security. If the disclosure is not in writing, the broker-dealer or associated person must put it in writing before completing the transaction.

Which of the following statements are true of treasury stock? A. Treasury stock has voting rights. B. When treasury stock is withdrawn from the publicly traded market, the amount of stock remaining in circulation is the number of issued shares. C. Treasury stock is considered issued stock. D. Increasing the amount of treasury stock a company holds will decrease earnings per share.

C. Treasury stock is considered issued stock. Treasury shares, or treasury stock, are shares that were issued in the past and have been repurchased by the company and removed from public circulation. While treasury stock is still considered issued stock, it has no voting rights and pays no dividends. A company may purchase its own shares to boost its earnings per share because as shares are taken out of circulation, earnings will be divided among fewer shares. An increase in earnings per share will usually boost the share price. When treasury stock is withdrawn from public circulation, the amount of stock remaining in circulation is the number of shares outstanding.

A Municipal Finance Professional (MFP) hosted a $500 plate fundraiser for a governmental issuer. Does this event trigger a ban on business for two years? A. No, it will not trigger a BAN, because the MFP did not contribute money, only time and space. B. No, it will not trigger a ban because the MFP was holding the fundraiser, not the municipal dealer. C. Yes, it will trigger a ban because an MFP may not host a fundraiser. D. Yes, it will trigger a ban because the cost per plate is above the de minis amount.

C. Yes, it will trigger a ban because an MFP may not host a fundraiser. MFPs are not permitted to solicit funds for municipal issuers or their officials without triggering a two-year ban on business for their firm. Thus, holding fundraisers is not allowed. Municipal dealers are also forbidden from holding fundraisers.

An insurance company's cost of operating and insuring an annuity is referred to by which of the following? A. 12b-1 fees B. sales load C. mortality and expense risk charge D. expense ratio

C. mortality and expense risk charge The mortality and expense risk charge (often referred to as M & E) is the percentage charged to annuity clients to offset the insurance companies risk and operating expenses. It typically runs 1-2% annually, and is part of why annuities are so costly to own.

Which of the following is permitted in an IRA: A. whole life insurance policy B. term insurance policy C. variable annuity D. variable life insurance policy

C. variable annuity A whole or term life insurance policy, as well as a variable life insurance policy, is specifically prohibited from inclusion in an IRA.

Investment Bank A is part of a syndicate responsible for selling a new municipal bond issue of $20,000,000 and has committed to a 30% allocation. The syndicate account is a Western account. Investment Bank A has successfully sold their original allotment of $6,000,000; however, there is $2,000,000 of unsold bonds from the remaining syndicate members. What is the remaining obligation to Investment Bank A? A. $2,000,000 B. $6,600,000 C. $600,000 D. $0

D. $0 In a Western account (or divided account) syndicate members are only responsible for their original allotment and therefore Investment Bank A would have no further obligation. In the case of an Eastern account, any unsold bonds would be split based on original allotment percentage and Investment Bank A would have been responsible for an additional $600,000. ($2,000,000 of unsold bonds X 30% allocation)

Your client's first trade in a new margin account is the purchase of 200 XOM @ 70, and he deposits the Reg T requirement. Six months later, XOM stock has risen to $82. How much cash can your customer borrow from this account? A. $600 B. $2,900 C. $2,400 D. $1,200

D. $1,200 Initially, your client deposited $7,000. The long market value at $82/share is $16,400. The debit balance is unchanged at $7,000, and equity is $9,400. Reg T on $16,400 is $8,200. The equity of $9,400 less the Reg T requirement of $8,200 leaves $1,200 in excess equity, which can be borrowed.

The lifetime gift tax exclusion is currently: A. $13.9 million B. $10.4 million C. $9.6 million D. $12.06 million

D. $12.06 million A gift tax applies to money or property that is given to other persons. However, there is an exemption for up to $12.06 million (as of 2022) in gifts that a person may use over the course of her life. This amount is called the lifetime gift tax exclusion.

Frieda purchases 500 shares of Wild Card Incorporated on margin at $22/share. She deposits the initial margin requirement into her account. Later that day, Wild Card's stock shoots up to $30/share, and Frieda decides to withdraw some cash from her account. Assuming the brokerage does not require higher margins that the default, how much is she allowed to withdraw? A. $5,750 B. $0 C. $1,000 D. $2,000

D. $2,000 Regulation T requires that a customer deposit 50% of a margin account's value upon making the first trade in the account. This means that Frieda's initial margin requirement is $5,500 (500 shares x $22/share = $11,000 x 0.50 = $5,500). Since a margin account's initial debit balance is the difference between its LMV and its initial margin on hand (or equity), Frieda's debit balance is $5,500. When the price of Wild Card rises to $30/share, the long market value (LMV) in Frieda's account increases to $15,000 (500 shares x $30/share = $15,000). Her debit balance remains at $5,500, making her equity $9,500 ($15,000 - $5,500 = $9,500). Her new Regulation T requirement is $7,500 ($15,000 x 0.50 = $7,500), meaning that Frieda can withdraw any amount in excess of $7,500 from her account. Thus she can withdraw $2,000 from her account ($9,500 - $7,500 = $2,000).

As a limited partner, you invest $27,000 and personally guarantee an additional $53,000 of debt in the partnership. The cost basis of your position in the partnership is A. $26,000 B. $27,000 C. $53,000 D. $80,000

D. $80,000 Your cost basis is "what you invest in the business," and includes cash invested and debts that are personally guaranteed.

What is the amount of time between when FINRA renders a default decision and when the sanctions imposed by the decision become effective? A. 45 days B. 30 days C. 35 days D. 25 days

D. 25 days FINRA may issue a complaint against any member firm or associated person who is suspected of violating any rule, law, or regulation that FINRA has jurisdiction to enforce. Complaints shall be served in writing to both the member firm or associated person and the Office of Hearing Officers.The Office of Hearing Officers shall quickly assign a Hearing Officer to preside over a disciplinary hearing. The member firm or person accused has 25 days to respond upon receipt of the complaint. A reply must specifically admit or deny the allegation or claim insufficient information to decide.If a respondent fails to reply, a second notice will be issued and the respondent will have an additional 14 days to respond. Failure to respond to this second notice will mean a tacit admission of guilt, and the Hearing Officer may issue a default decision. If the default decision is not appealed within 25 days, it will become the final disciplinary action.

A mutual fund must redeem investor shares within: A. 5 days of a request B. 3 days of a request C. 10 days of a request D. 7 days of a request

D. 7 days of a request Open-end management companies must redeem investors shares within 7 days of a customer request.

Which of the following would be the most suitable investment for someone looking for active management? A. A traditional ETF B. A unit investment trust C. A leveraged ETF D. A closed-end fund

D. A closed-end fund A closed-end fund comes with active management, meaning an investment adviser buys and sells securities within the fund. None of the other answer choices comes with active management.

Which of the following is not true of penny stocks? A. They are usually thinly traded. B. They tend to be riskier than other kinds of stock. C. They are usually not listed on a national exchange. D. A member firm must send customers account statements every three months showing the market value of each penny stock held in the customer's account.

D. A member firm must send customers account statements every three months showing the market value of each penny stock held in the customer's account. Penny stocks typically are low-priced (below $5), thinly traded securities. They typically are not listed on Nasdaq or any other national exchange. Because less information is available on these kinds of stock, investing in them can be risky. The member firm must provide customers with information on the amount of compensation that the firm and its broker(s) will receive from any source in connection with the trade. The member firm must also send customers monthly account statements showing the market value of each penny stock held in the customer's account.

Which type of option allows the holder to compel the writer to buy the underlying asset from the holder? A. A call B. A stock option C. A covered option D. A put

D. A put The two main types of option are a call and a put. Both types let the holder compel the writer to complete a transaction. With a put, the transaction that may be compelled is the sale of the underlying asset by the holder to the writer. A way to remember this is that a put lets the long "put" the asset in the short's hand and demand payment.

When proposing mutual funds to a client, POP enters the conversation when discussing: A. All of the choices listed B. C-shares C. B-shares D. A-shares

D. A-shares POP (Public Offering Price) is only a factor with shares sold with a front-end sales charge--A-shares. B and C shares are sold at NAV.

Refunded bonds in an advance refunding: A. Are always paid off with assets from a sinking fund B. Often have a lower credit rating than the refunding bonds C. Are typically paid off within 90 days of the issue of the refunding bonds D. Are defeased when assets sufficient to pay them off are kept in an escrow account

D. Are defeased when assets sufficient to pay them off are kept in an escrow account In a current refunding the old debt is retired immediately by the refunding bonds; however, the same is not true of an advance refunding. In an advance refunding, the old issue remains outstanding for a period longer than 90 days after the issuance of the new (i.e., refunding) bonds. The refunded bonds may remain outstanding until maturity or some future call date. The funds needed to pay the old debt are kept in an escrow account, and as long as those funds are sufficient to pay off the debt, the account and the refunded bonds cancel each other out for accounting and legal purposes. When this occurs, the refunded bonds are said to be defeased. While the funds to pay off the refunded bonds must be kept in an escrow account, they do not need to be kept in a sinking fund account. Finally, defeased bonds are usually considered to have little to no credit risk, and they often have an AAA rating.

Which of the following conditions must be met by a REIT in order to avoid taxation of dividends? A. Annually at least 75% of income must be distributed to shareholders B. Annually, at least 90% of gross income must be real estate-related income C. 95% of gross income must be related to real estate D. At least 75% of total assets must be invested in real estate

D. At least 75% of total assets must be invested in real estate In order to avoid taxation of dividends by the IRS, a REIT must meet the following requirements: > Annually, at least 75% of gross income must be real estate-related income. Additionally 95% of gross income must be from real estate sources and dividends or interest on any source > At least 75% of total assets must be invested in real estate > It must be managed by a board of directors or trustees > It must have a minimum of 100 shareholders > It must distribute at least 90% of its income to its shareholders

Brian has the following options positions: Short MNO Dec 60 call Long MNO Dec 70 call Brian has which of the following types of spreads? A. Bull credit spread B. Bear debit spread C. Bull debit spread D. Bear credit spread

D. Bear credit spread This spread would likely be a bear credit spread, or a credit call spread. That is because the call option with the lower strike price would likely have a higher premium than the call option with the higher strike price. A call option spread in which the short option has a higher premium than the long option is a credit spread (the investor receives more for the short option than he pays for the long option, and thus he has a credit.) When it comes to option spreads remember that the option with the higher premium is the dominant option. Since a short call investor is bearish on the underlying stock, a credit call spread is also known as a bear credit spread.

A representative would like to start a tax preparation business on the side. How much notice does she need to give her principal? A. Within 30 days B. Within 10 days C. Within 60 days D. Before she starts

D. Before she starts The representative must give prior notice to her employer before she starts work. Her employer has the obligation to check into the outside business and give approval or not.

Which of the following would close a position of 5 short puts on ABC? A. Buying 500 shares of ABC B. Selling short 500 shares of ABC C. Writing 5 calls on ABC D. Buying 5 puts on ABC

D. Buying 5 puts on ABC Closing a position occurs when a holder or writer of an option takes the opposite position on the same option contract. If you are short a put on ABC and you want to close out your position, you can offset that purchase by purchasing the same position. You will golong on an ABC put with the same strike price and expiration date. You have successfully closed your short position by implementing an identical long position on the same stock, and protected yourself from any further movements in the stock price.

Which of the following actions could offer an investor protection against market risk? A. Writing a put on a broad index B. Buying a call on a broad index C. Writing a call on a broad index D. Buying a put on a broad index

D. Buying a put on a broad index Options may be based on a single underlying stock, or they may be based on a broad-based stock index that tracks the stock market as a whole (i.e., S&P 500). An investor can purchase a put on a broad index to hedge against market risk. As the overall market declines, the value of the put increases. This profit can then be used to offset some of the investor's losses. However, if the overall market increases, the investor will lose the premium paid for the puts.

Which of these provides the best way of mitigating risk in your portfolio? A. Creating a long straddle B. Selling a call on a stock you don't own C. Selling a call on a stock you own D. Buying a put on a stock you own

D. Buying a put on a stock you own A long put on a stock you own is called a protective put. It is typically used to lock in gains on a stock you own that has risen in value. You purchase a put at or slightly below the current price, so that you can exercise the put if the price falls. This is the only strategy that reduces the risk of an existing position. Selling a call on a stock you own is called a covered call. It is a way to get more income out of an asset you have, but it does not reduce the risk of holding that asset. Selling a call on a stock you don't own is called a naked call. It is a riskier form of speculation than a covered call. A long straddle is a speculation that profits if the price of a stock moves sharply in either direction.

Javy purchases a 10-year 6% corporate bond with a par value of $1,000 for $760. At the time of his purchase, the bond has 8 years left until it matures. If Javy decides to accrete the bond and then sells it four years later for $825, what is his amount of capital gain or loss? A. Capital gain of $35 B. Capital gain of $85 C. Capital loss of $31 D. Capital loss of $55

D. Capital loss of $55 Since the bond has a par value of $1,000 and Javy pays $760 for it, he buys the bond at a $240 discount ($1,000 - $760 = $240). When determining the accreted amount per year, divide the total discount by the years left to maturity when the bond is purchased. Doing so here gives an annual accretion amount of $30 ($240 / 8 = $30). When the bond is later sold, capital gains/losses are then determined by subtracting the bond's adjusted cost basis from its sale price. The adjusted cost basis is calculated by adding the cost basis (or original purchase price) to the annual accretion for each year the bondholder held the bond. Thus Javy's adjusted cost basis is $880 ($760 + $30 + $30 + $30 + $30 = $880). Subtracting that total from the amount that Javy receives for the bond gives a total of -$55 ($825 - $880 = -$55), and thus Javy incurs a $55 capital loss as a result of his bond transactions. Note that as a result of accreting the discount Javy will add the annual accretion amount to his yearly coupon payments, and he will not be taxed on the discount at the time of sale.

Which of the following statements is true regarding current yield? A. Current yield increases when a bond price increases B. Current yield is constant for the life of the bond C. Current yield is dependent on the inflation rate D. Current yield decreases when a bond price increases

D. Current yield decreases when a bond price increases Current yield is the yearly coupon payment divided by the current price of the bond. Typically, bond prices and yields move in opposite directions. Therefore, an increase in bond prices results in a lower current yield, and a decrease in bond prices results in a higher current yield.

Prior to the execution of a transaction, a registered representative should attempt to obtain all of the following EXCEPT: A. Customer tax status B. Customer financial status C. Customer investment objectives D. Customer signature

D. Customer signature Customers are only required to provide verbal authorization for orders. No signature is required for non-insurance purchases.

Non-supervisory branch offices must be inspected: A. Monthly B. Every year C. Every 6 months D. Every 3 years

D. Every 3 years Non-supervisory branch offices must be inspected every three years.

Which of the following bonds would most likely require voter approval from a municipality? A. Corporate B. T-Bonds C. Revenue D. GO

D. GO Municipal General Obligation (GO) bonds may require voter approval because their primary source of revenue comes from taxes. Municipal revenue bonds derive their revenue from a specific source of revenue, such as a toll road. None of the other choices are municipal bonds.

To qualify as a REIT, a company must do all of the following EXCEPT: A. Be managed by a board of directors B. Distribute at least 90% of its taxable income to shareholders annually in the form of dividends C. Derive at least 95% of its gross income from real estate sources and dividends and interest from other sources D. Have a minimum of 400 shareholders after its first year of operation

D. Have a minimum of 400 shareholders after its first year of operation A Real Estate Investment Trust is a company that owns and operates income-producing real estate, such as office buildings, apartments, malls, hotels and resorts. They differ from other real estate companies in that they are required to operate the properties they develop after they have built them, rather than selling them off. Most REITs specialize in a single type of real estate.To qualify as a REIT, it must:1) Invest at least 75% of its assets into real estate or cash2) Distribute at least 90% of its taxable income to shareholders annually in the form of dividends3) Be a corporation, trust, or association that would be taxable as a domestic corporation except for its status as a REIT.4) Be managed by a board of directors and have 'unit' shares that are fully transferable5) Have a minimum of 100 shareholders after its first year of operation, and no more than 50% of its shares may be held by five or fewer individuals during the last half of any taxable year6) Derive at least 75% of its gross income from its real estate sources7) Derive at least 95% of its gross income from those real estate sources mentioned above and dividends and interest from other sources8) Have no more than 25% of its assets in securities of taxable REIT subsidiariesBy annually distributing at least 90% of taxable income to shareholders, REIT income is not taxed at the entity level. This is huge benefit to the REIT. However, because this income has never been taxed, dividend distributions to shareholders are not considered "qualified dividends," instead REIT dividends are generally taxed as ordinary income at the investor's top marginal rate.

Which of the following enjoy an implied guarantee from the federal government? I. Fannie Mae II. Ginnie Mae III. Freddie Mac IV. Sallie Mae A. II and IV B. III and IV C. I and II D. I and III

D. I and III While the GSEs Fannie Mae and Freddie Mac have never been backed by an explicit guarantee of the federal government, they have customarily been assumed to have an implied guarantee, and their securities have been priced accordingly. Ginnie Mae is not a GSE but an actual government agency, and it enjoys more than an implied guarantee. It is explicitly backed by the full faith and credit of the U.S. government. Sallie Mae is a former GSE that is now a private corporation. It is not backed by any kind of government guarantee, explicit or implied.

Which of the following must be included in a retail communication which was created by a representative, when the communication recommends a corporate equity security and neither the representative nor his firm holds a financial interest? I. The security's price at the time the recommendation was made II. Support for the recommendation A. Neither I nor II B. II only C. Both I and II D. I only

D. I only According to FINRA Rule 2210, communications that include recommendations for equity securities must contain the price of the security at the time of the recommendation. Retail communications with recommendations may include support for the recommendation in the communication itself, or support for the recommendation may be made available upon request. This means that if the communication itself does not include support for the recommendation, then the representative must be able to provide such information to clients upon request.

Which of the following are functions of an open-end mutual fund's transfer agent? I. Holding fund and client assets II. Redeeming shares at an investor's request III. Issuing new shares when purchased IV. Reselling old shares when redeemed A. II and IV B. I and IV C. I and III D. II and III

D. II and III A transfer agent helps facilitate the purchase and redemption of shares for investors. This role is separate from the custodian's role of actually safekeeping the cash and securities of the fund's investors. A transfer agent redeems shares at an investor's request, and then cancels them. Old shares are not resold. Instead, the transfer agent issues new shares when they are purchased.

If an investor buys a $1,000 ten-year TIPS with a 2% coupon, what will be true about the security? I. Annual interest income will be $20 regardless of inflation II. Interest income will be exempt from state and local taxes III. Unrealized gains in the principal will be subject to federal tax IV. If deflation occurs, the principal payment at maturity could fall below $1,000 A. III and IV B. I and II C. I and IV D. II and III

D. II and III TIPS or Treasury Inflation Protected Securities offer a fixed interest rate, in this case 2%, that is calculated twice a year by multiplying half the interest rate (because it's semi-annual) by the principal. The principal is adjusted semi-annually by the change in the Consumer Price Index (CPI) and is thus "inflation-protected." Therefore, inflation will affect how much in annual interest the TIPS pays and thus I is not correct. Like all Treasury securities, TIPS interest income is exempt from state and local taxes and any gain on the principal recorded at year-end on the 1099, while not realized until maturity, is still considered taxable income to the IRS - so II and III are correct. In the event of deflation or declining prices, even though the principal will decline in value, at maturity a nice thing happens: the Treasury will pay the investor back her initial principal if the initial principal was greater than the CPI-adjusted principal. Deflation protection, too!

Which of these statements are true of auction-rate securities (ARSs)? I. Their par value is reset by periodic auctions that also serve as their secondary market II. They have high liquiditiy risk III. They are mainly traded by small investors IV. They are always callable A. I and III B. II and III C. I and IV D. II and IV

D. II and IV Auction-rate securities (ARSs) get their name from the fact that both their secondary market, as well as the method of resetting their interest rates (not their par value), is a regularly held series of Dutch auctions, usually occurring every 7, 28, or 35 days. They trade at par and are callable at par on any interest payment date at the option of the issuer. Because ARSs are traded in denominations of $25,000 or more, the ARS market is largely composed of institutional investors. The auction rate securities market has a weakness, however. ARS auctions fail when there are not enough bids to purchase all the securities offered for sale in the auction. When an ARS auction fails, current investors are not able to sell their securities. Hence, ARSs are subject to liquidity risk.

The following statements are true regarding calculation of accrued bond interest: I. the 360-day year is used for Treasury bonds II. the actual number of days in a year is used for corporate bonds III. the actual number of days in a year is used for Treasury bonds IV. the 360-day year is used for corporate bonds A. I and II B. I and IV C. II and III D. III and IV

D. III and IV Treasury bonds use the actual number of days in a year in their computation of accrued interest, while corporate and municipal bonds use 360.

Which of these aspects of an economic expansion puts upward pressure on interest rates? A. Action by the Federal Reserve B. Falling demand for goods C. Falling production of goods D. Inflation

D. Inflation During the later stages of an expansion, inflation begins to increase, putting pressure on interest rates to rise as well. During an expansion, both demand for and production of goods rises. However, later in an expansion there is a tendency for demand for goods to exceed supply. Inflation increases, and lenders respond by raising both interest rates and loan qualification requirements. As a result, credit tightens. This marks the peak of the cycle and the beginning stages of a contraction. At the same time this is occuring, the Federal Reserve is likely attempting to push interest rates in the opposite direction. When inflation appears late in an expansion, the Fed typically attempts to fight its influence with monetary policies aimed at lowering interest rates.

Which of the following listings for a yield-based option would have an underlying yield of 2%? A. Long 10 May 2 call @ 1 B. Long 20 May 5 call @ 0.1 C. Long 10 May 10 put @ 0.2 D. Long 10 May 20 call @ 2

D. Long 10 May 20 call @ 2 A yield-based option, also called an interest rate option, gains or loses value based on changes in the underlying interest rate, known as the spot yield. The spot yield is the stated yield on a note or bond or the discount yield on a short-term bill. The option pays based on whether its "underlying value" goes up or down. The underlying value is 10 times the interest rate the option is based on. In the typical format for displaying options, the underlying value is shown between the month and where it says whether the option is a call or put. So a 2% interest rate translates into an underlying value of 20, and the only answer choice that has a 20 in the correct location is: Long 10 May 20 call @ 2 The option pays the underlying value times $100. If the interest rate remained 2%, the option would pay $2,000 per contract (20 x $100). Note that the other numbers are not relevant to this question. The first number shown is the number of options contracts, and the last number represents the premium.

A preliminary prospectus is required before the issue of: A. Any primary or secondary securities offering B. Any primary securities offering C. Any public securities offering D. Most public securities offerings

D. Most public securities offerings Most public securities offerings must be registered with the SEC, which means they must issue both a preliminary and final prospectus. However, there are exceptions to this rule, including Rule 147 intrastate offerings and Regulation A small business offerings. Private placements are private offerings that are usually preceded by a private placement memorandum (PPM). This document contains much of the same information as that contained in the prospectus for a public offering.

Which of the following are sources of debt service for double barrel bonds? A. None of the choices listed B. Ad valorem taxes only C. User fees only D. Property taxes and user fees

D. Property taxes and user fees So-called double barrel bonds are backed by full faith and credit of a municipality, including property taxes, as well as revenues accruing from the project they finance, such as user fees.

Total takedown can be defined as: A. The additional takedown plus the management fee B. The concession plus the additional takedown plus the management fee C. The gross spread D. The concession plus the additional takedown

D. The concession plus the additional takedown The total takedown is the aggregate of the concession plus the additional takedown.

A convertible bond has a conversion price of $20. A 2-for-1 stock split has just occurred. Which of the following is true? A. The conversion ratio will be affected, but it is impossible to say whether it will increase or decrease B. The conversion ratio will stay the same C. The conversion ratio will decrease D. The conversion ratio will increase

D. The conversion ratio will increase In the case of a 2-for-1 stock split, the price of a stock will be cut in half, while the conversion ratio will be doubled to keep investors whole, and the conversion price will decrease by half.

If a trading halt for a security takes place due to a large imbalance between buy and sell orders, which of the following is true? A. The halt is known as a regulatory halt B. The halt will be a cross-market halt and will be in effect for no less than 15 minutes C. The halt will only be lifted with SEC approval D. The halt may take place on one exchange, while trading for the security may be allowed on other exchanges

D. The halt may take place on one exchange, while trading for the security may be allowed on other exchanges A trading halt sometimes occurs is there is a significant imbalance between buy and sell orders for a specific security on an exchange. When this occurs, the exchange on which the imbalance exists will issue a halt to inform market participants of the imbalance and to allow Designated Market Makers to set a price range where trading can resume. This type of trading halt is called a non-regulatory halt, and it is different from a regulatory halt. The latter type of halt typically occurs when the issuer of a security is about to make an announcement that is likely to significantly influence a given security's price. Please note that a non-regulatory trading halt on one exchange does not preclude other exchanges from allowing the continued trading of the security.

When calculating the breakeven point for both the writer and the holder of a call option, which of the following statements is not true? A. The holder's breakeven is the strike price plus the premium B. The seller gains when the market price is below the breakeven point. C. The seller's breakeven is the strike price plus the premium D. The seller's breakeven is the strike price less the premium

D. The seller's breakeven is the strike price less the premium The breakeven point for a call option is the same for both buyer and seller. It is calculated by adding the premium price to the strike price. If the price of the underlying rises above that breakeven point, the call option holder will profit from his investment; if the price of the underlying remains below the breakeven point, the seller will profit.

If securities are purchased pursuant to a stand-by agreement, those securities may not be transferred for how long after the offering? A. Two weeks B. One month C. Two months D. Three months

D. Three months Securities sold pursuant to a stand-by agreement may not be sold, transferred, assigned, pledged, or hypothecated for three months after the effective date of the offering. A stand-by agreement is where an underwriter agrees to buy all unsold shares in an offering.

Under what circumstances must a telephone conversation with a prospect be tape recorded? A. All of the choices listed. B. When a registered rep has accidentally violated the telemarketing rules. C. When a registered rep has a customer complaint in his file. D. When a certain number of a firm's registered reps were previously associated with disciplined firms

D. When a certain number of a firm's registered reps were previously associated with disciplined firms A member firm must adopt special supervisory procedures over the telemarketing activities of all its registered personnel, if the member firm is found to employ an excessive number of registered persons who have previously been associated with a disciplined firm during the past three years. A disciplined firm is one that has been expelled from membership in any self-regulatory organization or is subject to an SEC order revoking its registration as a broker-dealer or futures commission merchant. The maximum allowable number of registered representatives previously employed by a disciplined firm before the taping rule must take effect depends on the member firm's size.

Which of the following is true of mutual fund distributions? A. If an investor purchases shares right before the distribution is made, he will not have to pay taxes on the distribution. B. They are always paid annually. C. If an investor reinvests the profits from the distribution, he will not have to pay taxes on it. D. When they are made, the fund's NAV decreases by the amount of the distribution.

D. When they are made, the fund's NAV decreases by the amount of the distribution. When a fund pays a distribution, the NAV per share decreases by the amount of the distribution. An investor will always have to pay taxes on the distribution. This is true even if he immediately reinvests the distribution amount or if he purchases fund shares right before the distribution is made. Finally, although many funds pay distributions annually, it is not true to say that is always the case.

A bond is listed as MAINE TPK AUTH REV P/R @ 102 5.00 12/01/15. This quote indicates that the bond: A. Is partially-refunded at a price of $1,025 B. Is a discount bond C. Is pre-refunded at a price of $1,025 D. Will be redeemed on December 1, 2015

D. Will be redeemed on December 1, 2015 REV P/R indicates that this is a revenue bond that has been pre-refunded. REV P/R @ 102 indicates that the bond was pre-refunded at a price of $1,020, not $1,025. Nothing in the quote indicates whether this is a premium or discount bond, but it surely had been a premium bond when it was pre-refunded. As a pre-refunded bond, it is guaranteed to be redeemed in its entirety at that price on the next call date, which is December 1, 2015. Note that the '5.00' notation in the quote indicates that the bond pays an annual coupon rate of 5%.

Compared to selling stock short, the advantages of buying puts include all of the following EXCEPT A. no margin interest to pay or margin call if stock goes up B. trade involves less of a capital commitment C. potential losses are limited D. potential gains are unlimited

D. potential gains are unlimited Gains on both short sales and puts are limited by the stock going to zero.

All of the following security transactions settle in two business days following the date of trade EXCEPT: A. municipal securities B. exchange-listed limited partnerships C. stocks D. stock options

D. stock options Stock options settle one business day after the date of the trade. Limited partnerships that are sold on an exchange settle in two business days. Other securities transactions that settle in two business days include: stocks, bonds, and municipal securities.

Which entity is responsible for enforcing the Securities Act of 1933? A. FINRA B. The state securities Administrator C. None of these choices D. the SEC

D. the SEC Though it was created by the Securities Exchange Act of 1934, the SEC is also responsible for enforcing the provisions of the Securities Act of 1933.

Irving buys 400 shares of ELP at 50. He then writes 5 ELP Oct 55 calls at 6. How much can Irving lose from doing this? A. $3100 B. $0 C. $2,000 D. unlimited

D. unlimited Because one of the calls is uncovered -- that is Irving owns 400 shares but he sold calls for 500 shares -- theoretically there is no limit to what he can lose. All other factors are irrelevant. This is a key fact to remember for the exam, as any possibility of unlimited risk will negate the need for further mathematical calculations. Another point to remember is that naked call writing is one of the riskiest types of trades that you can place. Any customer that does this should meet a firm's criteria for speculative investors.

Under the terms of the Investment Company Act of 1940, investment companies are not permitted to charge clients the maximum 8.5% sales charge unless the firm also offers: A. Both breakpoints and rights of accumulation B. Rights of accumulation C. Neither breakpoints nor rights of accumulation D. Breakpoints

A. Both breakpoints and rights of accumulation "Also note that if the fund does not offer breakpoints and rights of accumulation that satisfy FINRA, the fund cannot charge 8.5%." Breakpoints offer reduced sales commissions for larger orders, and rights of accumulation reduce sales charges on new orders that bring an existing account balance up to a breakpoint.

Imagine you purchased a corporate convertible bond at par with a conversion ratio of 20 and the bond is selling at 104. What would the parity price be for the common stock? A. $52 B. $20.80 C. $5.20 D. $208

A. $52 A conversion ratio tells how many shares of common stock can be bought with one bond. If the bond is selling for $1040, then we can divide this by 20 to get the price for the shares. $1040 / 20 = $52. The common stock would need to be trading at $52 to be trading at parity.

How much stock can an insider of CorpCo sell over the next 90 days, if there are 15,000,000 shares outstanding and the average weekly trading volume over the last four weeks is 200,000? A. 200,000 shares B. 15,000 shares C. 2,000 shares D. 150,000 shares

A. 200,000 shares A company insider is subject to volume limits, meaning that the insider may only sell a certain number of shares in the company during a 90-day period. The limit is either 1% of shares outstanding or the average weekly trading volume during the four weeks preceding the sale, whichever is higher. In this case, the company has 15 million shares outstanding, 1% of which is 150,000 shares. The average weekly trading volume over the last four weeks is 200,000. The higher of these figures, 200,000, is the number of shares that the insider may sell over the 90-day period.

Each of the following entities wishes to issue securities without registering them with the SEC. Which of them doesn't have to worry about whether it should choose Reg D, Reg A, etc.? A. A GSE issuing agency securities B. A mutual fund issuing C shares C. A corporation issuing preferred stock D. A bank issuing ADRs

A. A GSE issuing agency securities Securities issued or guaranteed by a federal agency such as Ginnie Mae, or a government-sponsored enterprise (GSE) such as Fannie Mae or Freddie Mac, are exempt from SEC registration, along with: U.S. Treasuries Municipal securities Securities issued by a nonprofit (including church bonds) Commercial paper maturing in under nine months Banker's acceptances maturing in under nine months Bank securities (not including bank holding companies) Eurobonds

An increase in the PPI would probably mean what for the stock price of a manufacturer? Choose the best answer. A. A negative impact on the price B. Neither a positive or negative impact on the price C. A positive impact on the price D. It would make the stock price more volatile

A. A negative impact on the price An increase in the PPI would probably have a negative impact on the stock price of a manufacturer.

A fair price when buying or selling securities is heavily influenced by each of the following except: A. A rule that forbids mark-ups and mark-downs of greater than 5% B. Market conditions with respect to the security C. The expense involved D. That the dealer is entitled to a profit

A. A rule that forbids mark-ups and mark-downs of greater than 5% Although the 5% Policy is a well known and much-used standard for mark-ups/downs, it is only a guideline and is not a rule.

The process by which original issue zero coupon municipal bonds avoid capital gains taxation at maturity is referred to as: A. Accretion B. Depreciation C. Disintermediation D. Amortization

A. Accretion Accretion is the opposite of amortization, and is used to step up the basis of bonds originally issued at a steep discount. Amortization is used to step down the basis of bonds bought at a premium.

Sarah has a portfolio of stocks. Which of the following would protect her against systematic risk? A. Buy puts on an index B. Sell calls on an index C. Sell puts on an index D. Buy calls on an index

A. Buy puts on an index Systematic risk is the risk that the entire stock market will decline. Sarah can protect herself against this by buying puts on a broad-based index. A put is the right to sell something at a set price in the future. If the entire market declines, she will make money by selling the put at the strike price. Doing so will lessen her losses.

Jennifer leaves her job as a registered representative to work in the service industry on July 1, 2022. She enrolls in FINRA's Maintaining Qualifications Program. If Jennifer wants to return to her job as a registered representative within the next five years and avoid the requirement to retake her qualifying exams, which of the following must she do? A. Complete the regulatory element and the firm element annually B. Complete the regulatory element at least once every three years and the firm element annually C. Complete each of the regulatory element, firm element, and practical element annually D. Obtain a waiver from her former employer and complete either the regulatory element or the practical element annually

A. Complete the regulatory element and the firm element annually Under FINRA's Maintaining Qualifications Program (MQP) a registered individual who left or leaves the industry after March 15, 2020 will not need to take their qualifying exam upon returning to the industry as long as they return within 5 years of their termination date. The individual must complete the FINRA-mandated regulatory element and practical element annually to be eligible for the extended five-year grace period. Completing the firm element is not a requirement for someone enrolled in the MQP. Note that if the person does not enroll in the MQP, they are subject to retaking their exam upon returning to the industry if their license lapses for two years or more.

For an insider trading violation, the maximum _____ penalty for a(n) _____ is a $25 million fine. A. Criminal; firm B. Civil; firm C. Criminal; individual D. Civil; individual

A. Criminal; firm For an insider trading violation, a $25 million fine is the maximum criminal penalty for a firm. The maximum criminal penalty for an individual is a $5 million fine and 20 years in prison. There may also be civil penalties on top of the criminal penalties. The maximum civil penalty for an individual is "treble damages," which means three times the amount of the profit gained or loss avoided as a result of the violation. The maximum civil penalty for a firm is $1 million or treble damages, whichever is greater.

Which of the following statements about auction-rate securities (ARS) and variable-rate demand obligations (VRDO) are correct? I. The interest rate of an ARS is determined by auction, but the interest rate of a VRDO is not II. Both have variable interest rates III. An ARS is a long-term bond, whereas a VRDO is a short-term bond IV. An ARS may be issued by a municipality, but a VRDO may not A. I and II B. III and IV C. I and III D. II and IV

A. I and II Both ARS and VRDOs are long-term securities with short-term interest rates. Each carry variable interest rates and both can be issued by municipalities. A big difference between the two is that the ARS interest rates are determined by auction and the VRDOs rates are not. Another difference between the two is that ARS are only resalable if there's a buyer at the auction while VRDOs can be sold back to the issuer at par plus any accrued interest.

Reliable Investments is a broker-dealer. Today the firm receives a written complaint from a customer named Janice stating her displeasure with the way her agent, Paul, executed one of her recent trades. She claims that he did not promptly place her market order for 200 shares of XYZ at $15/share, causing her purchase price to rise by $.05 per share. Which of the following is the firm obligated to do with the complaint? I. File it at an OSJ and keep it on file there for at least 4 years II. File it at the relevant branch office and keep it on file there for at least 4 years III. Report it to FINRA within 30 days IV. Make a record of any response taken by the firm related to the complaint A. I and IV B. II and IV C. I and III D. II and III

A. I and IV A customer complaint is any written statement from a customer that alleges a grievance that involves the activities of a member firm or its associated persons in connection with the solicitation or execution of a securities transaction. Some customer complaints must be reported to FINRA within 30 days of receipt. These involve when a firm or associated person is the subject of a complaint involving allegations of theft, forgery, or misappropriation of funds. Additionally, claims for damages of over $15,000 when filed against an associated person, or $25,000 when filed against a member firm, must be reported. Janice's complaint, because it involves less than $15,000, would not meet these standards, and thus Reliable does not need to file it with FINRA. However, all written customer complaints must be recorded by the member firm and kept in a separate file, and the records must stipulate any action taken by the member firm in response to that complaint. Customer complaint records shall be kept at the Office of Supervisory Jurisdiction (OSJ) under whose jurisdiction the complaint was filed and maintained for at least four years.

Which of the following are most likely to be associated with a competitive bid? I. Trust indenture II. Voter approval III. Underwriter prepares offering IV. Financial advisor prepares offering A. II and IV B. II and III C. I and IV D. I and III

A. II and IV Competitive bids are most often used with GO bonds, which usually require voter approval. In a negotiated bid, after the governing body of the issuer approvals the proposal, it signs a trust indenture, which is the contract between the issuer and the trustee, who acts as a fiduciary for the bondholders. With both competitive and negotiated underwritings, the financial advisor prepares the offering. A negotiated underwriting provides more of an opportunity for an underwriter to assist with this in a limited fashion, because the underwriter likely becomes involved earlier. However, an underwriter must be careful not to cross the line between playing an underwriter's role and a financial advisor's role. An issue's underwriter is prohibited by the MSRB from also acting as its financial advisor. The MSRB allows the underwriter only to provide advice about the issue's "structure, timing, terms and other similar matters" in a manner consistent with "an arm's-length relationship with the issuer."

When can a BD put a freeze on an account of a specified person because of suspicion that the power of attorney (POA) or guardian is abusing the account? A. If the registered rep suspects that abuse is occurring B. Only if the registered rep has evidence that the POA or guardian has acted fraudulently in the account C. The registered rep cannot freeze the account D. Only if the POA or guardian has made an excessive amount of withdrawals from the account

A. If the registered rep suspects that abuse is occurring As long as the customer is a specified adult, the broker-dealer only needs to have a reasonable belief that the customer may be a victim of financial exploitation to put a hold on the account. A specified adult is defined as a natural person who is at least 65 years old or at least 18 years old with a mental or physical condition that prevents them from protecting their own interests.

Current yield: A. Is the rate an investor earns if he/she purchases a bond and holds it for a year B. Is the same as the coupon rate C. Is the percentage of par value a bond investor earns annually D. Is the rate an investor earns if he/she purchases a bond and holds it to maturity

A. Is the rate an investor earns if he/she purchases a bond and holds it for a year Current yield is the return an investor earns if he/she purchases a bond today and holds it for a year. It is calculated by this formula: coupon payment/current market price of bond. Coupon payment is the interest payment that a bond investor earns annually. Coupon payment can also be described in terms of an interest rate earned per year, called nominal yield, and that rate is the percentage of par value a bond investor earns annually. Yield to maturity is the rate an investor earns if he/she purchases a bond and holds it to maturity.

Leo and Katherine have been married for 25 years. Leo wants to set up an annuity so that his wife will receive payments beginning at his death and continue to receive them until her own death. Which of following payout options would be the best fit? A. Joint life with last survivor B. None of the above C. Life income D. Life with period certain

A. Joint life with last survivor Because Leo wants payments to be distributed to his wife in the event of his death, joint life with last survivor would be his best option. Payments will continue until both parties have passed on.

The price movement of ___ bonds tends to be more like that of stocks. A. Junk B. Investment-grade C. Agency D. Municipal

A. Junk Junk bonds' low credit rating makes them particularly sensitive to market conditions and to the issuer's financial performance. Thus, junk bonds tend to act more like stocks and less like other bonds in their market behavior.

Let's play . . . Name that Spread! What is the name of the following spread?Sell 1 ABC 20 Call @ 4Buy 1 ABC 25 Call @ 2 A. Bull Credit B. Bear Credit C. Bull Debit D. Bear Debit

B. Bear Credit The first step is to determine whether it is a net credit or net debit. In this case, the 25 call was purchased for $200 (debit) and the 20 call was sold for $400 (credit) for a net credit of $200. The next step is to determine which direction would be profitable for the driving option (the one with the higher premium). In this case, to sell a call is bearish. Hence, we have a Bear Credit Spread

To qualify as a long-term capital gain or loss, stock must be held for more than one year. At purchase, the holding period clock begins: A. One day after the trade date B. On the trade date C. One day after the settlement date D. On the settlement date

A. One day after the trade date According to the IRS, the holding period clock begins the day after the shares were purchased.

Which of the following is a bond counsel least likely to do? A. Provide reassurance that a municipality is unlikely to default on an issue B. Examine whether any information is missing from the official statement C. Determine that the interest payments on the bond will be exempt from federal taxes D. Affirm that the issuer is legally able to issue the bond

A. Provide reassurance that a municipality is unlikely to default on an issue Bond counsel does not make financial pronouncements regarding a bond issue. Its role is to determine whether the bond issue has met all legal requirements to remain tax-free. To that end, it will examine the official statement, the accounting methods of the municipality, and any other relevant information to make its judgment.

Which of the following is excluded from income for regular tax but is added back as a preference item on the AMT: A. Qualified private activity bond interest B. Qualified treasury bond interest C. Build Big American Buildings bond interest D. All municipal bond interest

A. Qualified private activity bond interest When calculating the AMT or Alternative Minimum Tax, individuals must add back certain "tax preference items." Interest on specified private activity bonds, which comes from bonds that are "qualified" (at least 95% of the revenue is used for an approved public purpose), is excluded from income for regular tax must be added back as a preference item on the AMT tax calculation.

Which of the following common stockholder rights ensures that the investor's assets are not at risk for the company's debts? A. Right to limited liability B. Right to transfer C. Right to a residual claim D. Preemptive rights

A. Right to limited liability A defining feature of a corporation is that it offers limited liability to its investors, meaning that investors are held liable for only the amount of money they invest in the company. All stock certificates have the words "fully paid and non-assessable" printed on them to assure stockholders of this right. This means that investors' other assets are not at risk for the company's debts; nor are investors personally liable for any lawsuits that might be brought against the company. The most they can ever lose by the purchase of a company's stock is its purchase price. This is true not just for holders of common stock, but for any investor in a corporation.

Yield spreads, as measured by the difference in yields between high-yield ("junk") bonds and Treasury bonds, begin to widen. This widening: A. is a negative indicator for the economy B. is a positive indicator for the economy C. indicates a complete economic collapse is imminent D. has no relation to the overall economy

A. is a negative indicator for the economy The widening yield spread means the yield on the high-yield bonds has increased relative to Treasuries, so the price of high-yield bonds has decreased in relation to Treasuries. A relative price decrease means investors aren't willing to pay as much for the high-yield bonds as they used to. This indicates investors are nervous about the high-yield issuers' ability to repay, and this situation is a negative indicator for the economy. It is not, however, always indicative of a complete economic collapse.

Irving Investor goes to his new broker, Don Ethical, and tells him that he wants long-term aggressive growth with some income as well. Don might suggest a: A. Small-cap growth fund and a government bond fund B. A balanced fund C. None of the choices listed D. Large-cap growth fund and preferred stock

A. Small-cap growth fund and a government bond fund A small-cap growth fund would offer "aggressive growth" and a government bond fund would provide income. A large cap growth fund would not be considered as aggressive as a small cap growth fund although the preferred stock would provide some income. A balanced fund, typically considered a 60/40 stock/bond blend, would not typically offer aggressive growth although the bond component would offer income.

FINRA Rule 3240 concerns lending relationships between registered representatives and their customers. Under this rule, in order for a registered representative to be able to take a loan from a customer, the member firm must have written procedures allowing lending agreements, and the member must pre-approve the loan in writing. Moreover, the relationship between the representative and customer must fall into one of several permissible relationships. All of the following relationships would be permissible EXCEPT? A. The customer has given written approval to the representative B. The customer is in the business of lending money C. The customer is a member of the registered representative's immediate family D. The customer and the registered representative work at the same firm

A. The customer has given written approval to the representative FINRA Rule 3240 restricts lending between registered representatives and their customers. Under this rule, in order for a registered representative to be able to take a loan from a customer, the member firm must have written procedures allowing lending agreements, and the member must pre-approve the loan in writing. Moreover, the relationship between the representative and customer must fall into one of several permissible relationships: the customer is a member of the registered representative's immediate family, the customer is in the business of lending money, the customer and the registered representative work at the same firm, the lending agreement is based on a personal relationship outside of the broker-customer relationship, or the lending arrangement is based on a business relationship outside of the broker-customer relationship. Written approval from the customer is not enough.

An executive of a public company selectively discloses information about the company. Which of the following circumstances would exempt the company from Regulation FD's requirement that the selective disclosure be followed by public disclosure of the same information? A. The disclosure was made during a public offering's road show. B. The information is material and nonpublic. C. The disclosure was to one of the company's shareholders. D. The disclosure was unintentional.

A. The disclosure was made during a public offering's road show. Under Regulation FD, certain selective disclosures of material nonpublic information trigger a requirement that the same information be publicly disclosed. Notably, Regulation FD does not apply to statements made as part of a public offering, such as at a road show. The regulation also does not apply to those who owe a duty of trust to the company (such as lawyers, accountants, or investment bankers working for the company). However, disclosures to shareholders of the company do trigger the disclosure requirement. Whether or not the disclosure was intentional merely affects how quickly the public disclosure must be made. In the case of an intentional selective disclosure of material nonpublic information to someone outside the company, immediate public disclosure is required. If the disclosure was unintentional, then the regulation requires prompt public disclosure (typically within 24 hours of the company learning of the unintentional disclosure).

Which document would be the best place for an investor to find out about a municipality's financial condition for a municipal security? A. The official statement B. The trust indenture C. The bond resolution D. The prospectus

A. The official statement For a municipal security, the best place for an investor to find out about a municipality's financial condition would be the official statement. The official statement is similar to a prospectus and serves the purpose of a disclosure document.

A customer takes on the following positions: Short 200 shares of XYZ Long 2 calls of XYZ Why would she do this? A. To protect short gains B. To generate income C. To speculate and take advantage of leverage D. To protect long gains

A. To protect short gains To hedge a short position, buy a call or write a put. The long call provides protection against the market price rising, allowing you to buy at the strike price. The short put generates income, but may require you to buy if the market price falls below the strike price.

The cost basis for inherited securities is: A. The average cost of the securities during the period that the original owner held them B. The value of the securities when the original owner first bought them C. The value of the securities on the date the original owner dies D. The value of the securities on the date the new owner takes possession

C. The value of the securities on the date the original owner dies The cost basis of inherited securities is the price at the time of the original owner's death.

Imagine you purchased a corporate convertible bond at par with a conversion price of $20, and the bond is selling at 104. What would be the parity price for the common stock? A. $52 B. $20.80 C. $208 D. $5.20

B. $20.80 To find the parity price of the stock, we need to find the conversion ratio. To find the conversion ratio, divide the conversion price into the par value of the bond ($1000 / $20 = 50 shares). This tells us that one bond can be converted into 50 shares of common stock. We then take the price of the bond and divide by the conversion ratio to find the parity price of the common stock. $1040 / 50 = $20.80.

How many shares of stock is in one equity options contract? A. 1 B. 100 C. 1000 D. 10

B. 100 Each equity options contract consists of 100 shares of stock

For options contracts where a stock is the underlying asset, the contract size is always: A. 0.1% of the company's shares outstanding B. 100 shares C. $100,000 worth of shares D. 1 share

B. 100 shares For options contracts where a stock is the underlying asset, the contract size is always 100 shares.

For how long must a firm provide a copy of the prospectus to investors interested in purchasing a security from a company with an IPO that is listed on the Nasdaq? A. 40 days after it is first sold B. 25 days after it is first sold C. 10 days after it is first sold D. 90 days after it is first sold

B. 25 days after it is first sold For stocks that go public on an exchange like the NYSE or the Nasdaq, the prospectus has to be given to anyone who buys up to 25 days after the IPO. On the other hand, stocks that go public over the counter, the prospectus has to be given for up to 90 days after the IPO.

How much may a client be initially loaned under Regulation T? A. 25% of a security's value B. 50% of a security's value C. 65% of a security's value D. 35% of a security's value

B. 50% of a security's value Initially, Regulation T allows a broker-dealer to loan a client up to 50% of a security's market value.

Which of the following would need to be filed with FINRA? A. Correspondence that includes financial recommendations B. A retail communication that contains several investment recommendations C. An institutional communication that makes both financial and investment recommendations D. Each of the other choices must typically be filed with FINRA

B. A retail communication that contains several investment recommendations Retail communications that contain investment recommendations need to be filed with FINRA. Correspondence and institutional communications are not typically filed with FINRA.

Which of the following would not typically be done by a financial advisor of a municipal issuer? A. Recommend the timing of the sale of the bonds B. Act as an underwriter C. Prepare an official statement D. Assess a bond's impact on the community's credit rating

B. Act as an underwriter The role of the financial advisor is to: -Review the financial feasibility of the project and assess the issuer's sources of revenue -Assess the issuer's ability to stay under the debt ceiling -Recommend a financing structure and maturity schedule -Recommend a call schedule for the bonds and the timing of their sale -Assess the bond's impact on the community's credit rating, and -Prepare an Official Statement for distribution to potential underwriters and investors. The Municipal Securities Rulemaking Board (MSRB) prohibits a financial advisor from acting as an underwriter on the same issue. This is to prevent a conflict of interest. A financial advisor generally seeks to achieve the lowest possible interest cost for an issuer, while an underwriter seeks the highest yield that makes the securities attractive for resale to investors. An underwriter may also be inclined to advocate a larger issue than the issuer requires if it sees a broad market for the new securities, or a smaller one if it senses a weaker market.

Amy and Steve would like to start saving for the 5-year-old daughter's education and other future expenses. They both have good jobs and would like to contribute a total of $1,000 per month to an account for their daughter. Amy also wants their daughter to own the assets in the account by the time she is finished with college. Which of the following would be the most suitable account for them? A. A 529 savings plan B. An UGMA account C. A 529 prepaid tuition plan D. A Coverdell savings account

B. An UGMA account All of the assets in an UGMA account are kept for the benefit of the minor in the account, and they become the minor's assets when she reaches the age of majority. Additionally, UGMA accounts come with high maximum contribution limits, so Steve and Amy would be able to contribute $1,000 monthly to their daughter's account. This would not be true for a Coverdell savings account, which comes with a maximum annual contribution amount of $2,000. Though 529 plans also come with high maximum contribution levels, their assets do not become the assets of the beneficiary at any time.

The Customer Identification Program (CIP) is related to which of the following? A. Identifying margin insufficiencies B. Anti-money laundering compliance C. Protecting customer privacy D. Customer suitability requirements

B. Anti-money laundering compliance A broker-dealer is required to establish and maintain a written Customer Identification Program (CIP) as part of the government's anti-money laundering compliance program to verify the identity of a customer.

Which of the following would close a position of 5 short calls on ABC? A. Buying 500 shares of ABC B. Buying 5 calls on ABC C. Writing 5 puts on ABC D. Selling short 500 shares of ABC

B. Buying 5 calls on ABC Closing a position occurs when a holder or writer of an option takes the opposite position on the same option contract. If you are short a call on ABC and you want to close out your position, you can offset that purchase by purchasing the same position. You will go long on an ABC call with the same strike price and expiration date. You have successfully closed your short position by implementing an identical long position on the same stock, and protected yourself from any further movements in the stock price.

The Alternative Minimum Tax: A. Is levied on corporations only B. Eliminates many deductions and exemptions C. Offers lower income taxpayers an alternative tax calculation D. Is mostly paid by the ultra-rich

B. Eliminates many deductions and exemptions The alternative minimum tax, or AMT, is an alternative way of calculating income taxes. Certain tax deductions, credits, and exclusions do not receive favorable tax treatment under the AMT. Instead, these "tax preference items" must be added back to taxable income. The AMT was created as a backstop to make sure wealthy taxpayers could not avoid paying any income tax at all. For the very highest earners, however, the AMT is less of an issue, since the top marginal federal income tax rate is higher than the maximum AMT rate. This means the ultra-rich usually pay a higher tax bill with the regular tax calculation than via the AMT method. The AMT applies only to individual taxpayers, not corporations.

With a(n) __________ option, the buyer can only exercise the option on the expiration date, whereas with a(n) _________ option, the option can be exercised at any time up to and including the expiration date. A. Eastern; Western B. European; American C. Western; Eastern D. American; European

B. European; American European style options may only be exercised on the expiration date, whereas American options can be exercised at any time up to and including the expiration date.

A typical official statement will include which of the following information: I. Financial and economic conditions of the underwriter II. summary statement III. security of funds IV. tax status A. I, II, III and IV B. II, III and IV C. I and II D. I, III and IV

B. II, III and IV The official statement for a municipal bond includes the purposes and terms or conditions of the issue, including the loan amount, maturity structure, and redemption provisions. It also includes the financial and economic characteristics of the issuer, financial sources from which payments will be made, protective covenants, and any consequences in the case that the issuer defaults on its payment obligations. The price of the bond, its interest rate, any selling compensation associated with the issue, and the issuer's credit ratings are included in the final official statement. However, the financial and economic condition of the underwriter is not included in the official statement.

Which entity does not enforce MSRB rules? A. FDIC B. MSRB C. SEC D. FINRA

B. MSRB While the MSRB drafts rules and regulations, it does not have the authority to enforce these regulations. The MSRB rules are enforced by the SEC and FINRA. The FDIC enforces MSRB rules for non-national banks that are not part of the Federal Reserve System, while the Federal Reserve Board enforces rules applying to non-national banks that are part of the Federal Reserve System. MSRB rules are enforced for securities dealers at national banks by the Comptroller of the Currency.

For a Uniform Gift to Minors account, the assets are re-registered in the name of the new adult when the child reaches the age of: A. 18 B. Majority as determined by the child's state of residence. C. 25 D. 21

B. Majority as determined by the child's state of residence. State law determines the age of majority, and the assets are re-registered in accordance with the laws of the state of residence.

Membership in SIPC is: A. Mandatory for most registered representatives B. Mandatory for most broker-dealers C. Entirely voluntary D. Mandatory for most investment advisers

B. Mandatory for most broker-dealers Almost every SEC-registered broker-dealer is required to become a member of the Securities Investor Protection Corporation. Exempt broker-dealers include firms that exclusively sell mutual funds, variable annuities, insurance products, or that exclusively provide investment advice to registered investment or insurance companies.

The risk that a security's value will decrease due to the instability of a foreign government is called: A. Systematic risk B. Political risk C. Exchange rate risk D. Specific risk

B. Political risk Political risk refers to the ability of less established governments to disrupt economies and destabilize financial markets in their countries. Securities that trade in these countries, as well as ADRs and domestic stocks that rely heavily on foreign revenue, all carry this additional level of risk.

A horizontal spread is distinct in that it has: A. Same strike price, same expirations B. Same strike price, different expirations C. Same expiration, different strike prices D. Different strike prices, different expirations

B. Same strike price, different expirations A horizontal spread (or calendar spread) has the same strike prices, but different expirations. Options with different strike prices and different expirations are referred to as diagonal spreads, and options with the same expirations and different strike prices are vertical spreads. Finally, options with the same strike prices and the same expirations are not spreads.

Funds from a 529 college savings plan may be used for each of the following without penalty, except: A. A laptop that will be used in college classes B. School supplies for a private high school C. College tuition D. Room and board expenses at a university

B. School supplies for a private high school A 529 college savings plan allows the owners of the account to make tax-free withdrawals from the account if the funds are used for qualified education expenses for higher education (e.g., college). Qualified expenses include tuition, school fees, books, school supplies, school equipment, such as computers, reasonable room and board expenses (for those students attending school at least half-time). Qualified expenses allows include expenses associated with special needs services for special needs students. Withdrawals from a 529 plan will also be tax-free if they are used for tuition of elementary school, middle school, or high school (with a cap of $10,000). Expenses besides tuition for non-college schooling are not considered to be qualified expenses.

When the Federal Reserve wishes to raise the Federal Funds rate, it: A. Increases the number of securities in the Fed's System Open Market Account B. Sets a new target Federal Funds rate in a Board of Governors meeting C. Announces the new rate in The Bond Buyer D. Buys Treasury bills from primary dealers

B. Sets a new target Federal Funds rate in a Board of Governors meeting The Fed will decide on a target Federal Funds rate in a meeting of the Federal Open Market Committee, consisting of the presidents of the 12 Federal Reserve Banks and the seven members of the Board of Governors. If it wishes to raise the Federal Funds rate, the Federal Reserve Bank of New York will sell Treasury bills and bonds to its select primary dealers. The money the Fed receives from these securities sales to banks is thus removed from circulation. The System Open Market Account is the portfolio of securities owned by the Fed.

Which of the following is true of distributions from a non-qualified annuity? A. They are always taxed at an investor's ordinary tax rate B. Some or all of them can be taxed C. They are not taxed D. They are taxed at the capital gains rate

B. Some or all of them can be taxed Annuities are taxed upon withdrawal as ordinary income. However, a non-qualified annuity is one that has been paid for with after-tax money hence income taxes apply to earnings only; the distribution of contributions is tax-free.

A broker-dealer may offer a customer the option of opening a numbered securities account with the following required information? A. Standard account opening information minus the name B. Standard account opening information plus a signed document attesting to account ownership C. Certified copy of social security and birth certificate on file D. None, numbered accounts are not permitted

B. Standard account opening information plus a signed document attesting to account ownership A numbered account is one where only a number or a symbol instead of a name is used to identify the account. Numbered accounts are used to preserve a client's anonymity, although account holders are still required to register by filling out a client account form. In addition to the standard information required to open an account, numbered accounts require a signed statement by the account owner that the account belongs to them. This document must be kept on file at the broker-dealer. Account statements and confirmations will be printed with the number or the symbol instead of the customer's name.

Which of the following best describes the amount of buying power in a margin account? A. One-half its long market value B. Two times its excess equity C. One-half its special memorandum account D. Two times its initial margin requirement

B. Two times its excess equity Buying power is the purchasing power in a margin account that does not require the deposit of additional money to make a trade. Buying power is equal to twice the amount of excess equity in the account. Excess equity is held in a special memorandum account.

Your client shorts XOM at $65 and sells a June XOM 62.5 put @ 5. His breakeven is: A. XOM @ 65 B. XOM @ 70 C. XOM @ 62.5 D. XOM @ 67.5

B. XOM @ 70 An investor who shorts a security has sold shares of a stock that he has borrowed, but does not own, and must return the shares to the lender at some time in the future. Remember that a short seller loses money when the price of the stock rises above the price that he shorted the stock at. When an investor shorts a security and then sells a put on these securities, he has written a covered put. Writing covered puts offers additional income without adding additional risk to the short selling position. In fact, the additional income can be used to mitigate possible short sale losses by the amount of the premium. So in this example, the investor has gained $5 for writing the put, so the price can increase up to $5 before the investor breaks even. Thus, the investor's break even point is at the price that the security was shorted plus the price of the put. In this case, it would be $65 + $5 = $70.

What type of bond typically holds the highest interest rate risk? A. a 5-year corporate bond B. a 30-year treasury bond C. a T-bill D. a 10-year treasury note

B. a 30-year treasury bond Interest rate risk refers to the risk that interest rates will increase, causing the value of your bond to decrease. The probability of interest rates rising during longer time spans is greater than shorter time spans, hence, the 30-year Treasury bond has greater interest rate risk than any of the other bonds.

In 2015, your client purchased a Jul '32 Poughkeepsie GO 4% callable @101 in '27 in the secondary market for 102. If the bond is held to call, the yield to call earned by your client is most likely: A. greater than the yield to maturity B. lower than the yield to maturity C. Not enough information to answer the question D. equal to the yield to maturity

B. lower than the yield to maturity The bond was purchased at 102 and called at 101, making it a premium bond. For premium bonds, yield to call is most often less than yield to maturity.

Don Jones decides to try his hand at straddling the markets. He buys an ELP Feb 60 call for 3 and an ELP Feb 60 put for 4. The stock itself is currently trading at $57. Don's maximum possible loss is: A. $300 B. Unlimited C. $700 D. $400

C. $700 The maximum possible loss for a long straddle is the cost of the premiums paid ($300 + $400 = $700).

The last opportunity to exercise an April call is: A. 11:59 pm Eastern on the Saturday immediately following the 3rd Friday in April. B. 4:02 pm Eastern on the 3rd Friday in April. C. 5:30 pm Eastern on the 3rd Friday in April. D. 5:30 pm Eastern on the 3rd Friday in May.

C. 5:30 pm Eastern on the 3rd Friday in April. The last chance to exercise an April option is at 5:30 on the 3rd Friday. The last chance to close or trade an April option is 4:02 pm on the 3rd Friday. Options expire at 11:59 pm on that Saturday.

Shayna has the following open positions: Long AAPL Apr 400 Put @ 7 Short AAPL Apr 390 Put @ 4 The price of Apple is at $385 on the expiration day. Assuming any in the money options are exercised, how much money will Shayna earn or lose? A. A $200 loss B. A $1,200 gain C. A $700 gain D. A $200 gain

C. A $700 gain This is a debit put spread. Also called a bear put spread or a long put spread. If the stock price goes down to 390, she will hit the point where she earns her maximum profits of $700. Her maximum gain is the difference in the strike price minus the difference in the premiums (10 - 3 = 7, 7 x 100 = $700). $700 is the most she can make, so If the price goes below 390 she will still earn $700.

A member firm cannot open a margin account for a client before it obtains the customer's: A. Investment objectives B. Income verification C. Credit history D. Age

D. Age As with all accounts, a customer's age must be included on the new account application. The other options are not required, though the firm is expected to make a reasonable effort to determine certain relevant information, including suitability information.

Which of the following options is out-of-the-money? A. ABC Jun 50 put, ABC is trading @ $48 B. ABC Mar 20 call, ABC is trading @ $22 C. ABC Apr 10 put, ABC is trading @ $15 D. ABC Jan 40 call, ABC is trading @ $40

C. ABC Apr 10 put, ABC is trading @ $15 Call options are out-of-the-money if the market price is less than the strike price. Put options are out-of-the-money if the market is more than the strike price. Options where the strike price equals the market price are considered at-the-money. The answer, "ABC Apr 10 put, ABC is trading @ $15," is out-of-the-money, because the market price, $15, is higher than the strike price, $10. Remember, a put offers the purchaser the right to sell at the strike price. In this case, the strike price is below the market price; therefore, it would not be profitable to exercise the pub and it is thus out-of-the-money.

Damon is a 30-year-old social worker. He makes $30,000 per year and has a bit of money that he would like to invest with your firm. He says that he does not have the time to trade actively, so he would like to find a single type of investment that offers diversification without high costs and fees. Which of the following is most suitable for him? A. Mutual fund C shares B. Mutual fund A shares C. An exchange-traded fund (ETF) D. A non-listed REIT

C. An exchange-traded fund (ETF) An ETF allows an investor to track an index without paying high fees. Additionally, investors in ETFs can purchase as few as one share, so they do not need a lot of money to open an ETF position. Mutual fund A shares are suitable for investors who have a lot of money to put into the fund, which will allow them to meet breakpoints. C shares in a mutual fund typically come with high 12b-1 fees, and thus they would not be suitable for Damon. Finally, non-listed REITs can come with high front-end fees and significant transaction costs, such as property acquisition fees and asset management fees, and as a result would not be suitable for an investor who is averse to paying high fees.

To qualify as an omitting prospectus, an advertisement for a mutual funds must include a statement advising an investor to consider all of the following except: A. The mutual fund's specific risks B. The mutual fund's charges and expenses C. Disciplinary actions against the investment company in the last six months D. The mutual fund's investment objectives

C. Disciplinary actions against the investment company in the last six months To qualify as an omitting prospectus, an advertisement must include a statement that advises an investor to consider the investment objectives, risks, and charges and expenses of the investment company carefully before investing. The disciplinary history of the fund or its management company are not required.

Alpha is typically used to: A. Calculate a portfolio's expected return B. Compare before and after-tax yield C. Evaluate the performance of a portfolio D. Find the Sharpe ratio

C. Evaluate the performance of a portfolio Alpha is a measure of how much better a portfolio of securities performs than what could be expected from the market. A portfolio's alpha is typically used to evaluate a fund manager's performance. To calculate alpha, subtract the expected return of a portfolio from its actual return.

Each branch office is required to designate at least one ____________ with supervisory authority and responsibility for the activities of that office. A. General Securities Representative B. General Securities Principal C. General Securities Principal or General Securities Representative D. Registered Compliance Officer

C. General Securities Principal or General Securities Representative FINRA's supervisory procedures state that every branch office is required to designate at least one General Securities Representative (Series 7) or General Securities Principal (Series 24) with the supervisory authority and responsibility for the activities of that office and any non-branch offices in its jurisdiction.

Which of the following does not typically occur in the expansionary phase of a business cycle? A. Higher wages B. Increased economic activity C. Higher interest rates D. Increased employment opportunities

C. Higher interest rates Expansion is the first stage of a business cycle. This phase is typically marked by increased production, decreased unemployment, and rising wages. Additionally, since lenders make credit more available in the expansion phase, interest rates typically decrease.

Based on the Securities Exchange Act of 1934, the SEC has the authority to do which of the following to any person who has violated the Act or rules of regulation in terms of insider trading? I. Bring an action in a United States District Court against the person who directly committed such violation II. Bring an action in a United States District Court against the person who indirectly controlled the person who committed such violation III. Impose a civil penalty IV. Authorize that such civil penalties be paid to the Commission A. II and III B. I and III C. I and II D. III and IV

C. I and II The Commission has the authority to bring an action in a United States District Court against any person who directly committed a violation of insider trading or a person who indirectly controlled the person who committed such violation. Only the court, however, has authority to impose a civil penalty. Such penalties are made out to the United States Treasury, not the SEC.

Which type of market best characterizes the Nasdaq? A. Fourth market B. Auction C. Negotiated D. Third market

C. Negotiated The Nasdaq is a negotiated market because several market makers post bids for each security, on a computer network system that is not centralized. An auction market is a physical location where one designated market maker directs the flow of trades for each security, as an auctioneer might do. The third market is when exchange-listed securities are traded off the exchange. The fourth market is where institutional investors trade securities over ECNs or dark pools.

"Partnership democracy" in a limited partnership would allow the limited partners to vote on all of the following measures EXCEPT A. Suing the GP for breach of fiduciary duty B. Suing the GP for negligence C. Releasing the GP from his fiduciary responsibility D. Dissolving the partnership

C. Releasing the GP from his fiduciary responsibility Partnership democracy means limited partners get to vote on the major issues, including suing the general partner and dissolving the partnership. The fiduciary responsibilities of the GP are a matter of law, however, not the voting of limited partners.

The gross profit, or underwriting spread, in an equity securities issue includes all of the following except: A. The underwriting fee B. The management fee C. The coupon D. The selling concession

C. The coupon The management fee, the underwriting fee and the selling concession are the components of the spread in the underwriting of a securities issue. The coupon has to do with interest payments on a bond.

Margin accounts allow for broker-dealers to pledge customers' securities as collateral to a bank. If this happens and a vote takes place for the security which was pledged, what is the implication for the investor? A. The customer must vote via proxy B. The investor may file an appeal of transference directly with the SEC C. The vote goes with the collateralized shares and the customer loses their right to vote D. It has no affect on the customers rights

C. The vote goes with the collateralized shares and the customer loses their right to vote If the shares are collateralized, the customer will lose their right to vote during that period of time.

All of the following are true of covered calls, except: A. They are used to derive extra income from a stock the investor already owns. B. The investor limits her potential gains if the stock price rises. C. They are used to protect gains in the value of a stock the investor already owns. D. They combine a short call and an underlying stock owned by the investor.

C. They are used to protect gains in the value of a stock the investor already owns. A covered call is an options strategy in which an investor writes a call option on a stock the investor already owns. If the stock's market value does not rise above the strike price, the call expires and the investor pockets the premium. In this way, the investor derives extra income from owning the stock. However, a covered call limits the investor's potential gains from increases in the stock's value. If the stock's price rises above the strike price and the call is exercised, the investor will have to sell the stock at the strike price rather than the market price. By contrast, an investor who wants to protect gains in the value of a stock she already owns might use a protective put, but would not use a covered call.

Which of the following are true about the settlement of European style options that are exercised? A. They settle T + 1 B. They settle T + 3 C. They settle in cash same day D. They settle T + 2

C. They settle in cash same day Options can be either American style or European style. An American style option is one that can be exercised any time up to expiration date (the third Friday of the month). In contrast, a European style option is one that can be exercised on the expiration date only. When exercised, American style options settle T + 2, whereas European style options settle in cash the same day. When traded, all options settle T + 1.

A business continuity plan must be sent to FINRA? A. In the event that a significant business disruption occurs B. Whenever any information in the plan changes C. Whenever FINRA requests it D. Annually

C. Whenever FINRA requests it A member firm is required to create and maintain a written business continuity plan identifying procedures to keep the business running in the event of an emergency or significant business disruption. The plan must be kept readily available for delivery to FINRA promptly upon request. Additionally, whenever there is a change in one of the contact persons listed on the plan, FINRA must be notified of that change no later than 30 days after it occurs. However, changes in other plan information do not need to be submitted to FINRA unless requested.

ABC, LP is a limited partnership in which Alice is the general partner, and Bob and Carol are the limited partners. ABC takes out a recourse note from Big Bank to build a car wash. The business fails and ABC is unable to pay back the loan. Can Big Bank go after Bob and Carol's personal assets? Why or why not? A. Yes, because any partner in an LP has personal liability for the LP's debts equal to the partner's cost basis B. No, because the car wash served as security for the note C. Yes, because it was a recourse note D. No, because limited partners are not personally liable for an LP's debts

C. Yes, because it was a recourse note When an LP takes out a loan, it can take the form of a recourse note or a nonrecourse note. With a recourse note, the limited partners have personal liability for the loan, whereas with a nonrecourse note they do not. A limited partner does get some benefit from agreeing to a recourse note, in that his cost basis increases by his proportional share of the note. However, the partner's cost basis is not equal to his liability. His cost basis also includes the amount of his investment in the LP. It is possible that the car wash's assets were also pledged as security for the loan, whether or not it was a recourse note.

Variable-rate demand obligations include: A. both a put option and a call option B. a maintenance margin requirement C. a put option D. a call option

C. a put option Variable-rate demand obligations (VRDOs) contain a put option, which gives investors the right to put the security back to the issuer, at a price equal to the bond's face value plus accrued interest. For example, assume that an investor has a VRDO with a face value of $1,000 and accrued interest of $30. The security will mature in a little under three months. Due to a pressing medical expense, the investor decides to return the VRDO to the issuer and receive the $1,030.

Your client is short 100 XOM and places a buy stop at 75. The order is executed when the price of XOM A. falls to $75 or below. B. falls below $75. C. rises to $75 or above. D. rises above $75.

C. rises to $75 or above. Short sellers try to profit from a decline in the price of a security by borrowing shares, selling them, and then hoping to buy them back in the future at a lower price. A short seller might place a buy stop order above the current market price, to protect himself against a rise in the share price. In this question, if the price of XOM rises to $75 or above, the order becomes a market order and is immediately executed.

The simultaneous purchase of one option and sale of another option of the same class is called a: A. calendar spread B. straddle C. spread D. combination

C. spread This is the definition of a spread.

Howard & Phillip issued 15 million shares last year. The company now has 5 million treasury shares. The share price of the company's stock is $10. What is Howard & Phillip's market capitalization? A. $150 million B. $50 million C. $10 million D. $100 million

D. $100 million Market capitalization = share price x shares outstanding. To find shares outstanding, subtract treasury shares from issued shares. In this case, 15 million - 5 million = 10 million. So market capitalization = $10 x 10 million = $100 million.

Which of the following formulas is used to calculate the cost basis for an exercised long call option? A. (Market price - premium price) x 100 B. (Strike price - premium price) x 100 C. (Market price + premium price) x 100 D. (Strike price + premium price) x 100

D. (Strike price + premium price) x 100 For a long call option, the cost basis is the option's strike price plus its premium price times the 100 shares that comprise the option.

Which type of yield curve occurs when investors expect interest rates are at their peak and about to fall? A. A steep yield curve B. A normal yield curve C. A flat yield curve D. An inverted yield curve

D. An inverted yield curve An inverted yield occurs when yields for long-term bonds are lower than yields for short-term bonds. This occurs when investors want to lock in the current rates for the long-term because they expect rates to fall in the future. So demand for long-term bonds go up, driving their yields down. The opposite is true of short-term bonds. Investors don't want to invest in short term bonds because they believe that when the bonds mature, they will have to reinvest at lower rates. This causes demand for short-term bonds to drop and yields to rise. A flat yield curve exists when investors expect short-, medium-, and long-term bonds to all pay similar yields.

The term CLOSEST to the meaning of SMA in a margin account is A. Credit balance B. Purchasing power C. Debit balance D. Excess equity

D. Excess equity A special memorandum account (SMA) is closest to the idea of excess equity in the account, over and above the Reg T margin requirement. SMA differs slightly from excess equity in that SMA can be greater than (current) excess equity - it is equal to the highest amount of excess equity the margin account has experienced. It can be borrowed, or can be used to margin twice its amount of stock, as long as the equity value does not drop below the minimum maintenance requirement.

The document that describes the pertinent details of a municipal bond issue, including its pricing elements, is known as which of the following? A. Preliminary prospectus B. Prospectus C. Preliminary official statement D. Final official statement

D. Final official statement Municipal bonds are exempt from SEC registration, and thus they are not required to publish a prospectus. They must instead publish an official statement. The preliminary official statement describes the pertinent details of a municipal bond issue before its price and interest rates have been determined. Once the pricing elements have been decided, they are added to the preliminary official statement, and the new document is published as the final official statement.

Several months ago, you purchased a put option. The put had a strike price of $38 and a premium of $10. The stock is currently valued at $32. Which of the following is true of the option? I. It is out of the money II. It is in the money III. It has an intrinsic value of $6 IV. The option's time value is $6 A. I and III B. II and IV C. II only D. II and III

D. II and III A put option with a strike price greater than the stock's market price is said to be in the money. Intrinsic value is determined by subtracting market price from strike price (38 - 32 = 6), which is $6.

A customer has $10,000 to invest. His agent recommends that he invest $9,000 in State A's 529 plan and $1,000 in State B's 529 plan. Is this a violation? A. No, this is not a violation B. If State B's plan has a breakpoint at over $9000 and at less than or equal to $10,000, this is a violation C. Recommending that a customer split funds between multiple 529 plans is always a violation D. If State A's plan has a breakpoint at over $9000 and at less than or equal to $10,000, this is a violation

D. If State A's plan has a breakpoint at over $9000 and at less than or equal to $10,000, this is a violation Recommending that an investor purchase an amount just under a breakpoint is known as a breakpoint sale. In addition, recommending that a customer split funds between two essentially identical multiple 529 plans when a breakpoint was possible if they kept it in one fund is also considered a breakpoint sale. A breakpoint sale is a violation.

Sharing in a customer's profits or losses: Top of Form A. Does not require the approval of a principal B. Is called churning C. Is always prohibited D. Is allowed where the customer is an immediate family member

D. Is allowed where the customer is an immediate family member Broker-dealers and their associated persons generally may not share in a customer's profits or losses. Sharing in profits and losses is permitted, however, when the profit or loss is shared in proportion to the capital invested by each party and a principal approves of the arrangement. This proportionate requirement is removed if the associated person is an immediate family member of the customer. Excessive buying and selling in a customer's account chiefly to generate commissions that benefit the broker is called churning. Churning is strictly prohibited.

Which of the following statements about the FINRA's 5% rule is TRUE? A. It applies only to mark-ups or mark-downs B. It applies only to mark-downs C. It applies only to commissions D. It applies to commissions, mark-up, and markdowns

D. It applies to commissions, mark-up, and markdowns The 5% rule applies to commissions, mark-ups and mark-downs for both agency and principal transactions of nonexempt securities that are traded over-the-counter. Exemptions to the 5% rule may include any issue sold with a prospectus - such as new issues, mutual funds or direct participation programs (DPPs).

On a company's income statement, the subtotal that results from subtracting cost of goods sold and operating expenses from sales is: A. Gross profit B. Net income C. Retained earnings D. Operating profit

D. Operating profit An income statement is a document that summarizes a company's sales, expenses, and profits over a given period of time. The income statement starts with sales, also called revenues, which is the total amount of money taken in by the company. It then subtracts the company's various expenses, in a particular order, to arrive at the company's profits. Cost of goods sold (COGS) is the first expense to be subtracted from sales. COGS is the cost of producing the goods and services offered by the company, such as the cost of materials and labor. Gross profit is what remains after COGS has been subtracted. The next category of expenses to be subtracted is the operational expenses. These are the costs of running a business that are not directly related to the production of goods and services. The resulting figure is operating profit.

From an investor's perspective, which of the following is an advantage provided by a sinking fund? Top of Form A. Higher yield B. Reduced interest rate risk C. Reduced tax burden D. Reduced credit risk

D. Reduced credit risk A bond with a sinking fund provision requires the issuer to set money aside in an escrow account to ensure the repayment of principal. The maintenance of such a fund reduces credit risk and assures investors of repayment. Greater investor confidence results in greater marketability so a bond issue with a sinking fund provision typically has a higher credit rating and lower interest payments.

Which of the following is true when a municipal securities dealer makes a campaign contribution to a municipal official? A. The contribution will cause the dealer to lose its license B. The contribution cannot be in excess of $250 dollars C. The dealer cannot engage in any type of business with the official's municipality for at least two years following the contribution D. The dealer must disclose specific information related to the contributions

D. The dealer must disclose specific information related to the contributions The MSRB's 'pay to play' rule prohibits municipal securities broker-dealers from engaging in certain types of business with a municipality if they have made political contributions to an official of the municipality. However, it does not apply to all types of business activities. When triggered, the ban on business lasts two years from the date of the contribution. The rule also requires municipal securities broker-dealers to disclose specific information related to political contributions. Although the part of the rule known as the de minimis exception allows MFPs who are allowed to vote in an election to contribute up to $250 without triggering the ban, it is not true to say that no contribution in excess of $250 can be made. Contributions that exceed $250 will simply trigger the ban and are not necessarily prohibited. Finally, although violating the 'pay to play' rule causes a dealer to forfeit its ability to do business with a municipality for at least two years, it does not result in the loss of license.

Your customer owns stock mutual funds in an account with automatic reinvestment of dividends and capital gains. What happens to the value of his account on ex-dividend dates? A. The value of the account remains unchanged and the distribution is not a taxable event for him B. The value of the account grows by the amount of the distribution, and it is a taxable event for him C. The value of the account shrinks by the amount of the distribution D. The value of the account remains unchanged and the distribution is a taxable event for him

D. The value of the account remains unchanged and the distribution is a taxable event for him Upon distribution and reinvestment of dividends or capital gains, the customer ends up with more shares, and each share is worth slightly less. This is because the distribution lowers the NAV making each share worth less, but the customer has reinvested the distributions by purchasing more shares. The end result is that the value of the account is unchanged. The mutual fund company reports these distributions annually to the IRS, and they are treated as taxable income.

With regard to dividends, which of the following is true? A. They appear on the corporate income statement B. To be qualified, they must be paid at least annually C. They are taxed at a lower rate than interest income and capital gains D. They are paid after-tax by the corporation

D. They are paid after-tax by the corporation Dividends are a distribution to shareholders made out of a corporation's after-tax earnings. Earnings per share may be reported on the income statement but dividends are not reported on the income statement since they are an after-tax distribution, and, unlike interest expense, dividends are not tax -deductible. Dividends are taxed at either the investor's ordinary income tax rate or, if they are qualified, they are taxed at the investor's long-term capital gains rate. While interest income is taxed at the individual's ordinary income tax rate, no dividend is taxed at a rate lower than the long-term capital gains rate. In order to be "qualified," must meet several requirements including they must be issued by a US company or a "qualified foreign company" and the shares must have been held for more than 60 days including the stock's ex-dividend date. However, there is no frequency requirement for qualified dividends.

A broker-dealer selling municipal securities puts the following advertisement in the Oregonian. BUY OREGON MUNICIPAL BONDS BECAUSE THEY ARE TRIPLE TAX FREE FOR ALL RESIDENTS OF OREGON, WASHINGTON, AND CALIFORNIA. The broker-dealer did not file the advertisement with the MSRB. Which of the following statements are true? Choose the BEST answer. A. This ad would violate MSRB advertising rules because it has not been filed with the MSRB B. This ad would violate MSRB advertising rules because claims about taxation are forbidden C. This ad would be permitted D. This ad would violate MSRB advertising rules because its claims are false

D. This ad would violate MSRB advertising rules because its claims are false MSRB advertising rules state that advertisements related to the products a broker-dealer offers must not be materially false or misleading. Oregon municipal bonds will not be triple tax-free for residents and of Washington and California. Municipal Securities Advertisements do allow information about taxation and do not have to be filed with the MSRB.

Imagine an issuer sets up an escrow account for the purpose of paying off the principal and interest on a bond issue. When the account has enough funds in the account to pay off all the principal, interest payments and any call premium. The bond issue is said to be __________. A. refunded B. sunk C. advance refunded D. defeased

D. defeased When a bond issuer has enough funds in an escrow account (set up for the sole purpose of paying off the interest and principal of the bond issue) to pay off the issue's principal and interest, the bond issue is said to be defeased. This means that from an accounting perspective, the bond issue has been retired, and is removed from the books of the issuer. This process is called either defeasement or defeasance.

A feasibility study will be done prior to issuing a: A. moral obligation bond B. GO bond C. housing bond D. revenue bond

D. revenue bond For a revenue bond can be issued, a feasibility study will need to be conducted. A feasibility study is a study that evaluates all pertinent factors relating to the issuer's ability to generate revenue. The study must show that the issuer will most likely be able to meet its payment obligations from the revenue that is generated from the project.