Series 7 Practice Exam 5 Q&A

Which of the following actions by the Federal Reserve Board results in a decrease in the money supply? a. The purchase of securities in the open market b. The sale of securities in the open market c. A decrease in the discount rate d. A decrease in the reserve requirements

b. The sale of securities in the open market Explanation: The sale of securities by the Federal Reserve Board in the open market results in the withdrawal of reserves from the banking system, thereby decreasing the money supply. All the other actions by the FRB result in an increase in the money supply.

An airport deducts all of the following expenditures before arriving at its net revenues, EXCEPT: a. Runway maintenance expenses b. Debt service expenses c. Hangar expenses d. Salaries of airport personnel

b. Debt service expenses Explanation: Debt service expenses are paid first only in gross revenue pledges. It is assumed that the airport is using a net revenue pledge that results in all maintenance and operation expenses being deducted before arriving at net revenues.

An investor writes an uncovered XYZ June 15 put for a premium of 2. What is the maximum loss the investor could incur?

$1,300 Explanation: The lowest XYZ could decrease is to zero. The owner of the put could buy the stock for pennies and put (sell) it to the writer for $15 per share ($1,500). This is the price at which the writer will be required to buy the stock. However, since the writer received the $200 premium, the maximum loss is $1,300 ($1,500 loss - $200 premium received = $1,300 loss).

A municipality is issuing 40,000 bonds at a public offering price of $1,000. The manager of the underwriting syndicate receives $1.50 per bond. The total takedown is $6.50 per bond and the selling concession is $4.00 per bond. Assume the entire issue is sold with the selling group distributing 20,000 of the bonds sold. Calculate the amount of compensation the syndicate will receive for its risk on selling group sales.

$2.50 per bond for a total of $50,000 Explanation: The members of the syndicate receive $2.50 per bond for their risk. This is the total takedown of $6.50 minus the selling concession of $4.00. Since the selling group sold 20,000 bonds, the syndicate will receive $50,000 for its risk on those bonds ($2.50 per bond on 20,000 bonds).

Mr. Smith, a self-employed computer analyst, has total annual earnings of $125,000. What is the maximum deductible contribution he can make to his Keogh plan?

$25,000 Explanation: A Keogh plan allows a maximum annual contribution of 100% of compensation or $53,000, whichever is less. (For 2014, the limit was $52,000.) This question is asking the amount deductible. The amount deductible is limited to the lesser of 20% of compensation or $53,000 (also $52,000 for 2014). A self-employed individual may make a deductible contribution of 20% of self-employed income, up to a maximum of $53,000, to a Keogh account. Twenty percent of Mr. Smith's income ($125,000) is $25,000.

An investor purchases 10 XYZ October 40 puts when the market price of XYZ is $41 per share, and pays a premium of $3. What is the maximum loss this investor could incur?

$3,000 Explanation: A buyer of a call or put option pays the premium based on 100 shares of stock. The call option buyer has the right to call (buy) 100 shares of stock at the exercise (strike) price. The put option buyer has the right to put (sell) 100 shares of stock at the exercise price. In both cases, the premium the buyer pays is the maximum amount of money that can be lost if the option expires worthless. The total premium of $3,000 ($300 per contract) is the maximum amount of money the investor can lose.

A customer makes an initial investment of $20,000 in a high-yield bond fund with a purchase of 702 shares. Over the next five years, the customer deposits another $25,000 and also reinvests $14,000 of distributions for a total of 1,240 additional shares. If the fund is currently valued at $27.11, what is the customer's cost basis using the average cost method?

$30.38 Explanation: To calculate the cost basis using the average cost method, divide the sum of all investments (including reinvested distributions) by the total number of shares owned by the investor. The investor purchased $20,000 of the fund, giving him 702 shares. Over the next five years, the customer deposited another $25,000 and also reinvests $14,000 of distributions for a total number of 1,240 additional shares. The sum of all investments is $59,000 ($20,000 + $25,000 + $14,000) and the total shares owned is 1,942 (702 + 1,240). Therefore, the average cost is $30.38 ($59,000 / 1,942). The current value of the fund is not relevant

A customer buys an ABC July 50 call, paying a $3 premium. Seven months later, the customer exercises the call when the market price of ABC stock is $60 per share. The customer immediately sells the stock for $6,000. When computing the profit, the customer will use a cost basis of:

$5,300 Explanation: The customer paid $300 for the call option plus $5,000 when he exercised the option at the $50 strike price. The customer's cost basis is, therefore, $5,300. The strike price plus the premium equals the cost basis for a buyer of a call who is exercising the option.

An investor purchases 100 shares of XYZ at 60 and also writes an XYZ 65 call @ 3. What is the investor's maximum potential loss?

$5,700 Explanation: The investor will suffer a loss if the price of XYZ declines. XYZ could go bankrupt and the price of the stock would decline to zero. The investor will have a loss of $6,000 (his original cost) on the stock, which will be partly offset by the $300 premium received from writing the call. His net loss is then $5,700

A customer purchases $15,000 in convertible bonds (15 bonds at $1,000 par). The Federal Reserve Board margin requirement is 50% and the customer deposits $7,500. If the bonds increase in value to 108 ($16,200), how much excess equity will the customer have in the account?

$600 Explanation: If the bonds increase in value to $16,200, the equity in the account will be $8,700 (market value of $16,200 - $7,500 debit balance). The initial FRB requirement on $16,200 market value is $8,100 (50% x $16,200). Since there is $8,700 of equity, there is $600 of excess ($8,700 equity - $8,100 requirement).

XYZ Corporation has issued $50 million 7% bonds at a premium. The bonds have a current yield of 6% and a yield to maturity of 5%. An investor purchasing $1,000,000 face value of bonds at the offering will receive a yearly income of:

$70,000 Explanation: An owner of the bonds will receive 7% of the par value yearly regardless of the cost. In this example, the investor purchased $1,000,000 face value of bonds and will, therefore, receive $70,000 (7% of $1,000,000 = $70,000) in yearly income.

An individual invested $30,000 in an oil and gas balanced program as a limited partner. His portion of a recourse loan is $50,000. What is the individual's basis?

$80,000 Explanation: Under the IRS at-risk rule, an investor may include in his basis those monies for which he is in fact liable. Since the loan is a recourse loan, the investor is liable for its repayment. The investor's basis is, therefore, $80,000 ($30,000 investment + $50,000 recourse loan).

Premature withdrawals from an Individual Retirement Account (IRA) are subject to a penalty of:

10% Explanation: Premature withdrawals from an IRA or Keogh account are subject to a penalty of 10%.

A municipal bond with an 8% coupon and eight years to maturity is purchased for 106. If the bond is sold six years later, what will be its cost basis?

101.50 Explanation: When a bond is purchased at a premium (above par value), the premium must be amortized (reduced) over its life. The premium in this example is six points, which must be amortized over its 8-year life. It must be amortized 3/4 point each year (6 points divided by 8 years to maturity). After six years, it will be reduced by 4 1/2 points (3/4 x 6). Its cost basis will, therefore, be 101 1/2 (106 original cost - 4 1/2 points amortized premium).

A stock closes at $37. The next day the stock sells ex-dividend $0.68 per share. At what price will the stock open the next day if it opens at the same level it closed the day before?

36.32 Explanation: The price of a stock is reduced by an amount sufficient to cover the dividend. The price will be reduced by 68 cents. Therefore, $37 - .68 = $36.32.

Listed equity options stop trading at:

3:00 p.m. Central Time, 4:00 p.m. Eastern Time on the business day before the expiration date of the option Explanation: Listed equity options stop trading at 3:00 p.m. Central Time, 4:00 p.m. Eastern Time on the business day prior to the expiration date of the option. Trading ceases on the third Friday of the expiration month. The expiration date is on the Saturday immediately following the third Friday of the expiration month.

AQL stock is currently quoted at 48.50 bid, offered at 48.70. A client purchasing this security will pay:

48.70 plus a commission Explanation: A client purchasing a security pays the offer (ask) price plus a commission and, when selling a security, receives the bid price minus a commission

An investor buys a zero-coupon bond at 37. A few years later the bond's basis has been accreted for tax purposes to 42. If the bond is sold at 45, the investor will recognize:

A 3-point capital gain Explanation: When selling a zero-coupon security, if the bond is sold above the accreted value (not the original cost), it is considered a capital gain and, if sold below, a capital loss. According to IRS rules, the accretion added each year to the cost basis for a zero-coupon security is treated as interest income for that year. If a zero-coupon security is sold for its accreted value, the investor will have no gain or loss.

An investment in which of the following securities requires a customer to sign a statement attesting to her annual income and net worth?

A direct participation program Explanation: An investor purchasing a limited partnership or DPP is required to sign a subscription agreement. As part of this agreement a customer would be required to sign a statement attesting to her annual income and net worth. In order to be suitable for this type of investment, the customer must meet minimum annual income and net worth requirements. By signing this statement, the customer has acknowledged the information she disclosed is accurate. The other investments do not require this type of statement signed by the customer.

Which of the following securities is MOST appropriate for an investor seeking to buy a new home within the next year?

A long-term CD purchased in the secondary market, that matures in 12 months Explanation: In general, the most liquid securities are money-market securities (those that mature in a year or less). Securities with longer maturities tend to be more volatile. Even if a security is callable, there is no guarantee that the call will take place. If interest rates are rising, bond prices will fall, and call features are unlikely to be exercised by issuers.

A municipal dealer has a customer's order to purchase bonds on an agency basis. According to MSRB rules, the customer's order must be executed at:

A price that is fair and reasonable Explanation: MSRB rules require that transactions be executed at a price that is fair and reasonable

Which of the following option writers has unlimited risk potential? a. A call writer who owns the underlying stock b. A call writer who owns bonds convertible into the underlying stock c. A put writer who sells the underlying stock short d. A put writer who deposits cash equal to the strike price of the put

A put writer who sells the underlying stock short Explanation: All of these positions describe covered option writers. However, in the first two choices, if the market price of the stock rises, the call is exercised against the investor and she is obligated to sell the underlying stock. In both cases, she is long the security to fulfill her obligation. In choice (a), she has the stock if it is called away and, in choice (b), she can convert the bonds into stock that she is obligated to deliver when the option is exercised. With both of these choices, the loss is limited, since the stock can only decline to zero. In the case of the convertible bonds, if the stock price falls, the bonds may still have some value depending on the issuing corporation. In choices (c) and (d), the put would be exercised against the investor if the price of the underlying stock declines. In both cases, the investor will have the cash needed to purchase the stock if exercised. If the price of the underlying stock rises, the put option would expire. However, in choice (c), the investor is short the stock and, therefore, has unlimited risk potential.

Mr. Mulligan hears sensitive news on Culligan Corporation before it is disseminated to the public. He conveys this information to Smithers, who purchases Culligan Corporation for his own account. According to federal securities law, Mr. Mulligan will be considered:

A tipper Explanation: Mr. Mulligan is considered a tipper under the insider trading laws -- one who is liable under federal securities law for trading based on insider information or communicating such information to others who use the information.

The bonds included in The Bond Buyer 20-Bond Index have an average rating of:

Aa2 Explanation: The 20-Bond Index has an average rating on S&P of AA and on Moody's of Aa2. The 11-Bond Index contains general obligation bonds with an average rating on S&P of AA+ and on Moody's of Aa1.

Accumulation units are converted to annuity units when the:

Amount to be paid out is calculated Explanation: Accumulation units are converted to annuity units when the individual chooses to begin receiving payments.

Which of the following choices BEST defines the Municipal Bond Index? a. The average yield on 25 general obligation bonds with 30-year maturities b. The average price on 20 selected municipal revenue bonds with 20-year maturities c. An estimate of the prices of 40 long-term municipal bonds adjusted to a 6% coupon d. The average yield on 11 selected municipal revenue bonds with 20-year maturities

An estimate of the prices of 40 long-term municipal bonds adjusted to a 6% coupon Explanation: The Bond Buyer Municipal Bond Index is based on the prices of 40 recently issued, long-term general obligation and revenue bonds. The index is calculated by taking the price estimates and adjusting them to a 6.00% coupon. The index is published daily and serves as the basis for a futures contract (which is no longer traded). Three other Bond Buyer indices are the average yield on 25 revenue bonds with 30-year maturities, the average yield on 20 municipal general obligation bonds with 20-year maturities, and the average yield on 11 municipal general obligation bonds with 20-year maturities.

An individual considering moving to the payout phase of a variable annuity should understand the payments will:

Be based on the performance of the subaccount products in the separate account Explanation: The investor assumes the risk when purchasing a variable annuity. Once annuitized, the number of annuity units remains the same and payments are based on the performance of the subaccount products in the separate account, and the chosen settlement option. Should the value of the separate account fall below the investor's cost basis, the payments may amount to less than the cost basis.

A designated market maker/specialist has an order on its book from a public customer to buy stock at $34.70 and another order from a public customer to sell stock at $34.95. The DMM may: a. Buy stock for its own account at $34.71 b. Buy stock for its own account at $34.69 c. Sell stock from its own account at $34.96 d. Sell stock from its own account at $35.01

Buy stock for its own account at $34.71 Explanation: The specialist on an exchange is also referred to as a designated market maker (DMM). A DMM is not permitted to compete with public orders when trading for its own account. The DMM may buy stock at a higher price or sell stock at a lower price. In doing so, the DMM has narrowed the spread (the difference between the bid and ask). The DMM is permitted to buy stock at $34.71 since this price is higher than the price of the public order ($34.70). The other choices would result in the DMM buying lower or selling at a price equal to or higher than the public customer's order.

A fundamental analyst, evaluating the common stock of a corporation, will examine all of the following choices, EXCEPT the:

Current amount of short interest positions for the stock Explanation: A fundamental analyst will examine all the factors listed relating to a common stock except the current amount of short interest positions for the stock. Short interest is a statistic examined by a technical analyst. It represents the total amount of shares sold short that will be covered in the future.

Which of the following interest-rate environments makes call protection MOST valuable to a purchaser of bonds?

Decreasing interest rates Explanation: Call protection would be most valuable to a purchaser of bonds when interest rates decline. If interest rates fall, existing bond prices rise. A municipality or any issuer would likely call bonds when interest rates decline so it can issue new bonds with lower rates of interest. Although bonds may be callable at a small premium above par value, if the bonds are not callable, the investor may realize the full benefit of an increase in the market price of the bonds

Which of the following choices is available in a direct participation program in oil and gas but NOT in real estate? a. Passive income b. Depreciation c. Depletion d. Interest expense deductions

Depletion Explanation: The most advantageous tax benefit that an investor can receive from an oil and gas program is the depletion deduction, which accounts for the use of a natural resource. Depletion is not available in a DPP in real estate. Both types of DPPs may have passive income or losses, depreciation, and interest expense deductions.

A corporation is planning to issue new stock to the public but has not yet filed a registration statement with the SEC. As a registered representative of the firm that is expected to do the underwriting, you are permitted to take which of the following actions? a. Obtain indications of interest from prospective purchasers b. Discuss the offering with investment bankers at your firm c. Send a customer a copy of a preliminary prospectus (red herring) d. Guarantee a customer that he will be able to purchase 1,000 shares of the issue

Discuss the offering with investment bankers at your firm Explanation: A registered representative may discuss the offering only with employees at the firm. None of the other choices listed are permitted since the corporation has not filed a registration statement with the SEC. If a registration statement has been filed with the SEC, the registered representative may send a customer a red herring and obtain indications of interest to purchase the new issue. The registered representative cannot accept money nor guarantee a customer a particular amount of the issue

A stock trades ex-dividend on Monday the 20th. What is the last day an investor can purchase the stock and be entitled to the dividend?

Friday the 17th Explanation: To be entitled to receive the dividend, the stock must be purchased prior to the ex-dividend date. Friday the 17th is the last day an investor could purchase the stock and be entitled to the dividend, since it is the business day prior to the ex-date.

A block of bonds is offered firm by Dealer A to Dealer B for one hour with a five-minute recall. Dealer A calls Dealer B and says, fill or kill. Dealer B:

Has five minutes to take the bonds Explanation: When bonds are offered firm for one hour with a five-minute recall, the offering Dealer A cannot sell the bonds to anyone but Dealer B without giving Dealer B the first opportunity to take the bonds. When Dealer A called Dealer B and said, fill or kill, Dealer A was invoking the five minute recall. Dealer B would now have five-minutes to take the bonds or else Dealer A would be free to sell the bonds to someone else.

Which TWO of the following orders will be reduced when XYZ Corporation sells ex-dividend? I. A GTC order to sell 100 XYZ at $50 stop II. A GTC order to sell 100 XYZ at $50 stop-limit III. A GTC order to buy 100 XYZ at $50 stop IV. A GTC order to buy 100 XYZ at $50 stop-limit

I and II Explanation: Open or good-until-cancelled (GTC) orders that are entered below the market are automatically reduced when a stock sells ex-dividend unless they are marked Do Not Reduce (DNR). Orders that are entered below the current market at the time they are entered are buy limit orders, sell stop orders, and sell stop-limit orders. Open orders that are entered above the market are sell limit orders, buy stop, and buy stop-limit orders. The GTC sell stop and sell stop-limit orders are entered below the market and are reduced on the ex-dividend date.

For secondary market transactions, a municipal securities broker-dealer may use a broker's broker to: I. Disseminate the availability of the securities II. Sell securities but remain anonymous III. Increase the market price of the securities IV. Guarantee a profit on a trade

I and II only Explanation: A municipal securities broker-dealer may use a broker's broker to help sell bonds. Using a broker's broker will allow for good exposure to the market for the bonds. The broker's broker also keeps the identity of its client confidential. A broker's broker does not divulge the contraparty's name to the buyer or seller.

An investor purchased 1,000 shares of XYZ at $45 a share and, five months later, purchased another 1,000 shares of XYZ at $50 a share. If the investor sold 400 shares of XYZ nine months after the second purchase, which TWO of the following statements are TRUE? I. The investor is not required to identify which shares are being sold II. The investor is required to identify which shares are being sold III. The cost basis is $45 per share IV. The cost basis is $50 per share

I and III Explanation: In this question, the investor has two positions in XYZ stock and each position was purchased at different times and at different prices. When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. Since the investor did not identify the shares to be sold, the cost basis will be $45 per share (based on the first purchase).

Which TWO of the following persons may be permitted to purchase issuer-directed shares of an equity IPO? I. An employee of a FINRA member whose spouse is a director of the issuer II. A portfolio manager of a mutual fund purchasing for his personal account III. Employees of the issuer if the issuer is a FINRA member IV. An outside attorney assisting in the IPO

I and III Explanation: Issuer-directed securities provide an exemption for certain individuals under the New Issue Rule. Under this provision, issuers may direct securities to the parent company of the issuer, the subsidiary of an issuer, and employees and directors of an issuer. The issuer-directed provision also permits immediate family members of employees and directors to participate in the offering. Registered representatives are also allowed to purchase shares of an equity IPO if the issuer is that person's employing broker-dealer or is the parent or subsidiary of the broker-dealer. An attorney hired to assist in the IPO is also restricted and, since he is not employed by the issuer, he is not eligible to buy issuer-directed shares. A portfolio manager of a fund may not purchase for his personal account. A purchase may be made on behalf of the fund.

Evelyn has established the following position. Long 1 DEF May 50 call at 2 Short 1 DEF May 40 call at 6 She expects to profit in which TWO of the following situations? I. Both options expire unexercised II. Both options are exercised III. DEF rises in value IV. DEF falls in value

I and III Explanation: This position is referred to as a credit call spread. Evelyn has received more for establishing the position because the short call has a strike price less than the long call. If both calls expire unexercised, Evelyn will keep the difference. If DEF falls below $40 per share, neither call will be exercised, resulting in a profit for Evelyn.

A client owns 400 shares of stock in a European company. The client receives a cash dividend and tax is withheld by the European country. Which TWO of the following statements are TRUE concerning the U.S. tax implications for the client? I The taxes paid may be used as a credit II. The dividends are considered a return of capital III. The taxes paid may be used as a deduction IV. The dividend paid is exempt from taxes

I and III Explanation: U.S. citizens and corporations owning foreign stock may receive dividends from which foreign taxes have been withheld. The investor still owes U.S. income tax on the net dividend. The amount of the foreign tax, however, may be claimed by the investor as a deduction against income, or may be applied as a credit against U.S. income tax.

An investor who expects an increase in volatility in the equity markets would MOST likely adopt which TWO of the following strategies? I. Long VIX call options II. Establish a VIX call credit spread III. Establish a VIX put credit spread IV. Long VIX put options

I and III Explanation: VIX is the CBOE's Volatility Market Index option. It is a broad-based index option and is calculated using the S&P 500 Index option bid and ask quotes. The VIX (volatility index) is often referred to as a gauge of investors' fears. The index increases or decreases based on the expected volatility of the market. If an investor expects volatility to rise, she would be bullish on the VIX. A bullish option strategy such as long calls, put credit spreads (executed for a net credit), or call debit spreads (executed for a net debit) would enable the investor to profit if the VIX increases. Many investors buy VIX call options as a hedge against a possible decline in the market since the VIX usually moves inversely with the equity market.

Currency values in a floating-rate system are established by:

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

Which TWO of the following statements are TRUE about contributions made to an IRA? I. They must be in the form of cash II They may be in the form of securities III. They are permitted regardless of whether the individual is covered by an employer's plan IV. They are permitted only for individuals not covered by an employer's plan

I and III Explanation: Contributions to an IRA must be made in cash and may then be invested in intangible assets such as stocks and bonds. Any individual who earns income may contribute to an IRA. However, individuals covered under an employer plan may be limited to making contributions in after-tax dollars.

An investor would like to trade exchange-traded funds (ETFs) in her brokerage account. Which TWO of the following statements are TRUE concerning purchasing and selling short ETF shares? I. Purchases may be executed in a cash or margin account II. Short sales may be executed in a cash or margin account III. Short sales may be executed only in a margin account IV. Leveraged ETFs may be purchased only in a margin account

I and III Explanation: ETFs may be purchased in a cash or margin account. This applies to long positions in regular ETFs, inverse ETFs, or leveraged ETFs. If an investor sells short an ETF, this transaction must be executed in a margin account similar to selling short any equity security.

Which of the following choices represent logical strategies for a technical analyst? I. Buy calls when a stock breaks through a resistance level II. Buy calls when a stock breaks through a support level III. Buy puts when a stock breaks through a resistance level IV. Buy puts when a stock breaks through a support level

I and IV Explanation: A technical analyst believes that if a stock's price breaks through a resistance level, it will continue to rise until it reaches the next resistance level. The analyst will purchase calls if the stock's price breaks through a resistance level. The analyst will buy puts if the stock's price breaks through a support level, since the analyst believes the stock's price will continue to decline until the next support level.

A customer owns foreign securities that were purchased from a U.S. broker-dealer. Which TWO of the following amounts will be reported to the customer concerning the tax treatment of interest and dividends? I. The gross amount of dividends and interest II. The net amount of interest and dividends III. The amount of tax paid to the Internal Revenue Service IV. The amount of tax withheld by the foreign government

I and IV Explanation: Dividends and interest paid to a U.S. investor on foreign securities may be subject to 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 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.

In order to charge the maximum sales load of 8.5%, a mutual fund must offer which TWO of the following benefits? I. Breakpoints II. Letters of intent III. Tax deferral IV. Rights of accumulation

I and IV Explanation: In order to charge the maximum 8.5% sales charge, mutual funds must offer breakpoints and rights of accumulation.

When raising capital, which TWO of the following securities are required to register with the SEC under the Securities Act of 1933? I. A REIT that will be listed on the NYSE II. Commercial paper issued by a finance company maturing in one month III. A Eurodollar bond issued by a U.S corporation IV. An American Depositary Receipt issued by a British company

I and IV Explanation: There is no specific exemption under the registration provisions of the Securities Act of 1933 for ADRs or REITs. They both issue shares of common stock and, if sold to the public in the U.S., require SEC registration. Corporate debt with a maturity of 270 days or less (i.e., commercial paper) is exempt from registration. Securities initially offered outside the U.S., for example Eurodollar bonds, are also exempt from SEC registration.

Which TWO types of payments are prohibited by a broker-dealer? I. Paying a commission to an unregistered person for a transaction that involves an exempt security II. Paying a fee to a registered representative who is registered as an investment adviser representative III. Compensating a previously employed registered person who had signed a contract with that broker-dealer IV. A broker-dealer pays a previously registered person based on new accounts opened by the registered representative who takes over the previously registered person's accounts

I and IV Explanation: Under industry rules, broker-dealers are permitted to continue to compensate retired registered representatives for sales made prior to retirement (i.e., to compensate through continuing commissions, or trails) if a contract is signed with the RR who has retired. Payments may also be made to the RR's widow or other beneficiaries. These payments are permitted for existing business, not for new business or accounts obtained after the RR ceases to be employed by the member firm. A broker-dealer is also permitted to pay a fee to a registered representative, provided this person is also registered as an investment adviser representative

Which TWO of the following option strategies will be suitable recommendations for an investor who thinks interest rates will rise? I. Buying yield-based calls II. Buying yield-based puts III. Selling yield-based calls IV. Selling yield-based puts

I and IV Explanation: Yield-based options are cash-settled options based on a particular Treasury security's movement in yield. If an investor expects yields (interest rates) to rise, he will buy yield-based calls or sell yield-based puts.

Mr. Brown, a shareholder of XYZ Corporation, reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows: 1. 10 rights plus $10.50 are required to subscribe to one new share of stock 2. Fractional shares become whole shares 3. The record date is Friday, October 17 4. JPMorgan Chase and Bank of America are the transfer agents 5. Goldman Sachs and Morgan Stanley are the standby underwriters Mr. Brown will tender (submit) his rights to: I. JPMorgan Chase II. Bank of America III. Goldman Sachs IV. Morgan Stanley

I or II only Explanation: Mr. Brown will tender (submit) his rights to either of the transfer agents, JPMorgan Chase or Bank of America.

The 30-day visible supply of municipal securities refers to new municipal bonds that:

Will be sold in the next 30 days through competitive and negotiated sales of general obligation and revenue bonds Explanation: The 30-day visible supply of municipal securities refers to the face amount of new municipal bonds that will be sold in the next 30 days through competitive and negotiated sales of general obligation and revenue bonds. It is an indication of expected supply in the new issue market and is published each day in The Bond Buyer.

An employee who is leaving a firm wishes to receive a distribution from a qualified pension plan so that she can move the funds into her IRA. Which TWO of the following choices will allow her to avoid withholding tax? I. The check is made payable to her II. The check is made payable to the IRA trustee III. The transfer is made on a trustee-to-trustee basis IV. The transfer is made to the employee's personal bank account

II and III Explanation: A withholding tax of 20% may apply when a person moves funds from one retirement account to another. Withholding tax can be avoided when funds are transferred from one retirement account to another. There are two methods of transfers, one in which the funds are sent directly between custodians (trustee-to-trustee) and the other is when the check is made payable to the new trustee. If the check is made payable to the plan participant, it is defined as a rollover and a withholding tax may apply. Funds from a retirement plan may not be transferred directly to the employee's personal bank account.

Which TWO of the following statements are normally TRUE of money-market mutual funds? I. They are load funds II. They are no-load funds III. Dividends are computed daily and credited monthly IV. Dividends are computed weekly and credited monthly

II and III Explanation: Money-market funds are normally no-load, open-end investment companies. Their portfolio consists of short-term, fixed-income securities such as Treasury bills, commercial paper, and bankers' acceptances. Dividends on money-market fund shares are usually computed daily and credited monthly. Investors may elect to reinvest the dividends each month, thereby buying more shares.

Which TWO of the following statements are TRUE regarding the maintenance requirements for selling short stock that is trading at less than $5 per share? I. The maintenance requirement for shorting a stock at $2.00 per share is 100% of the market value II. The maintenance requirement for shorting a stock at $2.00 per share is $2.50 per share III. The maintenance requirement for shorting a stock at $4.00 per share is 100% of the market value IV. The maintenance requirement for shorting a stock at $4.00 per share is $2.50 per share

II and III Explanation: The industry maintenance requirement, when shorting stock that is trading at less than $5.00 per share, is the greater of $2.50 per share or 100% of the market value. When shorting stock less than $2.50 per share, the maintenance requirement is $2.50 per share, while the maintenance requirement for shorting stocks between $2.50 and $5.00 per share is 100% of the market value.

A tombstone ad states that Southern California Gas is issuing 8 3/4% first mortgage bonds at a price of 96.35% of their par value. Which TWO of the following statements are TRUE? I. The bonds are being sold to yield 9.635% annually II. The bonds will pay interest of $87.50 annually III. The bonds are subject to the Trust Indenture Act of 1939 IV. An investor purchasing the bonds would not pay federal income tax on the interest received

II and III Explanation: The rate of interest stated in the tombstone is 8 3/4%. This means the company will pay 8 3/4% of $1,000 or $87.50 per year in interest. The bonds are corporate bonds being issued by Southern California Gas Company (not the state of California) and are subject to the Trust Indenture Act of 1939. In addition, the interest received on a corporate bond is subject to federal and state income tax.

Which TWO of the following choices would NOT be included in a subscription agreement for a direct participation program (DPP)? I. A statement indicating the purchaser understands the risks of this investment II. The priority provisions if the partnership is liquidated III. A statement listing the amount of tax credits or deductions the investor will receive IV. A statement that attests to the investor's ability to meet the financial requirements of this investment

II and III Explanation: The subscription agreement will normally state the suitability standards for the program, specify who must sign the agreement, specify to whom the check must be made payable, and make inquiries of the purchaser to make sure that he or she understands the ramifications of the investment and can meet the financial requirements of this investment. Priority provisions for liquidating a limited partnership, and the tax implications, would be found in the offering documents.

The value of an investor's interest in a variable annuity during the accumulation period is subject to fluctuation according to the: I. AIR II. Amount of money deposited III. Performance of the separate account

II and III only Explanation: In a variable annuity, as investors add additional deposits to the separate account, the value of their investment will rise through the purchase of additional accumulation units. If the account performance is positive, the value of each accumulation unit will rise. The AIR is important in valuing a variable annuity only during the annuity (payout) period.

The Federal Reserve will normally: I. Buy securities in the open market during inflationary times II. Sell securities in the open market during inflationary times III. Buy securities in the open market during deflationary times IV. Sell securities in the open market during deflationary times

II and III only Explanation: When buying securities in the open market, the FRB adds money to the banking system. The FRB takes this action during deflationary times to make more funds available (looser credit), causing interest rates to decline, and thereby hoping to stimulate a sluggish economy. The Fed sells securities to take money out of the banking system when combating inflation.

Which TWO of the following types of municipal securities does NOT require voter approval? I. A general obligation bond backed by income taxes II. A special tax bond III. A bond backed by ad valorem taxes IV. A certificate of participation

II and IV Explanation: A general obligation bond would require voter approval since it is backed by the full faith and credit of the issuing municipality. A bond backed by ad valorem or real estate taxes is a type of general obligation bond. A special tax bond is financed by a tax other than an ad valorem tax, such as a tax on cigarettes, liquor, or gasoline, and would not require voter approval. A certificate of participation (COP) is a revenue bond backed by a lease payment that does not require voter approval.

Which TWO of the following statements are TRUE concerning step-down, long-term certificates of deposit? a. The initial interest rate is below market rates b. The initial interest rate is above market rates c. The final interest rate is higher than the initial rate d. The final interest rate is lower than the initial rate

II and IV Explanation: A step-down, long-term certificate of deposit (CD) offers an investor an interest rate that is initially higher than current market rates will pay for that maturity period. Subsequent interest rates paid to investors will be lower and may be adjusted more than once. Long-term CDs have a maturity of more than one year. An RR should disclose to the client that she will not receive the higher interest rate for the life of the CD.

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

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

Self-regulatory organizations generally have rules that: I. Mandate commission schedules that brokerage firms must charge II. Are designed to maintain a fair and orderly market III. Mandate all brokerage firms stand ready to buy or sell securities from their own account to maintain liquidity IV. Require brokerage firms to use reasonable diligence to provide customers with best execution

II and IV only Explanation: SROs have rules designed to maintain a fair and equitable market and require that firms use reasonable diligence to provide customers with best execution. They do not have set commission schedules nor do they require that all firms trade for their own account. Specialists on the exchange must provide liquidity.

The four bonds listed have the same maturity. Place them in their order of yield (during most economic times), from highest to lowest. I. Treasury bond II. Investment-grade corporate bond III. Investment-grade municipal general obligation bond IV. Investment-grade municipal revenue bond

II, I, IV, III Explanation: A corporate bond would have the highest yield followed by Treasuries, then municipals. The municipal bond typically has the lowest yield since it is exempt from federal income tax. General obligation bonds are generally considered safer than revenue bonds and, therefore, carry a lower yield. The corporate bond is of lower quality than the Treasury bond (a U.S. government obligation) and will, therefore, have a higher yield.

List from last to first the order of payments if a limited partnership declares bankruptcy. I. Secured creditors II. General partners III. Limited partners IV. General creditors

II, III, IV, I Explanation: If a limited partnership declares bankruptcy, state law provides a priority for settling accounts. The order for settling accounts is secured creditors, general or unsecured creditors, limited partners, and last, general partners. Remember that this question is asking for the order from last to first.

Margin requirements established by the FRB may be:

Increased by broker-dealers in the form of in-house rules Explanation: Margin requirements established by the FRB may be increased by broker-dealers in the form of in-house rules. FRB rules apply to both retail and institutional investors and may not be replaced by SRO rules.

A call premium is best described as the amount the:

Issuer pays above 100 to retire bonds prior to maturity Explanation: A bond issue's indenture will usually require that, if an issuer calls bonds (redeems prior to maturity), it must pay the bondholder a premium (above par value). For example, a bond that matures in 30 years is callable at 103.5 in 10 years. The issuer must pay a premium of $35 per bond (103.5% of $1,000 is $1,035) above par to retire the bonds prior to maturity.

A client with $1,000,000 to invest is interested in acquiring $100,000 of bonds that mature each year over the next 10 years. This approach is referred to as:

Laddering the portfolio Explanation: The approach is referred to as the laddering of a portfolio. When the earliest bonds mature, the proceeds are then reinvested at the long side (i.e., longest maturity) of the ladder. This investor reinvests the proceeds of the bonds that mature in year one into bonds that mature in 10 years. The purpose of this strategy is to reduce the impact that changes in interest rates will have on the portfolio. Investors that utilize a barbell strategy will buy bonds at the two ends (long and short maturities) of the yield curve. This strategy seeks to capture the high-coupon interest from the long-term bonds while also retaining the ability to reinvest quickly when the short-term bonds mature. Therefore, if the investor anticipates that there will be a shift in interest rates, only a portion of the portfolio will need to be adjusted.

A manager with a portfolio of oil and gas stocks will most likely hedge against a downward movement by purchasing:

Narrow-based index puts Explanation: Put options are commonly used to protect (hedge) a long stock position against a downward movement. As prices decline, the value of puts rises thus offsetting the decrease in the stock owned. For a portfolio consisting of companies from one industry, narrow-based index options are the best hedge since their performance will closely follow that industry.

An investor selling a combination will profit if the price of the underlying security is:

Neutral Explanation: Selling a call and a put on the same security with different strike prices, or different expiration dates, is a short combination. The client expects the underlying security to trade within a narrow range or be neutral.

A customer would like to open an account designated by number. The registered representative should:

Open the account if the customer signs a written statement acknowledging the account is the customer's Explanation: A customer may open a numbered account for reasons of confidentiality. However, the registered representative should open the account only if the customer signs a written statement acknowledging the fact that the account is the customer's. This must be kept on file at the brokerage firm.

Which of the following securities have the highest degree of credit risk?

Private Label MBS Explanation: Mortgage-backed securities (MBS) may be issued by a U.S. government agency, such as the Government National Mortgage Association (GNMA or Ginne Mae), or a government-sponsored enterprise (GSE), such as the Federal National Mortgage Association (FNMA or Fannie Mae) or the Federal Home Loan Mortgage Association (FHLMC or Freddie Mac). The securities issued by these three entities are commonly referred to as agency securities and receive high ratings (e.g., AAA). A collateralized mortgage obligation (CMO) is an example of this form of MBS. Mortgage-backed securities are also issued by financial institutions such as commercial banks, investment banks, and home builders. These securities are referred to as private label MBS and may contain some agency securities, however, they typically contain other types of mortgage loans that are not agency securities. A private label MBS is not an obligation of the U.S. government or any GSE and its credit rating is assigned by an independent credit agency. A private label MBS has a higher degree of credit risk and is generally not given a AAA rating.

A corporation announced in an ad in The Wall Street Journal that it intends to call for the redemption of all its outstanding 7.25% callable bonds at 103 1/4 plus accrued interest. The market price of the bonds was 102 3/4 at the time of the announcement. Which of the following alternatives is MOST advantageous to an existing bondholder? a. Redeem the bonds b. Sell the bonds at the current market price c. Do nothing and hope for a takeover bid from another company d. Hold the bonds to maturity and continue to earn interest

Redeem the bonds Explanation: When bonds are called for redemption, the bondholder can only redeem the bonds at the callable price or otherwise sell them in the market. The bondholder cannot continue to hold the bonds in anticipation of a better offer or until maturity.

A registered representative buys stock in a customer's margin account instead of the customer's retirement account. Which of the following actions should be taken?

Request a cancel and rebill after receiving principal approval Explanation: If a transaction is executed but the wrong account is used, the error can be corrected without placing a new order. This is done by transferring the transaction to the correct account number with the permission of a registered principal. This transfer process is sometimes referred to as a cancel and rebill. In some cases, an error is made using the correct account number for the client but the wrong account (e.g., a margin account instead of a retirement account). The same process of cancel and rebill is also used to correct this situation.

A registered representative sells shares of stock for an investor and executes the transaction using the wrong account. Which of the following actions should be taken?

Request a cancel and rebill after receiving principal approval Explanation: If a transaction is executed but the wrong account is used, the error can be corrected without placing a new order. This is done by transferring the transaction to the correct account number with the permission of a registered principal. This transfer process is sometimes referred to as a cancel and rebill. In some cases, an error is made using the correct account number for the customer but the wrong account (e.g., a margin account instead of an IRA account). The same process of cancel and rebill is also used to correct this situation.

A registered representative sells 1,500 shares of stock for a client and executes the transaction using the wrong account number. Which of the following actions should be taken?

Request a cancel and rebill after receiving principal approval Explanation: If a transaction is executed but the wrong account number is used, the error can be corrected without placing a new order. This is done by transferring the transaction to the correct account number with the permission of a registered principal. This transfer process is sometimes referred to as a cancel and rebill. In some cases, the error is made using the correct account number for the client but the wrong account (margin account instead of an IRA account). This kind of error is also corrected by using a cancel and rebill.

The 5% policy applies to transactions involving:

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

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

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

When a customer purchases securities and fails to pay for them by the payment date, the brokerage firm will:

Sell out the securities and freeze the account Explanation: When a customer purchases securities and fails to pay by the Reg T payment date (within 2 business days following settlement), the brokerage firm will sell out the securities and freeze the account for 90 days.

A customer has a discretionary account at a broker-dealer. The customer owns 1,000 shares of a stock that is the subject of a news article detailing a major SEC investigation. If you anticipate a significant decline in the stock, which of the following actions would be MOST appropriate for you to take?

Sell the stock on behalf of the customer and have the order approved promptly by a principal Explanation: This is a discretionary account and, therefore, shares may be sold without additional customer consent. A principal or supervisor of the broker-dealer is required to approve in writing promptly each discretionary order. Since the news is negative, the RR may want to sell the security on behalf of the customer. There is no requirement to receive notification or contact a research analyst at your firm.

In periods of easy money when interest rates are declining, yield curves will tend to:

Slope upward from the shorter to the longer maturities Explanation: In periods of easy money when interest rates are declining, yields on shorter maturities would be less than those on longer maturities. Yield curves will tend to slope upward from the shorter to the longer maturities.

A client has a brokerage account with a broker-dealer in New York City. She decides to move to Montana to retire. She still intends to maintain the account with the broker-dealer, which is registered only in New York. Which of the following statements is TRUE? a. This is permitted provided the client maintains a P.O. Box in New York b. This is permitted since the account was opened in New York prior to the client's move to Montana c. The client can maintain the brokerage account if the firm registers as an investment adviser in Montana d. The client can maintain the brokerage account if the firm registered as a broker-dealer in Montana

The client can maintain the brokerage account if the firm registered as a broker-dealer in Montana Explanation: A broker-dealer must be registered in each state in which it conducts business. In addition, the securities and the registered representative must be registered in all states in which the issue is sold. Registration as an investment adviser is not the same as registration as a broker-dealer.

Which of the following requirements exists when a client is considering exchanging one variable annuity for another? a. The customer must be asked if he engaged in an exchange within the previous 36 months b. The customer must be asked if he engaged in an exchange within the previous 24 months c. The customer is not permitted to make an exchange within a 36-month period d. The inquiry and the customer's response must be documented in writing and filed with FINRA's 1035 Exchange Review Committee within 30 days

The customer must be asked if he engaged in an exchange within the previous 36 months Explanation: When recommending an exchange of one variable annuity for another, a customer must be informed and must understand the ramifications of making the exchange. In addition, the exchange must benefit the customer. An inquiry must be made as to whether the customer engaged in an exchange within the previous 36 months and the inquiry and the customer's response must be documented in writing. Frequent exchanges can be considered churning. While there is no restriction for making exchanges within 36 months of a previous exchange, the exchange must be suitable. FINRA does not have a special committee to review exchanges.

A registered representative has been asked to compare a mutual fund to a fund of hedge funds. Which of the following statements is NOT TRUE?

The fees of mutual funds and a fund of hedge funds are similar Explanation: A fund of hedge funds pools investors' money and allocates it to hedge fund managers. The fees are not regulated in the same manner as with mutual funds. Hedge funds often have higher fees than mutual funds, and their fees may include a percentage of assets under management and a percentage of the gains (for example, a 2% management fee plus 20% of the gains). Some funds of hedge funds may be registered with the SEC and may offer an investor the ability to liquidate her shares (a few times a year). Hedge fund managers are not limited to investing in securities listed on U.S. exchanges.

A client buys 100 shares of SAR at $58 a share and writes 2 SAR October 60 calls at 3. Which of the following statements is TRUE?

The maximum loss is unlimited Explanation: The client's maximum loss is unlimited since two calls were written against 100 shares of stock. This client is writing a covered call and an uncovered call and the maximum loss on an uncovered call is unlimited. This position is referred to as ratio writing or a variable hedge, and the objective is to increase the income from writing more calls than stock owned. If the market price trades at or below $60, the client will have a $600 versus a $300 profit since two calls were written. The breakeven point is found by taking the purchase price of $58 and subtracting the total premiums of 6, which equals $52. The maximum profit is $800, which is found by taking the difference between the purchase price and the strike price and adding the premiums received from writing the call options (60 - 58 + 3 + 3).

Which of the following statements is TRUE concerning Trade Reporting and Compliance Engine (TRACE) reports?

The system is used for corporate debt Explanation: TRACE was created to provide greater transparency in the corporate bond market. Every FINRA member that is party to a transaction in TRACE-eligible securities must report its side of the transaction to FINRA. Transactions in municipal securities must be reported to the Real-Time Transaction Reporting System (RTRS), which is operated by the MSRB.

Which of the following choices best represents the placement ratio?

The total par value of new issues sold during the previous week divided by the total par value of new issues issued during the previous week Explanation: The placement ratio is published weekly by The Bond Buyer. It expresses the amount of bonds sold by new issue syndicates as a percentage of the total amount of new issues brought to market during that week

One of the major differences between an open-end and closed-end investment company is:

The types of securities that each may issue Explanation: A major difference between open-end and closed-end investment companies is their capitalization, the types of securities they issue to raise money. Open-end companies may only issue common stock. Closed-end companies may issue common stock, preferred stock, or bonds.

When purchasing a new issue of stock in a cash account, when must payment be made under Reg. T?

Two business days after the settlement date Explanation: Regulation T states that payment for a new issue in a cash account is due within two business days following the settlement date of the transaction. When buying shares of a new issue, an investor will receive a when-issued confirmation. Payment is due two business days following the date that the securities are ready for delivery.

Which of the following political contributions made by a municipal finance professional will NOT violate the provisions of the MSRB Rule G-37? a. $100 to a candidate for whom you may vote b. $100 to a candidate for whom you may not vote c. $500 to a candidate for whom you may vote d. $500 to a candidate for whom you may not vote

a. $100 to a candidate for whom you may vote Explanation: Municipal finance professionals (MFPs) are allowed to make political contributions of up to $250 per person to candidates for whom they are permitted to vote. Any contribution made to a candidate for whom they are not entitled to vote would be a violation. For example, if you are an MFP and a resident of New Jersey, you may not contribute to an election campaign for the governor of New York.

Which of the following choices is not a good delivery in the sale of 500 shares of common stock? a. One five-hundred-share certificate b. Five one-hundred-share certificates c. Ten fifty-share certificates d. Four fifty-share certificates and ten thirty-share certificates

a. Four fifty-share certificates and ten thirty-share certificates Explanation: Delivery must be made in 100-share certificates, multiples of 100, or any combination that adds up to 100 shares. In choice (d), four certificates of fifty shares would be acceptable, but 10 thirty-share certificates would not be, since 30-share certificates cannot be combined to add up to 100 shares.

An investor is long 1,000 shares of XYZ at $32 per share. The current market value of XYZ is $38. While the investor believes the stock is not likely to fluctuate over the next few months, she also feels the long-term outlook is bullish. Which of the following positions will allow the investor to increase the portfolio's yield without increasing the downside risk? a. Short 10 XYZ 40 calls b. Long 10 XYZ 40 calls c. Short 10 XYZ 40 puts d. Long 10 XYZ 40 puts

a. Short 10 XYZ 40 calls Explanation: This investor is a perfect candidate to establish a covered call position. Since she owns 1,000 shares of XYZ, 10 XYZ calls could be sold in her account without exposing her to the risk of having to go to the market to purchase stock should the calls be exercised. The total premiums received will reduce the amount she needs to receive when ultimately selling XYZ to recover her initial investment ($32 per share). Also, since she believes the stock is not likely to fluctuate over the next few months, she is not overly concerned that XYZ will appreciate to a point at which the short calls will be exercised ($40). If the investor had purchased either the calls (b) or the puts (d), it would have cost her money. While selling the puts (c) would generate income, it would expose her account to the risk of having to purchase 1,000 shares of XYZ at $40 per share if the puts were exercised.

Which of the following choices is NOT directly controlled by the Fed? a. The fed funds rate b. The reserve requirement c. Regulation T d. The discount rate

a. The fed funds rate Explanation: The fed funds rate is the rate charged by one bank with excess reserves to another bank needing overnight loans to meet reserve requirements. Although it is greatly influenced by the Fed, it is the only choice not under the Fed's direct control.

Which of the following parties would consider the information obtained in an annual report of a corporation to be the most important factor in making an investment decision? a. A technical analyst b. A chartist c. A Dow theorist d. A fundamental analyst

d. A fundamental analyst Explanation: The performance of management, sales, expenses, and earnings, which are items that could be obtained from the annual report of a corporation, are considered the most important factors in making an investment decision by a fundamental analyst. A technical analyst (chartist) is concerned with forces within the market, such as new highs and new lows, trading volume, and the number of advances and declines.

Which of the following funds is the least suitable for investors mainly seeking income? a. A mortgage-backed securities fund b. A municipal bond fund c. A balanced fund d. A sector fund

d. A sector fund Explanation: A sector fund invests in securities of a specific industry or specific geographic location and typically does not have income as a primary objective.

All of the following choices are part of the Federal Farm Credit System, EXCEPT: a. Banks for Cooperatives b. Federal Intermediate Credit Banks c. Federal Land Banks d. Federal National Mortgage Association

d. Federal National Mortgage Association Explanation: The Federal Farm Credit System is composed of the Banks for Cooperatives, Federal Intermediate Credit Banks, and Federal Land Banks.

All of the following factors are of importance with regard to debt structure when analyzing a municipal bond, EXCEPT: a. Total bonded debt b. Total direct debt c. Overlapping debt d. Matured debt

d. Matured debt Explanation: Matured debt is debt of the municipality that is no longer outstanding and, therefore, is not included in analyzing the debt structure of a municipal bond. Total bonded debt is all of the general obligation debt issued by a municipality, regardless of its purpose. Total direct debt is the sum of the total debt and any unfunded debt (i.e., short-term notes) of a municipality. Overlapping debt is that portion of the debt of other government units for which residents of a particular municipality are responsible, such as services or facilities shared by several municipalities.

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

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

As it relates to an initial public offering, the term spread is BEST defined as which of the following? a. The amount of profit that a member of the syndicate will make when it sells a new issue to a customer b. The amount of the firm's markup or markdown to a customer who buys or sells a security c. The difference between the price at which a firm will buy a security and the price at which it will sell a security d. The difference between the price that an issuer will receive for its securities from its underwriter and the price that the public will pay for the securities

d. The difference between the price that an issuer will receive for its securities from its underwriter and the price that the public will pay for the securities Explanation: When used in reference to an initial public offering, the spread represents the difference between the price that the issuer receives from an underwriter for its IPO and the price that a customer pays for the IPO (i.e., the public offering price or POP). For example, if the POP is $15.00 and the issuer receives $13.95, the spread is $1.05. Choice (c) is referring to the spread of a Nasdaq market maker which is the difference between the price at which the firm is willing to buy (bid) and the price at which the firm is willing to sell (ask or offer) a security. Choice (a) is not defined as the spread since it does not include the manager's fee component. The markup or markdown is the difference between the prices the customer paid or received compared to the best bid or offer price of all Nasdaq market makers (the inside market). For example, if the inside market is $25.50 - $25.70 and the customer paid $25.90 to purchase the stock, the markup is $.20.

A customer of a member firm goes on vacation and notifies the member firm in writing as to what should be done with his mail. Which of the following statements is NOT TRUE? a. The member firm may hold the customer's mail for a period of two months if the customer is traveling in the U.S. b. The member firm may hold the customer's mail for a period of three months if the customer is traveling abroad c. The member firm may forward the customer's mail to a general P.O. Box d. The mail may be forwarded to the registered representative

d. The mail may be forwarded to the registered representative Explanation: The registered representative is not permitted to have a customer's mail forwarded to him as this would be a violation of SRO rules. All of the other choices are true. The member firm may hold the customer's mail for two months if the customer is traveling in the United States and may hold the mail for three months if the customer is traveling abroad. The mail may also be forwarded to a general P.O. Box if desired.