Series 7 Practice Exam 1 Q&A
A customer opens a new margin account and buys 100 shares of XYZ Corporation at $40 per share. She then writes a call option against the position and receives a $2 premium. The customer must deposit cash in the account of:
$1,800 Explanation: The purchase of $4,000 worth of stock would require a $2,000 deposit (50% of $4,000 = $2,000). Since the call is covered, there is no margin requirement. The customer received $200 in premiums. This would be deducted from the $2,000 margin call, requiring a cash deposit of $1,800.
A Treasury bond has increased in value from 98.4 to 98.8. The bond has increased by:
$1.25 per $1,000 par value Explanation: Treasury bonds are quoted in 32nds of a point, and are then calculated as a percentage of the par value ($1,000). The difference between 98.4 and 98.8 is 4/32. One point equals $10, so 4/32 or 1/8 of a point equals $1.25.
An investor owns $10,000 worth of XYZ Corporation convertible bonds that are callable at 102. The bonds are currently selling in the market at 103. If the corporation calls the bonds at the call price, the investor will receive:
$10,200 Explanation: When bonds are called for redemption, the owner receives the call price. The call price is 102 for a total of $10,200 ($1,020 per bond x 10 bonds). If the investor were able to sell the bonds at the current price, she would receive $10,300 ($1,030 x 10 bonds). However, the question states that the bonds are called, which means the market price of the bond will gravitate to the call value of $10,200.
An individual's home has a resale value of $500,000 and an assessed value of $200,000. If the tax rate is 10 mills, the property tax is:
$2,000 Explanation: Property tax is computed by multiplying the assessed value by the millage rate. A mill equals 0.001 or $1 per $1,000 assessed value. The tax is $2,000 ($200,000 x .001 x 10 mills)
An investor purchased $100,000 face value of a 12% municipal bond that matures December 1, 2041. The transaction settles on August 1. The investor owes accrued interest of:
$2,000 Explanation: The bonds purchased by the investor will generate yearly interest of $12,000 ($100,000 par multiplied by 12%). The fact that the bonds mature on December 1, 2041 signifies that interest payments are made every December 1 and June 1. The investor will, therefore, owe 60 days of accrued interest (from June 1, the last coupon, up to but not including the settlement date of August 1). Since the yearly interest is $12,000, accrued interest would be $2,000 (60/360 x $12,000).
A municipal finance professional (MFP) and her spouse make a political contribution of $400 from a joint account and they both sign the check. According to the MSRB political contribution rules, the contribution is viewed as a:
$200 contribution from each party Explanation: When both an MFP and her spouse sign a contribution check, the contribution is considered to have been made by both and is split equally between the contributors. On the other hand, if the MFP is the only person who signs the check, then the entire amount of the contribution is allocated to the MFP. If that were the case, the underwriting ban would have been triggered since the contribution amount exceeds $250. There is no limit if the MFP's spouse writes a check from his personal account, rather than from a joint checking account.
On Monday, June 15, an investor purchases for regular-way settlement, $20,000 face value of 8% municipal bonds that mature on November 1, 2035. What is the dollar amount of accrued interest that the investor is required to pay?
$208.88 Explanation: Accrued Interest Formula = (Principal x Rate x Days of Interest) / 360 = ($20,000 x 8% x 47) / 360 = $208.88
A customer has purchased 10 ABC January 50 calls, paying a $2 premium and 10 ABC January 50 puts, paying a $2 premium. The market price of ABC stock is $50 per share. The buyer of these 10 straddles will need to deposit
$4,000 Explanation: When buying options, 100% of the purchase price (the premium) must be deposited. The customer paid a $2 ($200) premium for the call and a $2 ($200) premium for the put (a $4 premium for one straddle). The customer purchased 10 straddles and paid $400 per straddle for a total of $4,000. (10 straddles x $400 = $4,000.)
XYZ corporation has income before taxes of $2 million and received $100,000 in preferred dividends from a company in which it owns 25% of the outstanding shares. If XYZ corporation is in the 34% tax bracket, it will pay taxes of:
$686,800 Explanation: Since XYZ corporation owns 25% of the outstanding shares, it is exempt from paying taxes on 80% of dividends received from the stock. The corporation would need to pay taxes on only $20,000 of the dividends received (20% of the $100,000 in preferred dividends) plus the $2,000,000 of income the corporation earned. Since the corporation is in the 34% tax bracket, the tax would be $686,800. (34% of $2,020,000 = $686,800.)
A customer sells short 1,000 shares of stock. A few weeks later the company declares a 5% stock dividend. When the customer covers the short sale, the customer will be required to deliver:
1,050 shares Explanation: When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends declared are the responsibility of the customer who sold the stock short. In this example, the company declared a 5% stock dividend. Therefore, a customer who sold short 1,000 shares would be required to deliver 1,050 shares (1,000 shares x 5% = 50 additional shares) when covering the short sale.
The prospectus for a limited partnership states that the subscription price for each unit is $20,000. According to industry rules, the maximum allowable underwriting compensation for this public offering is:
10% of the gross proceeds of the offering Explanation: Industry rules allow a maximum total compensation of 10% of the gross proceeds of the offering in a limited partnership. This includes all items of compensation including trailing commissions
Listed below are a group of mutual funds. Net Asset Value Offer Price Net Change Dreyfus 11.55 12.67 -.05 Wellington 12.70 13.85 +.07 Lenox 5.14 5.14 +.09 Sentry 13.42 14.63 -.08 If an investor sells his shares in Sentry fund, he will receive:
13.42 Explanation: When an investor sells shares in a mutual fund, he will receive the bid price or net asset value. The Sentry fund's net asset value is listed as being $13.42. Therefore, the investor will receive $13.42 per share.
A registered representative is provided with the following financial information concerning a company: Debt of $225 million, par value of the common stock $40 million, paid-in capital of $70 million, and retained earnings of $750 million. The debt-to-equity ratio is:
26% Explanation: The debt-to-equity is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). The debt-to-equity ratio is 26% ($225 million / [the par value of the common stock is $40 million + paid-in capital of $70 million + retained earnings of $750 million = $860 million]). The debt-to-equity ratio is used to analyze the capital structure of a company.
A NYSE-listed stock closed at $72. The next day the stock is ex-dividend 60 cents. To determine if the stock increased or decreased from the close of trading, the price is based on:
71.40 Explanation: The stock will be reduced by 60 cents. The stock must be reduced in price to entirely cover the dividend. Therefore, the stock will open at 71.40 (72 - .60 = 71.40). If the stock closed at 72.50 that day, it will be quoted as an increase of $1.10 (72.50 - 71.40).
Which of the following choices is NOT considered of material value by FINRA if given by a mutual fund underwriter to a registered representative? a. A gift of $100 b. A gift of $200 c. Overrides in excess of commissions as stated in the prospectus d. A gift of $500
A gift of $100 Explanation: According to industry rules, a gift of more than $100 is considered substantial or of material value.
A woman will be retiring in 2020. She is interested in income and having her principal available at retirement. Of the following municipal bonds, you would recommend a(n): a. Aaa-rated 8.5% G.O. maturing in 2017 b. Aa-rated 10% G.O. maturing in 2039 which is callable in 2018 at 105 c. Aa-rated 8.5% G.O. maturing in 2020 d. Ba-rated revenue bond maturing in 2023
Aa-rated 8.5% G.O. maturing in 2020 Explanation: Since the woman wants her principal available at retirement, a bond maturing in 2020 (the year of her retirement), regardless of the yield, would be the best choice
The term marking-to-the-market refers to:
Adjusting the contract price to the current market price of an open contract for purposes of determining if additional cash is required Explanation: Marking-to-the-market refers to adjusting the contract price to the current market price of an open contract for purposes of determining if additional cash is required. This may occur when a customer writes uncovered options and the underlying stock moves against the writer. The customer might need to deposit additional funds and would be marked to the market for the appropriate amount. This could also occur when a customer sells stock short and the stock increases in value.
The State of North Carolina is offering $100,000,000 of general obligation bonds with serial maturities. The bonds maturing in 2029 have an interest rate of 5 1/2% and a yield to maturity of 5.60%. This means the bonds are being offered:
At a discount. Explanation: Since the bonds have a yield to maturity of 5.60% (that is greater than the 5 1/2% coupon rate), the bonds are being offered at less than their face (par) value. These bonds were, therefore, issued at a discount.
A client owns shares of stock purchased at $46 a share. If the current market price is now $70 and the client wants to protect her profit if the price should fall 10%, the RR should recommend which of the following orders? A) A market order B) Sell stop $63 C) Sell limit $63 D) Sell stop-limit $63
B) Sell stop $63 Explanation:This client only wants to sell her position if the stock declines by 10% or $7.00. The RR should recommend a sell stop at $63. A market order is not suitable since the client does not want to sell unless the price declines. A market order will not allow the client to receive further profits if the stock increases above $70. A sell limit is an order to sell at a specified price or higher and is usually placed above the current market price. Therefore, a sell limit at $63 is not suitable. Since the client never mentioned a specific limit selling price she is willing to accept, a stop limit order should not be recommended. In addition, a stop limit order may be activated but never executed, and the client would not be able to protect her profit
Which of the following securities is exempt from state taxes? a. Corporate stock b. Convertible bonds c. Federal National Mortgage Association (FNMA) bonds d. Treasury notes
d. Treasury notes Explanation: All of the choices listed are subject to state taxes except Treasury notes, which are U.S. government obligations and are subject to federal taxes, but exempt from state taxes.
A person hired by a municipal dealer must be registered:
Before effecting a transaction with a customer Explanation: A person must qualify as a municipal representative prior to effecting a transaction with a customer. To become qualified, the individual must pass a qualifying exam and serve a 90-day apprenticeship. There is no requirement that the person be registered within a specific period after hire. However, the person may only act as an apprentice for a maximum of 180 days.
A Swiss company that is expecting payment from a customer in U.S. dollars is concerned that the dollar will decline in value. To hedge against a decline in the U.S. dollar, the Swiss company should:
Buy Swiss franc calls Explanation: If the value of the U.S. dollar declines, the value of the Swiss franc will increase. The company should buy Swiss franc calls since it will profit on the calls if the U.S. dollar declines, leading to a Swiss franc increase. The profit on the call could help to offset the loss on the U.S. dollars it is expecting to receive as payment.
The recommendation to purchase a private activity bond would NOT be appropriate for a:
Client who is subject to the alternative minimum tax Explanation: A private activity bond is a type of municipal bond in which the funds being raised will be used to benefit a non-public (private) company (e.g., an airport terminal for an airline). If the person receiving the bond's interest payment is subject to the alternative minimum tax (AMT), the interest is taxable at the federal level. For this reason, these bonds are the least suitable for a client who is subject to the AMT.
A secondary market exists for:
Dealer-placed commercial paper Explanation: A secondary market exists for owners of commercial paper to sell their investments to dealers or other investors. There is no secondary market for federal funds, repos, or U.S. savings bonds.
Buyers of municipal bonds would normally NOT include:
Defined benefit plans Explanation: A defined benefit plan is a type of pension fund. Pension funds and other tax-deferred accounts would not benefit from the tax exemption provided by municipal bonds. As a result, unless the bonds are taxable and offer yields equivalent to other taxable bonds, pension funds would not include municipal bonds in their portfolio. The exception would be Build America Bonds (BABs), which are taxable municipal bonds
The Modified Accelerated Cost Recovery System is used when:
Depreciating machinery Explanation: The Modified Accelerated Cost Recovery System (MACRS) is one method that may be used to depreciate an asset. It allows for larger deductions during the earlier life of an asset when compared to the straight-line method of depreciation.
If a registered representative receives information that a client has recently received a large sum of money, the proper course of action is to:
Determine if the customer's investment objectives have changed Explanation: Registered representatives have a responsibility to update customer information periodically in case something has changed that would alter a customer's goals and objectives. Given that the customer has just experienced a financial windfall, the representative should check to see if the customer's investment objectives have changed before making any recommendations.
Mr. Jones has a margin account in which there is activity each month. The firm sends Mr. Jones an account statement:
Each month when there is activity during the month Explanation: Brokerage firms send customer statements monthly for accounts with activity during that month. For inactive accounts, statements must be sent at least quarterly.
A municipal bond will be accepted for delivery without a legal opinion if it is identified as:
Ex-legal Explanation: A municipal bond is expected to be delivered with a legal opinion unless the bond is identified as ex-legal at the time of the purchase.
When interest rates are trending upward, the economy will normally be in which phase of the business cycle?
Expansion Explanation: Increasing interest rates, along with increased costs and lower unemployment, are frequently associated with an expanding economy where there is an increasing demand for goods. As demand overtakes supply, prices begin to rise due to the scarcity of goods. This rise in prices is known as inflation. The Federal Reserve will look to raise interest rates in an attempt to curb demand and combat inflation.
A mutual fund buys stock from the portfolio of an insurance company. This is a trade executed in the:
Fourth market Explanation: When an institutional investor such as a mutual fund buys stock from the portfolio of an insurance company (another institution), it is considered a trade executed in the fourth market. This is the name given to the so-called market where institutions trade with other institutions.
A clause in an underwriting agreement that allows an underwriting syndicate to purchase additional shares from the issuer for sale to the public is a(n):
Green Shoe clause Explanation: A clause in an underwriting agreement that allows the syndicate to sell more of an issue than was originally available, and acquire those shares from the issuer, is known as a Green Shoe clause. This clause is found in the offering's overallotment provision and is limited to 15% of the offering.
A put option may be written in a cash account if the investor:
Has a cash balance in the account equal to the total exercise value of the contract Explanation: To write a covered put option in a cash account, the customer must have cash in the account equal to the total exercise value of the contract. If the writer is short the underlying stock, the put is considered covered for margin purposes, but this transaction may not be written in a cash account, only in a margin account.
Which TWO of the following statements are TRUE concerning the Securities Act of 1933? I. Registration provisions apply if the securities beings sold are listed on the NYSE II. Antifraud provisions do not apply if the securities being sold are listed on the NYSE III. Registration provisions do not apply to securities issued by a municipality IV. Antifraud provisions do not apply to securities issued by a municipality
I and III Explanation: The registration provisions of the 1933 Act apply if securities sold are listed on the NYSE or Nasdaq, but do not apply to securities issued by a municipality. The antifraud provisions of the Securities Act of 1933 apply to all securities, even those exempt from registration.
On September 14, a customer purchases an ABC December 60 call and sells an ABC November 60 call. The customer: I. Has engaged in a debit spread II. Has engaged in a credit spread III. Wants the spread to widen IV. Wants the spread to narrow
I and III only Explanation: To determine whether the customer wants the spread to widen or narrow, it is necessary to determine whether the spread is a debit or credit spread. The premium for an option is determined by two factors—the in-the-money amount of the option (intrinsic value) and the time value. Since both options have the same strike price, the intrinsic values (in-the-money amount) are equal. Therefore, any difference in premium is the result of a difference in time value. Since the December contract has longer to go until expiration than the November contract, it has more time value. Therefore, the premium for the December contract will be larger than for the November contract. Since the customer purchased the December contract (higher premium), it is a debit spread and will profit if the spread widens.
Which TWO of the following events may be reasons for a revenue bond issue to be called? I. There is a change in the tax status of the issuer II. Surplus funds are not available III. Interest rates rise dramatically IV. The facility is destroyed by fire
I and IV Explanation: Destruction by fire would be included in a catastrophe call provision and permit the issue to be called. If surplus funds are available (choice [II] states they are not available), the monies may be used to retire a portion of the outstanding bonds. If the tax status of an issuer is in doubt at the time of issuance, there is usually a provision requiring that the issue be called if the tax status of the issuer changes and the bonds become taxable. An issuer may refund an outstanding issue if interest rates are declining, not rising.
An investor takes the following position. Long 1 GHI Nov 65 put Short 1 GHI Nov 55 put Which TWO of the following statements are TRUE regarding this position? I. The investor paid money to create the position II. The investor received money to create the position III. The investor is bullish IV. The investor is bearish
I and IV Explanation: This position is referred to as a debit put spread. It cost the investor more than was received since the long put has a strike price greater than the short put. As a result, the long put is exercised first (since it has a higher strike price), allowing the investor to make money if the stock declines in value (a bearish move).
A municipal securities representative does an analysis of an official statement and prepares a summary report. The report must be approved by: I. A municipal securities principal II. FINRA III. The Issuer IV. The MSRB
I only Explanation: The preliminary and final official statements are not considered advertising since they are prepared by or for the issuer. However, a summary of an official statement is considered advertising since it is prepared by the municipal representative and, therefore, must be approved by a municipal principal.
Which TWO of the following time limitations must be complied with regarding the delivery of a risk disclosure document? I. A brokerage firm must deliver a risk disclosure document to a customer at the time the account has been approved for options trading II. A brokerage firm must deliver a risk disclosure document to a customer prior to the time the account has been approved for options trading III. A brokerage firm must deliver a risk disclosure document to a customer after the account has been approved for options trading IV. A brokerage firm must deliver a risk disclosure document to a customer after the first order has been entered
I or II Explanation: According to the rules of the exchanges where options are traded, a brokerage firm must deliver a risk disclosure document to a customer at or prior to the account being approved for options trading.
A municipal bond swap may be executed to: I. Establish a loss for tax purposes II. Increase cash flow III. Improve maturities IV. Improve yields
I, II, III, and IV Explanation: Municipal bond swaps may be executed to establish a loss, increase cash flow (increase income from larger coupon), improve maturities, improve yield, and improve quality.
A registered options principal (ROP) must review: I. Retail communication concerning options II. General options prospecting letters III. Option seminar transcripts IV. Allocation of exercise notices
I, II, III, and IV Explanation: The registered options principal (ROP) is specifically responsible for the firm's compliance program with respect to its options activities. The ROP performs an audit function to determine that these activities are conducted in compliance with current applicable regulations and rules. Some of the ROP's principal duties include establishing guidelines for options retail communication, and reviewing all such material before it is used. The ROP also reviews the method of allocation of exercise notices.
Which TWO of the following statements are TRUE concerning Section 457 plans? I. These plans are state-sponsored and used to fund higher education expenses II. These plans are used to fund retirement III. These plans grow tax-deferred IV. These plans grow tax-free
II and III Explanation: A Section 457 plan is a type of qualified retirement plan used by many public sector workers. 457 plans grow on a tax-deferred basis and are generally subject to the same contribution limits as 401(k) and 403(b) plans. Each has similar tax features and contribution allowances. The difference between the plans is the type of employee who may use them. A 401(k) plan is used primarily by for-profit employees, a 403(b) plan by nonprofit employees, and a 457 plan by some local government workers. State-sponsored, higher education savings plans that may be opened by an investor are referred to as Section 529 plans, not 457 plans.
A Web site is being designed for a registered representative of a member firm. Which TWO of the following statements are TRUE regarding the design of this Web site? I. The FINRA logo must be displayed II. The registered representative's firm name must be displayed III. A reference to FINRA membership is permitted IV. Links to other Web sites are not permitted
II and III Explanation: Care should be taken in the design of Web sites. The name of the member firm with whom the registered representative is associated must be displayed. While the use of the FINRA logo is NOT permitted, the registered representative's association with a FINRA member firm is allowed. However, when a reference to FINRA membership is used, the Web site must provide a hyperlink to FINRA's home page. Links to other Web sites are allowed but care should be taken that these sites do not provide fraudulent or misleading information
Which TWO of the following securities will MOST likely be subject to a withholding tax? I. A bond issued by a U.S. company but sold to U.S. investors II. A bond issued by a foreign company but sold to U.S. investors III. Stock issued by a foreign company but sold to U.S. investors IV. Stock issued by a U.S. company but sold to U.S. investors
II and III Explanation: Choice (II) is an example of a Yankee bond and choice (III) is an example of an ADR. Dividends and interest paid to a U.S. investor on foreign securities may be subject to a withholding tax by the country from which they were paid. If the investor has securities that paid dividends and/or interest that were subject to a foreign tax, the broker-dealer will send the investor a form that will report the gross amount of the dividends or interest, and the amount of tax withheld by the foreign government.
ABC Corporation intends to make an initial public offering of 10,000,000 shares of common stock, 7,500,000 shares of which will be new stock being issued by ABC Corporation and 2,500,000 shares will be for selling stockholders. Which TWO of the following statements regarding this offering are TRUE? I. It is a primary distribution II. It is a primary and secondary distribution III. The proceeds of the sale will be shared by the corporation and the selling stockholders IV. The corporation will receive all of the proceeds of the sale
II and III Explanation: Since both the corporation and existing shareholders are selling stock, it is both a primary and secondary distribution. In a primary distribution, proceeds go to the corporation. In a secondary distribution, proceeds go to the selling shareholders.
An investor owns stock that has increased in value. To protect his profit, he can: I. Enter a buy stop order II. Enter a sell stop order III. Buy put options on the stock IV. Buy call options on the stock
II and III only Explanation: A sell stop order can be used to protect a profit or limit a loss on an existing long position. It is not activated until the market declines to or below the stop price. By purchasing put options, the investor will have the right to sell his stock at a set price (strike price) and will establish a specific sales price
If convertible bondholders convert their bonds into the common stock of a corporation, the effect on the balance sheet of the corporation will be: I. An increase in current assets II. A decrease in total liabilities III. A decrease in stockholders' equity IV. An increase in stockholders' equity
II and IV only Explanation: The conversion of bonds to common stock reduces the total debt of the corporation while increasing stockholders' equity (additional shares of common stock). The answer, therefore, will be a decrease in the total liabilities and an increase in stockholders' equity
Charlene contacts her registered representative to buy an OTC stock. Rather than buying it directly from a market maker, Charlene's broker-dealer contacts another broker-dealer, who buys it from a market maker creating two levels of transaction fees. This is known as:
Interpositioning Explanation: Interpositioning occurs when a broker-dealer, executing an order for a customer, places another broker-dealer between itself and the market. This is generally prohibited.
Mr. Green is the manager for an asset allocation fund. In May, the fund's portfolio is allocated as follows. Cash (including T-bills) 5% Convertibles 12% Corporate Bonds 18% Common Stock 65% During the first week of June, Mr. Green shifted the assets in the portfolio to reflect: Cash (including T-bills) 65% Convertibles 5% Corporate Bonds 12% Common Stock 18% The reason for the change is most likely that Mr. Green:
Is bearish on bonds and stocks Explanation: The portfolio shift reflects significantly lower emphasis on stocks and a reduced position in bonds. If the manager anticipated a decrease in interest rates, he would be bullish on bonds. The bond allocation would then be expected to increase. Fundamental analysts are not market timers.
If an ABC July 40 put option is exercised, the writer:
Is obligated to purchase 100 shares of ABC stock Explanation: If the ABC put option is exercised, the writer is obligated to purchase 100 shares of ABC stock.
The stock price of XYZ Corporation has remained stable despite the fact that the company has increased the amount of its dividend. Under these conditions, what would happen to the stock's current yield?
It would increase Explanation: The current yield of a stock is found by dividing the stock's annual dividend by its market price. If the dividend increases while the market price remains the same, the stock's current yield will increase.
The major disadvantage to a limited partner in a DPP is:
Lack of liquidity Explanation: An investor has limited control (management) in equity investments and no control (management) in bond or DPP investments. The major disadvantage of a DPP is the lack of liquidity, meaning that the investor cannot easily sell his portion of ownership.
A CMO would be suitable for an investor seeking:
Monthly income, assuming he does not need the entire principal returned at maturity Explanation: CMOs pay monthly income made up of interest, which is taxable, and principal, which is a tax-free return of capital. Due to the structure of a CMO, a fluctuating amount of principal is returned monthly, not at maturity, which makes CMOs different from most other fixed-income securities.
A customer purchases 1,000 shares of an OTC equity in a cash account through an online brokerage firm on Wednesday, March 11th. The transaction will settle:
On March 16th Explanation: Regular way settlement of corporate securities is three business days. The transaction would settle on Monday, March 16th.
An option that is about to expire will automatically be exercised by the OCC if no instructions are given and if it is in-the-money by at least:
One Cent Explanation: The Options Clearing Corporation will automatically exercise an option that is about to expire if it is in-the-money by at least one cent.
An announcement in The Wall Street Journal states that New York State plans an advance refunding of its 7 1/2% Dormitory Bonds through the issuance of a special $50,000,000 bond issue. This means that:
Proceeds from the sale of a new bond issue will be put in an escrow account to retire the existing bond issue Explanation: Advance refunding means that proceeds from the sale of the new bond issue will be put in an escrow account to retire the existing bond issue. If a municipality wants to engage in advance refunding, as is the case in this example, the municipality will sell the new issue with the proceeds of the sale going into an escrow account containing U.S. government securities. The U.S. government securities would be purchased with a maturity date that coincides with the issue's call date. This allows the refunded issue to be retired using the proceeds from the matured government securities.
The system used to report municipal securities transactions is called the:
Real-Time Transaction Reporting System Explanation: Broker-dealers are required to report transactions in municipal securities to the Real-Time Transaction Reporting System (RTRS), which is operated by the MSRB.
As a customer's tax bracket increases, an RR is likely to allocate more of a customer's portfolio in:
Tax-exempt funds Explanation: This question focuses on an investor whose tax burden is increasing. An investment that produces a taxable return is taxed at the investor's marginal rate, i.e., the investor's tax bracket. Dividend income from a tax-exempt fund does not incur this burden. (Note, however, that capital gains distributions from a tax-exempt fund are taxable.
The Barge Towing Corporation has announced in a tombstone ad that it will issue $500,000,000 of 6 1/2% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2040 and are being issued at a $1,000 par value. The bonds are secured by:
The full faith and credit and no specific collateral of the Barge Towing Corporation Explanation: The tombstone ad states the bonds to be issued are subordinated debenture bonds, which are unsecured bonds. The bonds are secured by the full faith and credit and no specific collateral of the Barge Towing Corporation
A sales breakpoint of a mutual fund is:
The minimum dollar amount of a purchase of a mutual fund where a volume discount is given Explanation: A sales breakpoint of a mutual fund is the minimum dollar amount (not the share amount) of a purchase of a mutual fund where a volume discount is given. The percentage of the sales charge declines when certain minimum dollar amounts are reached.
A transaction occurs between two dealers for a Nasdaq stock. The trade must be reported by:
The seller within 10 seconds
Foreign currency spot transactions normally settle in:
Two business days Explanation: Settlement for foreign currency spot transactions is usually two business days.
If a customer places an order to buy bonds at 104 net, it indicates that the customer:
Wants to pay a maximum of 104 including any markup or commission Explanation: An order to buy at 104 net indicates the customer wants to pay a total of 104 including any markup or commission.
The purchase of a new issue prior to settlement with the issuer can BEST be described as a:
When-issued transaction Explanation: The term when-issued covers the period of a new issue of municipal securities from the original date of sale by the issuer to the delivery of securities to the underwriter. The purchase or sale of new issue securities prior to registration may be a violation of the 1933 Act.
A variable annuity would be MOST suitable for which of the following customers? a. A client in a high tax bracket who is purchasing the annuity for his spouse's retirement needs b. A client in a high tax bracket who is purchasing the annuity for short-term liquidity needs c. A client who is purchasing the annuity in a 401(k) for his retirement needs d. A client who is purchasing the annuity in order to have the funds available by the age of 50
a. A client in a high tax bracket who is purchasing the annuity for his spouse's retirement needs Explanation: A variable annuity is most suitable for an investor seeking long-term, tax-deferred income for retirement. A tax-deferred investment, as with a variable annuity, becomes more advantageous for an investor with a higher tax bracket. A variable annuity is unsuitable for customers that have short-term needs since the insurance company may impose surrender charges if the annuity proceeds are withdrawn early. It would also be unsuitable for a client purchasing the annuity in a tax-qualified account such as a 401(k) or IRA, since these accounts already have the benefits of tax-deferred growth. If a client withdraws the proceeds of a variable annuity prior to age 59 1/2, a 10% tax penalty applies.
Which of the following statements is TRUE concerning periodic payment variable annuities? a. A client's number of annuity units never changes b. A client's number of accumulation units never changes c. Annuity contracts never have a beneficiary d. The monthly payout is fixed by the inflation index
a. A client's number of annuity units never changes Explanation: During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The monthly payout is determined actuarially and is based on the performance of the separate account.
An investor with an investment objective of speculation wants to purchase a security that will increase by the same percentage as a decline in the S&P 500 Index. Which of the following securities would you recommend? a. An inverse exchange-traded fund (ETF) b. A leveraged exchange-traded fund (ETF) c. A leveraged inverse exchange-traded fund (ETF) d. An exchange-traded fund (ETF)
a. An inverse exchange-traded fund (ETF) Explanation: An inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. An inverse ETF based on the S&P 500 Index seeks to deliver the opposite performance of that index. So, if the S&P 500 rises by 1%, an inverse ETF would decrease by 1%, and if the S&P 500 falls by 1%, the inverse ETF would increase by 1% before fees and expenses. Choice (b) would be suitable if the customer anticipated an increase in the S&P 500 and wanted a multiple of that increase. Choice (c) would be suitable if the customer wanted a return that was a multiple or higher return and anticipated a decrease in the S&P 500, and choice (d) would be suitable if the customer only wanted to track the return of the S&P 500.
Which of the following factors is LEAST important when recommending a long-term brokered CD to a client? a. The CD was issued by a bank located in a different state from where the client lives b. The CD has a feature in which the interest rate is based on a percentage increase in an equity index c. The client will be purchasing the CD in a retirement account d. The firm may make a market in this CD, but is not obligated to do so
a. The CD was issued by a bank located in a different state from where the client lives Explanation: The state in which the client or issuing bank is located is not an important factor when recommending a long-term brokered CD. The features that establish the interest rate of the security, such as an index of fixed-income or equity securities, is relevant to the client. The amount of FDIC insurance and tax considerations are different depending on whether the CD is purchased in a retirement account. In addition, a broker-dealer is not required to maintain a secondary market or act as a market maker in a CD that was sold to the client. This will limit the liquidity of the security if the client needs the funds prior to maturity.
A client contacts an RR after reviewing the financial statements of the S-Works Carbon Company. The client is confused since the company paid a cash dividend but had a loss for the last fiscal year. Which of the following statements is TRUE? a. The company is permitted to pay a cash dividend even though it had a loss b. The company is not permitted to pay a cash dividend if it had a loss c. If the company has a loss in its last fiscal year, it may pay a cash dividend only with prior approval from shareholders d. If the company has a loss in its last fiscal year, it may pay a cash dividend only with prior approval from the SEC
a. The company is permitted to pay a cash dividend even though it had a loss Explanation: A company is permitted to pay cash dividends in excess of its net income even if it had a loss. In terms of financial accounting, cash dividends are paid out of retained earnings that are part of shareholders' equity. Therefore, cash dividends paid will reduce shareholders' equity. The company could have paid the cash dividend easily based on retained earnings from previous years.
Manny Ortiz, a registered representative with Red Sock Financial, has recommended the purchase of a variable annuity to Derek Pettitte, one of his clients. After agreeing to purchase the contract, which of the following actions must be taken? a. The information concerning the recommendation must be documented and signed by Manny b. The application must be forwarded by Manny directly to the issuing insurance company c. The principal only signs the recommendation if the purchase is approved d. The principal must review the application within five business days of receipt from Manny
a. The information concerning the recommendation must be documented and signed by Manny Explanation: If the purchase of a variable annuity is made after a recommendation by a registered representative, several steps must be taken before the application is submitted to the issuing insurance company. In this example, Manny must document and sign the recommendation before forwarding the application to the Office of Supervisory Jurisdiction (OSJ) of the member firm. The principal at the OSJ reviews the application to determine suitability. The principal must approve or reject the application within seven business days of receipt and must document and sign the approval or rejection.
An investor has sold a stock short. If the present market value is $2.00 per share, the minimum maintenance requirement will be: a. 50% b. $2.50 per share c. $2.00 per share d. 30%
b. $2.50 per share Explanation: When selling short securities that have a market value less than $5 per share, a minimum maintenance requirement of $2.50 per share or 100% of the market value, whichever is greater, applies. Since $2.50 a share is greater than $2.00 per share, this is the correct answer.
Which of the following bonds has the most interest-rate risk? a. A 3-month Treasury bill b. A 30-year Treasury STRIP c. A 6%-coupon, 30-year Treasury bond d. A 3%-coupon, 5-year Treasury note
b. A 30-year Treasury STRIP Explanation: The bond with the most interest-rate risk or price volatility is the one with the longest maturity and lowest coupon. Zero-coupon bonds would have the most interest-rate risk and a STRIP is a type of zero-coupon bond.
A registered representative opens an option account for a customer on October 1 and buys 5 ABC November 30 calls at 4. On October 16, the premium of the calls has decreased to 2 and the registered representative has not received a signed options agreement. The registered representative may: a. Not accept any orders from the customer until the signed options agreement is received b. Accept an order to sell the 5 ABC November 30 calls that were previously purchased c. Accept an order to buy 5 additional ABC November 30 calls d. Accept an order to buy 5 XYZ December 40 calls
b. Accept an order to sell the 5 ABC November 30 calls that were previously purchased Explanation: If the customer does not return the options agreement within 15 days of the approval of the account, the customer is permitted only to close out existing positions. Since the account was approved on October 1, the customer must sign the options agreement and return it to the firm by October 16. As of October 16, the customer may only open new options positions after the signed form is returned to the firm.
A customer contacts a registered representative and indicates her risk tolerance is to accept some risk to her initial principal in exchange for higher returns. The RR asks the customer if she understands that the account may lose value but may keep pace with or exceed inflation, and the customer agrees to these conditions. This customer's risk tolerance would BEST be defined as: a. Conservative b. Moderate c. Moderate conservative d. Moderate aggressive
b. Moderate Explanation: An investment risk tolerance in which the customer is willing to accept some risk to her initial principal, with some volatility and a possible loss of the funds invested in exchange for higher returns, is best defined as moderate. Moderate conservative includes low risk with an understanding there may be some volatility in exchange for a small amount of portfolio returns. Moderate or medium aggressive is a situation where the customer is willing to accept high risk and high volatility with a possible loss to her initial principal in exchange for high returns.
An investor has been following XYZ Corp. for several years and feels that the company is poised for some very profitable years. Since she wants to purchase a security that offers a consistent annual distribution and one that benefits from XYZ deciding to pay a significant cash dividend to its common stockholders, she should consider purchasing: a. Cumulative preferred stock b. Participating preferred stock c. Collateral secured bond d. Common stock
b. Participating preferred stock Explanation: Participating preferred stock allows the owners to share in the extraordinary earnings of a company. Essentially, participating preferred has a stated dividend, but these shareholders may receive more than that amount based on the profits of the issuing company. Cumulative preferred stock will add all unpaid dividends to a future payment if a cash dividend is to be paid to common shareholders. A collateral secured bond provides the holder with safety due to it being backed by a specific asset of the issuer; however, the issuer will pay no more than the bond's stated rate of interest. Common stock will pay only cash dividends if they are declared by the company s board of directors.
One of your clients anticipates a significant decline in XYZ stock. The client wants to establish a position to take advantage of a large decline, but not expose himself to significant risk. Which of the following actions best satisfies your client's needs? a. Short XYZ stock b. Purchase an XYZ put c. Purchase an XYZ straddle d. Establish an XYZ debit put spread
b. Purchase an XYZ put Explanation: A long put will allow your client to realize a gain determined by the amount the stock falls below the option's strike price, less the premium. The investor is at risk only for the amount paid for the put, i.e., the premium. In selling XYZ short, an investor exposes himself to unlimited risk. When purchasing a straddle, the investor pays a premium greater than when purchasing only one put on the stock. While the debit put spread is bearish, the gain is limited to the difference between the strike price on the long put and the strike price on the short put, less the net premium.
Which of the following items is NOT found by reviewing a company's balance sheet? a. The dollar value of the inventory b. The amount of interest paid on the company's bonds outstanding c. The amount of short-term debt d. The value of the treasury stock
b. The amount of interest paid on the company's bonds outstanding Explanation: The amount of interest paid on the company's bonds outstanding (interest expense) is found in a company's income statement. A company's assets (inventory), liabilities (debt or bonds), and shareholders' equity (treasury stock), are found on the balance sheet.
Which of the following parties is responsible for the safekeeping of the securities owned by a mutual fund? a. The registrar b. The custodian bank c. The sponsor d The transfer agent
b. The custodian bank Explanation: The custodian bank is responsible for the safekeeping of the securities owned by a mutual fund. The custodian bank has no responsibility relating to the management of the fund's portfolio.
The purchaser of a variable life insurance policy bears which of the following risks? a. The death benefit may fall to zero due to poor market performance b. The policy may have no cash value if the separate account performance is negative c. The insurance company may increase the premiums if the investment performance of the separate account is poor d. The increasing cost of doing business may force the insurance company to raise expense charges against the separate account
b. The policy may have no cash value if the separate account performance is negative Explanation: The cash value of a variable life insurance policy increases or decreases in relation to the performance of the separate account. Poor performance could cause the cash value to decline to zero. Although the death benefit can also increase or decrease, it may never fall below a set minimum. The premiums for variable life policies are fixed for the life of the policy. An expense guarantee clause in life insurance contracts prevents the insurance company from raising expense charges for the administration of the policy.
The penny stock rules would apply under which of the following circumstances? a. The stock is listed on Nasdaq b. The stock is quoted on the OTC Bulletin Board c. The transaction is not recommended by the broker-dealer d. The customer is an active trader in penny stocks
b. The stock is quoted on the OTC Bulletin Board Explanation: A penny stock, according to SEC rules, is a stock that sells for less than $5.00, that is not listed on Nasdaq or the NYSE. A stock quoted on the OTC Bulletin Board or OTC Pink Market (Pink Sheets) that has a bid price of less than $5.00 is defined as a penny stock. Penny stock rules would not apply under the following conditions. • The customer is defined as an existing customer, which is a person who has maintained an account with a broker-dealer for more than one year, or has previously engaged in 3 or more transactions involving penny stocks (i.e., an active trader of penny stocks) • In nonrecommended or unsolicited transactions • In transactions by a broker-dealer that is not a market maker in that security • In transactions by an institutional accredited investor
Which of the following choices makes a financial commitment in the distribution of a new issue of securities? a. The selling group b. The underwriting syndicate c. A customer who provides an indication of interest d. The exchange on which the security will be listed
b. The underwriting syndicate Explanation: The underwriting syndicate makes a commitment to the issuer to purchase the entire offering. If the syndicate cannot resell the offering at the public offering price, it may suffer a loss. While the selling group also participates in the sale of the new issue, it does not run the risk of losses if the securities do not sell. Regarding choice (c), a customer who provides an indication of interest has no obligation of any kind
Which of the following statements is TRUE concerning electronic communication networks (ECNs)? a. They can be used only by retail investors b. They can be used to obtain automatic execution c. They can be used only by institutional investors d. They can be used by clients that do not want to use a broker-dealer
b. They can be used to obtain automatic execution Explanation - Electronic communication networks (ECNs) are trading systems designed to match buyers with sellers of securities. They can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another, but allow subscribers such as broker-dealers to use these systems to execute the orders sent to them by their clients
Which of the following short positions violates SEC rules? a. A customer short stock that he borrowed from the brokerage firm b. A customer short and long the same stock at the same time c. A customer borrowing stock in order to profit from a tender offer d. A customer short stock while owning bonds convertible into that stock
c. A customer borrowing stock in order to profit from a tender offer Explanation: A tender offer takes place when an entity offers to buy a corporation's shares at a premium to the current market price. It is normally done for the purpose of acquiring control of the company. According to SEC rules, a customer may not tender short (borrowed) shares.
When pricing a bond, what information is NOT required? a. The coupon rate b. The maturity date c. The settlement date d. The number of bond years
d. The number of bond years Explanation: When pricing a bond (determining the yield when price is known or determining the price when yield is known), the coupon, settlement date, and maturity are required. The number of bond years is used to determine the net interest cost when an underwriting is bidding on a new issue of municipal bonds.
Which of the following investors would be LEAST suitable for an oil and gas direct participation program (DPP)? a. An investor in the highest federal tax bracket b. A retired investor who is in the highest federal tax bracket c. An investor who is concerned about the alternative minimum tax d. An investor who recently inherited $5,000,000
c. An investor who is concerned about the alternative minimum tax Explanation: An investment in an oil and gas limited partnership may have excess depletion and depreciation as well as excess intangible drilling costs. These are tax preference items and may result in an investor being subject to the alternative minimum tax (AMT). The other investors may or may not be suitable for an oil and gas DPP. It would depend on many other factors. However, an investor concerned about the AMT would not want to invest in a security that normally has tax preference items.
In a new municipal issue, what is a group order? a. An order placed by three or more members b. An institution purchasing bonds from a syndicate c. An order allowing all members to benefit d. A dealer buying for a group of investors
c. An order allowing all members to benefit Explanation: There are four types of orders that can be placed with a syndicate. 1. A presale order is any order placed before the syndicate that actually purchases the issue from the issuer 2. A group order is a situation where all members of the syndicate share in the profit 3. A designated order is usually placed by a large institution that designates two or more members to receive credit for the sale 4. A member order is an order placed by members for their customers
Which of the following statements is NOT TRUE regarding a SEP IRA? a. An employer makes contributions to an employee's IRA b. An employer is not required to make annual contributions c. Employees are permitted to make contributions to the account d. Employees are immediately vested for any contributions made to the account
c. Employees are permitted to make contributions to the account Explanation: A simplified employee pension plan (SEP IRA) does not allow the employee to make contributions. SEPs are funded by employer contributions only. This is different than for Keogh plans, which do allow for employees to make nondeductible contributions to their own account.
Which of the following terms are synonymous? a. Net asset value and offering price b. Selling price and bid price c. Net asset value and redemption price d. Bid price and management fee
c. Net asset value and redemption price Explanation: The net asset value and redemption price are synonymous. An investor who owns a mutual fund may redeem (sell) the security back to the fund at the net asset value (NAV).
A double-barreled municipal bond is backed by the: a. Revenues of a project b. Taxes of a municipality c. Revenues of a project and taxes of a municipality d. Revenues of the U.S. government
c. Revenues of a project and taxes of a municipality Explanation: A double-barreled municipal bond is backed by two sources of income, which would be the revenues of a project and the taxes of a municipality.
A research analyst at a broker-dealer is preparing a research report recommending ABC common stock. Which of the following situations need not be disclosed? a. ABC Corp is an investment banking client of the broker-dealer b. The broker-dealer has a 1% or greater beneficial ownership in ABC common stock c. The broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds d. The broker-dealer makes a market in ABC common stock
c. The broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds Explanation: The broker-dealer is required to make certain disclosures in its research reports, such as whether the firm has an investment banking relationship or makes a market in the common stock of ABC. It must also disclose its ownership in a subject security if the ownership is equal to or greater than 1% beneficial ownership in common equity. Since nonconvertible debt is not considered common equity, disclosure is not required.
Which of the following statements is NOT TRUE regarding accounts established under the Uniform Gifts to Minors Act? a. Taxes are the responsibility of the minor b. The custodian makes all investment decisions in the account c. The custodian may use account positions to cover short options positions in his own personal account d. The account must reflect the minor's Social Security number
c. The custodian may use account positions to cover short options positions in his own personal account Explanation: The custodian may not use securities in the custodian account to cover an options position in his own personal account. All securities in the custodian account must be used only for the benefit of the minor.
Long-term certificates of deposit (CDs) have which of the following characteristics? a. They may only be sold by broker-dealers that are subsidiaries of banks b. They are considered risk-free investments c. They may be sold prior to maturity at a price that is different from the client's original cost d. They are not subject to interest-rate risk since the principal is insured by the FDIC
c. They may be sold prior to maturity at a price that is different from the client's original cost Explanation: Long-term CDs have a maturity of more than one year. Since the securities are traded in the secondary market, changes in interest rates will cause price fluctuations. If sold prior to maturity, a CD investor may have a loss or gain. Long-term CDs are issued by banks, but may be sold by any type of broker-dealer. The FDIC provides protection up to $250,000.
Which of the following choices BEST describes Eurodollars? a. U.S. dollars on deposit in U.S. banks b. U.S. dollars on deposit in European banks c. U.S. dollars on deposit in foreign banks d. European currency on deposit in U.S. banks
c. U.S. dollars on deposit in foreign banks Explanation: Eurodollars are defined as U.S. dollars on deposit in foreign banks, not just in Europe.
What information would NOT need to be disclosed by a broker-dealer in a research report? a. The broker-dealer received compensation for assisting the company in an acquisition b. The analyst provided a target price for the company c. The analyst is a director of the company d. The analyst had owned shares in the company one year before writing the report
d. The analyst had owned shares in the company one year before writing the report Explanation: A broker-dealer is required to make certain disclosures in its research reports. Any investment banking compensation paid during the last 12 months, the anticipated price target, and the fact that the analyst is a director of the company are all required disclosures. In addition, any ownership in the company held by the analyst or a member of the analyst's immediate family at the time the report is issued must be disclosed. The fact that the analyst formerly owned shares that were sold does not need to be disclosed.
Four municipal bonds maturing in 2039 are all selling at a 7.00 basis. Which of the following bonds is most likely to be refunded? a. 5 1/2% callable in 2024 @ 103 b. 6 1/2% callable in 2023 @ 100 c. 7% callable in 2024 @ 103 d. 7 1/2% callable in 2023 @ 100
d. 7 1/2% callable in 2023 @ 100 Explanation: The most common reason for a municipality to refund an outstanding issue is to save interest costs. If a municipality can borrow money at a lower rate than the outstanding issue, it can use this money to refund the outstanding issue and thus save interest cost. The bonds are selling at a 7.00% yield. The municipality can then expect to borrow new monies at a 7.00% interest rate. The municipality can only save money by refunding an issue with a higher interest rate, 7 1/2%
Which of the following securities are based on the credit rating of the issuer? a. An exchange-traded fund (ETF) b. A mutual fund that contains only non-investment-grade securities c. A closed-end bond fund d. An exchange-traded note (ETN)
d. An exchange-traded note (ETN) Explanation: Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it can impact the value of the ETN negatively, regardless of how its underlying index performs. The credit rating of the securities included in a mutual fund, closed-end bond fund company, or ETF has an impact on these types of securities. These securities are not affected by the ratings of the company that is issuing the fund or ETF
Which of the following advantages is NOT a benefit of owning a real estate investment trust? a. Stable dividend income b. The ability to buy and sell shares easily c. Diversification d. Protection against rising interest rates
d. Protection against rising interest rates Explanation: Real estate investment trusts (REITs) offer investors a stable dividend based on the income produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange, offering investors liquidity. Since investors usually purchase REITs for their high dividend yield, if interest rates increase, the value of their shares will usually decrease as other newly issued income earnings securities become more attractive.
To determine what would happen to the coverage of revenue bonds when more bonds are going to be issued in the future, one should examine: a. The rate covenants of the bond b. Feasibility studies c. The refunding procedure of the bond d. The additional bonds test
d. The additional bonds test Explanation: The additional bonds test sets a minimum level of coverage of debt service for interest and principal for all outstanding bonds and for future debt. The additional bonds test protects original bondholders against the dilution of the debt service coverage. Rate covenants insure that rates will increase in line with costs to insure proper revenues for the maintenance of the facility or project and payment of the debt service. Feasibility studies are conducted to insure the proper need of the project being developed. Refunding is used to lower interest expense on bonds through the issuance of new bonds at lower coupon rates. The proceeds of the new bond sale would be used to repurchase the already outstanding high-coupon bonds.
Which of the following statements is NOT TRUE of treasury stock? a. It is listed on the company's balance sheet b. Treasury stock has no voting rights and does not receive dividends c. It is outstanding stock that has been repurchased by the corporation d. Treasury stock has been issued by the U.S. Treasury and was purchased by a corporation
d. Treasury stock has been issued by the U.S. Treasury and was purchased by a corporation Explanation: Treasury stock is stock that has been issued and was outstanding but has been repurchased by the company. Treasury stock does not have voting rights nor the right to receive dividends.
Which of the following positions/strategies is NOT bullish? a. A married put b. A short put c. A long 40 call and a short 50 call d. Writing a straddle
d. Writing a straddle Explanation: Straddle writers expect a neutral market and obtain the maximum gain if each option expires. Each of the other choices has an opportunity for a profit if the underlying security rises in value.
