Series 7

An investor purchases 200 shares of STC at $35 and subsequently purchases 2 STC Jan 35 puts at 2. At what market price must STC trade for the investor to have a profit? 32 34 36 38

38 If an investor is long stock and long a put, he will have a profit if the market price exceeds the cost of his stock plus the premium for the option. The stock must trade above 37 (35 cost + 2 premium).

A firm is not permitted to accept an exercise notice from a customer for a listed equity option after: 2:30 p.m. Eastern Time on the expiration date of the option 3:30 p.m. Eastern Time on the expiration date of the option 4:30 p.m. Eastern Time on the expiration date of the option 5:30 p.m. Eastern Time on the expiration date of the option

5:30 p.m. Eastern Time on the expiration date of the option

Which of the following best describes a guaranteed bond? A bond where the trustee pays interest and principal. A bond on which the U.S. Treasury promises to pay interest and principal if necessary. A bond that's insured by SIPC. A bond for which another corporation promises to pay interest and principal if necessary.

A bond for which another corporation promises to pay interest and principal if necessary.

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

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

An investor in an equipment leasing DPP would NOT expect: Depreciation deductions Cost recovery Appreciation Consistent income from the lease

Appreciation A DPP equipment leasing program purchases equipment and leases it to a user. The lease provides a consistent income. The limited partnership is permitted to depreciate the equipment. The equipment would not normally increase in value (i.e., appreciation).

An investor bought 5 NJF June 45 puts for a premium of 3 points per contract. For these options to have intrinsic value, the market price of NJF needs to be: Above $48 Above $45 Below $45 Below $42

Below $45 intrinsic value!!!

Which option position is bullish? Covered call option Debit call spread Debit put spread Short straddle

Debit call spread

For its most recent fiscal year, ABC Corporation had $20 million in net income. The company also paid a $5 million dividend to its preferred shareholders. The corporation has 7.5 million shares outstanding, but has warrants that permit holders to buy 2.5 million shares. What's the corporation's diluted earnings per share? $1.50 $2.67 $2.00 $2.50

EPS (20MM net income - 5MM preferred dividends)/(7.5MM+2.5MM) 7.5+2.5 = diluted earnings* 15MM/10MM= $1.5

A prime brokerage account would MOST likely be established for a(n): Individual opening an account for a minor Mutual fund Corporation Hedge fund

Hedge fund

When comparing variable annuities to fixed annuities, investment risk is assumed by the: I Investor in a variable annuity II Annuity company in a variable annuity III Investor in a fixed annuity IV Annuity company in a fixed annuity I and III only I and IV only II and III only II and IV only

I and IV only In a fixed annuity, the annuity company guarantees a fixed monthly payment. The company, therefore, must invest the monies and assume the investment risk. In a variable annuity, the annuity company makes no guarantee. The company will invest the investor's money and the investor's annuity benefits will depend on the value of the investments. The investor, therefore, assumes the investment risk.

Which TWO of the following securities are typically sold at a discount? I TIPS II Treasury bills III Bankers' acceptances IV Collateralized mortgage obligations I and III I and IV II and III II and IV

II and III Treasury bills and bankers' acceptances are typically sold at a discount. The amount of interest is based on the difference between the purchase price and the face value.

If an at-the-opening order is not executed: It will be put in the designated market maker's book for later execution It will be cancelled It will be executed off the floor It is handled as a market order

It will be cancelled

Which of the following objectives is the least suitable reason for investing in a mutual fund? Diversification Professional management Short-term trading Liquidity

Short-term trading

A bond swap is done for all of the following reasons, EXCEPT to: Increase the overall yield of the bond portfolio Increase the current income of a bond portfolio Establish a tax loss to offset income Take advantage of a large amount of accrued interest

Take advantage of a large amount of accrued interest A bond swap occurs for all of the reasons given except to take advantage of accrued interest. The amount of accrued interest is not a factor in a municipal bond purchase or sale.

A registered representative discovers that one of her customers is on the Office of Foreign Assets Control (OFAC) list. The RR or another person at her firm must notify: The Office of the Comptroller of the Currency The Treasury Department The SEC DFINRA

The Treasury Department

All of the following are advantages of CMOs, EXCEPT: There are a variety of bond classes available They produce tax-free interest They generally have AAA ratings They are available in denominations as low as $1,000

They produce tax-free interest

When comparing long-term bonds to short-term bonds, all of the following statements about long-term bonds are TRUE, EXCEPT: They usually have higher yields than short-term bonds They usually provide greater liquidity than short-term bonds They usually are more often callable than short-term bonds Their market prices are more sensitive to interest-rate changes than short-term bonds

They usually provide greater liquidity than short-term bonds All of the statements about long-term bonds compared to short-term bonds are true except that they usually provide greater liquidity than short-term bonds.

The securities that are deposited in an escrow account for an advance refunding of a municipal bond are: Revenue bonds General obligation bonds Federal agency bonds Treasury bonds

Treasury Bonds Only Treasury obligations are acceptable securities as escrow when a municipal bond is being advance refunded.

An individual purchased 100 shares of stock at $35 per share. The stock is now trading at $44 per share and the issuer decides to split the stock 2-for-1. After the split, the individual's cost basis per share will be: $17.50 $22.00 $35.00 $44.00

$17.50 A 2-for-1 stock split results in twice as many shares, with the values being adjusted to 1/2 of what they were before the split. The individual's stock would have an adjusted cost basis of $17.50 = $35 x 1/2.

An investor buys 200 shares of TDX at $20 per share. TDX declares a 10% stock dividend. The investor's cost basis per share for tax purposes would be: $18.00 $18.18 $22.00 $40.00

$18.18 An investor's cost basis must be adjusted downward upon receiving additional shares when a stock dividend is paid. In this example, the investor receives 20 additional shares (10% x 200). The investor's new cost basis per share would be found by dividing the initial cost of $4,000 by the total number of shares now owned (220). This equals a cost basis per share of $18.18.

closed-end fund's shares are listed in The Wall Street Journal with a Net Asset Value of 21.85 and a Market Price of 21.50. If a customer purchases the shares at the current market price, he will pay: QID: 1892102 Mark For Review $21.50 plus a sales charge $21.50 plus a commission $21.85 plus a sales charge $21.85 plus a commission

$21.50 plus a commission Since this is a closed-end investment company, its shares will sells at their current market value ($21.50) plus a commission. On the other hand, if these were shares of an open-end investment company, they would sell at their offering price, which is the net asset value of the shares plus any applicable sales charge.

An account has $140,000 in fully paid marginable securities, $50,000 in non-marginable securities, and $80,000 of cash. What's the total amount of stock that can be purchased on margin? $230,000 $130,000 $300,000 $160,000

$300,000 In this question the customer could buy a total of $300,000 on margin ($160,000 using cash + $140,000 loan value from marginable securities). Non-marginable securities don't provide customers with any loan value.

Mr. Jones buys an XRX October 50 put when the market price of XRX is also $50 per share, and pays a premium of $5. If XRX declines sharply and Mr. Jones exercises the put, what is the maximum profit Mr. Jones can have? $50 $500 $4,500 $5,000

$4,500 If the stock became worthless, Mr. Jones could then buy 100 shares and put it (sell it) to the writer for the $50 per share strike price, which equals $5,000 ($50 x 100 shares = $5,000). Mr. Jones would then make a profit of $5,000 minus the $500 premium paid for the put, which would be $4,500. The $4,500 is the maximum profit Mr. Jones could have since the stock could go no lower than zero.

An investor purchases 200 shares of STC at $35 and subsequently purchases 2 STC Jan 35 puts at 2. If the puts expire, what is the investor's profit or loss? $200 loss $200 gain $400 loss $400 gain

$400 loss When an option expires, the holder loses the entire premium. The client purchased two contracts at $200 each for a total loss of $400.

A new issue of municipal bonds has an aggregate par value of $10,000,000. The syndicate received $5,000,000 in designated orders, $5,000,000 in group orders, and $5,000,000 in member orders. How will the issue be allocated? $5 MM group and $5 MM designated $5 MM group and $5 MM member $5 MM designated, $2 1/2 MM group, and $2 1/2 MM member $3 1/3 MM designated, $3 1/3 MM group, and $3 1/3 MM member

$5 MM group and $5 MM designated When allocating bonds in a new municipal issue, presale orders normally have first priority. This is followed by group net, designated, and then member orders. The 5 MM in group orders and 5 MM in designated orders will be allocated. There are no bonds left for member orders.

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: $4,700 $5,000 $5,300 $6,000

$5,300 he 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.

A customer buys bonds with a $50,000 par value at 85 1/2. The bonds are callable at 110. If the customer holds the bonds to maturity, he will receive: $42,500 plus the last interest payment $50,000 plus the last interest payment $55,000 plus the last interest payment $85,000 plus the last interest payment

$50,000 plus the last interest payment At maturity, the holder of the bonds will receive the par value, which in this example is $50,000, plus the last interest payment.

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. If the customer had sold the option at $8 instead of exercising the option, the profit would have been taxable as: An $500 capital gain An $800 capital gain An ordinary gain of $700 An ordinary loss of $500

$500 capital gain If the customer had sold the option at $8 instead of exercising it, the $5 profit per share ($8 sale minus $3 cost equals $5 profit) would be taxable as a capital gain.

On June 5, 2021, an investor purchased 100 shares of ABC at $20. On November 10, 2021, he purchased an additional 100 shares of ABC at $12. On January 20, 2022, he sold 100 shares of ABC at $15. For tax purposes, he will report a: $300 capital gain in 2021 $300 capital loss in 2022 $500 capital gain in 2022 $500 capital loss in 2022

$500 capital loss in 2022 When selling a portion of his holdings, unless the investor identifies (on the order ticket) the specific shares that he's selling, the IRS requires the use of the first-in, first-out (FIFO) method. Since the investor did not identify the shares being sold, it's assumed that the first shares purchased (in June of 2021 at $20) were the shares sold. Therefore, the investor will report a loss of $500 in 2022.

A customer's margin account has a current market value of $10,000, a debit balance of $8,000, and SMA of $1,000. The customer could meet a maintenance call with: $100 cash $500 SMA $500 cash $1,000 SMA

$500 cash A long margin account must maintain equity equal to 25% of the market value. The account is $500 below the minimum ($2,500 required minus $2,000 equity). Using SMA will increase the debit balance and, therefore, may not be used to meet a maintenance call.

An investor writes an uncovered ABC March 45 put for a premium of 4. At expiration, ABC is at $36 per share and the put option is exercised. If the stock is immediately sold by the writer at the current market price, what is the writer's profit or loss? $400 loss $500 loss $400 profit $900 profit

$500 loss When the stock is put to the writer, he must buy the stock for $4,500. His cost basis for tax purposes is $4,100 ($4,500 strike price - $400 premium received). Since he sold the stock for $3,600, he has a net $500 loss ($4,100 - $3,600).

Ms. Green buys 300 shares of RSW at $15 per share. She then writes 3 RSW July 20 calls at 1 and writes 3 RSW July 10 puts at 50 cents. Ms. Green's maximum potential loss on the entire position is: Unlimited $7,050 $4,950 $4,050

$7,050 300 x 15 = 4,500 4,500 - 300(premium) = 4,200 3 RSW July 20 calls at 1 $3,000 ($10 x 100 shares x 3 contracts) writes 3 RSW July 10 puts at 50 cents $150 ($.50 x 100 shares x 3 contracts) aggregate strike price of equals $2,850 (3,000-150) potential loss = 4,200 + 2,850

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: $35,000 $50,000 $60,000 $70,000

$70,000 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.

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

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

LRR Corporation has earned $1.10 per share in each of the last four quarters and has paid out 20% of its earnings in the form of a cash dividend. If the stock is selling at $48 a share, what is its price/earnings ratio? 10.9 13.6 21.8 43.6

10.9 The price/earnings ratio is found by dividing the market price of $48 by the annual earnings per share. The annual EPS is $1.10 x 4 = $4.40., The price/earnings ratio is 10.9 ($48 / $4.40 = 10.9). The amount of the dividend is not relevant in calculating the price/earnings ratio.

Mr. Jones purchases 100 shares of IBM at $116 per share and writes an IBM June 115 call option at 5. Mr. Jones' breakeven point is: 110 111 120 121

11 116-5 = 11

A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered were at 18.60, 18.25, 18.38, 18.50, and 18.63. The execution price is: 18.25 18.38 18.50 18.63

18.50 After the order was activated by the round-lot sale of 18.25 (which is at or lower than 18.50), the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is the first price that meets this requirement and is the execution price.

A customer owns an AMF October 30 call option. If AMF should split 2 for 1, the customer will own: 1 AMF October 30 call for 100 shares 1 AMF October 15 call for 200 shares 2 AMF October 15 calls each for 100 shares 2 AMF October 30 calls each for 100 shares

2 AMF October 15 calls each for 100 shares

A customer buys two bonds, both have a par value of $1,000, and she pays 103 5/8 for each bond. The bonds are callable at 105. If the customer's bonds are called, she will receive: $2,000 $2,100 $2,072.50 $1,050

2,100 If the bonds are called the investor will receive 105% of the par value for each bond. $1,000 x 105% = $1,050; however, this is multiplied by two bonds for a total of $2,100.

An investor buys a DEF April 35 put at 3 and simultaneously writes a DEF April 30 put at 1. The maximum that the investor can lose on this position is: Unlimited $200 $300 $500

200 This is a debit spread. The investor paid $200 more for the option purchased than he received for the option sold. If both options expire, he will lose the entire $200, which is his maximum potential loss. (71798)

A brokerage customer is long 100 shares of ABC Company 6% cumulative preferred stock ($100 par). Over the last three years, ABC Company has had negative net income and the customer hasn't received any dividends during that period. How much must the customer receive in dividend income this year before common stockholders can receive a cash dividend? $6 $24 $600 $2,400

2400 Although the stated dividend is 6%, the board of directors for ABC Company must decide whether to declare it. Without sufficient earnings for the previous three years, the dividend could not be paid and, therefore, no common dividends were paid during the same period. Currently, there's $1,800 (6% x $100 par x 100 preferred shares x three years) of preferred dividends in arrears that must be paid to this customer before a dividend can be paid to common shareholders. Also, the $600 that the customer will need to be paid for the current year must be added to the $1,800 from past years. As a result, $2,400 must be paid to the customer before a common dividend can be paid.

With no other securities position, a customer sells short 100 shares of ABC at $40 and sells 1 ABC October 40 put for $500. The customer will break even when the price of the stock is at: $35 $50 $45 $40

45 An individual who sells short risks a loss if the price of the stock rises. If the price rises to $50 and the stock is bought in the open market to cover, the loss will be $1,000 minus the premium, for a net loss of $500. If the market price rises to 45, the loss of $500 is exactly matched by the premium income of $500 and the investor breaks even. The breakeven point for a short seller who writes a put is the market price of the short sale plus the premium.

A corporation has issued a bond with a 5% coupon that is convertible into common stock at $40. The bond is selling currently trading at par and the stock is selling at $39.00. If the bond increased in value by 20 points, what is parity of the stock? $25.00 $30.00 $40.60 $48.00

48 If the bond increased by 20 points over its par value of $1,000, it would be selling for $1,200. The parity price for the stock is found by dividing the market value of the bond ($1,200) by the conversion ratio of 25 ($1,000 or par value ÷ $40). This is equal to $48 ($1,200 ÷ 25 = $48). The current price of the stock is not relevant

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? QID: 1892009 Mark For Review 5 1/2% callable in 2024 @ 103 6 1/2% callable in 2023 @ 100 7% callable in 2024 @ 103 7 1/2% callable in 2023 @ 100

7 1/2% callable in 2023 @ 100 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%.

A client redeems shares of a mutual fund. According to current regulations, a check must be sent within how many days of submitting a redemption notice? 5 days 7 days 10 days 15 days

7 days Federal regulation requires that an individual receive payment for the redemption of a mutual fund within seven days.

A bond with a 6% coupon is priced at a 7.20 basis. If the bond's yield-to-maturity increases by 40 basis points, the yield would be: 5.6% 6.4% 7.6% 6.8%

7.6%

A customer owns 50 shares of ABC Corporation. ABC Corporation is engaging in a rights offering. Each existing share receives one right. The terms of the offering are that 10 rights plus $35 is required to buy one new share of stock. If the customer wanted to subscribe to the rights offering, how many additional rights would she need to buy 100 new shares of stock? 95 100 35 950

950 If an investor wanted to subscribe to 100 shares of stock, the investor would need 1,000 rights. (10 rights x 100 shares = 1,000 rights.) The investor owns 50 shares of stock and will receive 50 rights from the corporation (one right for each share owned). If the customer wanted to subscribe to 100 shares through the rights offering, the investor would need to purchase an additional 950 rights.

If interest rates are falling, which of the following municipal bonds will be impacted the MOST? A 12-year revenue bond A three-month tax anticipation note (TAN) A five-year zero-coupon revenue bond A 15-year general obligation bond that's callable in 10 years

A 12-year revenue bond Bonds with the longest maturity have the most interest rate risk. However, if interest rates decline, callable bonds are more likely to be called (i.e., they have call risk), which effectively decreases the bond's maturity to the call date. As a result, when interest rates are falling, a 12-year bond (non-callable) will be more effected than a 15-year bond that's callable in 10 years.

Regulation SHO requires which of the following actions? A broker-dealer is required to be a market maker in order for its customers to execute short sales. A broker-dealer must satisfy the locate requirement before allowing a customer to execute a short sale. The customer is required to locate the stock in order to execute a short sale. Before executing a short sale, a customer is required to deposit 100% of the short sale amount.

A broker-dealer must satisfy the locate requirement before allowing a customer to execute a short sale. Regulation SHO requires a broker-dealer to make a notation on every sell order ticket to indicate whether the transaction is a long sale or a short sale. A long sale is when the customer is selling stock that he owns and is not required to borrow the security to make delivery. With a short sale, the broker-dealer (not the customer) must be able to borrow the security to make delivery. There's no requirement for a broker-dealer to become a market maker in order for its customers to execute short sales. The margin requirement on short sales is 50%.

Which of the following scenarios would be permitted in a soft-dollar arrangement between an adviser and a broker-dealer? A broker-dealer pays for the cost of a coach flight for a portfolio manager to attend a conference A broker-dealer pays for the cost of a conference concerning the future of the computer software industry A broker-dealer pays for the cost of computer terminals used to deliver market data services A broker-dealer pays a percentage of the salaries of the adviser's internal research staff

A broker-dealer pays for the cost of a conference concerning the future of the computer software industry An adviser is permitted to use a broker-dealer to execute transactions in exchange for certain services. The term is referred to as soft dollars and it is defined as a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. The broker-dealer is permitted to pay for the cost of the conference that an adviser attends concerning securities within an industry in which the adviser will be invested. Travel costs and any costs that should be paid by the adviser (e.g., salaries of the adviser's internal research staff) are not covered under a soft-dollar arrangement. Whereas the cost of the computer terminals could not be paid for with soft dollars, the cost of the data services would be covered by soft dollars.

In a Delivery Versus Payment (DVP) and Receive Versus Payment (RVP) account, which of the following is required? QID: 1892026 Mark For Review Settlement to occur on a regular-way basis Approval by FINRA to open the account A form identifying the third-party agent for the client Physical delivery of securities

A form identifying the third-party agent for the client In order to use DVP or RVP as a means of settlement, the broker-dealer must be notified of the identity of the third-party bank or institution that's being used to provide delivery of securities or funds. These forms of settlement are generally used by institutions through book-entry settlement. Delivery and payment can be made as late as 35 days after the trade date.

Which of the following statements about the competitive bidding process is TRUE? The firm that submits a bid with the highest interest rate will win the bid. The firm that wins a competitive bid may only accept member orders. A notice of sale is published by the municipality to attract bidders. Revenue bonds are typically sold through a competitive bidding process.

A notice of sale is published by the municipality to attract bidders.

Cash dividends received from which of the following securities will be taxed as ordinary income? Preferred stock issued by a bank Common stock issued by an oil company A real estate investment trust Convertible preferred stock issued by a software company

A real estate investment trus Currently, qualified dividends paid on both common and preferred stock are taxed at a maximum rate of 20%. Dividends from a REIT are still taxed at the same rate as ordinary income since a REIT doesn't pay corporate income tax if it distributes a minimum percentage of its income. The type of company that issued the shares is NOT relevant to the tax status of the cash dividend.

Which of the following municipal bonds requires a feasibility study to determine the issuer's ability to pay interest when due? A special tax bond A general obligation bond A revenue bond A revenue anticipation note

A revenue bond A feasibility study is made by a qualified expert to determine if revenues of a project will be sufficient to pay interest when due. A revenue bond, which is backed by the earning power of a specific project, such as tolls from bridges, tunnels, or turnpikes, requires a feasibility study by qualified experts to determine if the revenue generated will be sufficient to pay the interest on the bonds. A special tax bond is secured by a special tax, such as a gasoline tax, and would not require a feasibility study. A general obligation bond is backed by the full faith, credit, and taxing power of the issuing municipality and would not require a feasibility study. A revenue anticipation note (short-term security) is considered a general obligation security.

For each penny stock transaction, a broker-dealer must provide the customer with all of the following items, EXCEPT: A risk disclosure document on penny stocks The current quotation for the security The compensation the broker-dealer will receive for the transaction The compensation the registered representative will receive for the transaction

A risk disclosure document on penny stocks A broker-dealer must provide the customer with a risk disclosure document on penny stocks once, prior to effecting the first transaction for the customer. The other items must be disclosed in connection with each transaction.

Securities purchased under a Rule 147 exemption may be sold to an out-of-state resident: Immediately After 30 days After three months After six months

After six months SEC Rule 147 and Rule 147A of the Securities Act of 1933 provides an exemption from registration for securities being sold on an intrastate basis. If securities are sold only to residents of a state by an issuer that is also a resident of the same state, the securities are exempt from both the registration and prospectus requirements of the Act. A resident of a state who acquires securities under Rule 147 is not allowed to sell the securities to a nonresident of the state for a period of six months following the last date of sale by the issuer. If an individual intends to sell the securities prior to six months, he may do so only to a resident of the same state.

Dividends and capital gain distributions in a variable annuity are: Taxable to the investor in the year declared Allowed to accumulate on a tax-deferred basis Used to reduce the cost basis of the investment Tax-deferred only if the IRA contribution funding the account is tax-deductible

Allowed to accumulate on a tax-deferred basis

A client wants to invest $250 per month and have broad exposure to the U.S. equity market. Which of the following recommendations is the MOST suitable for this client? A managed closed-end fund An S&P 500 Index mutual fund An S&P 500 Index exchange-traded fund An DJIA exchange-traded fund

An S&P 500 Index mutual fund

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

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

An investor has a large portfolio which includes cash, equities, and bonds. The investor is now seeking an alternative investment and is willing to tie up his funds for a long period. Which of the following investments should the investor's RR recommend? An asset allocation mutual fund An interval fund A mutual fund which is concentrated in convertible securities A closed-end fund that's listed on the NYSE and invests in undervalued small-cap companies

An interval fund The best recommendation is an interval fund, which is type of closed-end fund that continuously offers shares to investors. However, unlike most closed-end funds, interval fund shares don't trade above or below their NAV and they don't trade on an exchange. Instead, investors are allowed to sell their shares back to the fund at the current net asset value only at a preset interval (e.g., monthly, quarterly, semiannually). Since shareholders are only able to sell these funds at certain intervals that are stated in the fund's prospectus, interval funds are illiquid investments. Due to their limited liquidity, interval funds are suitable for long-term investors, those seeking income-producing investments, and those seeking to diversify their portfolios. In fact, these funds can provide individual investors with access to the types of exotic or alternative investments (e.g., private equity and certain commercial real estate investments) that are typically limited to hedge funds and institutional investors. Another issue for investors to understand about interval funds is that their fees and expenses tend to be much higher than other closed-end funds and mutual funds.

A business development company (BDC) is MOST suitable for which of the following investors? An investor who is seeking a liquid investment in a portfolio of established companies An investor who is seeking a non-speculative investment in a portfolio of companies that are privately held An investor who is seeking a speculative investment in a portfolio of distressed companies and understands that the investment will not offer liquidity An investor who is seeking a speculative investment in a portfolio of distressed companies and is interested in liquidity

An investor who is seeking a speculative investment in a portfolio of distressed companies and is interested in liquidity A business development company (BDC) raises capital by selling securities to investors, has a structure that is similar to a closed-end investment company, and provides the investor with access to their capital (liquidity). A BDC will use the money it raises to invest in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. Since some of the funds are invested in the equity of non-public companies, purchasing shares of a BDC is similar to buying a publicly traded investment in a private equity firm. Due to the speculative nature of BDC investments, RR's should inform investors of all of the potential risks before making the investment. (30712)

Which of the following statements is NOT TRUE concerning VIX options? An investor will buy VIX puts if he expects an increase in the volatility of the S&P 500 Index An investor will buy VIX calls if he expects the S&P 500 Index to fall An investor will buy VIX calls as a hedge if he expects the S&P 500 Index to fall VIX options can be used if an investor expects an increase or decrease in the volatility of the S&P 500 Index

An investor will buy VIX puts if he expects an increase in the volatility of the S&P 500 Index The VIX (volatility index) measures the implied volatility of S&P 500 options. Although implied volatility is calculated using S&P 500 options, the VIX actually predicts how much the S&P 500 index will fluctuate in the next 30 days. Because the VIX is a way to predict market declines, some investors call the VIX the fear index. The implied volatility of options, as well as the VIX itself, will increase when the S&P Index decreases in value (i.e., an inverse relationship). Investors can buy VIX calls to hedge against a downturn in the S&P 500.

In a new municipal issue, what is a group order? An order placed by three or more members An institution purchasing bonds from a syndicate An order allowing all members to benefit A dealer buying for a group of investors

An order allowing all members to benefit There are four types of orders that can be placed with a syndicate. A presale order is any order placed before the syndicate that actually purchases the issue from the issuer A group order is a situation where all members of the syndicate share in the profit A designated order is usually placed by a large institution that designates two or more members to receive credit for the sale A member order is an order placed by members for their customers

Which of the following approvals is required before a municipality can begin making payments on a moral obligation bond? Approval by a majority of legal age voters Approval by the state legislature Approval by the bond trustee Approval by the appropriate state agency

Approval by the state legislature

All of the following characteristics are TRUE of REITs, EXCEPT that they: Are not exempt from the Securities Act of 1933 Are not regulated investment companies Cannot pass losses through to the investors Are always exchange traded

Are always exchange traded

When must a 529 plan participant be provided with a statement of the portfolio or fund allocation? Prior to the completion of a transaction Within three business days of the completion of a transaction Within two business dates of the completion of a transaction At or before the completion of a transaction

At or before the completion of a transaction

Which of the following Moody's ratings is the most speculative in the investment-grade category? QID: 1892018 Mark For Review Aa A Baa Ba

Baa

In order to be eligible for portfolio margin, a client must: Be an accredited investor Have at least $500,000 of investable assets at a firm Be approved for uncovered writing Have a minimum five years' experience in derivatives investing

Be approved for uncovered writing A portfolio margin client must be approved for uncovered writing. There are no specific financial standards nor is there an experience level that must be met. If a customer wants to trade unlisted derivatives, the customer must maintain equity of at least $5,000,000 at all times.

A municipality borrowing for a short-term period to finance a capital project would issue: Commercial paper Tax anticipation notes Debentures Bond anticipation notes

Bond anticipation notes Tax anticipation notes are used to meet operational expenditures.

Which of the following will not offer protection in the event of a municipal bond declining in value due to rising interest rates or financial difficulties of the issuer? Put provisions Call provisions Bond insurance Letters of credit

Call provisions Bond insurance, letters of credit, or other credit enhancements can provide security in the event the issuer is at risk of defaulting on its municipal debt. If a bond declines in value due to rising interest rates, a put provision may be used by an investor to force the issuer to repurchase the bond at a predetermined price. Call provisions allow the issuer to retire the debt at a predetermined price, but this generally occurs when interest rates have fallen and bond prices have gone up. (17067)

f a customer is short 1,000 shares of RST stock, the customer: Must cover the position within six months Can use a buy stop order to limit losses if the stock advances May use the entire credit balance in the account to buy more stock Is entitled to receive dividends and vote at the annual meeting

Can use a buy stop order to limit losses if the stock advances A short position will be profitable if the market price of the security decreases. If the stock increases, the investor will have a loss. A buy stop order is placed above the market. If executed, stock will be purchased preventing further loss. There is no limit to the length of time that a short position may remain open. A portion of the short credit balance must always remain in the account to be used eventually to cover the short position. An investor who is short the stock does not receive dividends and does not have the right to vote.

Which of the following securities has prepayment risk? Mortgage bonds issued by a utility company Bonds issued by Freddie Mac Collateralized mortgage obligations Commercial paper

Collateralized mortgage obligations Many homeowners pay off their mortgages early. When interest rates fall, homeowners have an incentive to refinance and pay off their existing mortgages. These prepayments are passed through to the pools holding the old mortgages. The investors then need to reinvest this large amount of principal at a time when interest rates have declined. This is referred to as prepayment risk and it is associated with mortgage-backed securities such as CMOs. Although both Fannie Mae (FNMA) and Freddie Mac (FHLMC) issue mortgage-backed securities, the choice in this question "Bonds issued by Freddie Mac" covers the bonds of these issuers, which do not have prepayment risk.

A customer's niece has third party authorization and has recently been appointed to be the customer's trusted contact person. Although the customer seemed disoriented when she appointed her niece, the paperwork was still signed. The niece begins making cash withdrawals and changing investments in the account. When the registered representative contacts the customer to confirm the transactions, the customer sounds surprised; however, she states, "since it's my niece, just go along with it." What action should the registered representative take? Contact a principal of the firm to discuss the niece's withdrawals. Immediately place a temporary hold on the account. Contact the customer to suggest that she appoint a different trusted contact person. Follow the niece's instructions since she's the customer's trusted contact person.

Contact a principal of the firm to discuss the niece's withdrawals.

A corporation with an excellent earnings record has several issues of bonds outstanding. During a period of stable interest rates, which of the following securities are expected to fluctuate the most? Mortgage bonds Commercial paper Debenture bonds Convertible bonds

Convertible bonds

According to MSRB rules, a municipal bond dealer will NOT consider which of the following factors when determining a markup? Expenses Availability of the bond Coupon rate Total dollar amount of the transaction

Coupon rate

Python Industries has previously issued 5.0% bonds ($1,000 par value). The bonds mature in 12 years and are selling at a 20% discount to par. What is the current yield on the Python bonds? 5.00% 5.60% 6.25% 8.50%

Current Yield = annual interest payment/current market price Annual interest payment = 5.0% = $50 Current Market Price = (100%-20%).80 = 800 50/800= 6.25

If a company pays a cash dividend, which of the following is TRUE? Current assets decrease Current assets increase Shareholders' equity decreases Shareholders' equity increases

Current assets decrease

The Board of Directors of a corporation is responsible for establishing all of the following dates, EXCEPT the: Declaration date Payable date Ex-date Record date

Ex-date

When analyzing the credit risk of an issuer of general obligation bonds, which of the following is NOT a concern? The diversification of economic activity The budgetary pictures and legislative climate Any pending litigation against the issuer Existing or potential competitive facilities

Existing or potential competitive facilities The credit analysis of a general obligation bond is based on the issuer's ability to levy and collect taxes in an amount that's sufficient to cover the debt service of the issue. The main considerations are as follows: Demographics, such as the diversification of economic activity Factors affecting the issuer's ability to pay, such as the budgetary pictures and legislative climate The credit analysis of a revenue bond is based on the project's ability to generate enough revenue to pay the debt service of the issuer. One consideration is whether there are existing or potential competitive facilities (e.g., if a new airport is being financed by an issuer, determination must be made as to whether there's another airport in the same geographical area).

A corporation's long-term debt would most likely be called when interest rates: Rise above the bond's nominal yield Rise above the bond's yield to maturity Fall below the bond's nominal yield Fall below the bond's yield to maturity

Fall below the bond's nominal yield

During annuitization, a variable annuity owner will receive payments that are based on a: Fixed number of annuity units Fixed number of accumulation units Varying number of annuity units Varying number of accumulation units

Fixed number of annuity units During annuitization (payout), a variable annuity owner will receive payments that are based on a fixed number of annuity units. However, the annuity owner's payments will vary due to the fluctuations in the value of the annuity units. Annuity unit values fluctuate based on the performance of the securities in the separate account. (17010)

A client is seeking a safe investment that pays interest on a monthly basis. Which of the following securities would be an appropriate recommendation? STRIPS Preferred stock Treasury notes GNMA modified pass-through certificates

GNMA modified pass-through certificates Interest (and principal) payments on GNMA pass-through certificates are made monthly. Treasury notes and bonds pay interest semiannually. Preferred stock dividends are paid to shareholders only when declared by the corporation's board of directors. STRIPS are a zero-coupon Treasury security (non-interest-bearing). (74070)

In a direct participation program, which party is the last to be paid in a liquidation? Secured creditor General creditor General partner Limited partner

General partner For the dissolution of a direct participation program or limited partnership, the priority of claims on assets is secured creditors, then general creditors, then limited partners, and finally general partners.

Which of the following is included on an income statement? Current assets Gross revenues Stockholders' equity Current liabilities

Gross revenues Gross revenues (also referred to as gross sales) is found on an income statement. On the other hand, current assets, current liabilities, and stockholders' equity are all found on a balance sheet.

An equity fund invests in the stocks of companies whose earnings are projected to increase greatly over the next 10 years. This is an example of a: Fund of funds Value fund Balanced fund Growth fund

Growth fund Growth funds invest in the stocks of companies whose earnings are projected to grow at a more rapid rate than those of other companies.

A firm that is planning an offering of common stock has not filed a registration statement. Which of the following actions on the part of a registered representative are NOT a violation of the Securities Act of 1933? Having the registered representative contact an investment banker at the firm Informing a customer that he may receive as many shares as he desires Accepting orders for the shares to be offered Attempting to obtain indications of interest for the shares to be offered

Having the registered representative contact an investment banker at the firm There is no prohibition restricting an RR to contact an investment banker at the firm. The other actions listed are in violation of the Securities Act of 1933, if a registration statement has not been filed with the SEC. A registered representative may not inform a customer that the customer may receive as many shares as desired. Nor may the registered representative solicit buy orders or solicit indications of interest from the customer. A registration statement needs to be filed before indications of interest may be accepted, and only indications of interest will be acceptable at this time, not orders

Which TWO of the following choices can be calculated by examining the income statement of a company? I The earnings before interest and tax (EBIT) II The debt-to-equity ratio III The operating profit margin IV The amount of working capital I and III I and IV II and III II and IV

I and III EBIT may be found by subtracting the operating expenses from the sales or revenue of a company, and the operating profit margin is found by dividing the sales by the operating expenses. All of this information can be found in the income statement. The debt-to-equity ratio and amount of working capital can be calculated by examining a company's balance sheet.

Which TWO of the following choices would be the most suitable purchasers of municipal zero-coupon bonds? I An investor who does not seek present additional cash flow II An investor who seeks the tax benefits of long-term capital gains IIIAn investor who needs cash for living expenses IV A custodian account where the parent of the minor child is in the highest tax bracket I and III I and IV II and III II and IV

I and IV I An investor who does not seek present additional cash flow IV A custodian account where the parent of the minor child is in the highest tax bracket

A corporation purchases new machinery using cash. Which of the following choices are results of this transaction? I Working capital is reduced II Working capital remains the same III Total assets are reduced IV Total assets remain the same I and III I and IV II and III II and IV

I and IV hen purchasing machinery with cash, current assets (cash) are reduced and fixed assets (machinery) are increased by the same amount. Overall, total assets do not change. Since total assets (TA) and total liabilities (TL) remain the same, stockholders' equity (TA - TL) does not change. Working capital (current assets minus current liabilities) is reduced since current assets are reduced.

Under the provisions of Rule 10b-10, a confirmation sent to a customer must disclose which of the following? I The time of the transaction, or a statement that the time of the transaction will be furnished on request II The capacity in which the member acted, as either agent or principal III Unusual expenses incurred that will justify a higher markup IV The amount of markup charged on a Nasdaq principal transaction I and III only II and III only II and IV only I, II, and IV only

I, II, and IV only Broker-dealers must send confirmations to customers for each purchase and sale made for the customer. The confirmation must disclose, among other items, if the broker-dealer acted as a broker (agent) or as a dealer (principal). Markups must be disclosed for riskless principal transactions in Nasdaq-listed, and other exchange-listed (CQS) securities, but the factors that are considered in determining the markup do not have to be disclosed. (76603)

Which TWO of the following statements are TRUE about the market price of an option? I The more volatile the underlying stock, the smaller the premium II The current market price of the stock compared to the strike price influences the size of the option's premium III The longer the period of time remaining until the option expires, the greater the premium IV Out-of-the money options have no time value I and II I and III II and III II and IV

II and III II The current market price of the stock compared to the strike price influences the size of the option's premium III The longer the period of time remaining until the option expires, the greater the premium An option's premium is determined by the volatility of the underlying stock, the current market price of the underlying stock, and the time remaining until the option expires. The market price of the stock compared to the strike price determines whether the option is in- or out-of-the-money and the intrinsic value. An out-of-the-money option has no intrinsic value, its premium is all time value. The more volatile the underlying stock, the larger the premium. The longer the time remaining until the option expires, the greater the premium.

Two similar companies issue bonds at the same time. One company issues convertible bonds and the other issues nonconvertible bonds. Which two of the following statements are TRUE? I The convertible bonds will probably offer a higher coupon rate. II The convertible bonds will probably offer a lower coupon rate. III The convertible bonds will probably have a higher current yield. IV The nonconvertible bonds will probably have a higher yield to maturity. I and III I and IV II and III II and IV

II and IV Convertible bonds normally have a lower coupon rate than nonconvertible securities. The convertible bonds pay less interest and offer lower yields because the convertible feature gives individuals the ability to become stockholders at their discretion. Since the issuer is giving bondholders this advantage, it can offer a lower coupon rate.

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 I and III I and IV II and III II and IV

II and IV 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.

A registered representative is reviewing a corporation's financial statements. Which TWO of the following statements are TRUE concerning an issuer's bond interest expense? I The annual interest payments are found on the balance sheet II The annual interest payments are found on the income statement III The interest payment is deducted from net income IV The interest payment is deducted from EBIT I and III I and IV II and III II and IV

II and IV The annual interest payment or bond interest expense may be found on a company's income statement. The amount of debt or bonds outstanding may be found on the balance sheet. The annual interest payment is deducted from the earnings before interest and tax (EBIT). Bond interest is paid in pretax dollars, whereas cash dividends are paid from net income or in after-tax dollars.

When general obligation bonds are analyzed, the credit analysis will be affected by which TWO of the following factors? I Feasibility studies II The tax collection record of the municipality III The debt service coverage ratio IV An evaluation of the debt to real estate value ratios in the municipality I and III I and IV II and III II and IV

II and IV The tax collection record and the debt to real estate value ratios are two factors that would be considered when analyzing general obligation bonds. The tax collection record informs the analyst of the tax bases being used by the municipality as a comparison of prior years' tax bases and against other municipalities. The debt to real estate value ratios help the analyst study the relationship of debt to real estate valuation of the municipality and the municipality's ability to meet its debt compared with the real estate wealth of the municipality. Choices (I) and (III) apply to revenue bonds and would not be considered when analyzing general obligation

One of your investment banking clients has a significant amount of cash on hand. The client has sought your firm's advice regarding income-producing equity investments. Which TWO of the following investments pay a dividend but are NOT eligible for the corporate dividend exclusion? I Common stock II money-market fund III Preferred stock IV real estate investment trust I and III I and IV II and III II and IV

II money-market fund & IV real estate investment trust Corporations are allowed an exclusion on dividends received from investments in common and preferred stock. Real estate investment trusts (REITs) make distributions in pretax dollars. The payout from a REIT normally results from collections of rent or mortgage interest. Money-market fund dividends are distributions of interest earned on short-term debt securities.

Relative to a municipal bond purchased at a discount that is callable at par, place the following yields in the proper order from lowest to highest yield. I Current yield II Nominal yield III Yield to maturity IVYield to call I, II, III, IV II, I, III, IV IV, III, I, II II, I, IV, III

II, I, III, IV Nominal yield, Current yield, YTM, YTC A bond trading at a discount, which is callable at par, has a nominal yield that is less than its yield to maturity. Current yield falls between the nominal yield and yield to maturity, and the yield to call is greater than the yield to maturity. A bond trading at a premium has a nominal yield, which is higher than the yield to maturity, with the current yield in between the other two yields. The yield to call is lower than the yield to maturity for a bond selling at a premium, which is callable at par.

A client has established the following position: Long 1 DEF May 50 call at 2Short 1 DEF May 40 call at 6 In which of the following situations will the client have the maximum potential profit? If the market price of the stock is trading above 48 If both options contracts expired unexercised If the market price of the stock is trading below 52 If both option contracts are exercised

If both options contracts expired unexercised This position is referred to as a credit call spread. It's a credit because the client received more for the short call with the lower strike price than what was paid for the call with the higher strike price. If both calls expire unexercised, the client will keep the net premium (the maximum gain). This will occur If DEF remains at or below $40 per share, since neither call will be exercised. If the stock price is trading below 44 (the breakeven point), the client may have a profit, but the maximum profit is realized if both options expired unexercised.

A client has established the following position: Long 1 DEF May 50 call at 2Short 1 DEF May 40 call at 6 In which of the following situations will the client have the maximum potential profit? If the market price of the stock is trading above 48 If both options contracts expired unexercised If the market price of the stock is trading below 52 If both option contracts are exercised

If both options contracts expired unexercised This position is referred to as a credit call spread. It's a credit because the client received more for the short call with the lower strike price than what was paid for the call with the higher strike price. If both calls expire unexercised, the client will keep the net premium (the maximum gain). This will occur If DEF remains at or below $40 per share, since neither call will be exercised. If the stock price is trading below 44 (the breakeven point), the client may have a profit, but the maximum profit is realized if both options expired unexercised. (17058)

Which of the following statements is TRUE concerning the tax treatment of municipal bonds? If the bond was purchased at a premium, it will be accreted based on the constant yield method If the bond was purchased as an original issue discount (OID), the discount will be accreted based on a constant yield method The premium will not be amortized if the bond was purchased at a premium The discount will be amortized if the bond was purchased as an original issue discount (OID)

If the bond was purchased as an original issue discount (OID), the discount will be accreted based on a constant yield method A municipal bond purchased as an original issue discount (OID) is accreted (not amortized) each year for tax purposes based on a constant yield method (also called constant interest method), which uses the bond's yield to maturity. Municipal bonds purchased at a premium are amortized (not accreted) each year based on a constant yield method.

Issuers repurchase their shares to: Dilute their existing shareholders Reduce their annual interest expense Increase their earnings per share (EPS) Increase their working capital

Increase their earnings per share (EPS) When companies buy back their shares, it reduces the number of shares outstanding and accretes (doesn't dilute) the ownership of its current shareholders. Since these companies are reducing their outstanding shares, their earnings per share (EPS) will increase (i.e., since the denominator in EPS is decreasing, the ratio rises).

Which of the following statements is NOT TRUE as it relates to a bond selling at a discount? The yield to maturity is greater than the nominal yield. The nominal yield is less than the current yield. Interest rates most likely decreased after the bonds were issued. The par value exceeds the market price.

Interest rates most likely decreased after the bonds were issued. If the par value of a bond is greater than the bond's market price, it is selling at a discount. A bond sells at a discount because of an increase in interest rates since the bond was issued. For a discount bond, the yield to maturity is highest, followed by the current yield, with the nominal yield being lowest.

Under MSRB rules, which of the following documents do NOT need to be retained for a specific period? Customer confirmations Written customer complaints Issuers' official statements Customer related correspondence

Issuers' official statements Copies of official statements need not be retained since the MSRB does not have the authority to regulate issuers and, therefore, may not require the preparation of an official statement.

If a firm places a temporary hold on a customer's account: It applies to either the entire account or specific disbursements It applies to the entire account It only applies to specific disbursements It is required to obtain the prior approval of FINRA

It applies to either the entire account or specific disbursements If a firm places a temporary hold on a customer's account, it can apply to either the entire account or specific disbursements. If the firm places the temporary hold, it must permit disbursements from the account if there is no reasonable belief that financial exploitation is occurring (e.g., paying normal bills).

Which of the following choices gives the best indication of current interest rates on revenue bonds? Visible supply Placement ratio List of 20 bonds List of bonds with 30-year maturities

List of bonds with 30-year maturities

An investor is short 2,000 XYZ calls. In determining position limits, which of the following choices will be totaled with the short calls? Long XYZ puts Short ABC puts Long XYZ calls Short XYZ puts

Long XYZ puts The position limit rule regulates the maximum number of option contracts an investor may have, per security, on one side of the market. Buying puts (the right to sell) and selling calls (an obligation to sell) represent the short side of the market. Buying calls (the right to buy) and selling puts (an obligation to buy) represent the long side of the market.

A broker-dealer acting for a customer purchases stock from a market maker at $25 and sells it to a customer at $25 plus commission. The broker-dealer: Has violated industry regulations Must disclose the amount of its commission Must disclose the amount of markup charged the customer May not charge a commission exceeding 5%

Must disclose the amount of its commission If the broker-dealer is charging a commission, it is acting in an agency capacity. The amount of the commission must be disclosed to the customer. If the broker-dealer had sold the securities to the customer at a net price, it would have been acting in a dealer capacity and could not charge a commission in addition to its markup. Although the 5% Policy applies to commissions as well as markups, it is a guideline rather than an absolute ceiling. There may be circumstances in which a commission exceeding 5% is justified, or one below 5% a violation.

A municipal bond that is issued at par is later purchased at a discount and redeemed for par at maturity. The investor's profit on the transaction is taxed as: Capital gains Ordinary income Tax-deferred interest Tax-deferred capital gains

Ordinary income

Upon the death of the insured, the proceeds of a variable life policy: Are taxable as ordinary income Are taxable as long-term gains Are taxed as ordinary income to the extent of the premiums paid Pass to the beneficiary free from federal income tax

Pass to the beneficiary free from federal income tax

The subscription agreement for a limited partnership does NOT specify: Suitability standards Priority provisions upon liquidation To whom the check must be made payable Who must sign the agreement

Priority provisions upon liquidation All sales for limited partnership interests are conditioned upon acceptance by the general partner. Typically, a limited partner is considered accepted into the program once the general partner signs the subscription agreement. 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 understands the ramifications of the investment. Priority provisions for liquidating a limited partnership are found in the Certificate of Limited Partnership.

A variable annuity contract holder dies during the accumulation period. In this situation, which of the following statements is TRUE regarding the tax consequences? All proceeds pass to the beneficiary tax-free Proceeds in excess of cost are taxable as capital gains to the beneficiary Proceeds in excess of cost are taxable as ordinary income to the beneficiary Proceeds are not taxable if the beneficiary rolls them over into an IRA

Proceeds in excess of cost are taxable as ordinary income to the beneficiary

A client would like to open a numbered account. An RR may open the account: Under no circumstances Provided the broker-dealer has a written statement on file signed by the client Provided the broker-dealer has a written statement on file signed by the client that is also filed with the appropriate SRO Provided the broker-dealer has a written statement on file signed by the client and the client is an accredited investor

Provided the broker-dealer has a written statement on file signed by the client Any client 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 ownership of the account. This document must be kept on file at the brokerage firm, but does not need to be filed with an SRO.

Which of the following risk factors is the MOST important for purchasers of long-term, high-grade bonds? The ability to pay interest when due The ability to pay principal upon maturity Limited marketability Purchasing power risk

Purchasing Power Risk Long-term, high-grade bonds are relatively safe investments, but do have purchasing-power risk. Because the amount of interest income is fixed, the purchasing power of the interest income may decline over the long term because of inflation. A rise in inflation reduces the amount of goods and services that can be purchased with the fixed amount of dollars. (72682)

Broker-dealers are required to send account statements to customers no less frequently than: Monthly Monthly, if a transaction occurred Quarterly Quarterly, if a transaction occurred

Quarterly SRO rules require that broker-dealers send quarterly account statements to customers. Most broker-dealers send monthly statements if there is activity in the account, but rules do NOT require monthly statements.

Which of the following is an expense or charge NOT normally associated with a variable annuity? Investment management fees Expense charges Redemption fees Administrative expenses

Redemption fees Investment management fees, expense risk charges, and administrative expenses are all charges associated with variable annuities. A redemption fee is assessed upon redemption of a mutual fund.

Money put aside on a municipal revenue issue for the betterment and improvement of the facility is placed in the: Sinking fund Renewal and replacement fund Operating and maintenance fund Debt service fund

Renewal and replacement fund

If an investor is bearish on small-cap stocks, which of the following products should be avoided? Russell Index ETFs MSCI Emerging Market Index ETFs Diamonds REITs

Russell Index ETFs The Russell Index is a benchmark for small-cap stocks. All of the other answer choices track something other than small-cap equities. MSCI Emerging Market Index ETFs track securities that are listed on foreign securities exchanges of emerging markets. Diamonds are ETFs that mirror the DJIA (i.e., large-cap equities). REITs primarily invest in real estate holdings.

Which of the following agencies would NOT be used to back a CMO? FNMA GNMA SLMA FHLMC

SLMA

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

Securities quoted on the OTCBB

An employee in the operations department of a broker-dealer asks an Operations Professional what is meant by the term, covered XAM put. The BEST answer would be if it includes a position in which a customer is: Long XAM stock Long an XAM bond Short XAM stock Short an XAM bond

Short XAM stock The writer (seller) of a put option is obligated to purchase stock if the buyer of the put option exercises the contract. If a customer is short stock and is short a put, she is said to be covered on the transaction since she is already required to purchase the shares to cover the short sale transaction.

When interest rates are fluctuating, which of the following statements is TRUE regarding the movement of short-term rates compared to long-term rates? Short-term rates fluctuate more sharply than long-term rates. Long-term rates fluctuate more sharply than short-term rates. Both long- and short-term rates fluctuate equally. There is no relationship between the fluctuations in long-term and short-term rates.

Short-term rates fluctuate more sharply than long-term rates. When interest rates are fluctuating, short-term rates will fluctuate more sharply than long-term rates. However, in terms of prices, when interest rates are fluctuating, long-term bond prices are affected more than short-term bond prices.

Which action is NOT taken by the receiving firm when processing an Automated Customer Account Transfer Service (ACATS) request? Submission of the Transfer Initiation Form (TIF) data Submission of corrected TIF data if rejected Acceptance of the transfer Submission of the asset input data

Submission of the asset input data When transferring an account using ACATS, the receiving firm will submit the TIF data, and if there are no exceptions, will review the asset input data that was supplied by the carrying firm and accept the transfer. If there is an issue, the carrying firm will reject the transfer request and the receiving firm will update the TIF data within 24 hours. The carrying firm submits the asset input data since it holds the customer's assets. (63813)

Which of the following securities will provide an investor with protection against purchasing-power risk? Treasury bills Treasury notes TIPS STRIPS

TIPS Treasury Inflation-Protected Securities (TIPS) are U.S. government securities that are inflation-adjusted based on the Consumer Price Index (CPI). With TIPS, the rate of interest is fixed. However, the principal amount on which that interest is paid will vary based on the CPI. They are usually purchased as protection against inflationary or purchasing power risk. The other choices are U.S. government securities that pay an investor either a fixed rate or a fixed amount. (72808)

Which of the following issues will most likely have a mandatory sinking fund? Serial issues Balloon issues Term issues Convertible issues

Term issues A term bond issue is one in which all of the bonds mature in one specific year. In order to accumulate the funds that may be used to help retire the bonds, the issuer will deposit funds (above the amount that is used to pay interest) in a sinking fund. These funds will generally be used to retire some (if not all) of the bonds prior to maturity. A serial bond issue is one in which a portion of the bond offering is paid off each year.

A limited partner has contributed capital to a direct participation program. Two years later, he extends a loan. Which of the following statements is TRUE if the DPP declares bankruptcy? The LP is considered a limited partner for both the capital contribution and the loan The LP is considered a limited partner for the capital contribution and a creditor for the loan The LP is considered a creditor for the capital contribution and a limited partner for the loan The LP is considered a creditor for both the capital contribution and the loan

The LP is considered a limited partner for the capital contribution and a creditor for the loan A limited partner who has committed capital may also extend a loan to the partnership. If the partnership declares bankruptcy, the LP will be considered a limited partner for the capital contribution and a creditor for the amount of the loan.

On October 25, Mr. Smith purchased 5 listed XYZ Corporation July 50 calls and paid a $3 premium on each call. The current market price of XYZ Corporation is $48 per share. According to SRO rules, when will the calls expire? 2:00 p.m. Central Time, 3:00 p.m. Eastern Time on the third Friday of the month 3:10 p.m. Central Time, 4:10 p.m. Eastern Time on the third Friday of the month 4:30 p.m. Central Time, 5:30 p.m. Eastern Time on the third Friday of the month 10:59 p.m. Central Time, 11:59 p.m. Eastern Time on the third Friday of the month

The calls will expire at 10:59 p.m. Central Time, 11:59 p.m. Eastern Time on the third Friday of the month (July). Options stop trading at 3:00 p.m. Central Time, 4:00 p.m. Eastern Time on the third Friday of the month. A member firm is not permitted to accept an exercise notice from a customer after 5:30 p.m. Eastern Time (4:30 p.m. Central Time).

If a bond is currently selling for less than par value, then: The current yield is lower than the nominal yield The current yield is equal to the nominal yield The current yield is higher than the nominal yield Interest rates are currently lower than when the bond was originally issued

The current yield is higher than the nominal yield Bond yields and prices have an inverse (opposite) relationship, meaning that as one increases, the other would decrease. Therefore, if a bond is selling at a premium (above par), its current yield would have to be lower than its nominal yield.

The Founders Income Fund has declared a dividend that is payable to stockholders of record on Thursday, May 29. This mutual fund's ex-dividend will typically be on: Monday, May 26 Tuesday, May 27 Wednesday, May 28 The date that is set by the fund or its principal underwriter (sponsor)

The date that is set by the fund or its principal underwriter (sponsor)

A company currently has $125,000,000 of 3 1/4% convertible bonds. The company is going to offer bondholders $125,000,000 of 3 1/4% nonconvertible bonds plus cash of $15,000,000 for the convertible bonds. How will this transaction, if successful, affect the company's financial status? It will reduce the cash and debt position and reduce the potential dilutive effect on the common stock It will reduce the cash position and increase the debt position It will increase the cash position and reduce the potential dilutive effect on the common stock It will reduce the cash position and the potential dilutive effect on the common stock

The effect of the transaction will be to reduce the cash position and the potential dilutive effect on the common stock. The company is paying out cash and is also issuing nonconvertible bonds in place of convertible bonds (which could have been converted into common stock). This will reduce the cash position and the potential dilutive effect on the common stock.

Which of the following factors would be LEAST useful when analyzing the credit risk of an issuer of revenue bonds? User charges Rental and lease payments The federal funds rate Concessions and fees

The federal funds rate Current interest rates are factors that will affect all bond issuers and would be least useful when analyzing a specific issuer of revenue bonds. The other choices are all sources of revenue to be used to pay the interest and principal on a municipal revenue bond.

Which of the following factors is not taken into consideration when determining the markup on a municipal securities transaction? The dollar amount of the trade The best judgement of the dealer The fact that the dealer is entitled to make a profit The financial condition of the customer

The financial condition of the customer

A company has current assets of $5 million, fixed assets of $15 million, and intangible assets of $7 million. The company also has current liabilities of $2 million, long-term liabilities of $10 million, and shareholders' equity of $15 million. What's the company's working capital? $27 million $3 million $5 million $8 million

The formula for calculating the working capital is current assets minus current liabilities (i.e., Working Capital = Current Assets - Current Liabilities). Since the company has $5 million of current assets and $2 million of current liabilities, the working capital is $3 million ($5 million current assets - $2 million current liabilities).

A municipal bond with 10 years to maturity was purchased at 105. If an investor sold the bond six years later at 103, which of the following is TRUE regarding the tax result? The investor has a $20 long-term capital loss. The investor has no gain or loss. The investor has a $10 gain that's taxed at the investor's ordinary income rate. The investor has a $10 long-term capital gain.

The investor has a $10 long-term capital gain. For municipal bonds that are purchased at a premium, their cost basis must be amortized (reduced) to par value over their maturity. In this example, the bond is purchased at a $50 premium and it has 10 years to maturity. This means that the bond's basis will be amortized by $5 per year ($50 ÷ 10 years). After six years, the bond's basis will have been reduced by $30 ($5 x 6 years), which would bring the adjusted cost basis to $1,020 ($1,050 - $30). When the bond is sold for $1,030, the customer realized a $10 long-term capital gain ($1,030 - $1,020).

Which of the following statements about municipal revenue bonds is NOT TRUE? They are not subject to the debt limitations that apply to general obligation bonds The maturity of the bonds will equal the useful life of the facility being built They can be issued by states, political subdivisions, interstate authorities, and intrastate authorities The interest and principal payments are derived from the funds being generated by the facility

The maturity of the bonds will equal the useful life of the facility being built Municipal revenue bonds do not always have maturity schedules that equal the useful life of the facility being built. Instead, the facility's useful life should significantly exceed the maturity of the bonds. Municipal revenue bonds do not have the debt limitations that apply to general obligation bonds. A debt limitation is considered the statutory or constitutional maximum debt that an issuer may legally incur. Revenue bonds can be issued by states, political subdivisions (e.g., counties and townships), interstate authorities, and intrastate authorities. Municipal revenue bond interest and principal payments are derived from the funds being generated by the facility.

The ABC Growth Fund has been in existence for six years. An advertisement that refers to its ranking based on total return must refer to the total return for: The one- and five-year periods by the same ranking entity At least one year The one- and five-year periods by all ranking entities Since the fund has not been in existence for at least 10 years, it may not use ranking based on total return in its advertising

The one- and five-year periods by the same ranking entity The standards set forth by the SEC and FINRA regarding mutual fund communications (advertising) are that performance statistics should cover 1-, 5- and 10-year periods. If the fund has not been in existence for 10 years, then disclosure must be made for the relevant for 1- and/or 5-year periods. In addition, the total return exhibited and the specific ranking must be determined by the same ranking entity.

Which of the following factors is the LEAST useful when analyzing the credit risk of an issuer of revenue bonds? An engineering study The ratio of the amount of net overall debt to assessed valuation The debt service coverage ratio The feasibility study

The ratio of the amount of net overall debt to assessed valuation The ratio of the amount of net overall debt (both direct and overlapping) to assessed value is useful in analyzing the credit risk of an issuer of general obligation (not revenue) bonds. In order for a municipal revenue bond issuer to raise funds for a project, it will conduct a feasibility and engineering study.

A firm's suitability responsibilities for sales of variable annuities do NOT apply to recommendations in which of the following situations? The initial purchase of a variable annuity The reallocation of assets among subaccounts after the initial purchase The exchange of one variable annuity for another The initial subaccount allocations

The reallocation of assets among subaccounts after the initial purchase

When analyzing a mutual fund's expenses, an analyst does NOT consider: The management fees charged by the investment adviser The fees charged by the fund's custodian The fund's expense ratio The sales load charged to buy fund shares

The sales load charged to buy fund shares When analyzing a mutual fund's expenses, an analyst is concerned about the amount of expenses as compared to the amount of money managed by the fund. This comparison is made by calculating the fund's expense ratio (operating expenses divided by total net assets). The operating expenses include management fees (which is usually the largest expense) and the fee paid to the fund's custodian. Total net assets are the fund's assets minus liabilities. Sales charges are not considered expenses of the fund.

The penny stock rules apply under which of the following circumstances? The stock is listed on Nasdaq The stock is quoted on the OTC Bulletin Board The transaction is not recommended by the broker-dealer The customer is an active trader in penny stocks

The stock is quoted on the OTC Bulletin Board According to SEC rules, penny stock is a stock that sells for less than $5.00 and is not listed on Nasdaq or the NYSE. Instead, these low-priced stocks are quoted on the OTC Bulletin Board or OTC Pink Marketplace. However, penny stock rules don't apply under the following conditions: The customer is defined as an existing customer (i.e., a person who has maintained an account with a broker-dealer for more than one year or has previously engaged in three or more transactions involving penny stocks) The transaction is non-recommended or unsolicited The transaction is executed by a broker-dealer that's not a market maker in the security

A client buys 100 shares of XYZ Corporation at $27 per share and writes an XYZ October 30 call at a $3 premium.The XYZ Corporation 30 call option will expire on: October 30 The first day of November The third Friday of October The fourth Friday of October

The third Friday of October The expiration date for equity option contracts is the third Friday of the expiration month, at 11:59 p.m. Eastern Time.

Which of the following statements is NOT TRUE of industrial development revenue bonds? They are issued by local municipal governments They may be used to finance the construction of commercial property that will be used by private corporations Their credit rating is determined by an analysis of the municipal government issuing the bonds Interest is paid from rents received from private corporations

Their credit rating is determined by an analysis of the municipal government issuing the bonds Industrial development revenue bonds are issued by local municipal governments to build factories or other commercial properties. The plant or property is leased by the municipality to a corporation. The interest on the bonds is paid from the lease rental payments made by the corporation. The credit rating of the bond is based on the credit rating of the corporation and not on an analysis of the credit rating of the municipal government issuing the bonds.

An option contract for RFQ is for 108 shares. This is most likely a result of which of the following circumstances? This not possible because an option contract always represents 100 shares There has been a stock split There has been a stock dividend There has been a cash dividend

There has been a stock dividend The number of shares can be adjusted for a stock dividend or an odd stock split. 108 shares most likely represents an 8% stock dividend.

Which of the following statements is TRUE regarding the supervision of real-time communication through social networking sites? The site must be approved by FINRA. The site must be approved by the SEC. This communication is regulated in a manner that's similar to retail communication. This communication is regulated in a manner that's similar to correspondence.

This communication is regulated in a manner that's similar to correspondence. According to FINRA, social media sites (e.g., Instagram, Facebook, Twitter, and LinkedIn) can be used to promote products or services of a broker-dealer. Real-time communication through social media site is supervised in a manner that's similar to correspondence. In other words, the communication is subject to review and supervision, but doesn't require principal approval prior to use. In addition, the communication is NOT required to be filed with FINRA.

A client with an options account takes the following position: Long GHI Nov 65 puts and Short GHI Nov 55 puts. Which of the following statements is TRUE regarding this position? This position subjects the client to unlimited risk. This position will be profitable if the market price of the security declines. This position will be profitable if the market price of the security increases in value. This position will only be profitable if the market price of the stock is trading between 55 and 65.

This position will be profitable if the market price of the security declines. This position is referred to as a debit put spread. It's a debit because the cost to purchase a put with a higher strike price will be more than the amount received for selling a put with a lower strike price. The investor will make money if the stock declines (bearish) in value since the long put will be exercised first (it has a higher strike price and thereby more intrinsic value). The fact that the premiums are not given is irrelevant since the cost of a put with the higher strike price will always be more valuable that a put with a lower strike price (if given the same expiration month). The position may be profitable if the stock price was trading between 65 and 55, but will also be profitable if the stock is trading below 55.

A client with an options account takes the following position: Long GHI Nov 65 puts and Short GHI Nov 55 puts. Which of the following statements is TRUE regarding this position? This position subjects the client to unlimited risk. This position will be profitable if the market price of the security declines. This position will be profitable if the market price of the security increases in value. This position will only be profitable if the market price of the stock is trading between 55 and 65.

This position will be profitable if the market price of the security declines. debit put spread. the cost to purchase a put with a higher strike price will be more than the amount received for selling a put with a lower strike price. The investor will make money if the stock declines (bearish) in value since the long put will be exercised first (it has a higher strike price and thereby more intrinsic value). The fact that the premiums are not given is irrelevant since the cost of a put with the higher strike price will always be more valuable that a put with a lower strike price (if given the same expiration month). The position may be profitable if the stock price was trading between 65 and 55, but will also be profitable if the stock is trading below 55.

A customer has a net worth of $2 million and has $475,000 in a brokerage account. The customer wants to use some of the funds to purchase a vacation property near a beach, but has not yet found the right property. If the customer is subject to the highest marginal tax rate, wants preservation of capital, and access to her funds, what should her registered representative recommend? Short-term corporate debt Treasury bills Treasury notes Short-term U.S. government agency debt

Treasury bills For this customer, the best choice is Treasury bills since they have the lowest interest-rate and credit risk and offer safety of principal. Also, they're the most liquid securities which provides quick access to the funds.

If an investor expects interest rates to fall significantly in the next two years, what would be the most appropriate investment? T-bills Treasury notes Treasury bonds Mortgage pass-through certificates

Treasury bonds Long-term bond prices are more volatile than short-term bond prices. If the investor expects interest rates (yields) to decline, the investor is anticipating rising bond prices. Of the four choices, the investment that would appreciate the most is the Treasury bonds. (85117)

When purchasing a new issue of stock in a cash account, when must payment be made under Reg. T? On the settlement date Two business days after the trade date When the securities are delivered Two business days after the settlement date

Two business days after the settlement date

A customer who's in his late 20s wants capital appreciation and tax-deferred growth. He's willing to take a moderate degree of risk in his initial investment, but is concerned about the inflationary risk to his portfolio. Which of the following investments is MOST suitable? Equities Corporate debt Variable annuities Municipal debt

Variable annuities

As a retirement vehicle, which of the following choices would probably provide the greatest protection of purchasing power? Fixed annuities Variable annuities Corporate bonds Mortgage-backed securities

Variable annuities Variable annuities, theoretically, provide the greatest protection against loss of purchasing power. The payout is based on the securities (mostly equity securities) in the separate account, which historically have increased in inflationary periods. This provides for a larger cash payout to offset the effects of inflation. The other choices given have a fixed payout and do not offer protection against the loss of purchasing power in inflationary periods. (73296)

The purchase of a new issue prior to settlement with the issuer can BEST be described as a: Subject or workout transaction When-issued transaction Seller's option contract Violation of the Securities Act of 1933

When-issued transaction 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.

All of the following information must be disclosed to a customer on a confirmation, EXCEPT: The security traded, the price, and the number of shares Whether the firm acted as principal or agent The commission if the firm acted as an agent Whether the order was solicited or unsolicited

Whether the order was solicited or unsolicited

If an equity option is exercised, when is the settlement date for the stock transaction? On the same business day On the next business day Within two business days Within seven business days

Within two business days When an equity (stock) option is exercised, delivery of the underlying stock and payment for the stock is expected within 2 business days (regular-way settlement for stock).

Which of the following option strategies has the greatest risk? Buying a long straddle Writing an uncovered put Writing an uncovered call Buying a long combination

Writing an uncovered call

The tranche with the longest maturity and, therefore, the last to receive interest and principal payments within a CMO, is known as the: PAC tranche Z-tranche Supersinker Companion tranche

Z-tranche The separate classes of a CMO are known as tranches. The longest maturity is frequently called the Z-tranche or the accrual bond, and does not receive interest or principal payments until the shorter maturing tranches have been retired.

Mr. Jones purchases a Canadian dollar September 85 call option for a premium of .82. At what price (spot rate) would the Canadian dollar need to be trading in order for Mr. Jones to exercise the option and break even? (Assume 10,000 Canadian dollars per contract.) $0.8418 $0.8500 $0.8582 $858.20

he strike price is 85 (0.8500) the premium is .82 ($0.0082) the spot rate for the Canadian dollar would need to be $0.8582

In the case of inherited securities,

the value of the securities is determined at the time of death. The heirs are always considered to have long-term holding periods.

Which of the following municipal entities would NOT issue overlapping debt? A park district A library district A school district A turnpike authority

turnpike authority Overlapping debt involves only general obligation borrowing. A turnpike authority would typically issue only revenue bonds.

Mr. Jones purchases 100 shares of IBM at $116 per share and writes an IBM June 115 call option at 5. Mr. Jones' breakeven point is: 110 111 120 121

writer of a covered call will have a breakeven point equal to the purchase price of the stock (116) less the premium received (5) his breakeven point is $111 ($116 - $5 = $111).