Series 7 Par two Units 3-15

By regular or statutory voting procedures, a shareholder with 100 shares would be able to vote to fill seats for six directors in which of the following ways? A) 150 votes for any four candidates B) 300 votes for any two, none for the other four C) 100 votes for each of the six candidates D) 600 votes for any one director, no votes for the others

C Explanation With regulatory or statutory voting, the investor has one per share per vacant seat. In this case, this is 100 shares for each of the six open seats. Any of the choices would work for cumulative voting.

If a customer is long 10 ABC Jul 50 calls at 4.50, the contracts give the holder A) the right to sell stock. B) the obligation to buy stock. C) the obligation to sell stock. D) the right to buy stock.

D Explanation A long call gives the holder the right to buy stock.

A prospectus must be delivered to customers in the sale of all of the following transactions except A) mutual funds. B) new issues of registered common stock. C) unit investment trusts. D) exchange-traded funds (ETFs) trading in the secondary market.

D Explanation ETFs trading in the secondary market, like other securities that are already trading in the secondary market, do not require the delivery of a prospectus.

According to Municipal Securities Rulemaking Board (MSRB) rules, can a municipal securities representative give $50 crystal vases to 10 of his favorite clients? A) The representative is not allowed to give gifts to customers. B) He can, but only with written permission from the MSRB. C) No, the aggregate amount exceeds the permissible annual limit. D) Yes, he is permitted.

D Explanation If each gift meets the $100 annual gift limitation, then they are permitted.

If your customer bought an original issue discount bond from the Mount Vernon Port Authority, how is the discount on this bond taxed? A) Amortized during the life of the bond and not taxed B) As ordinary income C) As capital gains D) Accreted during the life of the bond and not taxed

D Explanation Under IRS rules, an owner of an original issue municipal discount bond must adjust the bond's cost basis by accreting the discount over the life of the bond. The accretion is not taxed.

XYZ Corporation has a market price of $45 per share and earnings per share (EPS) of $3 when XYZ announces a 3-for-1 split. After the split, the price-to-earnings (P/E) ratio of XYZ will be A) 15. B) 3. C) 5. D) 45.

A Explanation Before the split, the company had a P/E ratio of 15 ($45 per share / $3). After the split, the price per share and the EPS drop in the same proportion, leaving the P/E ratio unchanged (new price = $15, new EPS = $1).

Treasury STRIPS and Treasury receipts are quoted based on A) yield to maturity. B) amortization of premiums. C) 0.03125 (1/32 of a point in dollars). D) 0.125 (⅛ of a point in dollars).

A Explanation Noninterest-bearing securities, like zeroes, are quoted based on their yield to maturity. They are sold at a discount and mature at par.

The individual responsible for the overall supervision of all of a firm's options activities on behalf of its customers must be A) the financial and operations principal. B) a registered options principal (ROP). C) an office manager. D) the general securities principal.

B Explanation Any firm that transacts options trades will have a ROP to oversee trading and a ROP designated to carry the ultimate responsibility of supervision and ensure that options compliance procedures are followed.

If a corporation attaches warrants to a new issue of debt securities, which of the following would be a resulting benefit to the corporation? A) Increase in earnings per share B) Reduction of the debt securities' interest rate C) Dilution of shareholders' equity D) Reduction of the number of shares outstanding

B Explanation Usually, a warrant is issued along with a debt instrument, which is an enhancement that allows the issuer to offer a slightly lower interest rate.

Depletion allowances in oil and gas programs are based on the amount of oil A) sold. B) lost to shrinkage. C) in reserve. D) extracted.

A Explanation Depletion allowances are allowed to compensate for a mineral resource, which is considered accomplished when it is sold.

Your customer has experienced $7,500 in capital losses this year. He has realized $2,000 in capital gains and has $65,000 adjusted gross income. How much of his loss will he be able to carry forward to next year? A) $2,500 B) $4,500 C) $5,500 D) None

A Explanation He will first offset his $2,000 in capital gains, leaving $5,500 in losses. He next offsets $3,000 in adjusted gross income, leaving $2,500 in losses to carry forward to next year. Provided the loss is offset to the maximum each year, there is no limit to how long losses may be carried forward.

An investor owns 100 shares of IBM. Which of the following would make a long hedge? A) Buying a put on IBM B) Buying a call on IBM C) Writing a put D) Writing a call

A Explanation If you own the stock, you want the market value to rise. To hedge the position against a decrease in value, you would buy a put option.

A fund aims for consistent total returns. The management is empowered to shift assets among stocks, bonds, and short-term fixed-income securities in accordance with its projections of future market conditions. Because of its ability to diversify among many investment instruments, the fund has the potential to provide maximum returns while reducing volatility. This information describes which of the following mutual funds? A) ABC Stock Index Fund B) KPL Asset Allocation Fund C) ATF Capital Appreciation Fund D) KPL Government Income Fund

B Explanation Asset allocation funds shift assets among stocks, bonds, and short-term fixed-income securities in accordance with projections of future market conditions.

Which of the following insures general obligation bonds? A) Syndicate manager B) Securities Investors Protection Corporation (SIPC) C) Federal Deposit Insurance Corporation (FDIC) D) National Public Finance Guarantee Corp. and AMBAC

D Explanation Outstanding municipal general obligation bonds have been insured by the National Public Finance Guarantee Corp. and AMBAC. Insured bonds are typically AAA-implied rated. SIPC protects customer accounts against broker-dealer failure. The FDIC protects customer deposits against bank failure.

A customer is long 100 XYZ currently trading at $40 per share. To generate income, the customer writes 2 XYZ Aug 40 calls at 4 for a maximum loss potential of A) $3,600. B) $4,000. C) $3,200. D) unlimited.

D Explanation This is an example of ratio writing where a customer writes more calls than he has stock to cover. Because only one of the calls is covered, the other is uncovered, and loss potential is unlimited.

A planned amortization class (PAC) collateralized mortgage obligation (CMO) offers A) protection from extension risk only. B) protection from both prepayment and extension risk. C) protection from prepayment risk only. D) less protection than a targeted amortization class.

B Explanation A PAC offers protection from both prepayment and extension risk. This protection is greater than that offered by a targeted amortization class CMO, which protects against prepayment risk only.

If a customer buys a new issue municipal bond at a discount in the primary market, which of the following statements are true? The discount must be accreted. The discount may not be accreted. At maturity, there is a capital gain. At maturity, there is no capital gain. A) II and III B) I and IV C) I and III D) II and IV

B Explanation If a new issue municipal bond is bought at a discount in the primary market, the discount must be accreted. The accretion is considered interest income, and, as an original issue discount bond, is not taxable.

A customer buys 1 LMB Aug 70 put for 4 and 1 LMB Aug 70 call for 4. The customer will break even at $62 $66 $74 $78 A) I or III B) I or IV C) II or IV D) II or III

B Explanation To break even, the customer must recover $800 paid in premiums. On the long 70 call, this occurs if the market price rises to 78. On the long 70 put, this occurs if the market price falls to 62.

Which of the following statements regarding collateralized mortgage obligations (CMOs) is true? A) CMOs are considered high-yield bonds. B) CMOs may not trade at a premium. C) CMO returns are affected by interest rate changes. D) CMO earnings are tax exempt.

C Explanation CMOs, like other mortgage-backed securities, respond to changes in interest rates. When interest rates decline, certain CMO tranches are subject to prepayment risk. CMOs are corporate instruments, and their interest is taxable at all levels.

The primary asset in a tax-exempt bond fund would be A) short-term money market instruments. B) corporate bonds. C) common stock. D) municipal bonds.

D Explanation Bond funds will distribute taxable income or dividends unless invested in municipal bonds. Although dividend distributions from a municipal bond fund are tax exempt, capital gains distributions are fully taxable.

A corporation has a net income of $5.2 million after taxes. If 4 million shares of common stock are outstanding, the earnings per share (EPS) is A) $5.20. B) $1.78. C) $0.80. D) $1.30.

D Explanation Earnings per share equals net income (less preferred dividends) divided by the number of common shares outstanding. In this case, $5.2 million divided by 4 million equals an EPS of $1.30.

ABC Corporation owns stock in XYZ Corporation. What percentage of dividends paid by XYZ to ABC is taxable to ABC? A) 50% B) 65% C) 70% D) 100%

A Explanation The corporate dividend exclusion permits a corporation receiving dividends from another corporation to exclude 50% of those payments. Therefore, the corporation will only pay tax on the remaining 50%. This exclusion applies only to dividends, not interest.

One of your customers might buy a call option for all of the following reasons except A) deferring a stock buying decision. B) diversifying an investor's holdings. C) protecting an existing long stock position. D) protecting an existing short stock position.

C Explanation Buying a call will not protect a long stock position because a long call is a bullish strategy just as is a long position in a stock. Protection comes from buying an option with the opposite strategy, such as a long put. Buying a call is the strongest upside protection for a short stock position. A long call allows an investor to defer buying a stock by locking in the purchase price for up to nine months. Buying calls instead of buying their underlying stocks is also a strong diversification tool because it allows the investor to control many stocks in many different industries with a small outlay of funds.

After opening a new account, how many days does a firm have to provide the customer with a copy of the account record? A) 60 B) 45 C) 30 D) 90

C Explanation Member firms must provide new customers with a copy of the account record (new account form) within 30 days of opening the account; this ensures that the information the firm has on file is accurate.

A shareholder invested in a mutual fund and has signed a letter of intent to invest $25,000. Her original investment was $13,000, and her current account value is $17,000. For her to complete the letter, she must deposit A) $13,000. B) $27,000. C) $8,000. D) $12,000.

D Explanation Under a letter of intent, the full contribution is required for the letter to be completed. Appreciation is not considered.

Which of the following statements regarding warrants is true? A) Warrants are safer than corporate bonds. B) Warrants' terms are generally shorter than rights' terms. C) Warrants give the holder a perpetual interest in the issuer's stock. D) Warrants are often issued with other securities to make the offering more attractive.

D Explanation Warrants are generally issued with bond offerings to make the bonds more attractive. Warrants are long-term options to buy stock, and because they are equity securities, warrants, as investments, are considered less safe than bonds.

Which of the following option strategies, besides going long a call, can be used to purchase stock below its current market value? A) Short put B) Short straddle C) Short call D) Long put

A Explanation If the put is exercised by the owner, the writer of the put will be obligated to purchase the stock. The cost of the stock is reduced by the amount of premium taken in when the put was written, allowing the investor to purchase the stock at a net cost lower than the stock's current market value.

Treasury Inflation Protection Securities (TIPS) offer which of the following benefits to an investor? Semiannual adjustments to principal based on the Consumer Price Index (CPI) A guarantee of profit upon sale Interest payments that keep pace with inflation Provide investors with an income they can't outlive A) II and III B) I and III C) I and II D) III and IV

B Explanation TIPS are issued by the government and designed to offer investors inflation protection by adjusting the principal of the TIPS semiannually based on the CPI. In times of inflation, the interest payments increase, and they decrease during times of deflation. No security guarantees a profit upon sale, and only an annuity can guarantee an income for life.

Benefits of a municipal bond advance refunding include A) a decrease to the issuer's current interest cost. B) tax savings. C) a higher rating and greater marketability. D) a higher rating and lower coupon rate.

C Explanation Advance or prerefunding is refinancing an existing municipal bond issue before its maturity or call date by using money from the sale of a new bond issue. Because the proceeds of the new issue are placed into special U.S. government securities, the rating is automatically at the top. The higher rating increases the marketability. The current bond still exists until the specified call date. As such, the coupon has not changed. There are no taxes to be saved.

Your client's investment portfolio is 50% growth stocks, 10% foreign stocks, and 40% blue-chip stocks. If the client is interested in further diversification, which mutual fund would best meet that goal? A) Emerging market fund B) Aggressive growth fund C) Bond fund D) Global equity fund

C Explanation All of the current holdings are equities. To further diversify the current portfolio, the bond fund would be the best choice of those given to meet this objective.

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

D Explanation If more than 10% of a bond's proceeds go to private entities, the interest on the bond is a tax preference item for AMT purposes.

An investor, age 57, wants to amend an existing portfolio to have a greater percentage be in fixed-income (debt) instruments. Current market sentiment is that interest rates are very high and likely to begin contracting soon. The investor agrees and asks for your thoughts regarding what those debt instruments might be. The most suitably aligned with the market sentiment would be A) variable-rate municipal bonds. B) callable corporate bonds. C) money market fund. D) noncallable corporate bonds.

D Explanation If one anticipates that interest rates will be falling, noncallable bonds would be better, as there is no risk of them being called and you can continue to earn the higher rate the bonds were issued with. Anything with a variable rate will have the interest payable adjusted to align with current rates, and therefore, would not desirable when rates are falling. Money market funds are not debt instruments, and again, the returns they pay reflect trending interest rates.

A municipality has prerefunded its bond issue maturing in five years. This would mean all of the following except A) greater marketability. B) a higher rating. C) the bonds will be called in more than 90 days. D) a reduction to the coupon rate.

D Explanation The current bond still exists until the specified call date. As such, the coupon has not changed. Advance or prerefunding is refinancing an existing municipal bond issue before its maturity or call date by using money from the sale of a new bond issue. Because the proceeds of the new issue are placed into special U.S. government securities, the rating is automatically at the top. The higher rating increases the marketability. If the refunding is done in 90 days or less, it is called current refunding.

An investor in which of the following products may not receive dividends? A) Shares of common stock B) Units in a UIT C) Shares of preferred stock D) Oil and gas limited partnership interests

D Explanation The structure of a limited partnership does not allow for the payment of dividends. If there is income, it flows through to the investor, but it is not considered a dividend. Common stock can pay dividends and preferred stock is purchased for its dividend payout. UITs pay dividends in a manner similar to mutual funds.

Lambda Corporation has received a donation of 100,000 shares of its common stock from the spouse of the deceased founder of the company. This would appear on the company's books as A) reacquired stock. B) authorized, but unissued stock. C) unissued stock. D) treasury stock.

D Explanation When a corporation reacquires shares of outstanding stock, whether through open market purchase or, as in this case, donation, the stock is treasury stock.

The term high-yield bond would apply to a bond with a Moody's rating of A) Ba. B) Baa. C) BB. D) BBB.

A Explanation High-yield bonds are those whose ratings fall below investment grade. Investment grade is the top four. Using Moody's descriptions, ratings run from Aaa to Aa to A to Baa to Ba to B and then below. The first rating below the top four is Ba. That is equivalent to a BB rating from Standard & Poor's (but the question asks specifically about Moody's).

One of your customers exercises a put option. The stock is in the customer's account and your firm makes timely delivery. The proceeds from the sale of the stock will be paid to your firm by A) the broker-dealer to whom the exercise notice was assigned. B) the exchange where the option exercise took place. C) the OCC. D) the writer to whom the exercise notice was assigned.

A Explanation Look at this as a regular buy and sell. When the customer exercises the put, it is a sale of stock. When customers of member firms sell stock, those firms collect the sales proceeds from the contra party (the other member firm representing the buyer). The OCC assigns the exercise to a member firm that is then responsible for paying the broker-dealer representing the seller of the stock.

A customer purchases a municipal bond that has been advance refunded. It will be called at 102 four years from now. On the confirmation, the yield that must be stated is the yield to A) the 102 call. B) maturity. C) maturity or yield to call, whichever is higher. D) maturity or yield to call, whichever is lower.

A Explanation Municipal Securities Rulemaking Board rules require that when a call date has been fixed by a prerefunding, the resulting yield to call must be reflected on the confirmation. Because of the prerefunding, this bond issue will be called at the call date. There is no uncertainty surrounding this event; therefore, it is appropriate to price the bond to the call date. The original maturity on the bond has no further significance.

If XYZ Corporation sells an additional 1 million common stock with a par value of $1 for $10 per share, which of the following is true? A) Its paid-in surplus will increase. B) Its earnings per share will increase. C) Its liquidity ratio will decrease. D) The current ratio will decrease.

A Explanation Paid-in surplus is a balance sheet entry that accounts for money raised from the issuance of stock in excess of par value. When more shares are sold, paid-in surplus will increase.

Your customer wishes to invest in a security that will pay a specific level of dividends, but may also receive additional dividend amounts, should the underlying company have outstanding performance. Which of the following securities would best match this customer's objectives? A) Participating preferred stock B) Convertible preferred stock C) Cumulative preferred stock D) Class A common stock

A Explanation Participating preferred stock provides a stated dividend amount (as a percentage of par value) plus the opportunity to receive additional dividends, based on predetermined conditions, such as the profitability level of the underlying company. Although the convertible stock offers the possibility of capital appreciation due to its linkage to the common stock, that has no effect on the dividend.

Most exchange-traded funds (ETFs) are structured as open-end investment companies. However, they should not be confused with mutual funds. Among the differences between the two is that ETFs A) are traded in the secondary markets. B) compute their NAV hourly. C) can issued preferred stock. D) track indexes.

A Explanation The ET in ETF stands for exchange-traded (not the movie character). That is a solid hint that these trade on the exchanges. Stock exchanges are secondary markets. Because mutual funds are always part of a continuous new issue, their sale takes place in the primary market. Redemptions are back through the fund, not on any securities marketplace. There are mutual funds that track indexes just as ETFs do. Both compute their NAV as of the 4 pm close of the markets. No open-end investment company can issue preferred stock.

Several years ago, a client purchased 1,000 shares of RADAK common stock at $50 per share. Today, the stock is selling for $100 per share and the investor is nervous about the future for the market. An order is turned in to sell 10 RADAK 105 calls at a premium of 2 and buy 10 RADAK 95 puts at a premium of 2. This strategy is A) a cashless collar. B) exposing the investor to potential unlimited loss. C) a diagonal. D) a combination.

A Explanation The answer is a cashless collar. It is cashless is because the calls are sold for 2 and the puts bought for 2. That means no out-of-pocket cash. The investor has "put a collar" on the long position in the stock by selling an out-of-the-money call and buying an out-of-the-money put. If the option purchase was more expensive than the one sold, it is still a collar, but not cashless because the investor would have to come up with the difference. For example, if the cost of the put was 3 while the proceeds from the call was 2, the client's cost would be one point to establish the collar. The exam will want you to know that collars (cashless or not) are used to protect an existing profit.

A customer opens the following options position: Long 1 KALE Oct 70 put @4¼; short 1 KALE Oct 80 put @10. What is the customer's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $575; maximum loss is $425; breakeven point is $74.25. B) Maximum gain is $425; maximum loss is $575; breakeven point is $75.75. C) Maximum gain is $575; maximum loss is $425; breakeven point is $75.75. D) Maximum gain is $425; maximum loss is $575; breakeven point is $74.25.

A Explanation The first step is to identify the position. This is a credit put spread. It is a credit spread because the option sold brought in a higher premium than the one purchased. The credit of $575 is the most the investor can make. This is a bullish spread (the customer bought the low strike price and sold the high strike price). If the customer is correct and the stock rises above $80, the options will expire unexercised and the customer will keep that net credit of $575. If the customer is wrong and the price of the KALE stock falls below $70, the short put at 80 will be exercised, causing the customer to purchase the stock at $80. Then, the customer will exercise the long 70 put and sell that stock at $70. This results in a loss of $1,000 reduced by the $575 net credit, or $425 maximum loss. It is always easier to recognize that the maximum loss is the difference in strike prices minus the maximum profit. In this question, the spread is 10 points and the maximum profit is the credit of 5¾ points. That makes the maximum loss the remaining 4¼ points. Breakeven follows the put-down rule. Subtract the net premium from the higher strike price ($80 - 5.75 = $74.25).

A customer goes long 1 ABC June 40 call at 4 when buying the option in their account on Tuesday, April 4. When is the settlement date and what is the amount due? A) Wednesday, April 5; $400 B) Wednesday, April 5; $4,000 C) Thursday, April 6; $40 D) Tuesday, April 4; $4,000

A Explanation The settlement date for an option trade is T+1 business day, meaning this trade will settle on Wednesday, April 5. On that day, the buyer of the option must have the funds to pay the premium in the options account. The premium per share is $4. Premium times contract size (100 shares) is the amount the buyer will pay, and the amount the seller will receive ($4 times 100 = $400). If the buyer of the call exercised the option, they would buy 100 shares of ABC stock for the exercise price (strike price) of $40 and so would buy the stock for $4,000. Regular way settlement on the stock trade when exercised would be T+2 business days.

When a bond is issued by a national government, it is referred to as A) sovereign debt. B) high-quality debt. C) national debt. D) treasury debt.

A Explanation The term sovereign debt applies to securities issued by national governments. U.S. Treasuries are an example of sovereign debt issued here. Other countries have their versions, such as the Gilts of the United Kingdom. These are not considered alternative investments. Alternative investments are structured products that are complex and not easy to understand. Two of the most popular structured products are the ELNs and the ETNs.

There are risks inherent in any investment. One risk that index ETFs have that should be used to guide the investor's selection decision is A) regulatory risk. B) tracking risk. C) market risk. D) tax risk.

B Explanation Any investment that attempts to track an index or other benchmark needs to be evaluated in terms of its tracking error. That is, how close does the performance of the portfolio, in our question the EFT, match up to that of the index? This tracking error or risk will, over the long run, cause the performance of ETFs tracking the same index to have differing results. Because the portfolios are essentially the same, the market risk of all ETFs tracking the same index will be the same. That should be true of the tax and regulatory concerns as well. All things being equal, an investor should want the ETF that has the least tracking error.

One of your customers is in the highest income tax bracket. The customer is looking to invest $250,000 into mutual funds with an objective of receiving income with relative safety. Which of the following funds should you recommend to meet that objective? A) A U.S. Treasury bond fund B) A municipal bond fund C) A money market fund D) A corporate bond fund

B Explanation At least for purposes of selecting the correct answer on the exam, whenever you see high tax bracket, the choice is going to be municipal bonds. Because those bonds pay tax-free interest, they are highly attractive to those in high tax brackets. Even though the mutual fund is paying a dividend, the IRS treats the dividends from a bond fund the same as the interest paid by the individual bonds in the portfolio. Therefore, the dividends paid by a municipal bond fund carry tax-free treatment. Dividends paid by all the others are taxable. If the question had said the highest safety, then it would have been the U.S. Treasury bonds, but that would never be the question when a high tax bracket is in the question.

An investor holding a broad-based diversified portfolio of stocks feels that the market, which has slowed recently, may be poised for a brief fall before it continues an upward trend long term. The investor does not want to incur the cost of selling a portion of their holdings or assume the risk of mistiming the market. A possible strategy would be to A) sell an index put option. B) buy an index put option. C) buy an index call option. D) sell an index call option.

B Explanation By not liquidating, the client can benefit if the market increases. Because the portfolio is broad-based and diversified, it should move with the market. An index option also moves with the market, and therefore, would be a good hedge vehicle. A long put should be used because it will increase in value if the market should decline.

An investor in a limited partnership generating passive losses can offset these against passive income from other partnerships. rental income from direct investments in real estate. dividends received from listed securities. capital gains from the sale of unlisted securities. A) I and III B) I and II C) II and III D) III and IV

B Explanation Passive losses can be deducted from passive income and income from certain real estate investments; it cannot be deducted from active or portfolio (investment) income.

A customer purchased 10 municipal original issue discount (OID) bonds at 92. If he holds them to maturity, he will be federally taxed on which of the following? A) $8,000 B) $0 C) $800 D) $80

B Explanation The key here is OID. The discount on OID bonds is considered interest. A municipal bond interest is tax free. Therefore, the profit realized from the difference between the discounted purchase price and the redemption price at maturity is also considered tax free at the federal level. If the owner lives in the state within which the bonds are issued, they will be state and local tax free as well.

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

B Explanation The liquidation order is as follows: secured debt holders, unsecured debt holders (including general creditors), holders of subordinated bonds, preferred stockholders, and common stockholders.

A confirmation to a customer purchasing a new issue of bonds must disclose all of the following except A) coupon rate and maturity date. B) current yield. C) settlement date. D) customer's name.

B Explanation To conform with industry rules, confirmations must include the customer's name, trade and settlement dates, coupon rate and maturity, and the yield to maturity or yield to call (whichever is lower). The current yield (annual interest / current market price) is not included on confirmations.

Advertisements for the Abstemious Balanced Fund (ABF) describe the investment as a no-load fund. In order to make this claim, the fund must A) not have a 12b-1 charge in excess of 0.75% B) not have a conditional deferred sales charge C) not have a front-end load in excess of 0.10% D) have its first breakpoint no higher than $10,000

B Explanation When a fund promotes itself as a no-load fund, not only must there be no front-end load, there cannot be a back-end load (CDSC) either. The 12b-1 charge maximum is 0.25%. The concept of breakpoints applies solely to Class A shares (front-end load).

An investor in a high-income tax bracket owns a number of municipal bonds and wants to add some to a 401(k) plan he participates in and perhaps his IRA. As a registered representative, you would advise that this is A) suitable due to his high-income tax bracket. B) not suitable because the interest payments from municipal bonds are tax free already and have no place in a tax-advantaged (tax-deferred) account such as a 401(k) plan or IRA. C) not suitable because the investor already owns municipal bonds, and this would be a duplication of the same asset class in his tax-advantaged accounts. D) suitable because the investor already understands the advantages of owning tax-free interest paying instruments without any further suitability qualifications needed.

B Explanation While municipal bonds can be suitable for those in higher income tax brackets, they have no place in tax-advantaged (tax-deferred) accounts such as 401(k) plans or IRAs because the interest paid is already tax free.

An investor opens the following options position: Long 1 KAP Jul 50 call @ 4½ and short 1 KAP Jul 45 call @8¼. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain = $125; maximum loss = $375; breakeven point = $46.25. B) Maximum gain = $125; maximum loss = $375; breakeven point = $48.75. C) Maximum gain = $375; maximum loss = $125; breakeven point = $48.75. D) Maximum gain = $375; maximum loss = $125; breakeven point = $46.25.

C Explanation The first step is to identify the position. This is a credit call spread. It is a credit spread because the option sold brought in a higher premium than the one purchased. The credit of $375 is the most the investor can make. This is a bear call spread. We know that because the investor purchased the option with the higher strike price and sold the one with the lower strike price. The goal is for the stock's price to decline to the point where neither option is expired. That way, the investor keeps the net credit. If the market does not cooperate and the stock rises above $50 per share, the 45 call will be exercised and the investor will be required to sell the stock for $4,500. However, the stock needed for delivery can be obtained by exercising the long position for $5,000. This results in a loss of $500. When the $375 credit received is taken into consideration, the loss of $500 is reduced by the $375 premium, resulting in a maximum loss of $125. The quick way to do this is to subtract the net premium (the $375 credit) from the difference in strike prices (5 points) and the result is the same $125 loss. Breakeven follows the call-up rule; add the net credit to the lower strike price and that is $3.75 + $45 = $48.75.

If an investor watches the latest T-bill auction fall to 4.71% from 4.82%, the best interpretation is that A) the decline in yields indicates the Federal Reserve Board has raised the discount rate. B) the federal funds rate and other short-term interest rate indicators are probably rising. C) investors who purchased bills at this auction paid more for them than purchasers last week. D) investors who purchased T-bills 12 weeks ago paid less than subsequent purchasers.

C Explanation The rates on the T-bills fell, so prices rose, and the investor paid more for the bills this week than last week. The decline in yields indicates there was good demand for the securities because the price rose, driving the yields down. The question does not indicate the price of T-bills 12 weeks ago; it is unclear if the investor paid less for the T-bills then. The federal funds rate and other short-term interest rates would decline—not rise—in line with those of T-bills.

A broker-dealer registered with the SEC for 10 years would be required to have on file A) copies of bank statements and canceled checks for the past seven years. B) copies of all communications sent to customers since the firm started its business. C) its charter or articles of incorporation. D) customer order memorandums from the first three years.

C Explanation The retention requirement for articles of incorporation and corporate charters is the life of the firm. The retention requirement for customer communications, bank statements, and canceled checks is three years. In general, if you see the term blotter or ledger, it will be a six-year retention requirement. The "odd man out," so to speak, is customer complaints. Those have a four-year retention requirement.

An investor holds 3,000 shares of a stock with a current market value of $12 per share. After a 1:6 stock split, the investor's position will be A) 15,000 shares with a market value of $2.40 per share. B) 500 shares with a market value of $2.40 per share. C) 500 shares with a market value of $72 per share. D) 15,000 shares with a market value of $12 per share.

C Explanation This is an example of a reverse split. For each share owned, the investor will now have 1/6 of a share. That turns 3,000 shares into 500. At the same time, the market price per share will increase approximately by a factor of six. The key to any stock split question is that the total value of the account remains the same. Presplit, it was 3,000 × $12 = $36,000 and postsplit it is 500 × $72 = $36,000.

When a municipality is allocating funds from a revenue-producing facility under a net revenue pledge, the first priority is to A) pay debt service, including principal and interest. B) accumulate a surplus for facility expansion. C) pay operations and maintenance. D) establish a reserve for bond retirement.

C Explanation Under a net revenue pledge, operations and maintenance are paid first, with debt service following. In a gross revenue pledge, debt service is paid before operations and maintenance. Net revenue pledges are the more common of the two.

As a registered representative, you often have customers who are interested in learning about derivative products such as options and different derivative strategies. Of the following customer profiles, which would writing calls be considered least suitable for? A) Roald and Katy Johnson, both young professionals with a combined annual income of $80,000. Both making small annual IRA contributions and participating in company-sponsored 401(k) plans. Katy will also be eligible for pension plan payments after retirement several years away. Current savings total $25,000, and their joint investment account objective is growth. B) Chanice, age 41, able to add to her savings each month after living expenses from her monthly income. Currently building retirement account balances in an IRA and company-sponsored 401(k) plan. Recently investing in an income-producing vacation property. Her savings outside of retirement accounts currently total $70,000. Growth is listed on her investment account as her objective. C) Bernard and Judy Jones, both retired, covering monthly expenses with their Social Security and annual mandatory IRA withdrawals. Savings outside of retirement accounts total $25,000. Income is the investment objective listed on the account. D) DeMarcus, a small business owner nearing the sale of his business to take an early retirement at age 52. A lump-sum annuity has been in place in anticipation of the early retirement, and the business sale proceeds will be more than adequate for his early anticipated living expenses. Current savings total $55,000, and his investment account objective is growth.

C Explanation While these profiles offer some guidance, and any of them could be considered incomplete to some extent, the one for whom writing calls would be considered the least suitable is the retired joint account of Bernard and Judy Jones. Factors to note would be the nominal total savings and that both are in retirement, needing Social Security and mandatory IRA withdrawals to meet current living expenses. Consider that while writing calls brings income into an account, it is a strategy that is high in risk with an unlimited maximum loss potential—not suitable for a retired couple in their position.

Which of the following statements regarding collateralized mortgage obligations (CMO) investors are true? They have interest rate risk. They do not have interest rate risk. They have little or no risk exposure. They can be exposed to extension and prepayment risk. A) I and III B) II and III C) II and IV D) I and IV

D Explanation CMOs are backed by mortgages. All mortgage-backed securities are subject to interest rate risk. If rates rise, extended maturity risk exists, which means the actual life of the underlying mortgage will be longer than the expected life. If rates fall, prepayment risk exists, which means mortgage holders will likely refinance their existing mortgages. As a result, the actual life of the underlying mortgages will be shorter than the expected life.

An investment adviser representative may describe dollar cost averaging to a customer as A) a form of a mutual fund withdrawal plan. B) a means of purchasing more shares when share prices are high. C) a program for investing that will ensure profits even in a declining market. D) a funding technique that will cause the average cost per share to be less than the average price per share.

D Explanation Dollar cost averaging is beneficial to the client because it achieves an average cost per share that is less than the average price per share over time. Using a fixed dollar amount each investment period, it enables the investor to purchase more shares when prices are lower and fewer shares when prices are higher. While dollar cost averaging does not ensure profits in any market or ensure against losses, it is an economical and convenient method for acquiring shares.

A registered representative is interviewing a new customer, age 27. The customer wants to list capital appreciation as the primary investment objective for the account and is willing to take a moderate degree of risk at this time in her life. The customer also notes concern about inflation and how it will impact her portfolio over time. Which of the following investments is the most suitable recommendation? A) Long-term government bonds B) Municipal debt securities C) Corporate debt securities D) Equities such as common and preferred stock

D Explanation Equities would be the most appropriate investment, given the customer's age, capital appreciation investment objective, and willingness to accept moderate risk. The remaining answer choices, each with varying risk characteristics, are not likely to meet the capital appreciation objective.

Which of the following brokerage records must be kept for six years? A) Articles of incorporation or partnership agreements B) Customer correspondence and order tickets C) Bank statements and trial balances D) Blotters and general ledgers

D Explanation Five main brokerage records must be retained for six years: blotters, general ledgers, customer ledgers, stock records, and customer account records. Articles of incorporation are lifetime and the other two choices have a 3-year retention requirement.

Which of the following statements regarding fixed municipal unit trusts are true? The trust is managed. The trust is not managed. The portfolio can be traded. The portfolio cannot be traded. A) II and III B) I and IV C) I and III D) II and IV

D Explanation Fixed unit trusts are not managed; the portfolio of securities does not change. As bonds mature or are called, the proceeds are distributed pro rata to the unit holders. These units are redeemable by the issuer or its agent.

A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. How is the distribution taxed? The entire amount is taxed as ordinary income. The growth portion is taxed as ordinary income. The growth portion is taxed as a capital gain. The growth portion is subject to a 10% penalty. A) II and III B) I and IV C) III and IV D) II and IV

D Explanation On withdrawals from a nonqualified annuity, taxes are paid only on the amount that exceeds cost basis (the amount paid into the annuity). In this case, the investor is taking a lump-sum distribution before reaching age 59½ and must pay an additional 10% penalty on the taxable amount.

The price paid for a listed REIT is most similar to the pricing of A) a real estate limited partnership. B) an open-end investment management company. C) a collateralized mortgage obligation. D) a closed-end investment management company.

D Explanation Pricing of a listed REIT (real estate investment trust) is based on supply and demand. In this respect, they trade similarly to a closed-end investment management company. Open-end investment management companies are mutual funds and their pricing is based on the net asset value as computed daily. On the exam, unless stated otherwise, all real estate limited partnership offerings are offered through private placements. This means that they are not publicly traded and have limited liquidity.

If LEAPS options positions are maintained for more than 12 months, which of the following statements are true? The LEAPS writer's gains are taxed as short-term gains. The LEAPS writer's gains are taxed as long-term gains. The LEAPS buyer's gains are taxed as short-term gains. The LEAPS buyer's gains are taxed as long-term gains. A) I and III B) II and IV C) II and III D) I and IV

D Explanation The LEAPS writer's premium is taxed as a short-term gain. The LEAPS buyer took a position for longer than 12 months, so any profits are considered long-term capital gains. The writer's gain is short term because by opening with a sale, a holding period is never established.

An investor opens the following positions: Sell short 100 shares of BAF @61; short 1 BAF Sep 60 put @3¼. What is the customer's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $325; maximum loss is unlimited; breakeven point is $57.75. B) Maximum gain is $5,775; maximum loss is $425; breakeven point is $64.25. C) Maximum gain is $425; maximum loss is $5,775; breakeven point is $57.75. D) Maximum gain is $425; maximum loss is unlimited; breakeven point is $64.25.

D Explanation The first step is to identify the position. This is a short sale of stock and a sale of a put option. The sale of the put provides some income and offers protection only to the extent of the premium. Short sellers want the stock's price to decline. They lose when it rises. The investor has received $6,425 ($6,100 from the sale of the stock and $325 from the sale of the option). That makes the breakeven point $64.25 per share. Once the price of the BAF stock goes above that, the investor loses money. Because there is no limit as to how high the stock's price can go, the maximum loss is unlimited. If, on the other hand, the stock's price declines into the 50s or lower, the owner of the 60 put will exercise and our investor will pay $6,000 to purchase the stock. That stock will be used to cover the short sale. That means the investor sold the stock (short) at $61 and bought it back at $60 for a gain of $100. At that point, the investor's profit is the $300 from the premium on the sale of the put plus the $100 gain (the difference between 61 and 60). That is why the maximum gain is $425. Why doesn't the breakeven follow the "put-down" rule? That rule applies when the only positions are options. Once there is a long or short stock position along with an option position, it is the stock controlling the breakeven.

With the market price of Lepidoptera Corporation trading at $40 in June, an options trader purchases a JUL 30 call for $1,100, writes two JUL 40 calls for $400 each, and purchases another JUL 50 call for $100. This strategy is called A) a long double straddle. B) a strangle. C) a long double combination. D) a long call butterfly spread.

D Explanation This position is a butterfly spread. Technically, it is a long call butterfly spread because all the options are calls and the two short positions are at-the-money. Why the term butterfly? If you drew this on a graph, you would see the two options at 40 in the center with the 30 and the 50 on either side making it resemble a butterfly with the body and two wings. Will that be tested? No, but you might see butterfly as an incorrect answer to another options question. Here is something you should be able to do: What is the investor's maximum loss? The two long options cost $1,200 and the two short options bring in $800. That means a net debit of $400, and that debit is the maximum loss.

A registered representative of a FINRA member firm has developed a LinkedIn friendship with a registered investment adviser. This has resulted in the investment adviser directing transactions for many of their clients to this representative's broker-dealer. The broker-dealer is promoting an all-day seminar with presentations to be delivered by a number of outstanding economists and securities analysts. The seminar location is in a hotel ballroom down the street from the member firm's office. The firm has invited the investment adviser to attend as its guest. That location requires the adviser to fly in the night before and stay at the hotel. As the broker-dealer's guest, which of the following expenses are reimbursable by the broker-dealer without violating the safe harbor provisions of Section 28(e)? A) The travel expenses, but not the registration fee B) The registration fees for the seminar plus the hotel room for the night C) The registration fees for the seminar plus all of the travel expenses D) The registration fees for the seminar

D Explanation Under the safe harbor provisions of Section 28(e) of the Securities Exchange Act of 1934, broker-dealers are permitted to extend seminar invitations to investment advisers with whom they do or hope to do business. The only expense reimbursable by the broker-dealer is the fee to attend the seminar.

One of the advantages of writing a call option covered by shares of the underlying stock is A) the investor retains all of the upside potential. B) the investor has protected most of the downside risk. C) the underlying stock can be purchased on margin. D) immediate income is generated.

D Explanation When an investor writes a call option and owns the underlying shares, the premium is credited to the account on the next business day (T+1). For this benefit, the investor has given up most of the upside potential because once the stock rises above the exercise price, it will likely be called away. That places a limit on the upside potential. There is downside protection, but it is limited to the extent of the premium received. The underlying stock can be purchased on margin, regardless of writing the call.

Which of the following is true regarding a 5-for-4 stock split? A) The net worth of the company will be reduced. B) The par value will be unchanged. C) Each shareholder's proportionate equity will be unchanged. D) Retained earnings will be increased.

C Explanation Because each shareholder will receive additional stock, the proportional equity will remain the same.

Which of the following is not a money market instrument? A) Commercial paper B) Treasury bills C) Newly issued Treasury notes D) Banker's acceptances

C Explanation Commercial paper, Treasury bills, and banker's acceptances are debt instruments with maturities of one year or less, and therefore, are money market instruments. A newly issued Treasury note would have a maturity of 2-10 years, and therefore, would not be a money market instrument.

If a customer buys 1 ABC Jan 60 put at 6 and writes 1 ABC Jan 75 put at 13, the maximum loss is A) $1,500. B) $700. C) $800. D) $900.

C Explanation This is a credit spread. (More premium was received than was paid.) The maximum gain to a seller is the premium received (net credit of 7). In a spread, the maximum gain plus the maximum loss equals the difference in strike prices (75 − 60 = 15). Therefore, 15 minus the maximum gain of 7 equals the maximum loss of 8 multiplied by $100, or $800.

An American depository receipt (ADR) is used to A) facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States. B) finance foreign trade in which U.S. citizens are engaged. C) facilitate trading U.S. securities in foreign markets by U.S. citizens living abroad. D) sweeten a bond offering.

A Explanation ADRs make trading in foreign securities easier in U.S. markets for U.S. investors.

One of your customers called you with the good news that they are new grandparents. They are looking for a way to provide funds for the new child's college education and would like some kind of tax break if possible. What would be the most suitable suggestion? A) Start a Section 529 plan for the child B) Start an IRA in the child's name and make annual contributions on the child's behalf. C) Donate money to an UTMA account naming the child's parent as custodian D) Purchase zero-coupon bonds maturing in 18-20 years

A Explanation Among the many benefits of the Section 529 plan is that all earnings between now and withdrawal can be tax free when used for qualified expenses. In addition, if the grandparents have a substantial estate, they can contribute up to $75,000 ($150,000 if a joint gift) without any gift tax ramifications. The income from an UTMA account is taxable in the year received. The annual accretion is taxable on the zero-coupon bonds. Although it is true that the child's income from the investments may be below the taxable threshold today, in the later years that might not be the case. IRAs can only be funded from earned income, not gifts.

An investor writes an EFG Dec 85 put for 4¾ points. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain = $475; maximum loss = $8,025; breakeven point = $80.25 per share. B) Maximum gain = $475; maximum loss = $8,025; breakeven point = $89.25 per share. C) Maximum gain = $8,025; maximum loss = $475; breakeven point = $80.25 per share. D) Maximum gain = $475, maximum loss is unlimited; breakeven point = $80.25 per share.

A Explanation An option writer's maximum gain is generally limited to the premium (the credit to the account) received. In this case, that is 4¾ points or $475. To determine maximum loss, first think what strategy a put writer is following. Short puts are neutral to bullish! The investor will therefore lose when the market is bearish in the extreme, reaching zero. The maximum loss is the entire difference between the strike price and zero, offset (reduced) by the premium received (strike price minus premium). Breakeven follows the put-down rule. Subtract the $475 premium from the $85 strike price to get $80.25.

If a U.S. corporation wishes to issue eurodollar bonds, which of the following statements are true? The corporation will be subject to currency risk. The corporation will not be subject to currency risk. The issue must be filed with the SEC. The issue need not be filed with the SEC. A) II and IV B) I and IV C) I and III D) II and III

A Explanation Because eurodollar bonds are denominated in U.S. dollars, a U.S. corporate issuer will not be subject to foreign exchange risk, regardless of the country of issuance. In addition, because the bonds are issued outside the United States, the issue is not registered with the SEC.

Before issuing a revenue bond, an issuer will engage various consultants to prepare a report detailing the need for a particular project. This is generally called A) the feasibility study. B) the consultant's report. C) the economic study. D) the revenue report.

A Explanation Because most revenue bonds depend on cash flow from a facility or project, a feasibility study is done to determine its justification.

All of the following may receive breakpoint discounts except A) an investment club. B) a husband and wife in a joint account. C) a pension plan trustee. D) an investor in an individual retirement account.

A Explanation Breakpoints are not available to investment clubs.

All of the following records must be retained for 3 years except A) customer statements. B) fingerprint cards for terminated personnel. C) copies of retail communication. D) audio tapes of orders handled by the trading room.

A Explanation Customer statements must be retained for 6 years. The other choices are all 3-year records.

Most investment professionals believe that a diversified portfolio is the best choice for the typical investor. Diversifying a portfolio can be accomplished by doing all of the following except A) buying securities from different broker-dealers. B) selecting securities of companies in different industries. C) including securities from different parts of the country. D) buying securities with varying maturities.

A Explanation Diversification by maturity, by industry, and by geography are all accepted methods of portfolio diversification. Using several different broker-dealers does not create portfolio diversification.

The exchange privilege offered by open-end investment companies allows investors to A) exchange shares of one open-end fund for another in the same fund family at a net asset value basis. B) exchange personally owned securities for shares of the investment company. C) delay the payment of taxes on shares. D) purchase new fund shares from dividends.

A Explanation Exchange privileges allow an investor to convert the value of shares held in one fund for those of an equal value in the same family. Remember that conversion is a taxable event—if the shares converted have increased in value, capital gains taxes will be due.

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

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

A registered representative (RR) recommends a variable annuity (VA) with an income rider to a client. The client's investment objectives, tax bracket, investment experience, and risk tolerance all align well with a VA recommendation. The client agrees to purchase the contract and informs the RR that he will be cashing out a VA he purchased two years ago to fund the new contract and will forward the check as soon as he receives it. Based on this information, the RR should A) reevaluate whether the recommendation for the VA contract is still suitable based on the client's proposed funding of the investment. B) complete all paper work to purchase the annuity contract and obtain the client's signature immediately. C) suggest to the client that perhaps a loan or refinancing his vacation home might be a better way to fund the contract purchase. D) contact the issuer of the client's existing VA contract to facilitate the client's surrender of the contract.

A Explanation Funding a VA contract by cashing out either life insurance policies or existing VA contracts, especially those held for a short time, is not suitable. These contracts come with high surrender charges. Suggesting that loans or drawing equity from a home to fund VA contracts have also been targeted as abusive sales practices. Of the answer choices given, the best would be to reevaluate the recommendation based on the new information tendered by the client.

In analyzing a municipal government obligation bond, an increase in all of the following would be a negative indication except A) property values. B) municipal operating expenses. C) delinquent taxes. D) unemployment.

A Explanation Increasing property values would have a tendency to increase the taxes paid to the municipality.

A resident of New York City purchases an Albany, New York, general obligation bond and receives $600 of interest from that bond during the year. How is that $600 taxed? A) It is not subject to federal income tax. B) It is subject to state income tax at ordinary rates. C) It is subject to federal income tax at ordinary rates. D) Taxation is deferred until the bond matures.

A Explanation Interest from public purpose municipal bonds is exempt from federal income tax, and most states have chosen to make interest on their municipal bonds exempt from state income tax to residents of their states.

Municipal bonds would be considered the most suitable for which of the following customer scenarios? A) An investor in a high-income tax bracket wanting income for their investment account B) An investor in a high-income bracket wanting growth for their investment account C) An investor in a moderate income tax bracket seeking growth in their employer-sponsored 401(k) plan D) An investor in a low income bracket wanting income in their IRA

A Explanation Interest received from bonds make them more appropriate for investors with income objectives rather than growth objectives. Because interest from municipal bonds is tax free, they benefit those in higher tax brackets the most. Lastly, because the interest is tax free, they have no place in a tax-favored account such as an IRA or 401(k) plan.

A C corporation's income statement renders the following information: pretax income: $2,000,000; dividends from preferred stock issued by other corporations: $100,000; interest paid on outstanding debentures: $200,000. This corporation has taxable income of A) $2,050,000. B) $1,850,000. C) $1,900,000. D) $2,100,000.

A Explanation Remember the 50% dividend exclusion available to C corporations. All of the $2 million of pretax income is taxable along with half of the $100,000 in dividends. The interest is included (as the exam often does) as an extra number to confuse. Pretax income is always after all expenses including interest.

Net asset value (NAV) per share for a mutual fund can be expected to decrease if A) the fund has made dividend distributions to shareholders. B) the issuers of securities in the portfolio have made dividend distributions. C) the fund has experienced a net redemption of shares. D) the securities in the portfolio have appreciated in value.

A Explanation The NAV per share will rise or fall relative to the value of the underlying portfolio. If dividends are distributed to shareholders, the fund's assets decrease, and their per-share value will decline accordingly. Appreciation of the portfolio and dividends received will increase the value. Redemption of shares will have no impact on the NAV per share, as the money paid out is offset by a reduced number of shares outstanding.

The over-the-counter (OTC) market could be characterized as what type of market? A) Dealer B) Primary C) First D) Auction

A Explanation The OTC market is a dealer market.

Which of the following would best describe, "Bought 1 Jan 55 call at 3 and sold 1 Jan 60 call at 1"? A) A bull vertical spread B) A bear time spread C) A bull horizontal spread D) A bear vertical spread

A Explanation The client paid two points out of pocket for a call spread. Break even here is 57. Your client wants the stock to go up; hence, a bull spread. Because the exercise prices are different, it is also a vertical spread.

The rate on an adjustable preferred stock may be indexed to A) the Treasury bill rate. B) the Dow Jones Industrial Average. C) the Consumer Price Index. D) the Producer Price Index.

A Explanation The dividend on an adjustable rate preferred stock is tied to a particular interest rate, and the Treasury bill rate is a common benchmark.

All of the following are true except A) Treasury bills are quoted in 1/8ths and as a percentage of par. B) U.S. Treasury bonds are quoted in 32nds and as a percentage of par. C) corporate bonds are quoted in 1/8ths and as a percentage of par. D) income bonds are required to pay interest only if it is earned.

A Explanation U.S. Treasury bills are issued at a discount and are quoted as a percentage of the par value.

Parker has been a client of Enigma Mathematical Portfolio Modeling (EMPM), a FINRA member broker-dealer, for 10 years. Parker has decided that it is time to move the account to a new firm, Turing Technical Analytics, (TTA). Which of the following statements accurately reflects the requirements when using the ACATS system? A) The transfer initiation form (TIF) is sent to ACATS by the receiving firm. B) The transfer initiation form (TIF) is sent to the carrying firm by the receiving firm. C) The transfer initiation form (TIF) is sent to ACATS by the carrying firm. D) The transfer initiation form (TIF) is sent to ACATS by the customer.

A Explanation When a customer wishes to transfer an account from one member firm to another, the customer's signature is required on the TIF. That TIF is then sent to ACATS by the receiving firm (the one who will be getting the new account—Turing Technical Analytics (TTA).

Financial footnotes found in which of the following would be of the greatest importance to your broker-dealer's retail customers? The broker-dealer's principal-approved advertising Balance sheets of stocks you've recommended to them Income statements of stocks you've recommended to them Your broker-dealer's website page showing the history of the firm A) II and III B) I and III C) I and IV D) II and IV

A Explanation While footnotes found anywhere are of importance, those found in financial statements, such as balance sheets and income statements, would be the most important to your broker-dealer's customers when evaluating investment recommendations.

To create a credit calendar spread, an investor should buy the near expiration. buy the distant expiration. sell the near expiration. sell the distant expiration. A) I and III B) I and IV C) II and IV D) II and III

B Explanation A credit calendar spread occurs when premium received exceeds the amount paid out. An investor creates a credit spread by selling the distant expiration and buying the near expiration. The distant expiration has more time value, and therefore, a higher premium.

In which of the following mutual funds is it most likely that a dividend paid by that mutual fund would be nontaxable to the shareholders? A) The WVCXC Gas and Electric Utilities Fund B) The ABQYX State I Municipal Bond Fund C) The CHXKC Preferred Stock Income Fund D) The FFLQX Sunbelt Growth Fund

B Explanation A mutual fund whose portfolio consists of tax-free municipal bonds has its net investment income taxed, when distributed as a dividend, in the same manner the individual bonds are taxed. This is an example of a single state fund where the income is not only tax exempt on the federal level, but tax exempt to residents of State I as well.

An investor has a portfolio containing 60% equities, 5% debt instruments, and 35% options and futures. Which of the following would best describe this investor's investment style? A) Moderate B) Aggressive C) Moderate/Aggressive D) Conservative

B Explanation All facets of the portfolio point toward aggressive. The dominate factor would be that over one-third of the portfolio consists of securities considered speculative in nature. Those would include derivative products such as options and futures, high-yield bonds (i.e., junk bonds), and others. Then note that the equity/debt allocation leans more toward aggressive than moderate and isn't conservative in any way.

All of the following regarding Section 529 education savings plans are true except A) there are high contribution limits. B) tax-deductible contributions are at the federal level. C) withdrawals at the federal level for qualified education expenses are tax free. D) they are not subject to income limitations.

B Explanation Contributions are made with after-tax dollars and are not deductible.

Having a five-year-old child, a couple wants to begin saving for her college education. They can currently budget $350 per month toward the goal. They know that college costs 13 years in the future need to be factored, but they are not too comfortable with market risk. Which would best align with their profile? A) Money market mutual fund B) 529 prepaid tuition plan C) Coverdell Education Savings Account (ESA) D) Variable annuity plan

B Explanation Coverdell ESAs and Section 529 plans are the only choices here specifically associated with saving for education. Because the Coverdell ESA can only accept $2,000 per child, per year, and the couple can currently invest more than twice that amount, the 529 plan is the better choice. Additionally, being concerned about inflation and not comfortable with market risk, investing in a 529 prepaid tuition plan enables them to purchase tomorrow's tuition at today's prices.

All of the following statements regarding Government National Mortgage Association (GNMA) pass-through securities are true except A) investors receive a monthly check representing both interest and a return of principal. B) GNMAs are considered to be the riskiest of the agency issues. C) the minimum initial investment is $1,000. D) investors own an undivided interest in a pool of mortgages.

B Explanation GNMA securities, which are backed by the full faith and credit of the U.S. government, are considered to be the safest of the agency issues. As is the case with most agencies, the minimum denomination is $1,000.

A corporation wishes to raise additional capital by making use of a rights offering. One of your clients owns 200 shares of the issuing corporation's common stock and 100 shares of its preferred stock. The terms of the offering state that four rights will be necessary to purchase one new share at the subscription price of $20. The current market price of the stock is $24 per share. How many rights will your client receive? A) 300 B) 200 C) 75 D) 50

B Explanation No matter how many new shares are being offered and how many rights it takes to buy each new share, on your exam, shareholders will always receive one right for each share of common stock they own. With this client owning 200 shares, that is 200 rights. There are never rights with preferred stock.

An investor purchased a single premium deferred variable annuity 20 years ago. The premium deposit was $50,000. The account is now worth $200,000 and the investor is still working. When does the investor have to begin taking required minimum distributions? A) At age 72 B) Never with a nonqualified annuity C) At age 72 or when no longer working, whichever is later D) At age 59½

B Explanation On the exam, unless stated to the contrary, every annuity is nonqualified. One of the benefits of nonqualified annuities is that there is no age at withdrawals must commence. In general, earnings withdrawn prior to age 59½ are subject to the additional 10% penalty on top of tax at ordinary rates.

Corporations issue equity securities. One category of equity is preferred stock. A number of different adjectives can apply to preferred stock issues. Which of the following preferred stock issues would likely offer the greatest protection against interest rate risk? A) Participating B) Convertible C) Cumulative D) Callable

B Explanation Owners of convertible preferred stock have the ability to convert the preferred into common stock. This offers growth potential not otherwise available to a preferred stockholder. This feature causes the stock's price to track that of the common. That results in convertible preferred stock having less interest rate risk than the others do.

The amount paid in excess of par value on the sale of common shares by an issuer is reflected in which of the following accounts on the corporate financial records? A) In the retained earnings B) In the paid-in surplus C) In the earned surplus D) In the capital stock

B Explanation Paid-in surplus, or capital surplus, is the excess over par value that investors pay for stock on its original issue. Generally, par value on common stock is a matter of record for accounting purposes.

All of the following are regulated by the Municipal Securities Rulemaking Board (MSRB) except A) quotes. B) issuers. C) dealers. D) sales representatives.

B Explanation Quotes, dealers, and sales representatives are regulated by the MSRB, but issuers are not.

In an effort to raise additional capital, which type of registered investment company may issue debt securities? A) An open-end investment company B) A closed-end investment company C) A face amount certificate company D) A unit investment trust

B Explanation The capital structure of closed-end investment companies differs from other investment companies. Closed-end investment companies may issue debt securities, as well as preferred stock. Open-end companies and UITs can purchase debt securities for their portfolios but can only issue one class of equity.

An investor buys 2 RST 40 calls and pays a premium of 4 each. He also buys 2 RST 40 puts and pays a premium of 2.50 each. When purchased, RST is trading at $40.75. On the expiration date, RST is trading at $32.50, and the investor closes his positions for intrinsic value. Excluding commission, the investor realizes A) a $100 loss. B) a $200 profit. C) a $200 loss. D) a $100 profit.

B Explanation The cost of opening these two straddles is $1,300. On the expiration date, the puts are worth $750 each, for a total of $1,500, giving the investor a $200 profit. The calls will expire worthless. Alternatively, the breakeven points for this long straddle are 33.50 and 46.50 (add the combined premiums of 6.50 to the call strike and subtract combined premiums from the put strike). The investor profits in a long straddle when the stock moves outside the breakeven points. As the stock is at 32.50, the customer makes 1 point (33.50 − 32.50) on each straddle, resulting in a $200 profit.

Which of the following would have the least impact in marketing a municipal bond issue? A) The size of the block offered B) The dated date of the issue C) The maturity of the issue D) The rating of the issue

B Explanation The dated date of a bond issue is merely the date on which the issue begins to accrue interest. As such, it would have less to do with the marketing efforts related to a new issue than would items such as the size of the block offered, the rating of the issue (how financially strong it is), and the maturity.

An investor opens the following options position: Buy 1 FOZ Mar 40 call @3; buy 1 FOZ Mar 40 put @2. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $500; maximum loss is unlimited; breakeven point is $40. B) Maximum gain is unlimited; maximum loss is $500; breakeven points are $35 and $45. C) Maximum gain is $3,500; maximum loss is $500; breakeven points are $35 and $45. D) Maximum gain is unlimited; maximum loss is $500; breakeven point is $40.

B Explanation The first step is to identify the position. This is a long straddle—a long put and a long call with identical terms. That means we are going to have two breakeven points. The maximum gain is unlimited because one of the positions is a long call. The maximum loss is the amount paid for the straddle (the two premiums totaling $500). Breakeven follows the call-up and put-down rules. Add the premium to the strike of the call ($40 + $5 = $45) and subtract the premium from the strike of the put ($40 ‒ $5 = $35).

A client writes 1 Apr 30 call and buys 1 Apr 40 call. This is a bull spread. a bear spread. a debit spread. a credit spread. A) I and IV B) II and IV C) II and III D) I and III

B Explanation This is a call credit spread, and bears sell calls. The 30 call is worth more because it has a lower strike price. Long the lower is bullish; short the lower is bearish.

Which of the following statements regarding Section 529 education savings plans are true? Contributions are considered gifts under federal law. Contributions are tax deductible under federal law. Earnings generated are taxable each year. Earnings generated are tax deferred. A) II and IV B) I and IV C) II and III D) I and III

B Explanation Under federal law, contributions made into Section 529 plans are considered gifts and are not deductible at the federal level. Furthermore, earnings generated each year are tax deferred and, on withdrawal, are tax free at the federal level—if used for qualified education expenses.

A customer purchases $50,000 of bonds at a discount in the secondary market. The bonds mature in 10 years and are callable in five years at par. Under industry rules, the customer's confirmation will show A) both the YTM and YTC. B) YTM C) either the YTM or YTC. D) YTC.

B Explanation With callable bonds, the confirmation must show the lower of the yield to maturity (YTM) or yield to call (YTC). For a bond bought at a discount, the YTM is lower than YTC. On the exam, you will never encounter a call on a bond selling at a discount—it is less expensive to purchase the bond in the open market than pay the call price (which is always at least par).

All of the following trade with accrued interest except A) Treasury bonds. B) zero coupon bonds. C) convertible bonds. D) jumbo certificates of deposit.

B Explanation Zero coupon bonds are issued at a deep discount from face value instead of providing semiannual interest payments. T-bonds, convertible bonds, and CDs all make periodic interest payments; thus, the seller receives any accrued interest from the buyer.

Corporate bonds that are guaranteed are A) required to maintain a self-liquidating sinking or surplus fund. B) insured by Assured Guaranty Corporation. C) guaranteed as to payment of principal and interest by another corporation. D) guaranteed as to payment of principal and interest by the U.S. government.

C Explanation A guaranteed corporate bond is one guaranteed by another corporation that typically has a higher credit rating than the issuing corporation and is in a control relationship with it.

Which of the following statements is not true? A) A stock with a beta of 1.2 will move 20% more than the market. B) A stock with a beta of 0.8 will move 20% less than the market. C) Beta is a measure of a security's deviation from its historical average returns. D) Beta is a volatility measure of a security compared with the overall market.

C Explanation A measure of a security's deviation from its historical average returns is the security's standard deviation. Beta measures a security's volatility in relation to the overall market. Stocks with a beta greater than 1 are more volatile than the market, and stocks with a beta less than 1 are less volatile than the market.

Marcus owns 5,000 shares of KYZ stock. He recently received proxies in the mail. Marcus would be able to use the proxies for all of the following except A) to vote on the proposed issuance of 100,000 shares of convertible preferred stock. B) to vote on a proposed 2:1 stock split. C) to buy additional shares of KYZ common stock after the stock splits 2:1. D) to vote for three members of the board of directors.

C Explanation A proxy is a form of absentee ballot used by stockholders to vote on company matters such as stock splits, members of the board of directors, and issuance of additional equity-related securities such as convertible securities. Stockholders do not vote on dividend-related matters, nor are proxies used to purchase shares of stock.

All of the following are reasons to consider adding REITs to your client's portfolio except A) capital appreciation from equity REITs. B) reasonable income from mortgage REITs. C) redemption at net asset value. D) low or negative correlation to the stock market.

C Explanation Although REITs do compute a net asset value, because of the illiquidity of real estate, that value is only an approximation. The actual price an investor receives when selling is based on supply and demand and may be more or less than the NAV. REITs typically have a low or negative correlation to the stock market. This means that when the stock market is going down, REITs tend to move in the opposite direction. By having an ownership position in the properties, the Equity REITs has an opportunity for capital appreciation. The mortgage REIT receives the interest income paid on the underlying mortgages.

A broker-dealer that is a financial advisor to a municipal issuer cannot act as an underwriter of the issuer's bonds in a negotiated underwriting and receive compensation for both services. cannot act as an underwriter of the issuer's bonds in a competitive bid underwriting and receive compensation for both services. may always act as an underwriter of the issuer's bonds in a negotiated underwriting and receive compensation for both services. may always act as an underwriter of the issuer's bonds in a competitive bid underwriting and receive compensation for both service. A) I and III B) II and IV C) I and II D) II and III

C Explanation Broker-dealers acting as financial advisors to a municipality regarding a municipal issue are prohibited by Municipal Securities Rulemaking Board Rule G-23 to also act as underwriters for the same issue, regardless of whether the underwriting process has been done by competitive bid or was negotiated. In the event that an exception is allowed, or the broker-dealer performs an advisory function specifically associated with the underwriting, the broker-dealer would be limited to accepting fees for the advisory service only and not be allowed to accept fees for any underwriting services.

Which of the following statements regarding a death in a tenants in common (TIC) account are true? The decedent's interest in the account goes to his estate. The decedent's interest in the account goes to the remaining tenant. The member firm must freeze both the account and acceptance of orders until the required documents are presented. The member may immediately accept orders from the remaining tenant. A) I and IV B) II and IV C) I and III D) II and III

C Explanation If one party in a TIC account dies, the decedent's interest in the account goes to his estate, not to any other party to the account. The member firm must freeze the account and acceptance of all orders until the required documents are presented.

A foreign company that exports its products to the United States wishes to protect itself during a time in which the U.S. dollar is expected to be devalued. The company should buy U.S. dollars. sell U.S. dollars. buy foreign currency. sell foreign currency. A) I and III B) II and IV C) II and III D) III and IV

C Explanation If the company expects the U.S. dollar to become devalued, that means that the foreign currency will increase in value. It would make sense at this time, therefore, for the company to get rid of its U.S. dollars, which are expected to decline in value, and acquire the foreign currency, which will appreciate relative to the U.S. dollar.

A client purchases 1,000 shares of the XYZ Value Fund when the NAV is $18.75 and the POP is $19.74. Five years later, the client makes a gift to her daughter when NAV is $24.50 and POP is $25.79. The daughter elects to receive all distributions in cash. Two years after the gift, she sells all shares when the NAV is $34.25 and POP is $36.05. What are the tax consequences of this sale? A) Long-term capital gain of $15,500 B) Long-term capital gain of $16,310 C) Long-term capital gain of $14.510 D) Long-term capital gain of $17,300

C Explanation In the case of a gift of securities, the donee acquires the donor's cost basis—$19.74 per share. Sale (redemption) takes place at the NAV ($34.25) for a profit of $14.51 per share (times 1,000 shares).

A wealthy client owns a large percentage of a thinly traded common stock. When this client wants to sell a major portion of her securities, she will immediately face A) market risk. B) interest rate risk. C) marketability risk. D) credit risk.

C Explanation It is difficult to sell a large block of securities in a thinly traded stock without a substantial discount to market price. This is known as liquidity or marketability risk. Technically, the terms are not identical, but for test purposes, consider it so.

If an investor is in the highest federal income tax bracket and is subject to the alternative minimum tax (AMT), which of the following securities should an agent recommend? A) Corporate bond B) Treasury bond C) General obligation (GO) bond D) Industrial revenue bond

C Explanation Municipal bonds are suitable for the portfolio of an investor who is in a high tax bracket because the interest is exempt from federal income tax. A GO bond is a better recommendation than an industrial revenue bond because the interest on industrial revenue bonds is likely subject to the AMT.

If a municipal bond with 10 years to maturity is purchased from the issuer for 110, and after two years, it is sold for 110, the bondholder must report A) capital loss of two points. B) no capital gain or loss. C) capital gain of two points. D) capital gain of 20 points.

C Explanation Municipal bonds bought at a premium must be amortized. The amount of the premium is 10 points. With 10 years to maturity, the annual amortization is one point. After two years, the bond's cost basis has been amortized down to 108. If at that point it is sold for 110, there is a two-point capital gain.

Mutual funds have several different methods for assessing charges to become shareholders. One of those is the front-end load and is charged when purchasing A) Class C shares. B) Class D shares. C) Class A shares. D) Class B shares.

C Explanation Purchasers of Class A shares pay a sales charge on each investment. Because the sales charge comes off the amount invested, it is called a front-end load. Class B and C shares have back-end loads, although Cs usually drop off after one year. There are shares for almost the entire alphabet, but we are not hearing anything about them−only the A, B, and C.

If a client who seeks diversification through real estate is concerned about illiquidity associated with investing in real estate, which of the following investments is most suitable? A) Privately placed investment B) Interest in a real estate limited partnership C) Real estate investment trust D) Direct investment in a shopping center renting retail space to a broad variety of stores

C Explanation Real estate investment trusts are best suited to the client because they are market-traded securities that provide an investor with a liquid market in which to invest in real estate.

Which of the following statements are true? Systematic risk can be diversified away. Systematic risk cannot be diversified away. Nonsystematic risk can be diversified away. Nonsystematic risk cannot be diversified away. A) I and III B) II and IV C) II and III D) I and IV

C Explanation Systematic risk, which affects all investments, cannot be diversified away. Nonsystematic risk, or company risk, can.

Municipal Securities Rulemaking Board (MSRB) rules for NYSE member firms are enforced by A) the NYSE. B) the SEC. C) FINRA. D) the MSRB.

C Explanation The board's rules are enforced by FINRA for securities firms. The MSRB has rulemaking authority but no enforcement or examination authority.

A customer opens the following positions: Buy 100 shares of ABC @$60; sell 1 ABC Jun 60 call @3. What is the customer's maximum gain, maximum loss, and breakeven point? A) Maximum gain is unlimited; maximum loss is $5,700; breakeven point is $57. B) Maximum gain is $300; maximum loss is $5,700; breakeven point is $63. C) Maximum gain is $300; maximum loss is $5,700; breakeven point is $57. D) Maximum gain is $300, maximum loss is unlimited; breakeven point is $57.

C Explanation The first step is to identify the position. This is long stock with a short call. This is a covered call position. Breakeven is the customer's net cost. The price of the stock ($60) minus the premium ($3) received equals the $57 per share breakeven point. The strategy is to generate some income with a little protection against a decline in the price of the ABC stock. The premium income is the most this client can make. If the stock's price should rise well above the cost of $60 per share, the short call will be exercised and the customer will deliver the stock purchased at $60 and receive $60. Regardless of how high the stock price rises, this customer can never make more than the $3 premium. If the stock's price should decline, the call will expire unexercised. That 3-point premium protects the long stock, but only for those 3 points. Once the market price falls below $57 (the breakeven point), it is all a loss for the customer down to a maximum $5,700 if the price drops to zero. Why doesn't the breakeven follow the "call-up" rule? That rule applies when the only positions are options. Once there is a long or short stock position along with an option position, it is the stock controlling the breakeven.

An investor purchased 100 shares of Wilmont Auto Supply Holdings (WASH) on June 1, 2018, at $55 per share. On July 5, 2019, WASH is trading at $40 per share and the investor sells at the market price. On August 1, 2019, the investor purchases a WASH Jan 40 call @4. If there are no other transactions during 2019, the investor's tax consequences are A) not able to be determined until we know the disposition of the option. B) $1,500 short-term loss because the option was purchased less than 30 days after the sale erasing the holding period. C) no taxable loss for 2019 because of the wash sale rule. D) $1,500 long-term loss with no wash sale violation because the stock was long term before the purchase of the option.

C Explanation The investor in WASH has violated the wash sale rule. Anytime a security is sold at a loss and then repurchased within 30 days of the sale (before or after), the loss cannot be taken at that time. The rule includes the purchase of substantially identical securities, such as call options, warrants, and convertibles, when determining if a violation has taken place. Because the question asks for the 2019 tax consequences, the disposition of the option expiring in Jan 2020 is irrelevant.

A customer establishes the following positions: Long 1 ABC Jun 25 call at 2 Long 1 ABC Jun 25 put at 2 At expiration, the position is profitable if the stock price is A) above 25 or below 25. B) above 21 or below 29. C) below 21 or above 29. D) greater than 21.

C Explanation The investor purchased a long straddle (both a call and put with the same strike prices and expiration months). While straddle investors are uncertain about the direction of the market, long straddles require substantial price movement (volatility) for profit because the two premiums paid must be recovered. In this example, the breakeven of the call is found by adding the total premiums of four to the call strike price of 25 (25 + 4 = 29). The breakeven of the put is found by subtracting the total premiums of four from the put strike price of 25 (25 − 4 = 21). The market must either move up by four (total premiums paid) or down by four to be at breakeven. For profit, the market must be above or below the breakeven points.

An investor purchased 100 shares of RAVAD common stock at $40 per share on June 17, 2019. On May 11, 2020, with the RAVAD selling at $60, the investor hedges by purchasing one RAVAD Oct 55 put at 2. The put expires with the RAVAD selling at $65 and the investor liquidates the long stock position at that price. This would result in A) a long-term capital gain of $2,500 and a short-term capital loss of $200. B) a long-term capital gain of $2,300. C) a short-term capital gain of $2,500 and a short-term capital loss of $200. D) a short-term capital gain of $2,700.

C Explanation The investor purchased a protective put on the long RAVAD position. At the time of the purchase of the put, the holding period of the stock was less than the long-term requirement of more than 12 months. When that happens, the IRS rules that the short-term holding period (June to May is short term) is erased. Your new holding period for the underlying stock begins on the earliest of the date you dispose of the stock, the date you exercise the put, the date you sell the put, or the date the put expires. Because the investor disposed of the stock at the same time the put expired, there is no holding period, so any gains will be short term. As far as the math, the stock was purchased for $4,000 (100 shares @ $40 per share). The stock is sold for $6,500 (100 shares @ $65 per share). That is a gain of $2,500 (short term). When a long put expires, it is a capital loss in the amount of the premium. In our question, the premium was 2 points ($200) and that is a complete loss. Because the put has a five-month holding period (May to October), the loss is short term. In the real world, most accountants would just net the $2,500 short-term gains and the $200 short-term loss and report a $2,300 short-term gain. It is possible that could appear on the exam, but unlikely that you would have both choices. Please let us know if you do see something like this.

Common stock that has no voting power, no rights to receive dividends, that has been authorized and issued but is not outstanding is known as A) subordinated shares. B) unissued stock. C) treasury stock. D) Class B common shares.

C Explanation This is the definition of treasury stock.

An aggressive investor buys ABC stock with a beta of 1.7. The S&P 500 has a 10% rate of return for the year, and ABC's return is 12%. What is the alpha for ABC? A) +5% B) +3% C) -5% D) -3%

C Explanation With a beta of 1.7, an investor would expect ABC stock to be 70% more volatile than the general market as measured by the S&P 500. Remember, the beta of the market is 1.0. Therefore, we would expect to see the stock return 17% based on the S&P 500's 10% return. However, the actual return on ABC was only 12%. Alpha measures the difference in the actual return vs. the expected return. The difference between the expected return (sometimes referred to as the required return) of 17% and the actual return of 12% is a negative 5%. That represents an alpha of -5% for ABC stock.

The real value of property within the city limits is $100 million. The city uses a 50% assessment rate. A 10 mill tax rate will provide tax revenues of A) $5,000. B) $1,000,000. C) $50,000. D) $500,000.

D Explanation 1 mill = $0.001. 10 mills = 0.01 (10 × 0.001). $100 million × 50% assessment rate = $50 million. $50,000,000 × 0.01 = $500,000.

All of the following investment strategies offer either fully or partially tax-deductible contributions to individuals who meet eligibility requirements except A) IRAs. B) Keogh plans. C) defined contribution plans. D) variable annuities.

D Explanation Contributions to a nonqualified variable annuity are not tax deductible. Contributions to an IRA may be tax deductible, depending on the individual's earnings and participation in a company-sponsored qualified retirement plan.

FINRA's 5% markup policy does not apply to A) REITs. B) third-market trades. C) commissions. D) issues sold by prospectus.

D Explanation FINRA's 5% markup policy applies to all secondary market trades, whether customers are charged markups, markdowns, or commissions. Issues sold by prospectus and municipal securities, however, are exempt from the policy.

One of your individual customers would like to add some foreign debt securities to their portfolio. When told that the investment would be $2,500, the best suggestion would be to A) tell the customer that $2,500 is below the minimum purchase quantity of foreign bonds. B) contact a broker-dealer in the foreign country of choice and open an account there. C) use one of the overseas branches of your firm to suggest the appropriate issues. D) invest in a mutual fund concentrating in foreign debt securities.

D Explanation For small investments, a mutual fund or exchange-traded fund (ETF) is usually going to be the most suitable choice. Most countries do not allow nonresident noncitizens to open local brokerage accounts, and that is a pretty impractical idea anyway. If your firm has an overseas office, it could be a source of information, but when only $2,500 is involved, purchasing individual bonds issued by a foreign nation is usually not reasonable.

Which of the following strategies is intended to be profitable with either a significant upside or significant downside move in the underlying stock? A) Horizontal spread B) Short straddle C) Vertical spread D) Long straddle

D Explanation If the stock moves sharply up or down, the customer will profit from owning a long straddle.

Income from which of the following investments is passive income? Real estate direct participation programs (DPPs) Vacation cottage rentals Real estate investment trusts (REITs) Collateralized mortgage obligations (CMOs) A) II and III B) I and III C) II and IV D) I and II

D Explanation Passive income results from DPPs and personal real estate rentals. REITs and CMOs are securities, and income from securities is considered portfolio income.

Information gathered to verify a customer's identity must be maintained by a member firm for at least A) 3 years. B) 6 years. C) the lifetime of the firm. D) 5 years.

D Explanation The USA PATRIOT Act requires that information gathered to verify a customer's identity must be maintained for at least five years.

A customer is short 100 XYZ shares at 26 and long 1 XYZ 30 call at 1. What is the maximum potential gain for the customer? A) $2,600 B) $5,200 C) $500 D) $2,500

D Explanation The customer has hedged his short stock position from a market advance by buying the call. If the market falls, the investor can make a maximum of $26 per share if the stock price falls to zero, less the premium of 1 paid to buy the call, for a maximum gain of $2,500 (26 − 1 = 25).

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

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

Dollar cost averaging (DCA) will always result in a lower cost per share than the price paid per share except A) when the price for each purchase is decreasing. B) when the price for each purchase is fluctuating.. C) when the price for each purchase is increasing. D) when the price for each purchase is the same.

D Explanation There are two requirements for a dollar cost averaging program to work. The first is that the same amount must be invested at each specified interval. The second is that the price per transaction does not remain the same. If that is the case, then the average cost per share and average price paid per transaction are the same. The price needs to move for DCA to show a benefit.

Which of the following choices lists Treasury bills, Treasury bonds, and Treasury notes in ascending order of maturity? A) Notes, bills, bonds. B) Bonds, notes, bills. C) Bills, bonds, notes. D) Bills, notes, bonds.

D Explanation Treasury bills have a maturity of less than one year, Treasury notes mature in 1 to 10 years, and Treasury bonds mature in 10 years or more.

A foreign currency investor is long 40,000 Swiss francs at $0.81. If the investor buys 4 Jul 80 SF puts at 1.25 to hedge, the breakeven point is A) 0.4875. B) 0.4975. C) 0.5125. D) 0.8225.

D Explanation When hedging with puts, the breakeven point is the cost of the underlying investment plus premium paid ($0.81 plus $0.0125 equals $0.8225, or 82.25 cents).

From time to time, an investor's situation arises where they may need to liquidate a portion of the portfolio. It could be a medical need, an emergency repair, or a joyous event such as a wedding. Getting the necessary cash would be most difficult from which of the following holdings? A) A mutual fund B) A listed option C) A unit investment trust D) A DPP

D Explanation When it comes to liquidity, at least for the exam, DPPs rank near the bottom of the list. Mutual funds and UITs are redeemable by the issuer, and closing a position in an option contract settles the next day.