Series 7 Q&A Exams

Company AZX has announced a partial tender offer for Company BHQ. A shareholder of Company BHQ is long 1,000 shares of stock and long 2 BHQ puts. For the purpose of tendering shares, the stockholder may tender:

1,000 shares Explanation: An investor who holds stock in a company that is the subject of a tender offer may tender only stock that he holds long. Short tendering is not permitted. The long puts do not affect the client's net long position. If a shareholder had written call options positions against the long stock, the options positions will reduce his net long holdings in the stock.

Which TWO of the following statements are TRUE regarding Roth IRAs? I. Contributions are in pretax dollars II. Contributions are in after-tax dollars III. Qualifying distributions are taxable IV. Qualifying distributions are tax-free

II and IV Explanation: If an individual earns less than $116,000 (or $183,000 jointly), the full benefits of Roth IRAs can be realized. (For 2014, the limits were $114,000 and $181,000). This would allow the individual to contribute up to $5,500 (plus $1,000 for individuals age 50 and over) in after-tax dollars and receive qualifying distributions that are tax-free.

The Consumer Price Index:

Measures the average change in prices for specific goods and services purchased by consumers in certain cities Explanation: The Consumer Price Index (CPI) measures the average change in prices for selected goods and services purchased by consumers in certain cities. The CPI measures the change from a previous base period and is computed monthly.

An investment contract that offers life insurance benefits plus participation in a portfolio of securities is called a:

Variable life insurance contract Explanation: A variable life insurance contract offers life insurance benefits and participation in a separate portfolio of securities. A variable annuity offers a death benefit, but a death benefit is not considered life insurance.

The credit rating agencies have downgraded an issuer of an exchange-traded note. Which of the following statements is TRUE? a. It will have a negative impact on the security b. It will have a positive impact on the security c. It will have no impact on the security d. The issuer will be obligated to repay the investor his principal immediately

a. It will have a negative impact on the security Explanation: Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates and the credit rating agencies downgrade the issuer of the ETN, it would impact the value of the ETN negatively.

Which of the following choices is NOT a factor in secondary-market municipal joint accounts? a. Members may not publish different offering prices b. They require a good faith deposit c. There may be an order period d. There may be a takedown

b. They require a good faith deposit Explanation: A good faith deposit is a sum of money given to the issuer of a new municipal bond issue along with a syndicate's bid and is not a factor in secondary-market transactions. A secondary-market joint account exists when two or more dealers form an account to jointly offer a block of bonds in the secondary market. As with a new issue, there may be an order period as well as a takedown (member's discount). MSRB rules prohibit members of the account from offering the bonds at different prices.

Dividends paid by a corporation to its shareholders are NOT: a. Determined by a corporation's board of directors b. Voted upon by a corporation's shareholders c. In the form of cash or the corporation's stock d. In the form of stock owned in another corporation

b. Voted upon by a corporation's shareholders Explanation: A corporation can pay a dividend to its stockholders in the form of its own stock, stock owned in another corporation, or in cash. The amount of dividend to be paid is determined by the board of directors. Shareholders do not vote on dividend payments.

Which of the following choices is NOT considered an established business relationship under the Telephone Consumer Protection Act? a. You have executed two trades for the person called b. You have contacted the person twice but have not yet executed a trade c. The person called has completed an account form to retain your services d. The person has requested information but not yet opened an account

b. You have contacted the person twice but have not yet executed a trade Explanation: According to the Telephone Consumer Protection Act, a business relationship exists if the consumer has made an inquiry, application, purchase, or transaction with respect to the products or services offered by your firm. Prior solicitations do not alone establish a business relationship.

A customer's margin account has a credit balance of $20,000 and a debit balance of $15,000. On what amount will the customer be charged interest?

$15,000 Explanation: Customers are charged interest on the average daily amount of the debit balance in their account. Generally, they are not charged interest in a short account.

A customer's margin account is as follows. Long Market Value $25,000 MNO $11,000 XYZ Debit Balance $20,000 SMA $ 800 The customer sells $3,000 of stock in the account. What will the value of the SMA be after the sale?

$2,300 Explanation: This account is restricted since the equity ($16,000) is less than the Reg T requirement of the account's market value ($36,000 x 50% = $18,000). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds multiplied by the Reg T requirement of 50%. In this question, the sale of $3,000 worth of stock will be used to reduce the customer's debit balance to $17,000 and the SMA will be credited by $1,500 ($3,000 sale x 50% Reg T). This will bring the SMA up to $2,300 ($800 + $1,500).

A GNMA pass-through is quoted 98.10 to 98.18. This quote represents a spread per $1,000 face value of:

$2.50 Explanation: GNMA pass-through certificates (as with T-notes and T-bonds) are quoted in 32nds. The spread of .08 represents 8/32 or 1/4 (.25) and has a value of $2.50 per $1,000.

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

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

When may a new issue become marginable?

30 days from the effective date Explanation: When approved for margin trading by the FRB, a new issue becomes marginable 30 days from the effective date of the offering.

Listed equity options cease trading at:

4:00 p.m. Eastern Time on the expiration date Explanation: Listed equity options cease trading at 4:00 p.m. Eastern Time on the expiration date. Beginning February 1, 2015, the expiration date for listed equity options is the third Friday of the expiration month, at 11:59 p.m. Eastern Time.

Company R has announced a tender offer for Company T. A shareholder of Company T is long 1,000 shares of stock and has written 5 covered calls against the stock. For the purpose of tendering shares, the shareholder may tender:

500 shares Explanation: An investor who holds stock in a company that is the subject of a tender offer may tender only stock that he holds long. If a shareholder has written call option positions against the long stock, the options positions will reduce his net long holdings in the stock.

ABC Corporation is paying a $5 yearly dividend on its preferred stock. The market price of the preferred stock is $80. The current yield is:

6.25% Explanation: The current yield on common or preferred stock is found by dividing the yearly dividend by the market price of the stock. In this example, the market price of the preferred stock is $80 and the yearly dividend is $5. This equals a current yield of 6.25% ($5 divided by $80 equals 6.25%).

An individual may roll over a lump-sum distribution from a corporate pension plan to an IRA without tax consequences if it is done within:

60 days Explanation: When a lump-sum withdrawal from a corporate pension plan, Keogh, or IRA is deposited into an IRA, it is referred to as a rollover. If the rollover is done within 60 days, the investor will avoid a taxable event. If the distribution is from a qualified plan other than an IRA, the distributing company must withhold 20% of the distribution for the IRS. Only one rollover is permitted each year.

An insider owning 500,000 shares of unregistered ABC stock has filed a Form 144 Notice of Offering. The weekly volume of trading for ABC on all exchanges was: June 30 61,000 June 23 62,000 June 16 64,000 June 9 65,000 June 2 40,000 ABC has 6,500,000 shares of stock outstanding. On July 3, the insider would like to sell a portion of his unregistered stock. What is the maximum amount of shares he may sell under Rule 144?

65,000 Explanation: On July 3, the insider wants to sell unregistered ABC stock under Rule 144. The trading volume for the previous four weeks was: June 30 61,000 June 23 62,000 June 16 64,000 June 9 65,000 Total four-week volume 252,000 The average volume is 63,000 shares (252,000 divided by four weeks equals 63,000). Rule 144 states that the insider may sell an amount equal to the average weekly volume of the previous four weeks, or 1% of the outstanding shares, whichever is greater. One percent of the 6,500,000 outstanding shares equals 65,000. Therefore, the investor may sell 65,000 shares of the security.

The dated date of a municipal bond is January 1, 2014. The first coupon date is August 1, 2014. The first coupon will represent how many months of interest?

7 months Explanation: The first coupon will be paid in 7 months. This is known as an odd (in this case, long) first coupon payment. The interest will begin to accrue from the dated date but will be paid on the first coupon date.

If 70 Ford Motor option contracts were traded on a particular day, how many shares of Ford Motor Corporation common stock does this represent?

7,000 Explanation: The number of shares would be 7,000, as each contract represents 100 shares. There were 70 contracts traded (70 contracts x 100 shares = 7,000 shares).

A NYSE-listed stock closed at $72. The next day the stock is ex-dividend 60 cents. To determine if the stock increased or decreased from the close of trading, the price is based on:

71.40 Explanation: The stock will be reduced by 60 cents. The stock must be reduced in price to entirely cover the dividend. Therefore, the stock will open at 71.40 (72 - .60 = 71.40). If the stock closed at 72.50 that day, it will be quoted as an increase of $1.10 (72.50 - 71.40).

On September 22, a customer purchases 2 listed XYZ May 70 calls and pays a $4 premium for each call. The current market price of XYZ Corporation is $69 per share. What is the customer's breakeven point?

74 Explanation: The strike price plus the premium equals the breakeven point for the buyer of a call. The breakeven point is $74 (the $70 strike price + the $4 premium = $74). The fact that the investor bought multiple contracts is not relevant since the breakeven point is a price per share.

A registered representative is provided with the following financial information concerning a company: Debt of $225 million, par value of the common stock $40 million, paid-in capital of $70 million, and retained earnings of $750 million. The common stock ratio is:

79% Explanation: The common stock ratio is found by dividing total shareholder equity by a company's total capital. Shareholder equity is equal to the par value of the common stock + paid-in capital + retained earnings, and the total capital is found by adding the debt to shareholder equity. The common stock ratio is 79% [par value of the common stock is $40 million + paid-in capital of $70 million + retained earnings of $750 million = $860 million / $1,085 million ($225 million + $860 million)]. The common stock ratio is used to analyze the capital structure of a company.

A corporation has $7,000,000 in income after paying preferred dividends of $500,000. The company has 1,000,000 shares of common stock outstanding. The market price of the stock is $56. What is the price-earnings ratio?

8 times Explanation: The price-earnings ratio is the market price ($56) of the stock divided by the earnings per share ($7), which equals 8 times. The earnings per share of $7.00 is found by dividing the $7,000,000 of available income to the common stockholders by the 1,000,000 shares of common stock outstanding.

A corporate bond has a 12% nominal yield. To be equivalent, an investor in the 28% tax bracket would need a municipal bond with a yield of:

8.6% Explanation: To determine the net yield of a taxable bond, multiply the yield by the complement of the tax bracket. The net yield is 8.6% (12% yield multiplied by 72%, which is the complement of the tax bracket).

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. Above what market price for ABC will there no longer be an effect on the individual's profit?

95 Explanation: The spread will widen as the market price rises. The maximum spread occurs at a market price of 95. If it rises above 95, the spread will not widen beyond 5 (the difference between the strike prices).

A customer sells XYZ short at $40 and sells one XYZ October 40 put at 5. What will the customer's profit or loss per share be if the put is exercised when the market value of the stock is $35, and the stock received pursuant to that exercise is used to cover the short stock position?

A $5 profit Explanation: If the put is exercised when the market price is less than $40, the stock acquired by the writer will be used to close out the short position. There is no profit or loss on the short sale (sell short at $40 and cover at $40). The entire profit is the premium income of $5. The seller of a put who sells short can never profit by more than the premium when the short sale price and the strike price are the same.

During a period of stable interest rates, which bond has the most potential to show a significant change in price?

A 7 1/2%, 10-year convertible subordinated debenture Explanation: If interest rates are stable, most bond prices will have little movement. However, a convertible debenture could show significant price appreciation or depreciation if the underlying equity changes in value because of the potential to convert. This keeps the bond price in the vicinity of conversion parity. Parity is achieved when the value of the bond equals the value of the common stock derived from conversion.

A municipal bond trader who is looking for assistance in buying or selling a specific municipal bond issue in the secondary market will MOST likely use:

A broker's broker Explanation: A broker's broker is a primary source for a quote in the secondary market and assists the trader in finding the best price on a specific issue. The Bond Buyer and The Wall Street Journal are publications and do not provide quotes or pricing information on specific municipal bonds traded in the secondary market. The OTC Pink Market provides quotes for securities not listed on the NYSE or Nasdaq.

Structured products are typically comprised of two components including:

A fixed-income note and a derivative product Explanation: A structured product is typically built around a fixed-income instrument and a derivative product. The note pays a specified rate of interest to the investor at defined intervals. The derivative component establishes the amount of payment at maturity.

A municipal tombstone advertisement must be approved by:

A municipal securities principal Explanation: MSRB rules require that an advertisement must be approved prior to its first use by a municipal securities principal.

An investor has an equity portfolio that consists mainly of domestic companies. If an RR wants to diversify the client's portfolio to include foreign companies, which of the following investment products would MOST closely achieve this goal?

A mutual fund that tracks the EAFE Index Explanation: The MSCI EAFE (Morgan Stanley Capital International Europe, Australasia, and Far East) Index follows the equity performance of the developed markets but excludes the U.S. and Canada. The FTSE Index mostly follows the stocks of companies trading on the London Stock Exchange.

When a member firm issues a research report, it must be approved by:

A supervisory analyst Explanation: When a member firm issues a research report, it must be approved by a supervisory analyst. A supervisory analyst must be registered as such with FINRA and is required to pass a separate examination.

A client wants all trade confirmations sent to his investment adviser. This will require:

A written letter from the client

The Bond Buyer contains a 20-Bond Index and an 11-Bond Index. The bonds included in the 11-Bond Index have an average rating of:

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

When an investor sells an interest in a limited partnership, her cost basis for tax purposes is the:

Adjusted basis Explanation: An investor's basis will be reduced by any claimed losses and any cash distributions. This reduced (adjusted) basis is the cost basis at the time of sale.

A company based in Europe with offices located in New Jersey would like to have its stock traded on the NYSE. This most likely will be accomplished through the issuance of:

American Depositary Receipts Explanation: American Depositary Receipts (ADRs) facilitate U.S. investment in the stock of foreign corporations. When the foreign securities are deposited in a U.S. bank based in that country, a receipt for those securities is issued and traded in the U.S. as if it were the foreign security itself.

Accumulation units are converted to annuity units when the:

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

A registered representative has a dispute with his firm over compensation. This dispute will be resolved by:

An arbitration panel Explanation: Registered representatives agree to arbitrate any disputes with their employer, with the exception of statutory discrimination and harassment claims.

A husband or wife may give a lifetime tax-free gift to a spouse of:

An unlimited amount Explanation: A husband or wife may give a lifetime tax-free gift of an unlimited amount to a spouse. Any person may give a gift or $14,000 per person, per year without incurring a gift tax.

An investor established the following positions. Long 100 shares of XYZ at $37 per share Long 1 XYZ 35 put at 1.75 This investor prefers XYZ to:

Appreciate significantly Explanation: The investor purchased the stock at $37 per share and protected it by purchasing the right to sell XYZ at $35, paying a 1.75 premium (long XYZ 35 put). The investor loses money if the stock falls below the breakeven price of $38.75 ($37 purchase price of the stock + the 1.75 premium on the purchase of the put). The investor prefers XYZ to appreciate significantly since there is the potential for unlimited gains.

An open-end investment company has increased in value because of a rise in the market. This is best characterized as:

Appreciation Explanation: An increase in the market price of an open-end investment company or other security from the purchase price is appreciation. There is only a capital gain when the security is sold and the appreciation is realized.

The State of North Carolina is offering $100,000,000 of general obligation bonds with serial maturities. The bonds maturing in 2029 have an interest rate of 5 1/2% and a yield to maturity of 5.60%. This means the bonds are being offered:

At a discount. Explanation: Since the bonds have a yield to maturity of 5.60% (that is greater than the 5 1/2% coupon rate), the bonds are being offered at less than their face (par) value. These bonds were, therefore, issued at a discount.

A limited partner lends money to the partnership. The limited partner will:

Become a general creditor of the partnership Explanation: A limited partner is permitted to lend money to the partnership. He will be considered a general creditor since he was a lender.

What information can be found on the Consolidated Quotation System?

Bid/asked quotations for listed stocks reported by national exchanges and OTC third market makers Explanation: The Consolidated Quotation System (CQS) provides subscribers with bid/asked quotations for securities listed on national exchanges, including quotes from OTC market makers in those securities (the third market).

An investor believes that the U.S. dollar will strengthen in the coming months. Which of the following option strategies provides the greatest potential gain?

Buying euro puts Explanation: If the U.S. dollar strengthens, the euro will typically fall. Buying euro puts provides the greatest potential gain. There are no listed options on the U.S. dollar. Selling options provides a maximum gain that is limited to the total premium. Short straddles are profitable only if the underlying investment remains stable in price.

How often is a broker-dealer required to calculate the amount of margin a customer is required to deposit?

Daily Explanation: FINRA requires a broker-dealer to calculate the amount of initial and maintenance margin that must be maintained in a customer's account on a daily basis.

Which of the following choices is NOT taxable to the owner of mutual fund shares? a. Dividends that were reinvested at net asset value b. Fund shares that appreciated which are exchanged for other shares in the same family of funds c. Fund shares held by the investor, which have appreciated but have not yet been sold d. A capital gains distribution that was reinvested at net asset value

Fund shares held by the investor, which have appreciated but have not yet been sold Explanation: Owning fund shares that have appreciated in value does not incur taxes. The appreciation becomes taxable as a capital gain when the shares are sold for the profit. An exchange within a family of funds is considered a sale and subsequent purchase, and will be a taxable event if the sale resulted in a gain. Dividends and capital gain distributions are taxable events whether or not they are reinvested

An investor purchases the following bonds: State of Florida 8% bond due 2020, State of California 8 1/2% bond due 2020, State of New York Housing Finance Agency 9% Revenue bond due 2030, and Wayne County, Michigan 8 1/2% Water and Sewer Revenue bond due 2030. This portfolio offers:

Geographical diversification Explanation: The portfolio offers the investor geographical diversification because the issues are from different municipalities throughout the country.

Short-term municipal obligations payable from funds that usually are received from the federal government are:

Grant anticipation notes Explanation: Grant anticipation notes are short-term municipal notes issued on the expectation of receiving grant money, usually from the federal government.

A clause in an underwriting agreement that allows an underwriting syndicate to purchase additional shares from the issuer for sale to the public is a(n):

Green Shoe clause Explanation: A clause in an underwriting agreement that allows the syndicate to sell more of an issue than was originally available, and acquire those shares from the issuer, is known as a Green Shoe clause. This clause is found in the offering's overallotment provision and is limited to 15% of the offering.

A registered representative wants to take on a second job working part-time as a waiter in a restaurant. This is allowed as long as the individual notifies:

His employer Explanation: Prior written notification must be provided to the registered representative's employer.

The custodian bank of a mutual fund:

Holds the fund's cash and securities and performs essential clerical functions but does not manage the fund Explanation: The custodian bank of a mutual fund only holds the fund's cash and securities and performs important clerical functions. It does not manage the fund, which is the responsibility of the investment adviser. The custodian bank does not distribute the fund or guarantee investors against any loss that may be incurred if the fund should decline in value.

Which TWO of the following activities would require special disclosure documents? I. Penny stock trading II. Trading in high-yield bonds III. Day trading IV. Online trading

I and III Explanation: Regulators have singled out penny stock investing and day trading as presenting significant risks that warrant providing special risk disclosure documents.

An investor purchased a municipal bond at a discount. If the investor holds the bond to maturity, a gain will be considered: I. Tax-free interest if the bond is an OID II. A capital gain if the bond is an OID III. Ordinary income if the bond is not an OID IV. Tax-free interest if the bond is not an OID

I and III only Explanation: For an OID (original issue discount), the discount is considered interest. Because this is a municipal bond, the interest is tax-exempt. For a non-OID (a secondary market discount), the discount is reported as ordinary income.

A customer has purchased 10 ABC January 50 calls, paying a $2 premium, and 10 ABC January 50 puts, paying a $2 premium. The market price of ABC stock is $50 per share. The buyer's breakeven points are: I. $46 II. $48 III. $52 IV. $54

I and IV Explanation: The customer has the right to call the stock at $50. He has paid a $400 premium per straddle. The breakeven point on the call is determined by adding the 50 strike price to the premium of 4. This equals a breakeven of $54. The customer also has the right to put or sell the stock to the writer at $50, but has paid a $400 premium. The breakeven point on the put is four points below the strike price of $50, which equals $46. The buyer's breakeven points will, therefore, be $46 and $54.

Duties of the ROP include: I. Reviewing selected customer accounts II. Establishing option training programs for registered representatives and ROPs III. Reviewing retail communications

I, II, and III

Prior to being listed on an exchange, which of the following factors must be evaluated? I. The number of shareholders II. The dividend payout III. The earnings record IV. The current market price

I, III, and IV only Explanation: Listing requirements include: a minimum number of round-lot shareholders, a minimum number of shares publicly held, minimum market values, a positive earnings history, and national interest in the stock. The amount of dividends paid or the dividend payout ratio is not a factor.

When opening a new account, what is the order in which the following actions take place? I. Determining customer suitability II. Obtaining a signed options agreement III. Entering the initial order IV. Obtaining approval from the ROP

I, IV, III, II Explanation: When opening an account, the first step is to obtain the essential facts regarding the customer's investment objectives and financial means in order to determine suitability. The account is then approved by the ROP and the initial order is entered. The member firm has 15 days to obtain the signed options agreement.

Fred's Auto Centers is looking to raise $10 million to expand its business. The company has entered into an agreement to raise the capital through Winco Securities, a local investment banking firm. Winco Securities has made no guarantee that it will be able to raise the full amount of the offering. Which TWO of the following statements regarding this scenario are TRUE? I. This is an example of a firm-commitment underwriting II. This is a best-efforts underwriting III. Winco is acting as an agent for Fred's Auto Centers IV. Winco is acting as principal in this underwriting

II and III Explanation: The underwriting is being done best-efforts, since no guarantee to raise the $10 million has been made by Winco Securities. Winco is acting as an agent in the transaction because any unsold shares will be retained by Fred's Auto Centers. Winco will be compensated only for the shares it sells and assumes no liability in the deal.

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

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

An individual who owns STC stock could provide protection against a decrease in market value by: I. Buying calls II. Buying puts III. Selling calls IV. Selling puts

II and III only Explanation: In order to protect against a decline in market value, an investor could buy puts or sell calls. If the market price were to fall, the price of the puts purchased would rise and an investor could realize a profit by exercising the puts or selling the puts at the higher premium. The price of the calls would fall and the calls would most likely expire, enabling the seller to keep the premium received

Which TWO of the following choices BEST describe a gasoline tax? I. Graduated taxes II. Flat taxes III. Progressive taxes IV. Regressive taxes

II and IV Explanation: A regressive tax is flat (i.e., the tax rate remains constant regardless of the taxable amount). Examples of regressive taxes are sales taxes and gasoline taxes. A progressive tax is graduated (i.e., the tax rate increases as the taxable amount increases). Income taxes, estate taxes and gift taxes are progressive.

A registered representative sends an electronic communication to 75 of her existing customers, explaining that account statements are now available online. Which TWO of the following statements are TRUE? I. This is considered correspondence II. This is considered a retail communication III. This activity requires principal approval prior to use IV. This activity should be reviewed

II and IV Explanation: This activity is considered a retail communication since the registered representative is sending the communication to more than 25 customers. A retail communication is any written or electronic communication that is distributed or made available to more than 25 retail investors within any 30-calendar-day period. If the communication is directed to 25 or fewer individuals, it is considered correspondence. If the retail communication does not make a recommendation, or promote a product or service, prior principal approval is not required. FINRA does not consider announcing the availability of online account statements as promoting a product or service. This activity should, however, be reviewed and supervised by the broker-dealer.

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

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

An application to purchase a variable annuity need NOT be approved by a principal:

If the application is not submitted through a broker-dealer Explanation: An application for the purchase of a variable annuity that is received directly from the customer need not be approved by a principal. If the application is submitted through a broker-dealer, it must be approved by a principal or rejected.

The spot prices of foreign currencies are determined:

In the Interbank market Explanation: The spot prices for foreign currencies are determined in the Interbank market, which consists of commercial banks trading currencies.

An investor owns Treasury bonds that mature in 20 years. This investor will be exposed to: a. Credit risk b. Inflationary risk c. No risk d. Capital risk

Inflationary risk Explanation: Credit risk is the risk that the investor will not receive interest and/or principal when it is due. Capital risk is the risk that the investor will lose his investment. Since Treasury bonds are direct obligations of the U.S. government, there is no risk that the investor will not receive interest and/or principal when due, or lose his investment. Therefore, the investor is free of credit and capital risk. All fixed-income securities expose an investor to inflationary risk (purchasing-power risk).

Charlene contacts her registered representative to buy an OTC stock. Rather than buying it directly from a market maker, Charlene's broker-dealer contacts another broker-dealer, who buys it from a market maker creating two levels of transaction fees. This is known as:

Interpositioning Explanation: Interpositioning occurs when a broker-dealer, executing an order for a customer, places another broker-dealer between itself and the market. This is generally prohibited.

If an ABC July 40 put option is exercised, the writer:

Is obligated to purchase 100 shares of ABC stock Explanation: If the ABC put option is exercised, the writer is obligated to purchase 100 shares of ABC stock.

A customer buys a 6 3/4% municipal bond at 101 3/4. The yield to maturity on the bond is:

Less than 6 3/4% Explanation: The customer bought the bond at 101 3/4, which is at a premium over the $1,000 par value of the bond. If she holds the bond to maturity, her yield will be less than 6 3/4%, since a bond bought at a premium will have a yield to maturity that is less than the coupon rate.

A transfer agent does NOT perform which of the following functions?

Make sure that outstanding shares do not exceed authorized shares Explanation: The transfer agent is responsible for issuing new certificates, cancelling old certificates, keeping a record of shareholders and the number of shares each owns, and handling problems that come about in cases of missing, lost, stolen, or mutilated securities. The registrar makes sure that outstanding shares do not exceed authorized shares.

An investor is a limited partner in a direct participation program that the IRS has determined to be abusive. This investor:

May be subject to pay back taxes as well as penalties and interest Explanation: If the IRS deems a direct participation program abusive, deductions previously claimed may be disallowed causing investors to pay back taxes as well as interest and penalties on the back taxes. A DPP may be considered abusive if it is based on a false assumption or if it overstated property values for the purpose of generating large deductions.

An aunt wishes to give her niece securities as a gift. The niece's parents have recently died and a court has appointed a guardian other than the aunt. The aunt:

May give the securities without the permission of the guardian Explanation: The aunt may give securities to the minor as a gift. There are no restrictions on a donor giving a gift.

Collateralized mortgage obligations (CMOs) make interest payments to investors:

Monthly Explanation: CMOs are issued in minimum denominations of $1,000, are backed by pass-through securities (FNMA, GNMA, and FHLMC), and pay interest and principal monthly.

A municipal dealer gives another dealer a firm quote of par for a block of municipal bonds. The dealer that gave the quote

Must do the trade at par

A customer entered a market order to purchase 100 shares of XYZ Corporation. The brokerage firm confirms to the customer the purchase of 100 shares of XYZ Corporation at 28.25. The firm later finds that the purchase was actually executed at 28.75. The customer:

Must pay 28.75 Explanation: The customer must pay 28.75, which was the actual purchase price, even though the brokerage firm confirmed (erroneously) to the customer that the purchase was made at 28.25.

An investor buys a zero-coupon corporate bond at 37. After three years, the bond's basis has accreted for tax purposes to 40. If the bond is sold for its accreted value, the investor will recognize:

No gain or loss Explanation: If a zero-coupon security is sold for its accreted value, the investor will have no gain or loss. When selling a zero-coupon security, any amount above the accreted value is considered a capital gain and below, a capital loss. According to IRS rules, the accretion added each year to the cost basis for a zero-coupon security is treated as interest income for that year.

Promotional material made available to the public may compare collateralized mortgage obligations (CMOs) to:

No other investment product Explanation: Any type of promotional communication made available to customers may not compare CMOs to any other security. This is due to the uniqueness of this product.

How long after a new issue is registered for sale will it be shown on the Nasdaq system?

On the effective date Explanation: A new issue will appear on the Nasdaq system on the effective date of the issue. The effective date, which is determined by the SEC upon completion of the registration process, is the first date that the securities may be sold to the public.

A customer has a short margin account with a broker-dealer. This account must be marked to the market:

Once a day Explanation: The term marked to the market refers to the adjustment made in a customer's account due to a change in the market value of the securities. A margin account is marked to the market once a day (daily) to make sure the account is above the maintenance requirement. Any change may result in the customer being required to deposit additional funds in the account.

When a corporation seeks a bank loan, the bank will base its charge to the corporation on the:

Prime rate Explanation: A corporation pays the prime rate when borrowing from a bank if it is among the bank's best-credit-rated customers. Other corporations pay a higher rate, but it is based on the prime rate.

An ad valorem tax is based on:

Property values Explanation: An ad valorem tax is based on property values. The tax is based on the assessed value of the property and the millage rate (tax rate). It may also be referred to as a real estate or property tax.

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

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

A client owns 2,000 shares of TBDR. She expects a decline in the market and instructs her broker to sell 1,500 shares of the stock. The order ticket will be marked:

Sell long Explanation: Since the client owns shares equal to or greater than the amount she plans to sell, the order ticket will be marked sell long. Sell short is used if the client does not own the security and will deliver borrowed securities. Selling short against the box is used when a client with a long position sells the same security but borrows the stock to effect delivery rather than delivering the long position. The ticket to sell is still marked short.

The term all-or-none, in trading municipal bonds, applies to:

Sellers' offering terms Explanation: Offerings are sometimes made on an all-or-none basis (an AON offering), which is a situation where the offerer agrees to sell the bonds only if all that he has available will be bought.

In April, an investor purchased 1,000 shares of XYZ at $47 and, in August, purchased another 1,000 shares of XYZ at $55 per share. In June of the following year, the investor sold 400 shares of XYZ at $59 per share and stipulated that the shares being sold are from the purchase that was made in August. For tax purposes, the investor will report a:

Short-term capital gain of $1,600 Explanation: In this question, the investor has two positions in ABC stock and each position was purchased at different times and at different prices. When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. Since the investor stipulated that the shares being sold were against the shares that were purchased in August and those shares were held for one year or less, the capital gain is short-term. The cost basis of the shares being sold is $55 and the proceeds per share on the sale is $59. Therefore, the gain of $4 per share is multiplied by the 400 share position, resulting in a $1,600 total gain.

An investor whose portfolio consists of high-yield municipal bonds, equity securities, and futures and options MOST likely has an investment objective of:

Speculation Explanation: An investor whose portfolio consists of high-yield municipal bonds, equity securities, and futures and options most likely has an investment objective of speculation.

In a municipal bond underwriting, the difference between what the issuer receives and the public offering price is known as the:

Spread Explanation: The spread in a municipal bond underwriting is the gross profit earned by the syndicate. It is the difference between the amount the issuer receives for the bonds and the public offering price for the bonds. The takedown is the discount given to syndicate members by the manager of the syndicate on any bonds sold. The concession is a trade discount given to dealers who are not members of the syndicate. For example, a syndicate member may take down bonds at par minus 5/8 and sell them to the public at par, making a 5/8-point profit. The dealer who is not a member of the syndicate may buy the bonds at par minus 1/4-point concession and sell them to the public at par, making a 1/4-point profit.

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

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

As a customer's tax bracket increases, an RR is likely to allocate more of a customer's portfolio in:

Tax-exempt funds Explanation: This question focuses on an investor whose tax burden is increasing. An investment that produces a taxable return is taxed at the investor's marginal rate, i.e., the investor's tax bracket. Dividend income from a tax-exempt fund does not incur this burden. (Note, however, that capital gains distributions from a tax-exempt fund are taxable.

Which of the following statements about technical analysis is TRUE?

The advance-decline index is a good indicator of the strength of a bull or bear market Explanation: The advance-decline index is a measurement of advancing stocks versus declining stocks over a specified period. It is a good indicator of the strength of a bull or bear market. The other technical analysis theories are just the opposite of how they should be stated.

A broker-dealer may reject a delivery of municipal bonds if:

The bonds are lacking a legal opinion Explanation: A delivery of municipal bonds may be rejected if they do not meet good delivery requirements such as missing or mutilated coupons or lack of a legal opinion. A change in market price is not a reason for rejecting delivery of municipal bonds (or any other security).

A customer is short 100 ABC at $120. The market is moving up sharply and the customer decides to cover her short position. The customer instructs her registered representative to cover the short position at the market on the close. The order will be executed at:

The closing price of the day

A broker-dealer receives a confirmation for a trade that does not appear on its records. The broker-dealer should send a DK notice to:

The contrabroker Explanation: A DK notice is sent to the contrabroker upon receipt of the confirmation for an uncompared trade. The broker-dealer sending the DK notice states that the trade does not appear on its records and, therefore, denies any responsibility for the settlement of the trade unless the contraparty can prove that the trade did indeed take place.

An individual who is considering an investment in a DPP should be most concerned with:

The economic viability of the programs Explanation: The most important factor for any DPP is whether it is a good investment. The tax-related aspects are only of benefit if the program is economically sound.

A broker-dealer owns 100 shares of ABCO stock, which it purchased at 28. If the stock is sold to a customer, the broker-dealer will base a markup on:

The lowest offer on the Nasdaq system Explanation: When selling stock to a customer, a markup should be based on the lowest offer on the Nasdaq system, not the price the dealer paid to purchase the stock (dealer's inventory cost).

A customer enters a stop order to sell 1,000 shares of ATT at 35. The order will be executed at:

The next trade after 35 is touched Explanation: Stop orders become market orders once they are activated. After the order is activated at or below 35, the next trade will be the execution price.

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

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

A bond counsel will issue an unqualified legal opinion for a municipal bond issue to state that:

There are no limitations or pending lawsuits that hinder the issuance of the bonds Explanation: A bond counsel renders an unqualified legal opinion if there are no situations in existence that could adversely affect the legality of the issue.

T-bills purchased at the weekly auction will have a settlement date on the:

Thursday following the auction Explanation: The auction for 13- and 26-week T-bills is held each Monday. Settlement is on Thursday of the same week.

A customer in his late twenties wants capital appreciation and tax-deferred growth. He is willing to take a moderate degree of risk in his initial investment. The customer is also concerned about the inflationary risk to his portfolio. Which of the following investments is MOST suitable?

Variable annuities Explanation: Since the investor is concerned about inflationary risk, wants tax-deferred growth, and is willing to accept a moderate degree of risk to his initial investment, variable annuities are the most appropriate investment. If the investor did not want a tax-deferred investment with the same objectives, equities would be the most suitable choice.

Municipal bearer bonds that are in default of interest, trade:

With unpaid coupons attached Explanation: Municipal bonds that are in default, trade flat (without accrued interest) and must be delivered with all unpaid coupons attached. If the bonds begin paying interest, the present holder is entitled to the past interest payments.

If an equity option is exercised, when is the settlement date for the stock transaction?

Within three business days Explanation: When an equity (stock) option is exercised, delivery of the underlying stock and payment for the stock is expected within 3 business days (regular-way settlement for stock).

Under SRO rules, the carrying firm must complete the transfer of a customer account:

Within three business days of validation of the transfer instructions Explanation: If a customer wants to transfer an account to another broker-dealer, she must sign a transfer request. The firm where the client has the existing account is known as the carrying firm and the new firm is known as the receiving firm. According to SRO rules, the transfer of a customer account must be completed by the carrying party within three business days of validation of the transfer instructions. The carrying firm must either validate the instructions or take exception within one business day

Your client owns a portfolio of blue-chip equity securities and wants to increase the overall rate of return through the use of options. The most conservative strategy to achieve this objective is to:

Write covered calls Explanation: The most conservative strategy for the investor to achieve her objective is to write covered calls. The call premium received will increase the yield on her portfolio of stocks because it will add to the income generated by the dividends received from the stock.

A registered representative has established a discretionary municipal bond account for a customer. Which of the following bonds may the RR purchase for the account? a. General obligation bonds only b. Any suitable bonds c. Bonds rated Baa or higher d. Any bond that is not subject to the alternative minimum tax

b. Any suitable bonds Explanation: An RR must be sure to recommend only bonds that are suitable for a customer in any type of account.

Which of the following persons establishes positions in secondary market municipal bonds for a broker-dealer? a. Underwriter b. Trader c. Agent d. Principal

b. Trader Explanation: A trader is responsible for positioning (carrying inventory) secondary market municipal bonds. An underwriter is involved in the distribution of new issues.

Four municipal bonds maturing in 2039 are all selling at a 7.00 basis. Which of the following bonds is most likely to be refunded? a. 5 1/2% callable in 2024 @ 103 b. 6 1/2% callable in 2023 @ 100 c. 7% callable in 2024 @ 103 d. 7 1/2% callable in 2023 @ 100

d. 7 1/2% callable in 2023 @ 100 Explanation: The most common reason for a municipality to refund an outstanding issue is to save interest costs. If a municipality can borrow money at a lower rate than the outstanding issue, it can use this money to refund the outstanding issue and thus save interest cost. The bonds are selling at a 7.00% yield. The municipality can then expect to borrow new monies at a 7.00% interest rate. The municipality can only save money by refunding an issue with a higher interest rate, 7 1/2%

Which of the following services does NOT rate fixed-income securities? a. Moody's b. Standard & Poor's c. Fitch d. AMBAC

d. AMBAC Explanation: AMBAC insures new municipal bond issues. Moody's, Standard & Poor's, and Fitch are credit rating services.

All of the following information should be obtained by a registered representative when opening a new account for a customer, EXCEPT the: a. Street address b. Tax identification number c. Occupation d. Education

d. Education

When pricing a bond, what information is NOT required? a. The coupon rate b. The maturity date c. The settlement date d. The number of bond years

d. The number of bond years Explanation: When pricing a bond (determining the yield when price is known or determining the price when yield is known), the coupon, settlement date, and maturity are required. The number of bond years is used to determine the net interest cost when an underwriting is bidding on a new issue of municipal bonds.

Andrew, a client of yours, anticipates that the value of the U.S. dollar is weakening in relation to the euro and decides to purchase 10 March 95 euro call options at 1.30 when the spot price is 95.55. The contract size of each euro contract is 10,000. Andrew is required to deposit:

$1,300 Explanation: In order to take advantage of the anticipated increase in the value of the euro, Andrew is purchasing 10 euro calls at a premium of 1.30. Euro options are quoted in cents per unit, so the decimal must be moved two places to the left to convert the quote to dollars ($.0130). To calculate the cost of the euro call, multiply the contract size (10,000) times the dollar value of the premium ($.0130). 10,000 x $.0130 = $130 Since Andrew is purchasing 10 options, the total cost is $1,300.

Mordecai is a 73-year-old retired machine lathe operator. He earns $35,000 in retirement benefits. Last year he earned $1,650 as a pitching instructor for the Altoona Miners and received $800 in dividend income. What is the maximum contribution he may make to his Roth IRA?

$1,650 Explanation: Roth IRAs do not have an age limitation placed on contributions or withdrawals. The annual contribution is limited to 100% of the individual's earned income, not to exceed $6,500 ($5,500 + $1,000 catch-up provision) per year. Mordecai may contribute up to $1,650. Earnings received as retirement benefits and investment income are not eligible for the calculation of Roth IRA contributions.

An individual purchases two BP (British pound) 150 calls @ 9.20. The contract size is 10,000 BP. The total cost for the contracts is:

$1,840 Explanation: British pound option premiums are quoted in cents per unit. To convert to dollars, the decimal point must be moved two places to the left. The total cost is calculated by multiplying the contract size (10,000) by the premium expressed in dollars ($.0920) and is $920 (10,000 x .0920) per contract. Since the individual purchased two contracts, the total cost is $1,840.

A Treasury bond has increased in value from 98.4 to 98.8. The bond has increased by:

$1.25 per $1,000 par value Explanation: Treasury bonds are quoted in 32nds of a point, and are then calculated as a percentage of the par value ($1,000). The difference between 98.4 and 98.8 is 4/32. One point equals $10, so 4/32 or 1/8 of a point equals $1.25.

An investor owns $10,000 worth of XYZ Corporation convertible bonds that are callable at 102. The bonds are currently selling in the market at 103. If the corporation calls the bonds at the call price, the investor will receive:

$10,200 Explanation: When bonds are called for redemption, the owner receives the call price. The call price is 102 for a total of $10,200 ($1,020 per bond x 10 bonds). If the investor were able to sell the bonds at the current price, she would receive $10,300 ($1,030 x 10 bonds). However, the question states that the bonds are called, which means the market price of the bond will gravitate to the call value of $10,200.

A broker-dealer wishes to give a gift to a registered representative of another firm. Industry regulations consider the gift to be of material value if it exceeded a value of:

$100 Explanation: According to the industry regulations, a gift of more than $100 would be considered substantial or of material value.

The minimum denomination for negotiable certificates of deposit is:

$100,000 Explanation: The minimum denomination for negotiable CDs is $100,000. Typical denominations are often $1,000,000 or more.

ABC Corporation has net income of $6,000,000. It had $1,000,000 in interest expense and is in the 34% tax bracket. ABC has 500,000 shares of common stock and 10,000 shares of 10% preferred stock ($100 par value) outstanding. What are the earnings per share for ABC?

$11.80 Explanation: Since the question gives ABC Corporation's net income, interest and taxes have already been deducted. Earnings per share is equal to net income minus the preferred dividend divided by the number of common shares outstanding. ($6,000,000 net income - $100,000 preferred dividend) divided by 500,000 shares outstanding = $11.80 earnings per share.

An investor purchases 10 two-year ABC puts @ 12.25. The dollar amount the investor will pay is:

$12,250.00 Explanation: The cost of a long-term equity option is found by multiplying the premium quote by $100. The cost of 10 puts quoted at 12.25 is, therefore, $12,250 (12.25 x $100 x 10 = $12,250).

What is the basic balance sheet equation?

Total Assets = Total Liabilities + Stockholders' Equity

A corporation is issuing 5,000,000 shares of stock at a public offering price of $13 per share. The manager of the underwriting syndicate receives $0.15 per share. The syndicate members' compensation is $0.65 per share for each share they sell. The selling group's concession is $0.40 per share for each share they sell. The syndicate is allocated 4,000,000 shares and the selling group is allocated 1,000,000 shares. Assuming that all of the shares are sold, what amount will the syndicate members receive for their risk on shares sold by the selling group?

$0.25 per share for a total of $250,000 Explanation: The members of the syndicate receive $0.25 per share for their risk. Since the selling group was allocated 1,000,000 shares, the syndicate will receive $0.25 per share on 1,000,000 shares for a total of $250,000

In order to sell variable annuities to clients, a person must hold which of the following?

A life insurance license and securities registration Explanation: Variable annuities are considered both insurance products and securities. As a result, an individual must be properly registered (Series 6 or 7) and hold a life insurance license.

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

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

A customer sells 100 shares of GM short. GM pays a 5% stock dividend. When the customer covers the short position, the customer will need to deliver:

105 shares of GM Explanation: When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends paid are the responsibility of the customer who sold the stock short. In this example, GM paid a 5% stock dividend. Therefore, a customer who sold 100 shares of GM short would need to deliver 105 shares (100 shares x 5% = 5 additional shares) to cover the short sale.

An individual in the 28% tax bracket can purchase an 8 1/2% municipal bond at par. What taxable yield would be required to equal the yield on the municipal bond?

11.8% Explanation: The taxable equivalent yield of a municipal bond equals the municipal yield divided by the complement of the tax bracket (100% minus the tax bracket). In this example, the municipal yield (8 1/2%) divided by the complement of the tax bracket (72% or 0.72) equals 11.8%.

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

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

If a municipal bond has a basis of 4.35 and a coupon rate of 4.95%, the bond is selling at:

A premium Explanation: Municipal bonds may be quoted on a yield to maturity basis, which in this example is a 4.35 basis. This means the bond has a yield to maturity of 4.35%. If the nominal yield (coupon rate) is 4.95%, this means that the bond is selling at a premium, above the par value ($1,000). If the yield to maturity (4.35%) is less than the nominal yield (4.95%), the bond is selling at a premium.

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

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

A customer has realized a capital gain from the sale of a municipal bond. To reduce the customer's tax liability, the capital gain can be offset against a capital loss from which of the following investments? I. A general obligation bond II. An equity security III. A corporate bond IV. A real estate investment trust

I, II, III, and IV Explanation: Since all of the investments are considered capital assets, a capital loss in any of these can offset a capital gain from the sale of a municipal bond. Capital assets include stocks, bonds, options, municipal securities, real estate, and interests or shares in partnerships.

A self-employed individual has total income of $120,000. If the individual wants to open a Keogh plan: I. It must be opened by the time he files his tax return II. It must be opened by the end of the tax year III. A maximum deductible contribution of $24,000 is permitted IV. A maximum deductible contribution of $53,000 is permitted

II and III Explanation: A Keogh plan must be opened by the end of the tax year (December 31). However, contributions are permitted until the filing deadline for the tax return (April 15). A self-employed individual may deduct 20% of self-employed income or $53,000, whichever is less, to a Keogh plan.(For 2014, the limit was $52,000.) 20% of $120,000 is $24,000 and would be the maximum allowable deductible contribution.

ABC Corporation intends to make an initial public offering of 10,000,000 shares of common stock, 7,500,000 shares of which will be new stock being issued by ABC Corporation and 2,500,000 shares will be for selling stockholders. Which TWO of the following statements regarding this offering are TRUE? I. It is a primary distribution II. It is a primary and secondary distribution III. The proceeds of the sale will be shared by the corporation and the selling stockholders IV. The corporation will receive all of the proceeds of the sale

II and III Explanation: Since both the corporation and existing shareholders are selling stock, it is both a primary and secondary distribution. In a primary distribution, proceeds go to the corporation. In a secondary distribution, proceeds go to the selling shareholders.

Which TWO of the following securities are considered defensive stocks? I. A construction company II. An energy company III. A food distributor IV. An automobile manufacturer

II and III Explanation: A defensive stock is not drastically affected by a downturn in the economy. Those companies involved in the necessary areas of life are considered defensive (e.g., energy or utilities, tobacco, food, clothing, soft drink, and candy companies). Construction, mining, steel, automobile, and heavy equipment manufacturing companies are more affected by an economic downturn.

When computing the dollar price of a municipal bond sold on a yield basis, which of the following call features will be used? I. Sinking fund call II. Catastrophe call III. In-whole call

III only Explanation: When pricing a bond, only a call feature that allows the issuer to call the entire issue is used.

A buy stop order is entered: I. Below a support level II. Above a resistance level III. To limit a loss on a long stock position IV. To limit a loss on a short stock position

II and IV Explanation: A stop order may be used to limit a loss or protect a profit on an existing position. If an investor is short stock, he can enter a buy stop order which, if activated, will cover his short position and protect the profit or limit the loss on the short position. A technical analyst may also place a buy stop above the resistance level to purchase the stock should there be a price breakout.

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

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

When the economy is peaking, what will be the expected sequence of the next three stages of the business cycle? I. Trough II. Expansion III. Contraction

III, I, II Explanation: Historically, the business cycle has moved sequentially through four stages. An expanding economy will peak once the supply of goods and services surpasses demand. As the economy contracts, demand for products decreases causing a reduction in business activity. The economy will bottom out (forming a trough), leading the way to expansion and the beginning of a new cycle. Thus, if the economy is at its peak, the next three stages in succession will be contraction (recession), trough, and expansion.

Place the following ratings in the proper order from highest to lowest. I. A II. Aa III. Aaa IV. Baa

III, II, I, and IV Explanation: The highest Moody's rating is Aaa followed by Aa, A, and Baa.

A customer is most interested in safety of principal and wishes to avoid risk. List the securities you would recommend to the customer from those with the LEAST risk to those with the MOST risk. I. General obligation bonds II. Treasury notes III. Treasury bills IV. Revenue bonds

III, II, I, and IV Explanation: The safest security with the shortest maturity is Treasury bills, followed by the longer-term Treasury notes, followed by general obligation bonds, and then revenue bonds.

Regulation FD applies to:

Issuers of securities Explanation: Regulation FD applies to issuers of securities. Regulation FD requires that material, nonpublic information disclosed to analysts or other investors be made public. If the disclosure is intentional, the information must be simultaneously disclosed to the public. If the disclosure is unintentional, the public disclosure must be made within 24 hours. Form 8-K, filed with the SEC, is one method of meeting the public disclosure requirement.

The advance-decline theory states that:

It is bullish if more stocks go up than go down during the day Explanation: A technical indicator that measures the strength of the market by comparing the number of stocks that increase and decrease is called the advance-decline theory. It shows the general direction and breadth of a market movement on a given day.

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

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

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

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

When must a customer sign an agreement to abide by the rules of the exchanges and the rules of the Options Clearing Corporation with regard to position limits?

Not later than 15 days following the approval of the account Explanation: The investor must sign an agreement to abide by the position limit rules of the exchanges and of the Options Clearing Corporation no later than 15 days following the approval of the account.

In an effort to secure more trading activity with a high net worth customer, a registered representative agrees to return part of the commission on trades to reduce the cost of the transactions. This practice is:

Not permitted Explanation: This practice is known as rebating and is prohibited.

If a customer wishes to open an account to trade options, the account must be approved:

Prior to the time an initial order is accepted Explanation: If a customer wishes to open an account to trade options, the account must be approved by an ROP prior to the time an initial order is accepted.

The major provisions of ERISA provide protection for:

Private sector employees against improper investments by their employer Explanation: ERISA provides private sector employers with guidelines for proper investments in employee pension plans. This provides protection for employees against improper investments by their employer. ERISA does not apply to public sector (government) plans.

It is most beneficial to the holder of a call if the price of the underlying security is:

Rising Explanation: The holder (purchaser) of a call expects the market price of the underlying security to rise and, therefore, will profit from a rise in the security.

A municipal bond counsel will NOT:

Set the underwriting concession Explanation: The bond counsel will not determine the underwriting concession. This will be determined by the underwriting syndicate

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

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

When analyzing a mutual fund's expenses, an analyst does NOT consider:

The sales load charged to buy fund shares Explanation: 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.

A transaction occurs between two dealers for a Nasdaq stock. The trade must be reported by:

The seller within 10 seconds

In a municipal bond transaction, T + 3 means:

The transaction will settle regular-way in 3 business days from the trade date Explanation: T + 3 in a municipal bond transaction means the bonds will settle regular-way in 3 business days from the trade date.

A variable annuity has an AIR of 4%. This past year, the separate account grew at a rate of 12%. The appreciation in the separate account:

Will increase an annuitant's monthly payment from the annuity Explanation: If the separate account of a variable annuity grows at a greater rate than the AIR, monthly payments from the annuity will increase.

Which of the following terms are synonymous? a. Net asset value and offering price b. Selling price and bid price c. Net asset value and redemption price d. Bid price and management fee

c. Net asset value and redemption price Explanation: The net asset value and redemption price are synonymous. An investor who owns a mutual fund may redeem (sell) the security back to the fund at the net asset value (NAV).

A fundamental analyst could use a corporation's balance sheet to determine all of the following metrics, EXCEPT: a. Net working capital b. Common stock ratio c. Cash flow d. Debt-to-equity ratio

c. Cash flow Explanation: Cash flow (net income or loss plus depreciation expense) is found by using an income statement. All of the other choices are derived from the balance sheet.

A woman with a low income has saved $5,000 to invest for her young son's college education. Which of the following investments would be the MOST appropriate? a. T-bills b. Municipal bonds c. Zero-coupon bonds d. A real estate limited partnership

c. Zero-coupon bonds Explanation: Since the woman has a low income, municipal bonds and limited partnerships would not be of benefit. Since the son is young, a long-term investment would be most appropriate.

The provisions for the flow of funds of a revenue bond issue appear in the: a. Syndicate letter b. Account summary statement c. Notice of sale d. Indenture

d. Indenture Explanation: The indenture contains all the agreements and covenants pertaining to a bond issue, and also contains the provisions for the application and allocation of funds of a revenue bond.

Which of the following securities is exempt from state taxes? a. Corporate stock b. Convertible bonds c. Federal National Mortgage Association (FNMA) bonds d. Treasury notes

d. Treasury notes Explanation: All of the choices listed are subject to state taxes except Treasury notes, which are U.S. government obligations and are subject to federal taxes, but exempt from state taxes.

An individual purchases an Australian dollar June 65 put at 2.34 that was sold at 3.68. If the contract size is 10,000 Australian dollars, what is the individual's total profit?

$134 Explanation: Premiums for Australian dollar options are quoted in cents per unit. To express the premium in dollar terms, the decimal must be moved two places to the left. The total cost is the contract size (10,000) times the premium expressed in dollars (decimal moved two places to the left, $.0234), which equals $234. Since the contract was sold at 3.68 ($368), the profit is $134.

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

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

The prospectus for a limited partnership states that the subscription price for each unit is $20,000. According to industry rules, the maximum allowable underwriting compensation for this public offering is:

10% of the gross proceeds of the offering Explanation: Industry rules allow a maximum total compensation of 10% of the gross proceeds of the offering in a limited partnership. This includes all items of compensation including trailing commissions

A customer purchased an initial public offering of stock at $38 a share. The current market price is $24 and the EPS is 19 cents. If the company has no plans to pay a cash dividend, what is the price/earnings ratio of the company?

126.3 Explanation: The price/earnings ratio is found by dividing the current market price of $24 by the earnings per share of 19 cents. This equals a price/earnings ratio of 126.3 ($24 / $.19). The IPO price and the amount of the dividend are not relevant in calculating the price/earnings ratio.

Listed below are a group of mutual funds. Net Asset Value Offer Price Net Change Dreyfus 11.55 12.67 -.05 Wellington 12.70 13.85 +.07 Lenox 5.14 5.14 +.09 Sentry 13.42 14.63 -.08 If an investor sells his shares in Sentry fund, he will receive:

13.42 Explanation: When an investor sells shares in a mutual fund, he will receive the bid price or net asset value. The Sentry fund's net asset value is listed as being $13.42. Therefore, the investor will receive $13.42 per share.

If a municipal bond has a basis of 4.33 and a coupon rate of 5.77%, the bond is selling at:

A premium Explanation: Municipal bonds may be quoted on a yield to maturity basis, which in this example is a 4.33 basis. This means the bond has a yield to maturity of 4.33%. If the nominal yield (coupon rate) is 5.77%, this means that the bond is selling at a premium, above the par value ($1,000). If the yield to maturity (4.33%) is less than the nominal yield (5.77%), the bond is selling at a premium.

A broker-dealer is acting as a principal in which of the following scenarios? I. Selling bonds from inventory to an individual II. Selling bonds from inventory to another broker-dealer III. Buying bonds from another broker-dealer for inventory IV. Buying 500 bonds to fill an insurance company's order for 250 bonds

I, II, III, and IV Explanation: A broker-dealer is acting as a principal when buying for or selling from inventory. In choice (IV), the broker-dealer is buying 500 bonds to fill an order for 250 bonds. The remaining 250 bonds will be for inventory.

For tax purposes, corporations may exclude a portion of the dividends received from: I. Municipal bonds II. Corporate bonds of other corporations III. Preferred stocks of other corporations IV. Common stocks of other corporations

III and IV only Explanation: Corporations may exclude a portion of the dividends received from equity investments in other corporations. This includes common stock and preferred stock.

If a customer places an order to buy bonds at 104 net, it indicates that the customer:

Wants to pay a maximum of 104 including any markup or commission Explanation: An order to buy at 104 net indicates the customer wants to pay a total of 104 including any markup or commission.

A registered representative enters an order for a client. In error, the RR purchases shares of the wrong security. Which of the following statements is TRUE? a. The shares must be placed in the RR's error account b. The shares must be placed in the broker-dealer's error account c. The RR must contact the client and cancel the original transaction d. The firm is required to report the error to the market in which the order was executed

The shares must be placed in the broker-dealer's error account Explanation: All broker-dealers are required to maintain an error account. It is used by a broker-dealer if the firm or an RR executes a trade in error (e.g., the wrong security or the wrong side of the market). RRs do not have an error account. It is maintained by the firm. The firm should execute the original transaction immediately and maintain a record of the error. The firm is not required to notify the market where the order entered in error was executed.

A FINRA member subscribing to CQS, calls a market maker displaying a quote on the system and executes a trade. This transaction is considered to have occurred in the:

Third market Explanation: CQS displays quotations by members for NYSE and NYSE MKT (formally NYSE Amex) listed securities. Transactions in listed securities between FINRA members in the over-the-counter market are considered third-market transactions. Although executed in the over-the-counter market, such transactions must still be reported to the Tape.

When looking at a newspaper listing for foreign currency options, the spot prices for the underlying foreign currencies are quoted in:

U.S. terms Explanation: For foreign currency options, spot prices are quoted in U.S. terms (the cost in U.S. dollars to purchase one unit of the foreign currency). All of the spot prices are quoted in cents per unit except the Japanese yen (1/100th cent per unit).

Upon the sale of a limited partnership interest in a direct participation program, the broker-dealer should have the investor make his check payable to:

Whomever is specified in the subscription agreement Explanation: The subscription agreement will specify the party to whom the check should be made payable.

The 30-Day Visible Supply of municipal securities refers to new municipal bonds that:

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

The Federal Reserve Board's Open Market Committee (FOMC) buys and sells which of the following securities most often to accomplish its aims? a. Treasury bills b. Treasury notes c. Treasury bonds d. Agency bonds

a. Treasury bills Explanation: The Federal Reserve Board's Open Market Committee (FOMC) purchases and sells U.S. government securities in the open market to accomplish the Federal Reserve Board's aims of influencing the money supply. The securities most often used are Treasury bills.

Which of the following bonds has the most interest-rate risk? a. A 3-month Treasury bill b. A 30-year Treasury STRIP c. A 6%-coupon, 30-year Treasury bond d. A 3%-coupon, 5-year Treasury note

b. A 30-year Treasury STRIP Explanation: The bond with the most interest-rate risk or price volatility is the one with the longest maturity and lowest coupon. Zero-coupon bonds would have the most interest-rate risk and a STRIP is a type of zero-coupon bond.

Which of following investment allocations is the BEST recommendation for a customer with an aggressive risk tolerance? a. 10% large-cap equity funds, 5% international equity mutual funds, 55% bond funds, and 30% cash b. 15% large-cap equity funds, 5% small-cap equity funds, 15% international equity funds, 45% bond funds, and 20% cash c. 35% large-cap equity funds, 15% small-cap equity funds, 15% international equity funds, 30% bond funds, and 5% cash d. 50% large-cap equity funds, 20% small-cap equity funds, 20% international equity funds, 5% bond funds, and 5% cash

d. 50% large-cap equity funds, 20% small-cap equity funds, 20% international equity funds, 5% bond funds, and 5% cash Explanation: An aggressive risk tolerance is for investors who want high growth and do not need income. These investors are willing to accept high volatility and the possibility of substantial loss of their principal. Choices (a), (b), and (c) offer too small of an allocation in equities

A customer's initial trade in a margin account is the short sale of 500 shares of DEF stock at $20. After making the required deposit, the credit balance in the account is:

$15,000 Explanation: The credit balance in a short margin account is determined by adding the short sale proceeds and the Reg T deposit. In this example, the short sale proceeds are $10,000 (500 shares x $20). The Reg T requirement is $5,000 ($10,000 x 50%). The credit balance is $15,000

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. At expiration, the individual will have a profit if the market price of ABC is:

93 Explanation: This is a debit spread since the investor is paying more (4) for the purchased calls than he receives (2) for the calls that were written. The maximum loss for a debit spread is the amount of the debit. A simple way to look at a debit spread is to focus in on the buy side of the spread. Approach the questions as if the investor purchased the 90 call at the net debit of 2 ($2,000 for 10 contracts). Therefore, look at the purchase of a 90 call at 2 (net debit). The breakeven point when buying a call is the strike price (90) plus the premium (net debit of 2). Any market price above the breakeven point of 92 will make the position profitable.

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?

950 Explanation: The terms of the rights offering are that 10 rights are required to subscribe to one new share of stock. 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.

According to Regulation T, when purchasing an option contract the transaction must be paid for within:

According to Regulation T, when purchasing an option contract the transaction must be paid for within: Explanation: According to Regulation T, securities must be paid for within 2 business days of the standard (regular-way) settlement date. Since regular-way settlement is three business days, payment is required within five business days from the trade date. Therefore, while option transactions settle next day, the customer has five business days in which to pay for a purchase.

The 5% Markup Policy applies when a member firm:

Acts as a dealer in a transaction with a customer Explanation: A broker is an agent who acts for someone else and receives a commission when a trade is executed. A dealer is a principal who acts for his own account and adds a markup on a purchase. In both cases, they must conform to the 5% Markup Policy, which is a guide broker-dealers must follow. The 5% Markup Policy covers all transactions except municipal bonds and those requiring a prospectus (i.e., the sale of a new issue, mutual fund, and registered secondary). If a member was acting as an underwriter, the firm would be involved in a new issue and, if acting as a sponsor would be involved in the sale of a mutual fund. Since these transactions require a prospectus, they would not be covered by the 5% Markup Policy.

The term marking-to-the-market refers to:

Adjusting the contract price to the current market price of an open contract for purposes of determining if additional cash is required Explanation: Marking-to-the-market refers to adjusting the contract price to the current market price of an open contract for purposes of determining if additional cash is required. This may occur when a customer writes uncovered options and the underlying stock moves against the writer. The customer might need to deposit additional funds and would be marked to the market for the appropriate amount. This could also occur when a customer sells stock short and the stock increases in value.

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

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

The Modified Accelerated Cost Recovery System is used when:

Depreciating machinery Explanation: The Modified Accelerated Cost Recovery System (MACRS) is one method that may be used to depreciate an asset. It allows for larger deductions during the earlier life of an asset when compared to the straight-line method of depreciation.

A reverse convertible security would be MOST suitable for an investor who:

Desires higher yield and is anticipating the value of the underlying asset will remain stable Explanation: Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal. If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal. The investor is anticipating a stable price for the underlying asset and is not able to participate in any increase in the value of the underlying asset. If the investor was anticipating an increase in the value of the underlying asset, buying this asset would be more suitable. Choice (d) is incorrect since any change in the value of the issuer's common stock would have little impact on the value of a reverse convertible security.

On Monday August 3, the board of directors of XYZ Corporation issued a press release stating that at today's meeting, they had decided to pay a 25-cent quarterly dividend. The checks for the dividend are to be sent out on September 15. The checks will be made out to anyone who is recorded as a shareholder as of Friday, August 28. The first trading day on which purchasers of XYZ stock will not receive the dividend is Wednesday, August 26, which is called the:

Ex-dividend date Explanation: The ex-dividend date is the first day a stock trades without a dividend and this date is typically two business days prior to the record date. Therefore, a person who purchases the stock on or after the ex-dividend date is not entitled to the dividend.

The interest rate that fluctuates the most is the:

Federal funds rate Explanation: Short-term rates fluctuate more than long-term rates. The federal funds rate, which is the rate of interest one bank charges another bank for the use of excess reserves for short-term periods (usually overnight), fluctuates the most since it has the shortest maturity. Although long-term bond prices fluctuate more than short-term bond prices, the yields of short-term securities fluctuate more than those for long-term securities.

The stock price of XYZ Corporation has remained stable despite the fact that the company has increased the amount of its dividend. Under these conditions, what would happen to the stock's current yield?

It would increase Explanation: The current yield of a stock is found by dividing the stock's annual dividend by its market price. If the dividend increases while the market price remains the same, the stock's current yield will increase.

If interest rates increase, which TWO of the following events will most likely occur? I. Yield-based call premiums will increase II. Yield-based put premiums will increase III. Bond prices will rise IV. Bond prices will fall

I and IV Explanation: The value of yield-based options is determined by the difference between the yield of a Treasury index and the strike price. Yield-based calls have intrinsic value when the Treasury index yield is above the strike price. Yield-based puts have intrinsic value when the Treasury index yield is below the strike price. When interest rates (yields) increase, yield-based call premiums will increase. Bond prices move in the opposite direction, falling when interest rates increase.

A client owns 3,000 shares of stock in a company headquartered outside the U.S. The client receives a cash dividend and tax is withheld by the country where the company is located. Which TWO of the following statements are TRUE concerning the U.S. tax implications for the client? I. The dividend received is treated as a return of capital II. The taxes paid may be used as a credit III. The dividend paid is exempt from taxes IV. The taxes paid may be used as a deduction

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

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 IV. Yield to call

II, I, III, IV Explanation: 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 registered representative is permitted to contact a person whose name is on the national Do Not Call List:

If the person has provided prior written consent to be contacted Explanation: A person may register her number on the Federal Trade Commission (FTC) National Do Not Call Registry and have it remain on the list indefinitely. Broker-dealers are required to download the names on this list in order to prevent RRs from cold calling any of these persons. The following three exceptions exist which permit RRs to contact any person whose name is on this list. 1. The firm has obtained the person's expressed prior written consent as evidenced by a signed written agreement. The agreement must state that the person agrees to be contacted and the telephone number to which calls may be made. 2. There is an established business relationship between the RR and the person. 3. There is a personal relationship between the RR and the person.

If the federal tax exemption for municipal bond interest were eliminated, expectations are that yields on newly issued municipal bonds would:

Increase Explanation: If the tax-exempt status were eliminated, yields on newly issued municipal bonds would need to increase to compete with the higher yields of non-tax-exempt bonds.

According to SRO rules, an e-mail message complaining about excessive commissions sent to an RR's personal electronic device:

Is a complaint and must be maintained by the broker-dealer Explanation: Records of customer complaints must be maintained according to SRO record-keeping rules. Complaints may be delivered in any written format, including letters, e-mail, IMs, and text messages. There is no requirement to follow up an electronic communication with a paper document or to send the complaint to the appropriate SRO.

A when, as, and if distributed contract settles:

On the day determined by FINRA Explanation: When, as, and if issued contracts are contracts for securities that are trading but are not yet available for delivery. They are also referred to as a when-issued (WI) security. FINRA determines when the date of settlement will be, i.e., when a sufficient percentage of the issue is outstanding.

A registered representative receives an order from the president of XYZ Corporation to sell unregistered XYZ shares. The client purchased the shares in a private placement 90 days ago. This order:

Is a violation of Rule 144 if executed Explanation: According to Rule 144, an affiliated person (e.g., the president of a company) must hold unregistered (restricted) stock for at least six months before it may be sold. Since the president of XYZ Corporation owned the stock for only 90 days, the order to sell violates Rule 144, if executed.

A registered representative employed by the research department of a member firm is NOT permitted to be supervised by which department of a broker-dealer?

Investment banking Explanation: Current regulations require a member firm's research department to be separate from its investment banking department to avoid conflicts of interest. An RR employed by the research department is not allowed to be supervised by the investment banking department. The rules do not specify which area of a broker-dealer must supervise an RR working in research, but they do state which department is not permitted to supervise.

A call premium is best described as the amount the:

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

How would preferred stock most likely be affected by an increase in interest rates?

Its market value would decrease Explanation: Since preferred stock is a fixed-income security paying a fixed dividend each quarter, it is affected by interest rates in the same way as bonds. If interest rates rise, the value of existing bonds and preferred stock will fall. If interest rates fall, the value of existing bonds and preferred stock will rise.

JULY 20XX S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Use the calendar to answer this question. If a customer bought $50,000 par value of Treasury notes on July 3, when will payment be due?

July 5 Explanation: U.S. government notes have a next-business-day settlement and delivery date. Therefore, payment is due for the notes on the next business day, which is July 5. Remember, July 4 is a U.S. national holiday and is not considered a business day.

The major disadvantage to a limited partner in a DPP is:

Lack of liquidity Explanation: An investor has limited control (management) in equity investments and no control (management) in bond or DPP investments. The major disadvantage of a DPP is the lack of liquidity, meaning that the investor cannot easily sell his portion of ownership.

A client's wife calls and wants to purchase 200 shares of XYZ in her husband's personal account. The registered representative handling the account knows that a favorable earnings report is about to be issued. The registered representative:

May not accept the order because the wife does not have trading authorization to enter orders for the husband's personal account Explanation: The registered representative may not accept the order because the wife does not have trading authorization to enter orders for her husband's personal account.

A CMO would be suitable for an investor seeking:

Monthly income, assuming he does not need the entire principal returned at maturity Explanation: CMOs pay monthly income made up of interest, which is taxable, and principal, which is a tax-free return of capital. Due to the structure of a CMO, a fluctuating amount of principal is returned monthly, not at maturity, which makes CMOs different from most other fixed-income securities.

A project financed through revenue bonds is experiencing difficulty in that revenues are not sufficient to meet debt service payments. If, through legislative approval, the state pays interest and principal in a timely manner, the issue is most likely:

Moral obligation bonds Explanation: Moral obligation bonds are municipal revenue bonds that are payable by the state if revenues from the project do not satisfy debt service payments. However, in order for the state to service the debt, approval of the state legislature is required. Double-barreled bonds are issued as general obligations backed by the full faith and credit of the issuing municipality.

Which of the following choices is found in a variable annuity but not in a mutual fund?

Mortality expenses Explanation: Mortality expenses are charged against the account to provide the death benefit found in annuities, as well as to cover the cost of potentially providing the annuitant with payments for life. All other expenses or fees can be found in both mutual funds and annuities

SIPC is a(n):

Not-for-profit corporation Explanation: The Securities Investor Protection Corporation (SIPC) is a nonprofit corporation that was created by an act of Congress in 1970. SIPC insures a customer's account for up to $500,000 in the event of a brokerage firm's failure. SIPC is not a government-sponsored agency or a regulatory body.

Knowing a client's tax bracket is particularly useful when evaluating the suitability of which type of investment?

Municipal bonds Explanation: Knowing a client's tax bracket is particularly useful when evaluating the suitability of municipal bonds. The interest on municipal bonds is typically tax-exempt, which is less of an advantage if the client is in a low tax bracket.

A variable annuity application sent by a FINRA member does not include a principal's approval. The insurance company:

Must reject the application Explanation: Annuity suitability rules require that contracts sold through FINRA members be forwarded to the representative's OSJ and be approved by a principal within 7 business days of receipt before being sent to the insurance company. If a principal does not approve the application, it must be rejected.

An individual sells investment company products after passing the General Securities Representative Examination (Series 7). According to MSRB rules, if this individual will be selling municipal securities:

Nothing more is required Explanation: Passing the General Securities Representative Examination (Series 7) satisfies the MSRB examination requirement for municipal securities sales limited representatives. This registration allows a person to engage in sales to, or purchases from, customers in municipal securities. In this case, the individual need not complete an apprenticeship period due to prior experience. Experience as a general securities representative, mutual fund salesperson, or government securities representative would fulfill the apprenticeship requirement.

When referring to call option contracts, the term open interest means the:

Number of contracts that have not been closed out through a sale or by expiration Explanation: The term open interest, when referring to call option contracts, means the number of contracts that have not been closed out through a sale or by expiration.

Which of the following items is NOT an appropriate asset for an equipment leasing program?

Oil and gas pipe Explanation: Oil and gas pipe is not an appropriate leasing item. Unlike the other assets listed, it would be difficult for the bond trustee to seize the oil and gas pipe collateral and resell it to another user in case of a default by the bond issuer.

A customer purchases 1,000 shares of an OTC equity in a cash account through an online brokerage firm on Wednesday, March 11th. The transaction will settle:

On March 16th Explanation: Regular way settlement of corporate securities is three business days. The transaction would settle on Monday, March 16th.

A customer owns a call on ABC Corporation that has a $60 strike price. ABC Corporation has announced a 5-for-4 split. After the split, the customer will own:

One call for 125 shares at a $48 strike price Explanation: The company has announced a 5-for-4 split. After the split, the customer will own one call contract representing 125 shares with a $48 strike price. In an odd split, the number of contracts remains the same. The number of shares per contract is increased by multiplying 100 times the split ratio (100 x 5/4 = 125). The strike price is reduced by multiplying it by the inverse of the split ratio (60 x 4/5 = 48).

Prior to the maturity of a variable-rate demand obligation, an investor has the right to receive the:

Par value plus accrued interest Explanation: A variable-rate demand obligation (VRDO) can be redeemed prior to maturity on any date the interest rate on the obligation is reset. Rates can be reset on a monthly, weekly, or daily basis. The obligation will be redeemed at par value plus accrued interest.

An investor is interested in purchasing an interest in a real estate limited partnership. To exhibit suitability, the investor could provide:

Past tax returns Explanation: When investing in a DPP, the customer must verify that he meets all suitability standards. This can be accomplished by furnishing documents such as past tax returns and a statement of net worth

The FRB will most likely sell securities if it is attempting to:

Stop an inflationary trend Explanation: Inflation occurs when the money supply expands faster than the supply of goods and services. To combat inflation, the Federal Reserve will most likely sell securities in order to reduce the money supply.

A registered representative has limited discretion over a customer's account. The registered representative may:

Place orders before the order has been approved by a principal Explanation: Limited discretion does not permit free withdrawal of funds. The account owner must receive confirmations. Buy stop orders are permitted. The RR may place orders which can be approved promptly afterward.

A broker-dealer appears on the Nasdaq system as a market maker for DCIR common stock. An employee of the firm responsible for maintaining the firm's inventory in DCIR is known as a:

Position trader Explanation: A position trader is responsible for maintaining a broker-dealer's inventory as well as trading the firm's account.

A registered representative is using a social networking site that permits real-time communication. FINRA would BEST define this type of communication as a(n):

Public appearance Explanation: Social media sites that permit real-time communication or interactive, electronic forums fall under the guidelines of a public appearance, according to FINRA. Examples include Facebook, Twitter, and LinkedIn. Most firms do not permit their RRs to use these types of systems to communicate with customers to conduct business because they are not able to monitor the sites. Correspondence is any oral or written communication distributed or made available to 25 or fewer retail investors.

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

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

A municipality may issue a Direct Pay Build America Bond to finance all of the following activities, EXCEPT to: a. Refund a mass transportation bond b. Raise capital to expand its school system c. Make a primary offering to establish a public sewer system d. Raise additional capital for a government housing project

Refund a mass transportation bond Explanation: A Direct Pay Build America Bond may be used to raise capital for the same purposes as regular tax-exempt municipal debt, except for refundings, working capital, and private activity bonds.

A 17-year-old, whose birthday is approaching, wants to open his own brokerage account at a firm. Which of the following choices is the BEST course of action for the RR to take?

Refuse to open the account Explanation: Minors are not permitted to open accounts with broker-dealers since they are not legally responsible and could reject certain transactions once they reach the age of majority. The age of majority is actually determined by the state. In most states, the age of majority is age 18.

Income that is derived from which of the following sources may NOT be used to fund an IRA contribution?

Rental income received from a summer rental Explanation: Contributions that are made to an IRA must be based on taxable compensation which includes salary or wages (part-time or full-time), bonuses, tips, commissions, net income from self-employment, and taxable alimony. IRA contributions may not be based on rental income from properties, funds received from annuity contracts, or funds received from dividends and interest from securities in a portfolio.

A registered representative is sending an e-mail to 50 individual investors. This is defined as a(n):

Retail communication Explanation: FINRA's Communications with the Public Rule defines different types of communication. Correspondence, which is defined as any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. Institutional communication, which is defined as any written or electronic communication that is distributed or made available only to institutional investors. This would not include any internal communication by the broker-dealer. Retail communication, which is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period. Public appearances are situations where employees associated with a broker-dealer or sponsor participate in a television or radio interview, seminar, or forum, or make a public appearance, or engage in speaking activities that are unscripted and are not otherwise considered retail communication. Social media sites, which permit real-time communication or interactive, electronic forums, fall under the guidelines of a public appearance (e.g., Facebook, Twitter, and LinkedIn). Since the e-mail is being sent to more than 25 individual (retail) investors, it is defined as a retail communication.

The Federal Reserve Board was given the authority to set margin requirements according to the provisions of the:

Securities Exchange Act of 1934 Explanation: The Securities Exchange Act of 1934 gave the Federal Reserve Board the power to set margin requirements. This is done through Regulation T (for broker-dealers) and Regulation U (for banks and lenders other than broker-dealers).

The 5% policy applies to transactions involving:

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

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

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

An investor who sells 1 GE Dec 50 call and sells 1 GE Dec 40 put has:

Sold a combination Explanation: Selling a call and put on the same security with different strike prices, or different expiration dates, is a short combination.

A customer believes a stock will have a wide fluctuation in price over a short period. If he wants to engage in an option strategy that will be profitable from a sharp movement either on the upside or downside, he will buy a:

Straddle Explanation: The customer will buy a straddle, which is the simultaneous purchase of a put and a call with the same expiration dates and the same strike prices. If the market moved up sharply, the call could be exercised and if it moved down sharply, the put could be exercised, resulting in a profit.

An investor must pay accrued interest for a secondary market purchase of:

Tax anticipation notes Explanation: Zero-coupon bonds and Treasury bills are original issue discount securities and trade without accrued interest. While Series EE bonds are also OID securities, they do not trade in the secondary market. Tax anticipation notes (TANs) are typically interest-bearing securities and trade with accrued interest.

The fluctuations in the value of a variable annuity will correspond with the fluctuations in the:

Value of the securities held in the separate account of the annuity Explanation: The fluctuations in the value of a variable annuity will correspond with the fluctuations in the value of the securities held in the separate account of the annuity. This is the securities portion of the annuity.

Which of the following choices is a type of retirement plan associated with individuals who work for a private company? a. A 401(k) plan b. A 403(b) plan c. A 457 plan d. A 529 plan

a. A 401(k) plan Explanation: A 401(k) plan is a tax-advantaged retirement account established by corporations, both private and publicly traded. A 457 plan is a tax-advantaged retirement plan that may be established by a governmental body (a municipality) or nongovernmental (nonprofit) employers. 403(b) plans are established by certain nonprofit organizations, such as religious organizations or public schools. A 529 plan is a tax-advantaged savings plan used by individuals to fund higher education needs.

The Federal Intermediate Credit Bank (FICB) makes: a. Agricultural loans to farmers b. Loans to finance residential mortgages c. Business loans to veterans d. Loans to utility companies

a. Agricultural loans to farmers Explanation: The Federal Intermediate Credit Bank (FICB) makes agricultural loans to farmers.

A REIT is NOT used for a tax shelter because it does NOT: a. Allow flow-through of losses b. Allow flow-through of income c. Provide limited liability d. Offer income potential

a. Allow flow-through of losses Explanation: A REIT allows the flow-through of income, but not losses. Shareholders have limited liability. While a REIT is similar in structure to a mutual fund, it is not defined as an investment company. Also, while it may invest in real estate properties, it is not considered to be a limited partnership. Partnerships can pass through losses.

An individual who is bearish or wants protection against a downside move in the market will probably: a. Buy a put option b. Sell a put option c. Buy a call option d. Write an uncovered call

a. Buy a put option Explanation: An individual who is bearish will buy a put option. If the market declines, the individual will purchase the security in the market at a lower price and put (sell) it to the writer at the higher agreed-upon strike price.

Which of the following descriptions regarding the Capital Asset Pricing Model (CAPM) is NOT TRUE? a. It predicts future values for the stock b. It was developed to explain the behavior of security prices c. It provides a mechanism to assess risk and return d. It is based on the efficient market theory and assumes investors act rationally

a. It predicts future values for the stock Explanation: CAPM does not establish a price objective for the stock. All of the other descriptions listed are correct.

In an underwriting of a new issue by a syndicate, which of the following statements is TRUE? a. The underwriting spread is larger than the selling concession b. The selling concession is larger than the underwriting spread c. The reallowance is larger than the underwriting spread d. The reallowance is larger than the selling concession

a. The underwriting spread is larger than the selling concession Explanation: In the underwriting of a new issue, the underwriting spread is larger than the selling concession. The underwriting spread is larger because members of the underwriting syndicate assume the risks of the underwriting. The selling concession given to the selling group is less because the selling group acts in a best-efforts capacity and does not assume the risks involved in a firm-commitment underwriting. A reallowance is compensation given to broker-dealers who are nonmembers of the syndicate or selling group who would like to participate in the underwriting. The reallowance given is less than the amount members of the syndicate or selling group receive.

Which of the following option orders may be accepted by an order book official? a. Discretionary b. Limit c. Spread d. Not-held

b. Limit Explanation: An order book official on the floor of an options exchange is permitted to accept limit orders only.

Which of the following statements is NOT TRUE regarding a SEP IRA? a. An employer makes contributions to an employee's IRA b. An employer is not required to make annual contributions c. Employees are permitted to make contributions to the account d. Employees are immediately vested for any contributions made to the account

c. Employees are permitted to make contributions to the account Explanation: A simplified employee pension plan (SEP IRA) does not allow the employee to make contributions. SEPs are funded by employer contributions only. This is different than for Keogh plans, which do allow for employees to make nondeductible contributions to their own account.

Which of the following positions best enables an investor to take advantage of a significant appreciation in DEF stock? a. A debit DEF call spread b. A credit DEF put spread c. Long a DEF straddle d. Short a DEF straddle

c. Long a DEF straddle Explanation: The long straddle offers an investor the ability to realize unlimited gains since the client is long a call option. The gains are determined by the amount the stock appreciates. While a debit call spread is bullish, the gain is limited to the difference between the strike price on the long call and the strike price on the short call. The credit put spread is also bullish, but the gain is limited to the net premium received. The short straddle exposes an investor to unlimited risk if the stock rises.

Which of the following option positions obligates the investor to sell shares if exercised? a. Long a call b. Long a put c. Short a call d. Short a put

c. Short a call Explanation: A short call position obligates the investor to sell shares if the option is exercised.

A 1% increase in the federal funds rate will NOT have an effect on: a. Short-term bond prices b. Long-term bond prices c. The discount rate d. Treasury bill prices

c. The discount rate Explanation: The federal funds rate is the rate one bank charges another bank when loaning excess reserves. It is the most sensitive of all interest rates and affects all bond prices and other interest rates except the discount rate which is set by the Federal Reserve Board.

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

c. The federal funds rate Explanation: 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.

If interest rates decline, which of the following securities will probably have the greatest increase in market value? a. Treasury bills b. Commercial paper c. Treasury bonds d. Treasury notes

c. Treasury bonds Explanation: When interest rates decline, the securities with the longest maturities will most likely have the greatest price increase.

The security with the longest expiration date would normally be a: a. Put b. Call c. Warrant d. Right

c. Warrant Explanation: A warrant generally has an expiration date longer than a put, call, or right. There are some warrants which never expire.

Which of the following securities are based on the credit rating of the issuer? a. An exchange-traded fund (ETF) b. A mutual fund that contains only non-investment-grade securities c. A closed-end bond fund d. An exchange-traded note (ETN)

d. An exchange-traded note (ETN) Explanation: Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it can impact the value of the ETN negatively, regardless of how its underlying index performs. The credit rating of the securities included in a mutual fund, closed-end bond fund company, or ETF has an impact on these types of securities. These securities are not affected by the ratings of the company that is issuing the fund or ETF

A limited partnership would be LEAST suitable for which of the following accounts? a. An institutional account b. A trust account c. A corporate account d. A UTMA account

d. A UTMA account Explanation: Of the choices listed, a UTMA (custodian or minor's) account would be least suitable for a limited partnership. A limited partnership generally has limited marketability and a lack of liquidity. In addition, most custodian accounts would not be in a position to benefit from the tax advantages of a limited partnership or a DPP.

Which of the following choices represents the percentage of new municipal issues brought to market during a particular week that has already been sold? a. The Bond Buyer Index b. The Blue List c. The Visible Supply d. The Placement Ratio

d. The Placement Ratio Explanation: The placement ratio represents the percentage of new municipal bond issues of $5,000,000 or more that has been sold in a particular week. The Bond Buyer compiles this ratio.

Which of the following rates is set by the Federal Reserve Board? a. The broker call rate b. The federal funds rate c. The prime rate d. The discount rate

d. The discount rate Explanation: Of the choices given, only the discount rate is set by the Federal Reserve Board. The prime rate is the rate of interest that commercial banks charge their best-rated customers and is established by each bank. The call rate, which is the rate of interest charged to brokerage firms for margin loans, is set by each bank. The federal funds rate is the charge for overnight loans between banks and is set by each bank.

A customer has a long margin account with the following securities in the account. (Assume a 50% FRB initial margin requirement.) Stock Market Price Market Value Debit Balance 100 A Co. $30 $3,000 $8,400 100 B Co. $25 $2,500 200 C Co. $15 $3,000 100 D Co. $35 $3,500 ----------- $12,000 How far could the market value of the securities in the account decline, before a maintenance call will be sent?

$11,200 Explanation: To determine how far the securities worth $12,000 in the account can decline before the customer receives a maintenance call, multiply the debit balance of $8,400 by 4/3. $8,400 x 4 = $33,600 divided by 3 = $11,200. Another method that can be used is to take 1/3 of the debit balance, which is $2,800, and add it to the debit balance of $8,400. The result would be 4/3rds of the debit balance and would equal $11,200. ($8,400 + $2,800 = $11,200.)

Mr. Green, a new client, decides to short 100 shares of JRF at $18 per share. What is the initial margin requirement for this trade?

$2,000 Explanation: If the initial transaction in a margin account is a short sale, industry rules require a minimum equity deposit of $2,000 or the required Reg. T deposit, whichever is greater. Since $2,000 is greater than $1,800, the required deposit is $2,000. For a purchase, the minimum equity requirement is the lesser of $2,000 or 100% of the purchase price.

A customer owns a total of 750 shares of a mutual fund and has invested $22,000 over the last three years. If the fund is currently valued at $31.20, what is the customer's cost basis using the average cost method?

$29.33 Explanation: To calculate the cost basis using the average cost method, divide the sum of all investments by the total shares owned by the investor. The investor owns 750 shares and the total amount invested is $22,000. Therefore, the average cost is $29.33. The current value of the fund is not relevant.

A customer in the highest tax bracket has $1,500 in long-term capital gains from stock transactions at the end of the year. The customer will need to pay taxes of:

$300 Explanation: Long-term capital gains are gains on securities held in excess of 12 months and are taxed at a maximum rate of 20%. Although the investor is in the highest tax bracket, the investor will be taxed at a rate of 20%. Therefore, the customer will need to pay taxes of $300 ($1,500 x 20% = $300).

A customer's margin account has a market value of $750,000 and a debit balance of $400,000. She also has a commodities account that has equity of $150,000. If the firm goes bankrupt, SIPC will provide coverage to this customer for:

$350,000 in the margin account and nothing for the commodities account Explanation: SIPC will cover the customer's equity in the margin account ($350,000). SIPC does not provide coverage for commodities accounts.

Ms. Green buys 300 shares of RSW at 15. 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 is:

$7,050 Explanation: Ms. Green has written 3 covered calls and 3 uncovered puts. In both cases, the maximum loss occurs if the underlying stock (RSW) becomes worthless. If the market price of RSW is zero, the 3 covered calls would result in a $4,200 loss (300 shares x $15 purchase price - $300 premium received). At zero, the 3 uncovered puts are exercised for a net loss of $2,850 (3 contracts x $10 strike price - the premium received of $150). Thus, the total loss is $7,050 ($4,200 + $2,850).

A bond purchased at 104 eight years ago has an adjusted cost basis of 102 1/2. If the bond was sold at 110, the tax consequence is a:

$75 gain per bond Explanation: When a bond is purchased at a premium, the premium must be amortized over the life of the bond. If the bond is sold prior to maturity, the loss or gain is determined from its adjusted cost basis. The adjusted cost basis is given as 102 1/2, so no calculation is necessary. There is a gain of $75 per bond ($1,100 sale price minus $1,025 adjusted cost basis).

A registered representative for ABC Brokerage has just been elected president of the Harper Valley School Board. The school district is going to float a new serial issue of general obligation bonds backed by ad valorem taxes. ABC Brokerage's relationship to the school district can be described as:

A control relationship Explanation: A control relationship exists when a brokerage firm or an employee of a firm is in a position to control or influence the issuance of securities by an issuer.

A reverse repurchase agreement is sometimes called a(n): a. Repo b. Arbitrage c. Matched sale d. Treasury sale

Matched sale Explanation: A reverse repurchase agreement (matched sale) occurs when the Federal Open Market Committee (FOMC) sells securities to dealers with the intention of buying the securities back at a future date. This has the short-term effect of absorbing (removing) funds from the money supply.

Which of the following choices is LEAST important to an investor considering a bond swap? a. Accrued interest b. Annual income c. Capital loss d. Maturity dates

a. Accrued interest Explanation: A bond swap involves selling one bond and using the proceeds to buy another bond with either a different yield, interest rate, or maturity date. This is usually done to establish a capital loss for tax purposes. Of the choices given, the least important factor to consider in the swap or exchange is accrued interest since accrued interest paid will be included in the next interest payment and all accrued interest received has been earned prior to the bond being sold.

Which of the following money-market securities assists in financing importing and exporting operations? a. Bankers' acceptances b. Treasury bills c. Eurodollar CDs d. Revenue anticipation notes

a. Bankers' acceptances Explanation: Of the choices given, a banker's acceptance (BA) is the only instrument that is used as a means of financing foreign trade. Do not confuse a BA with an ADR (American Depositary Receipt) which facilitates the trading of foreign securities in U.S. markets. A Eurodollar certificate of deposit pays interest and principal in Eurodollars (U.S. dollars deposited in nondomestic banks) and is not used to finance importing and exporting operations. A revenue anticipation note is a short-term municipal security issued in anticipation of receiving revenues from the federal or state government.

A registered representative is discussing the investment merits of ABC stock with a customer. The registered representative may say: a. "Let's buy ABC stock because we expect it to go up 4 points in the next two weeks." b. "Our mergers department is working on a leveraged buyout for ABC Corporation, so let's buy it now before it is announced to the public" c. "One of our analysts just issued a favorable research report for public use on ABC stock, which estimates a 10% growth in earnings over the next three years and it appears to be a good situation for you." d. "Let's buy ABC stock because we are in a bull market and all stocks go up in a bull market."

c. "One of our analysts just issued a favorable research report for public use on ABC stock, which estimates a 10% growth in earnings over the next three years and it appears to be a good situation for you." Explanation: This is the only statement that would not be a violation since it is a statement of fact, coupled with an opinion or estimate of what should happen in the future. The other statements are violations because they definitely state an event (the stock will go up) will occur, which cannot be known in advance. Spreading rumors is also a violation.

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

d. List of bonds with 30-year maturities Explanation: The Bond Buyer computes the Revenue Bond Index which is the average yield of 25 revenue bonds with 30-year maturities.

Which of the following ratios would be used by an analyst examining the capital structure of an industrial corporation? a. The current ratio b. The dividend payout ratio c. The price/earnings ratio d. The debt-to-equity ratio

d. The debt-to-equity ratio Explanation: The capital structure of a corporation is the dollar amount of the corporation's capitalization (equity and debt securities). An analyst will, therefore, be interested in the debt-to-equity ratio. This is actually the ratio of those securities creating fixed charges (bonds plus preferred stock) to common stock.

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.)

$0.8582 Explanation: The breakeven formula for call buyers is the strike price plus the premium. The strike price is 85 (0.8500) and the premium is .82 ($0.0082). Therefore, the spot rate for the Canadian dollar would need to be $0.8582 for Mr. Jones to break even.

What is meant by 4.50% less 3/4 for a municipal bond selling in the secondary market?

$1,000 bond at 4.50 yield - $7.50 Explanation: Quotes for serial municipal bonds are usually per $1,000 and on a yield to maturity basis. The less 3/4 represents the concession or discount offered to another dealer (3/4 point = $7.50).

What is meant by 4.50% less 3/4 for a municipal bond selling in the secondary market?

$1,000 bond at 4.50 yield - $7.50 Explanation: Quotes for serial municipal bonds are usually per $1,000 and on a yield-to-maturity basis. The less 3/4 represents the concession or discount offered to another dealer. 3/4 point = $7.50.

Emily and her sister Lucy have the following accounts at a brokerage firm. - Emily has a cash account with $420,000 of securities. - Lucy has a margin account with $665,000 of securities and a debit balance of $365,000. - A cash account for Emily and Lucy as JTWROS with $290,000 in securities. If the brokerage firm were to go bankrupt, SIPC would provide a maximum of:

$1,010,000 coverage for all the accounts combined Explanation: SIPC provides protection of $500,000 for each customer (different account title). Since each account has a different title, each would receive coverage of $500,000 of securities. Emily's cash account would receive $420,000 and the joint account would receive $290,000. SIPC will cover Lucy's current equity in a margin account of $300,000. The total coverage is $1,010,000 ($420,000 + $300,000 + $290,000).

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

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

The FRB initial margin requirement is 50%. A customer's initial transaction in a margin account is a purchase of 100 shares of XYZ at $15 per share. The customer would need to deposit what amount in this new account?

$1,500 Explanation: Securities purchased in a new margin account require a minimum equity of $2,000. If the securities are worth less than $2,000, then the securities must be paid for in full. In this example, the purchase is for $1,500, requiring the customer to deposit the full amount of the purchase.

An individual purchases two BP (British pound) 150 calls @ 7.50. The contract size is 10,000 BP. The total cost for the contracts is:

$1,500.00 Explanation: British pound option premiums are quoted in cents per unit. To convert to dollars, the decimal point must be moved two places to the left. The total cost is calculated by multiplying the contract size (10,000) by the premium expressed in dollars ($0.0750), yielding $750.00 per contract. Since the individual purchased two contracts, the total cost is $1,500.00.

An investor purchases $40,000 of a mutual fund when the price of the fund is $18.50. In the same year, the investor receives a $700 dividend distribution and a capital gain distribution of $1,100. Both distributions are reinvested in additional shares at a price of $17.90. If the fund has a current value of is $22.80 and the investor sells $9,000 worth of the fund, what is the investor's capital gain using the average cost method?

$1,710 Explanation: Using the average cost method, the gain is found by subtracting the cost basis from the sales proceeds. To calculate the cost basis using the average cost method, divide the sum of all investments by the number of shares owned by the investor. The investor purchased $40,000 of the fund at a price of $18.50, The total number of shares purchased is 2,162.16. The investor also received a total of $1,800 in distributions, all reinvested in additional shares when the price is $17.90. The total number of shares purchased is 100.59. The total amount invested is $41,800. The total number of shares owned is 2,262.75. Therefore, the average cost is $18.47. The number of shares being sold is 394.74 ($9,000 / 22.80). If we subtract the cost basis of $7,290 (394.74 x $18.47) from $9,000, this equals a capital gain of $1,710.

A customer opens a new margin account and buys 100 shares of XYZ Corporation at $40 per share. She then writes a call option against the position and receives a $2 premium. The customer must deposit cash in the account of:

$1,800 Explanation: The purchase of $4,000 worth of stock would require a $2,000 deposit (50% of $4,000 = $2,000). Since the call is covered, there is no margin requirement. The customer received $200 in premiums. This would be deducted from the $2,000 margin call, requiring a cash deposit of $1,800.

The Barge Towing Corporation has announced in a tombstone ad that it will issue $500,000,000 of 6 1/2% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2040 and are being issued at a $1,000 par value. If the bonds were subsequently trading in the market at $1,020, the market price of the common stock, to be on parity with the bond, will be:

$10.74 Explanation: The conversion price is given as $10.50. To find the conversion ratio, divide the par value ($1,000) of the bond by the conversion price of $10.50. This equals a conversion ratio of 95 to 1 ($1,000 divided by $10.50 equals 95). To find parity (equality in dollar value) for the stock, divide the market price of the bond by the conversion ratio. The market price of the bond is 102 ($1,020) and the conversion ratio is 95 to 1. Therefore, $1,020 divided by 95 equals approximately $10.74. This would be the parity price for the stock.

A customer purchased on margin 100 shares of ABC stock at 120 and sold short 100 shares of XYZ stock at 100. The customer also wrote an ABC 120 call @ 3 and an XYZ 100 put @ 2. What is the margin requirement for the combined transactions?

$11,000 Explanation: The FRB margin requirement for the purchase or short sale of stock is 50%. Therefore, the margin requirement for the stock purchase is $6,000 (50% of $12,000) and for the short sale is $5,000 (50% of $10,000). The call is covered since the customer owns the underlying stock and the put is covered since the customer is short the underlying stock. Since there is no margin requirement for a covered call or put, the total margin requirement is $11,000. If the question had asked for the cash deposit, subtract the total premiums received ($500) from the margin requirement of $11,000.

Listed below is part of the balance sheet of the MEM Corporation. ASSETS LIABILITIES Cash $2,000,000 Notes Payable $ 100,000 AccRec 3,000,000 AccPay 1,400,000 Inventories 10,000,000 Taxes Payable 1,500,000 Goodwill 20,000,000 Notes due 2021 8,000,000 Land 30,000,000 Debentures 20,000,000 The net working capital is:

$12,000,000 Explanation: Net working capital is the difference between the current assets and the current liabilities. In this example, the current assets are: Cash $ 2,000,000 Accounts Receivable 3,000,000 Inventories 10,000,000 Total Current Assets $ 15,000,000 The current liabilities are: Notes Payable $ 100,000 Accounts Payable 1,400,000 Taxes Payable 1,500,000 Total Current Liabilities $ 3,000,000 The net working capital is, therefore, $15,000,000 minus $3,000,000, which equals $12,000,000.

An investor purchases $25,000 of a mutual fund when the price of the fund is $13.20. In the same year, the investor receives a $400 dividend distribution and a capital gain distribution of $700. Both distributions are reinvested in additional shares at a price of $12.80. If the fund has a current value of $14.50, what is the investor's cost basis using the average cost method?

$13.18 Explanation: To calculate the cost basis using the average cost method, divide the total sum of all investments by the shares owned by the investor. The investor purchased $25,000 of the fund at a price of $13.20. The total number of shares purchased was 1,893.94. He also received a total of $1,100 in distributions, all reinvested in additional shares when the price was $12.80. The number of shares purchased is 85.94. The total amount invested is $26,100. The total number of shares owned is 1,979.88. Therefore, the average cost is $13.18. The current value of the fund is not relevant.

An investor purchases $40,000 of a mutual fund when the price of the fund is $18.50. In the same year, the investor receives a $700 dividend distribution and a capital gain distribution of $1,100. Both distributions are reinvested in additional shares at a price of $17.90. If the fund has a current value of is $22.80, what is the investor's cost basis using the average cost method?

$18.47 Explanation: To calculate the cost basis using the average cost method, divide the sum of all investments by the total shares owned by the investor. The investor purchased $40,000 of the fund at a price of $18.50. The total number of shares purchased was 2,162.16. The investor also received a total of $1,800 in distributions, all reinvested in additional shares when the price was $17.90. The total number of shares purchased is 100.56. The total amount invested is $41,800. The total number of shares owned is 2,262.72. Therefore, the average cost is $18.47. The current value of the fund is not relevant.

An individual's home has a resale value of $500,000 and an assessed value of $200,000. If the tax rate is 10 mills, the property tax is:

$2,000 Explanation: Property tax is computed by multiplying the assessed value by the millage rate. A mill equals 0.001 or $1 per $1,000 assessed value. The tax is $2,000 ($200,000 x .001 x 10 mills)

An investor purchased $100,000 face value of a 12% municipal bond that matures December 1, 2041. The transaction settles on August 1. The investor owes accrued interest of:

$2,000 Explanation: The bonds purchased by the investor will generate yearly interest of $12,000 ($100,000 par multiplied by 12%). The fact that the bonds mature on December 1, 2041 signifies that interest payments are made every December 1 and June 1. The investor will, therefore, owe 60 days of accrued interest (from June 1, the last coupon, up to but not including the settlement date of August 1). Since the yearly interest is $12,000, accrued interest would be $2,000 (60/360 x $12,000).

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. The individual's maximum loss is:

$2,000 Explanation: This is a debit spread since the investor is paying more (4) for the purchased calls than he receives (2) for the calls that were written. The maximum loss for a debit spread is the amount of the debit. A simple way to look at a debit spread is to focus in on the buy side of the spread. Approach the questions as if the investor purchased the 90 call at the net debit of 2 ($2,000 for 10 contracts). The maximum loss when purchasing an option is the premium (net premium).

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. The individual's maximum loss is:

$2,000 Explanation: This is a debit spread since the investor is paying more (4) for the purchased call than he receives (2) for the call that was written. The maximum loss for a debit spread is the amount of the debit. A simple way to look at a debit spread is to focus in on the buy side of the spread. This is the more valuable option contract and, therefore, defines the investment strategy. Approach the questions as if the investor purchased the 90 call at the net debit of 2 ($2,000 for 10 contracts). The maximum loss when purchasing an option is the premium (net premium).

An investor writes an uncovered RST May 25 put for a premium of 4. The maximum loss the investor could sustain is:

$2,100 Explanation: If RST Corporation's market price declines to pennies per share, the owner of the put could buy the RST stock for pennies and put it to the writer for $25 per share, or $2,500. This is the price that the writer would be required to pay for the stock. However, since the writer received $400 in premium, the maximum loss he could have will be $2,100 ($2,500 loss - $400 premium = $2,100 loss).

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%. What is the minimum equity requirement for the short position?

$2,100 Explanation: The SRO minimum maintenance requirement for a short position is 30% of the market value. The market value is $7,000, and 30% of $7,000 equals $2,100.

The initial FRB margin requirement is 50%. A customer purchased 100 XRX at $100 per share depositing the required margin. If Xerox increased in value to $150 per share, how much SMA would the customer have in the account?

$2,500 Explanation: First, determine the amount of the debit balance. If the customer purchased $10,000 worth of stock at a 50% margin requirement and deposited $5,000, the debit balance is $5,000. ($10,000 market value - $5,000 margin requirement = $5,000 debit balance). XRX increased to $150 per share, making the market value $15,000. The equity then increases to $10,000. The SMA (excess equity) is found by subtracting the FRB required equity of the current market value in the account (50% x $15,000 = $7,500) from the actual equity in the account ($10,000). The SMA is, therefore, $2,500.

A 60-year-old individual has invested $30,000 in a nonqualified variable annuity. The annuity's value is currently $40,000. If the individual withdraws $20,000 and is in a 28% tax bracket, his tax liability will be:

$2,800 Explanation: The amount invested in a nonqualified variable annuity may not be deducted from income. All earnings accrue tax-deferred. A withdrawal will be taxed on a LIFO method, meaning the earnings (last in) will be considered the first to be withdrawn. Earnings are taxed as ordinary income. Withdrawal of the invested amount is considered return of capital and is not taxed. The annuity has earnings of $10,000 and, therefore, $10,000 of the $20,000 withdrawn is taxable and the remaining $10,000 is considered return of capital. The tax liability is $2,800 ($10,000 taxable amount x 28% tax bracket). Had the individual been under 59 1/2 years of age when the withdrawal was made, the distribution also would have been subject to a 10% penalty on the taxable portion.

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

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

A customer sold short 1,000 shares of XYZ Corporation that is presently selling at $2 per share. Industry rules require a minimum maintenance margin of:

$2.50 per share Explanation: When a stock that has been sold short has a market value of less than $5, industry rules require a minimum maintenance margin of $2.50 per share or 100% of the value of the securities, whichever is greater. In this example, $2.50 per share is greater and the customer would have to deposit $2,500 in the account to meet the requirement.

A corporation has the following capital structure: 5% Convertible Bonds (conversion price is $20) $100,000 5% Preferred Stock $100,000 $1 Par Value Common Stock (5,000 shares outstanding) $ 5,000 Tax Rate is 34% Find the earnings per share after dilution, assuming earnings before interest and taxes is $50,000.

$2.80 Explanation: If the bonds are converted, there will be an additional 5,000 shares outstanding ($100,000 face value bonds divided by the conversion price of $20 equals 5,000 shares). The company will not need to pay the interest on the bonds since they were converted. The calculation is as follows. Taxable Income $50,000 - Taxes (34%) 17,000 Net Income $33,000 EPS = Net Income - Preferred Dividends / Number of Common Shares Outstanding EPS = $33,000 - $5,000 / (5,000 shares of Common Stock plus 5,000 additional shares (fr/ conversion)) EPS = $28,000 / = $2.80 EPS 10,000 shares

A customer has the following accounts with a brokerage firm. Cash Account $20,000 securities (market value) $10,000 cash Long Margin Account $60,000 securities (market value) $30,000 debit balance $10,000 SMA Short Margin Account $40,000 securities (market value) $60,000 credit balance The total amount of cash that may be withdrawn from all the accounts is:

$20,000 Explanation: The $10,000 in cash may be withdrawn from the cash account. The $10,000 SMA in the long margin position may also be withdrawn for a total of $20,000. The short margin position does not have SMA. Therefore, in this example, nothing can be withdrawn from that position.

A customer makes an initial investment of $75,000 in a high-yield bond fund with a purchase of 3,850 shares. Over the next four years, the customer deposits another $48,000 and also reinvests $17,000 of distributions for a total of 2,895 additional shares. If the fund is currently valued at $26.51, what is the customer's cost basis using the average cost method?

$20.76 Explanation: To calculate the cost basis using the average cost method, divide the sum of all investments (including reinvested distributions) by the total number of shares owned by the investor. The investor purchased $75,000 of the fund, giving him 3,850 shares. Over the next five years, the customer deposited another $48,000 and also reinvests $17,000 of distributions for a total of 2,895 additional shares. The sum of all investments is $140,000 ($75,000 + $48,000 + $17,000) and the total shares owned is 6,745 (3,850 + 2,895). Therefore, the average cost is $20.76 ($140,000 ÷ 6,745). The current value of the fund is not relevant.

A municipal finance professional (MFP) and her spouse make a political contribution of $400 from a joint account and they both sign the check. According to the MSRB political contribution rules, the contribution is viewed as a:

$200 contribution from each party Explanation: When both an MFP and her spouse sign a contribution check, the contribution is considered to have been made by both and is split equally between the contributors. On the other hand, if the MFP is the only person who signs the check, then the entire amount of the contribution is allocated to the MFP. If that were the case, the underwriting ban would have been triggered since the contribution amount exceeds $250. There is no limit if the MFP's spouse writes a check from his personal account, rather than from a joint checking account.

An investor writes an uncovered ABC March 50 call for a premium of 4. At expiration, ABC is at $56 per share and the call option is exercised. If the stock is purchased by the writer at the current market price for delivery, what is the writer's profit or loss?

$200 loss Explanation: When the stock is called away from the writer, he is obligated to sell the stock at the strike price of 50, receiving $5,000. The writer also received the premium of $400. Since the stock cost $5,600 to buy in the market, the writer incurs a loss of $200 ($5,600 cost - $5,400 received).

On Monday, June 15, an investor purchases for regular-way settlement, $20,000 face value of 8% municipal bonds that mature on November 1, 2035. What is the dollar amount of accrued interest that the investor is required to pay?

$208.88 Explanation: Accrued Interest Formula = (Principal x Rate x Days of Interest) / 360 = ($20,000 x 8% x 47) / 360 = $208.88

An investor writes an uncovered RST May 25 put for a premium of 4. At what market price will the investor break even?

$21 Explanation: The writer calculates his breakeven point by deducting the $4 premium from the $25 exercise price. The writer will, therefore, break even at $21.

A closed-end fund trading on the NYSE has a current bid price of $21.50 and an offer price of $21.70. A customer purchasing the fund would pay:

$21.70 plus a commission Explanation: The customer would pay $21.70 plus a commission. A closed-end fund is purchased and sold like any other stock traded on the NYSE. The customer would pay the offer price plus a commission or receive the bid price less a commission when selling the security. The term sales charge refers to the built-in compensation charged by an open-end (mutual fund) company when a customer buys shares of the fund.

A convertible bond is convertible at $25. The bond is currently selling in the market at $960. What should the stock be selling at to be at parity with the bond?

$24.00 Explanation: The bond is convertible at $25. This means the conversion ratio is 40 to 1 ($1,000 par value divided by the conversion price of $25 equals the conversion ratio of 40 to 1). To find parity for the stock, divide the market value of the bond by the conversion ratio. The market value of the bond $960, divided by the conversion ratio of 40 to 1 equals the $24 parity price for the stock.

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

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

A customer buys an IBM call option and pays a 2.50 point premium. The aggregate dollar amount paid is:

$250.00 Explanation: Each option contract is based on 100 shares of common stock. The dollar amount paid is $250 ($2.50 x 100 shares).

An investor owns convertible preferred stock that was originally purchased at $106. The stock is convertible at $25, pays a 5% annual dividend, is callable at $110, and is trading at a current market price of $112. If the common stock is currently trading at $27.75 and the investor decides to convert the preferred stock into common stock, what would be the cost basis per share for the newly acquired common stock?

$26.50 Explanation: To determine the cost basis of the common stock, the first step is to calculate the conversion ratio (i.e., the number of common shares to be received if the preferred stock is converted). To calculate this, the par value of the preferred stock ($100) is divided by the conversion price ($25). As a result, four shares of common stock are received upon conversion. The cost basis of the newly acquired common shares is found by dividing the original purchase price of the preferred stock ($106) by the number of shares received (4). $106 ÷ 4 = $26.50. Any future gains or losses on the sale of the common stock are based on this price.

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

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

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. The individual's maximum profit is:

$3,000 Explanation: The investor has established a debit spread and will profit if the spread (difference in premium) widens. The widest the spread can get is the difference in strike prices (95 - 90 = 5). The maximum profit is the difference in the strike prices ($5,000) minus the net debit ($2,000) or $3,000.

Mrs. Jones owns stock from which she received $3,000 in cash dividends. Mr. Jones owns stock from which he received $400 in cash dividends. How much of the cash dividends received are Mr. and Mrs. Jones liable for when filing their joint return?

$3,400 Explanation: Cash dividends received by individuals are fully taxable and, therefore, the entire $3,400 total of dividends is liable for taxes.

A customer owns 20 ABC Corporation October 30 calls in a margin account. The customer exercises the calls and on the same day sells the stock at $32. The customer will need to deposit what amount in the account?

$30,000 Explanation: If a client exercises an option in a margin account, he is required to meet the Reg T deposit on the underlying shares. The client owns 20 ABC Corporation October 30 calls and if he exercises the contract he purchases $60,000 worth of stock. (100 shares per contract x 20 contracts = 2,000 shares. 2,000 shares x 30 strike price equals $60,000.) Under Reg T, the client must meet the deposit requirement of 50% ($30,000) on this purchase. This requirement must be met even if the shares are sold the same day the contract is exercised.

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

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

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:

$45 Explanation: 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.

XYZ Corporation is selling 10,000,000 shares of common stock through an underwriter, at $15 per share. The underwriting spread is as follows. The manager's fee is 20 cents, the underwriting risk 20 cents, and the selling concession 60 cents. Selling group members have been allocated 500,000 shares. If the selling group members sell their entire allocation, their compensation will be:

$300,000 Explanation: Selling group members are broker-dealers who participate in the sale of the issue on a best-efforts basis (i.e., assuming no risk). They receive a selling concession (compensation) that is less than that received by syndicate members, who do assume risk. The selling concession is $.60. This is part of the $1.00 underwriting spread. If the selling group members sell their entire allocation, they will receive $300,000 (500,000 shares x $0.60 per share). Syndicate members receive the selling concession and the underwriting risk per share sold, or $.80.

Calculate the SMA for the following margin account. Long Account Short Account $150,000 Market Value $45,000 Market Value $50,000 Debit Balance $75,000 Credit Balance

$32,500 Explanation: The formula for calculating SMA is: Actual equity - Reg T Requirement = SMA The equity in the long account is $100,000 ($150,000 LMV - $50,000 DR). The equity in the short account is $30,000 ($75,000 CR - $45,000 SMV). Total equity is $130,000. The Reg T requirement for the long account is $75,000 ($150,000 LMV x 50%). The Reg T requirement for the short account is $22,500 ($45,000 SMV x 50%). The total Reg T requirement is $97,500. The combined SMA is, therefore, $32,500 ($130,000 Actual equity - $97,500 Reg T requirement).

A client purchases $900,000 of stock in a margin account and deposits the Regulation T margin requirement. If the current value of the stock is $800,000 and the broker-dealer declares bankruptcy, SIPC would cover:

$350,000 Explanation: When the customer met the original Reg. T call, he deposited $450,000 (50% of $900,000) and borrowed $450,000, which is the debit balance. Now the market value (MV) has fallen from $900,000 to $800,000, so the new equity level is $350,000 ($800,000 MV minus the debit balance of $450,000 equals $350,000). SIPC will cover the customer's current equity in the margin account of $350,000. SIPC does not cover a decline in the market value of securities.

An investor established the following positions. Long 100 shares of XYZ at $37 per share Long 1 XYZ 35 put at 1.75 This investor breaks even when XYZ is at:

$38.75 per share Explanation: The investor purchased the stock at $37 per share and protected it by purchasing the right to sell XYZ at $35, paying a premium of 1.75 (long XYZ 35 put). The investor will break even when the price of XYZ is at $38.75 ($37 purchase price of the stock + the 1.75 premium on the put).

A customer has purchased 10 ABC January 50 calls, paying a $2 premium and 10 ABC January 50 puts, paying a $2 premium. The market price of ABC stock is $50 per share. The buyer of these 10 straddles will need to deposit

$4,000 Explanation: When buying options, 100% of the purchase price (the premium) must be deposited. The customer paid a $2 ($200) premium for the call and a $2 ($200) premium for the put (a $4 premium for one straddle). The customer purchased 10 straddles and paid $400 per straddle for a total of $4,000. (10 straddles x $400 = $4,000.)

The initial FRB margin requirement is 50%. A customer purchases 1,000 shares of Depaul Corporation stock at $70 per share and makes the necessary deposit. If the stock increases in value to $78 per share and later declines to $67 a share, how much SMA would the customer have in the account?

$4,000 Explanation: First, determine the amount of the debit balance. If the customer purchased $70,000 worth of stock at a 50% margin requirement and deposited $35,000, the debit balance is $35,000 ($70,000 market value - $35,000 margin requirement = $35,000 debit balance). Depaul increased to $78 per share, making the market value $78,000. The equity increases to $43,000. The excess equity (SMA) is found by subtracting the FRB-required equity of $39,000 (50% of $78,000) from the actual equity in the account, $43,000. The SMA is, therefore, $4,000. The SMA remains in the account until it is used. The SMA balance will never decrease because of market movements. Securities held in a margin account that increases in value can create excess equity (SMA). However, if these securities later decline in value, this will not decrease SMA.

A customer purchased 10 ABC January 50 calls, paying a $2 premium and 10 ABC January 50 puts, paying a $2 premium. The market price of ABC stock is $50 per share.The buyer of these 10 straddles will need to deposit:

$4,000 Explanation: When buying options, 100% of the purchase price (the premium) must be deposited. The customer paid a $2 ($200) premium for the call and a $2 ($200) premium for the put (a $4 premium for one straddle). The customer has purchased 10 straddles and paid $400 per straddle for a total of $4,000 (10 straddles x $400 = $4,000).

A client has a margin account with the following positions: short 2,000 shares of EXA at $22 and long 40 EXA convertible bonds at $1,150 that are convertible at $20. If the client is using the convertible bonds as a hedge, the maintenance requirement is:

$4,600 Explanation: If a client is long a security that is convertible into an equal number of shares of a short position carried by the same client, the maintenance requirement is 10% of the current market value of the long position. This is an industry rule, not a Regulation T requirement. Each bond is convertible into 50 shares (the par value of $1,000 divided by the conversion price of $20). The client may convert the 40 bonds into a total of 2,000 shares (50 shares x 40 bonds), which is equal to the number of shares the client is short. The maintenance requirement is 10% of the long position, which is equal to $4,600 ($1,150 x 40 bonds x 10%).

A municipal finance professional (MFP) and her spouse make a political contribution of $400 from a joint account. Only the MFP signs the check. According to the MSRB political contribution rules, the contribution would be viewed as a:

$400 contribution from the MFP Explanation: If the MFP is the only party who signs the check, the entire amount of the contribution is allocated to the MFP. In this case, the underwriting ban would be triggered since the amount exceeds $250. When both the MFP and her spouse sign the contribution check, the contribution is viewed as being split equally between the contributors. There is no limit if the spouse writes a check from his personal account, rather than the joint checking account.

A customer's margin account has a market value of $800,000 and a debit balance of $375,000. He also has a commodities account that has equity of $150,000. If the firm went bankrupt, SIPC would provide coverage to this customer for:

$425,000 in the margin account and nothing for the commodities account Explanation: SIPC will cover the customer's equity in the margin account ($425,000). SIPC does not provide coverage for commodities or futures accounts.

An investor buys 100 shares of XYZ at $50 per share and, at the same time, writes an XYZ May 50 call option for a $5 premium. Excluding commissions and dividends, at what price would XYZ need to be selling for the writer to break even?

$45 Explanation: The breakeven point for the writer of a covered call is the original cost of the stock minus the premium received on the option (50 - 5 = 45). If the market price were at 45 at expiration, the call would expire and the writer would keep the $500 premium. However, the stock purchased at $50 would be worth only $45, which is equal to the investor's cost.

An investor makes an opening sale of 10 option contracts when the bid price was $7.00 and the offer price was $7.10. Later in the day, the investor makes a closing purchase of 10 contracts when the bid price was $6.50 and the offer price was $6.55. Assuming both trades were market orders, what is the investor's gain or loss on these transactions?

$450 capital gain Explanation: An investor who places a market order will normally buy at the offer and sell at the bid. In this case, the investor sold 10 contracts at the bid price of $7.00, for sales proceeds of $7,000 (10 contracts x $700 per contract). To close out the position, the investor bought 10 contracts at the offer price of $6.55, for a total cost of $6,550 ($655 x 10 contracts). The $450 capital gain is based on the difference between the cost basis and sales proceeds

An individual owns 800 shares of stock at an original cost of $55 per share. If the company distributes a 15% stock dividend, what is the client's cost basis per share?

$47.83 Explanation: A stock dividend is not a taxable event when received. The investor must adjust her cost basis. The investor would now own 920 shares (800 shares x 1.15). The new cost basis would be $47.83 (original cost of $44,000 [800 shares x $55] divided by 920 shares).

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?

$48.00 Explanation: 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.

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 Explanation: 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 purchases $10,000 of stock on margin. Before depositing the required amount, the stock rises to a market value of $12,000. How much will the customer be required to deposit?

$5,000 Explanation: Regulation T requires 50% of the purchase price to be deposited by the customer within two business days after the settlement date of the transaction (five business days from the trade date). Any market price change during this period will not affect the amount of the deposit. The requirement will be $5,000 (50% of the purchase price of $10,000).

An accountant earns $200,000 and wishes to make the maximum IRA contribution for himself and his nonworking spouse. He can contribute a maximum of:

$5,500 in her account plus $5,500 in his account Explanation: An individual with earned income and a nonworking spouse may contribute a total of $11,000 for himself and his wife. However, the contribution must be made in two separate accounts, each housing $5,500.

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

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

A 1/2-point dealer's concession in a municipal bond equals:

$5.00 on a $1,000 par value bond Explanation: A 1/2-point dealer's concession is the equivalent of 1/2 of 1% of the par value. This is the dollar equivalent of $5.00 on a $1,000 par value bond.

An investor's market order to buy 10 ABC June 45 calls is executed when the bid price was $5.10 and the offer price was $5.15. The investor later placed a market order to conduct a closing sale of the 10 contracts when the bid price was $5.20 and the offer price was $5.25. What is the investor's capital gain on these transactions?

$50 Explanation: An investor placing a market order will normally buy at the offer and sell at the bid. In this case, the investor purchased 10 contracts at the offer price of $5.15 and then closed out that position by selling 10 contracts at the bid price of $5.20. The investor's cost basis for 10 contracts is $5,150 (10 contracts x $515 per contract) and the investor's sales proceeds are $5,200 (10 contracts x $520 per contract). The investor's capital gain of $50 is based on the difference between the cost basis and sales proceeds.

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:

$50,000 Explanation: At maturity, the holder of the bonds will receive the par value, which in this example is $50,000. The call price and market value are not relevant.

An investor writes an uncovered RST May 25 put for a premium of 4. When RST is at 16, the put option is exercised. If the stock is immediately sold at the current market price, what is the investor's profit or loss?

$500 loss Explanation: If the stock is put to the writer, he would have to buy the stock for $2,500. His cost basis for tax purposes would be $2,100 ($2,500 strike price - $400 premium received). Since he then sold the stock for $1,600, he would have a net $500 loss ($2,100 - $1,600).

A corporate bond has increased in value by 3/4 of a point. The bond has increased by:

$7.50 per $1,000 par value Explanation: One point equals $10. An increase of 3/4 of a point in a corporate bond is $7.50 per $1,000 of par value.

A customer writes an XYZ June 60 straddle for a 5-point premium. At expiration, the market price of XYZ is 50 and the put side is exercised. The customer then sells the stock that was put to her at the current market price. The customer has realized a:

$500 loss Explanation: The customer has received a total of $5 in premiums or $500 for the straddle. The call side of the straddle expires, but the put is exercised. The writer must buy the stock at $60 per share (the exercise price). The stock is then sold at the $50 market price, which results in a $1,000 loss ([$60 - $50] x 100 shares). However, since the customer initially received a premium when she wrote the straddle, the loss is only $500 ($1,000 loss from exercising the put - $500 premium).

In May, a customer sells an STC July 40 listed call for a $6 premium and buys an STC July 30 listed call for $10. Near expiration, STC is selling at $39. The 40 call expires and the customer closes out the 30 call at its intrinsic value. The net result is a:

$500 profit Explanation: When the market price of STC is at $39, the July 30 call has an intrinsic value of 9 points. Since the investor paid a debit of $400, this will result in a profit of $500 ($900 intrinsic value - $400 debit).

What is the SRO maintenance requirement on a $1 million purchase of a 2x Long Gold Index ETF?

$500,000 Explanation: Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25% on long positions and 30% on short positions. The margin requirement on these securities can be computed by multiplying the portfolio leverage factor by the standard SRO maintenance requirement. In this case, the standard long requirement is 25% multiplied by a factor of 2, so the client must maintain a 50% margin. $1,000,000 x 25% = $250,000. $250,000 x 2 = $500,000.

A customer has a cash account that has securities valued at $320,000 and $180,000 in cash. The customer and a spouse also have a joint account with securities valued at $120,000 and $270,000 in cash. If the member firm were to become bankrupt, the coverage under SIPC would be:

$500,000 for the individual account and $370,000 for the joint account Explanation: Both the individual account and the joint account are considered separate customers and will each receive independent coverage of $500,000, of which no more than $250,000 may be for cash. In the individual account, full coverage will be provided of $500,000 ($320,000 of securities and $180,000 in cash). In the joint account, the full value of the securities is covered. However, only $250,000 of the cash in the account is covered. The total coverage for the joint account would be $370,000 ($120,000 + $250,000). For the balance of $20,000 cash, the customer will become a general creditor of the broker-dealer.

A Keogh Plan is a type of retirement plan that allows self-employed individuals to contribute 20% of their income with a maximum contribution of:

$53,000 Explanation: A Keogh Plan allows self-employed individuals to contribute 20% of their income with a maximum deductible contribution of $53,000. (For 2014, the limit was $52,000.)

The closing prices of two mutual funds on Monday, July 17, are: Bid Offer Change WORLD FUND 18.30 20.00 +.10 OCEAN FUND 5.25 5.50 +.02 An investor who bought 300 shares of WORLD Fund on Monday, July 17, will pay:

$6,000 Explanation: When an investor buys shares of a mutual fund (open-end investment company), the investor pays the offering price, which includes the sales charge. When buying the WORLD Fund, the investor would pay the offering price of $20.00. Three hundred shares purchased at $20.00 equals, $6,000 ($20.00 x 300 shares).

A municipality is issuing 40,000 bonds at a public offering price of $1,000. The manager of the underwriting syndicate receives $1.50 per bond. The total takedown is $6.50 per bond and the selling concession is $4.00 per bond. When the issue is completely sold, the managing underwriter's fee will total:

$60,000 Explanation: The syndicate manager receives $1.50 for every bond. The manager will receive, in total, $60,000 (40,000 bonds x $1.50 per bond).

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

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

XYZ corporation has income before taxes of $2 million and received $100,000 in preferred dividends from a company in which it owns 25% of the outstanding shares. If XYZ corporation is in the 34% tax bracket, it will pay taxes of:

$686,800 Explanation: Since XYZ corporation owns 25% of the outstanding shares, it is exempt from paying taxes on 80% of dividends received from the stock. The corporation would need to pay taxes on only $20,000 of the dividends received (20% of the $100,000 in preferred dividends) plus the $2,000,000 of income the corporation earned. Since the corporation is in the 34% tax bracket, the tax would be $686,800. (34% of $2,020,000 = $686,800.)

A corporation has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability?

$690,200 Explanation: If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 30% of the dividends it receives on stock that it owns (70% is excluded). The company will have to add $30,000 (30% of $100,000) to its taxable income. The total taxable income will, therefore, be $2,030,000. The tax liability will be $690,200 ($2,030,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 20% of the dividends would be taxable.

Aglet International, Inc. has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability?

$690,200 Explanation: If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 30% of the dividends it receives on stock that it owns (70% is excluded). The company would need to add $30,000 (30% of $100,000) to its taxable income. The total taxable income, therefore, is $2,030,000. The tax liability is $690,200 ($2,030,000 times 34% tax rate). If the corporation owned at least 20% of the distributing company, only 20% of the dividends would be taxable.

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

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

A customer has an existing margin account with equity of $36,000. If the FRB requirement is 50% and the customer sells short 100 shares at $15.00 a share, the required deposit is:

$750 Explanation: The FRB requirement is 50%, which is the same for purchases as it is for short sales. Therefore, the required deposit is $750 (50% x $1,500). Since this trade is executed in an existing account, the only requirement is the FRB's. If this had been the initial trade in the account, the required deposit under industry rules would be $2,000.

An investor purchases a $100,000 face value municipal bond with a 5-year maturity at 105. After two years, the bond is sold at 95. For tax purposes, the investor has a(n):

$8,000 loss Explanation: When a municipal bond is purchased at a premium, the bond's premium must be amortized to find an adjusted cost basis. If the bond is sold above the adjusted cost basis, the result is a capital gain. If the bond is sold below the adjusted cost basis, the result is a capital loss. If the bond is held to maturity, there is neither a loss nor a gain for tax purposes. This is because the adjusted basis would equal the par value after the premium is amortized. This bond is purchased at $105,000 with a 5-year maturity. The premium of $5,000 ($105,000 - $100,000 = $5,000) must be amortized over a 5-year period ($5,000 divided by 5 years equals $1,000 per year). Therefore, each year the original cost of the bond is reduced by $1,000. If the bond is sold after 2 years, the adjusted cost basis is $103,000 ($105,000 - $2,000 = $103,000). Since the bond is sold at $95,000, there is a capital loss of $8,000 ($103,000 - $95,000).

An individual purchased a British pound June 160 call at 0.80. If the contract size is 10,000 British pounds, what is the individual's total cost?

$80 Explanation: Premiums for British pound options are quoted in cents per unit. To express the premium in dollar terms, the decimal must be moved two places to the left. The total cost is the contract size (10,000) times the premium expressed in dollars (decimal moved two places to the left, $0.0080), which equals $80.

A customer has the following accounts with a brokerage firm. Cash Account $20,000 securities (market value) $10,000 cash Long Margin Account $60,000 securities (market value) $30,000 debit balance $10,000 SMA Short Margin Account $40,000 securities (market value) $60,000 credit balance The Federal Reserve Board margin requirement is 50%. The total equity in all the accounts is:

$80,000 Explanation: The equity in the cash account equals $20,000 market value of the securities plus $10,000 in cash, for a total of $30,000. The equity in the long margin account is the market value of the securities ($60,000) minus the debit balance ($30,000). This equals $30,000. The $10,000 SMA is not taken into account when computing equity. The equity in a short margin account is computed by subtracting the current market value of the securities ($40,000) from the credit balance ($60,000). This equals $20,000. Adding the equity in all of the accounts, the total equity is equal to $80,000. ($30,000 equity in the cash account + $30,000 equity in the long margin account + $20,000 equity in the short margin account = $80,000.)

An individual invested $30,000 in an oil and gas balanced program as a limited partner. His portion of a recourse loan is $50,000. Assuming sufficient passive income, the maximum passive losses that a limited partner may claim is:

$80,000 Explanation: The maximum amount of losses that may be deducted by a limited partner is the extent of his basis (in this question, $80,000). Assuming sufficient passive income, the limited partner may deduct $80,000.

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

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

An investor purchases 100 shares of XYZ at 60 and also writes an XYZ 65 call @ 3. If the call is exercised when the market price of XYZ is 70, what is the investor's profit?

$800 Explanation: If the call is exercised, the investor will be required to sell his stock at the strike price of 65 (not the market price of 70). The proceeds of the sale will be $6,800 ($6,500 strike price plus $300 premium received). Since his original cost is $6,000, he will have a profit of $800.

Napa Tools 7 1/4% bonds due in 2038 are listed in a financial publication as having closed the previous day at 81 7/8. The closing price of Napa Tools bonds is:

$818.75 Explanation: Corporate bonds may be quoted in fractions as a percentage of par value. The closing price of 81 7/8 is equal to 81 7/8% of the $1,000 par value. When converted to a decimal, it equals .81875 of $1,000. Therefore, the correct answer is $818.75.

What is the SRO maintenance requirement on a $1 million short position of a 3x Inverse Gold Index ETF?

$900,000 Explanation: Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25% on long positions and 30% on short positions. The margin requirement on these securities can be computed by multiplying the portfolio leverage factor by the standard SRO maintenance requirement. In this case, the standard short requirement is 30% multiplied by a factor of 3, so the client must maintain a 90% margin. $1,000,000 x 30% = $300,000. $300,000 x 3 = $900,000.

A municipality is issuing 50,000 bonds at a public offerings price of $1,000. The manager of the underwriting syndicate receives $1.25 per bond. The total takedown is $8.75 per bond and the selling concession is $5.00 per bond. What amount will the issuer receive?

$990.00 per bond for a total of $49,500,000 Explanation: In a new municipal bond offering, the underwriting syndicate assumes the risk and is, therefore, entitled to make a profit on all bonds sold. Members of the selling group do not assume any risk and make a profit on only the bonds they sell (selling concession). The members of the underwriting syndicate receive $8.75 for bonds they sell. This is the total takedown which is composed of a selling concession of $5.00 per bond and an additional takedown of $3.75 per bond for their risk. The total spread is $10.00 ($1.25 manager's fee plus $3.75 to the syndicate for risk plus a $5.00 profit for the sale of the bonds). The issuer will receive $990 per bond ($1,000 offering price minus $10.00 underwriting spread) for a total of $49,500,000 ($990 x 50,000 bonds).

A new municipal bond issue has a total par value of $80,000,000. A member of the underwriting syndicate has sold its entire commitment of $10,000,000. If the syndicate is organized as a divided (western) account and there is an unsold balance of $2,000,000, what is the member's remaining liability?

0 Explanation: In a divided account, a member is responsible for selling only its participation. The member's responsibility ends once the firm has sold its $10,000,000 commitment. In an undivided (eastern) account, a syndicate member retains liability for unsold bonds. Regardless of the amount of bonds sold, the member is still liable for an amount of bonds equal to its percentage participation.

A customer has funded his Roth IRA with $200,000. The account has grown to $470,000. At age 70 1/2, the customer is considering taking his first distribution. His distribution this year is based upon a 27.4 period of time. If he fails to take his distribution, what is his penalty?

0 Explanation: This question contains information that is not essential to answering the question and is used as a distracter. There is no required minimum distribution (RMD) requirement for a Roth IRA. If the question had focused on a traditional IRA, the penalty would be 50% of the RMD amount.

An investor buys a 5% municipal bond at 102 1/2. The bond has a yield to maturity of 4 1/2%. If the investor holds the bond to maturity, he will have a loss for tax purposes of:

0 Explanation: The IRS requires that a premium paid for a municipal bond be amortized over the life of the bond. At maturity, the investor will have an adjusted cost (after amortization) of par ($1,000). Since this is the amount received at maturity, there is no loss for tax purposes.

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 Explanation: 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).

In a limited partnership, a general partner's minimum participation in profits and losses is:

1% Explanation: According to tax law, a general partner must have at least a 1% participation in profits and losses for a business to maintain limited partnership status.

A corporation has $125,000,000 of convertible bonds outstanding. The conversion price is $50. The corporation refunds $75,000,000 of the bonds for nonconvertible bonds. How many additional shares of common stock will be outstanding if the remaining bonds are converted?

1,000,000 shares Explanation: After the refunding, $50,000,000 of convertible bonds will remain outstanding. If these bonds are converted, there will be an additional 1,000,000 shares of common stock outstanding ($50,000,000 of bonds / the conversion price of $50 = 1,000,000 shares of common stock).

A customer sells short 1,000 shares of stock. A few weeks later the company declares a 5% stock dividend. When the customer covers the short sale, the customer will be required to deliver:

1,050 shares Explanation: When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends declared are the responsibility of the customer who sold the stock short. In this example, the company declared a 5% stock dividend. Therefore, a customer who sold short 1,000 shares would be required to deliver 1,050 shares (1,000 shares x 5% = 50 additional shares) when covering the short sale.

The current yield on a municipal bond with a coupon rate of 4.50%, purchased at par and currently trading at $1,055, is:

4.26% Explanation: The current yield is found by dividing the yearly interest payment of $45 by the market price of $1, 055. This equals 4.26%. The fact that the bond was purchased at par is not relevant.

A notice of sale appears showing that RFQ corporation is selling 800,000 units at $60 per unit. Each unit consists of 2 shares of preferred stock and a warrant for 1/2 share of common stock. If all of the warrants are exercised, how many shares will be outstanding?

1,600,000 shares of preferred and 400,000 shares of common Explanation: Each unit was composed of 2 shares of preferred stock and a warrant for 1/2 share of common stock. There will immediately be 1,600,000 (800,000 x 2) shares of preferred outstanding. If the warrants are exercised, there will be 400,000 (1/2 of 800,000) shares of common stock outstanding.

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 Explanation: 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.

Public orders on a designated market maker's book show an inside market comprised of Broker A bidding for 100 shares of ABC Corporation at 42.25. Broker B is offering to sell 300 shares of ABC at 42.63. The size of the market would be:

100 by 300 Explanation: The amount of shares at the highest bid and the lowest offer on the designated market maker's book is called the size of the market. The size of the market is 100 shares bid for at 42.25 and 300 shares offered at 42.63 or 100 by 300.

The amount of margin that must be deposited by the purchaser of an option contract is:

100% Explanation: According to Federal Reserve Board Regulation T, options may not be bought on margin. Therefore, the buyer will need to deposit 100% of the purchase price, which is the premium.

How much margin must the purchaser of one RFQ Feb 60 call for a $3 premium deposit?

100% Explanation: Options may not be purchased on margin. According to Regulation T, the full purchase price (the premium) must be deposited.

What is the margin requirement when purchasing options?

100% Explanation: When purchasing options, the margin requirement is 100% of the premium.

What is the maximum amount a customer may withdraw from a Special Memorandum Account?

100% of the SMA Explanation: The full amount or 100% of the SMA may be withdrawn. The buying power is 2 times the SMA.

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

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

An investor purchases a zero-coupon municipal bond maturing in 15 years that is callable in five years at 102. If the bond is called, the investor will receive:

102% of the compound accreted value Explanation: The investor would receive 102% of the compound accreted value since the security is a zero-coupon bond or original issue discount (OID) bond. The compound accreted value is equal to the original value of the bond plus the annual accretion as of the call date. If the bond was not an OID bond and was called, the investor would receive 102% of par or $1,020.

A corporation calls for the redemption of 1,000,000 shares of convertible preferred stock. The corporation announces that the convertible preferred will be redeemed at a price of $20 plus an accumulated dividend of 12 cents. Each share of preferred can be converted into 1/2 share of common. The preferred stock is selling at $19. There are 2,000,000 shares of common outstanding. Earnings for the common stock are $2.50 per share. The common stock is selling at 35.75. What will the market price of the preferred stock be if it is selling at parity with the common stock?

17.88 Explanation: The preferred stock is convertible into 1/2 share of common stock. The common stock is selling for 35.75. Parity (or equality in dollar value) for the preferred stock is 1/2 of 35.75 (17.88).

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:

18.50 Explanation: 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:

2 AMF October 15 calls each for 100 shares Explanation: When a stock splits 2 for 1 (an even split), the number of contracts increases and the strike price is reduced proportionately. The number of shares representing each listed option remains at 100 shares. The customer will now have 2 calls for 100 shares each at the adjusted strike price of $15 or 2 AMF October 15 calls for 100 shares each of AMF. Listed options are adjusted for stock splits, stock dividends, and rights offerings, but are not adjusted for cash dividends.

Your firm is a syndicate member and an underwriter of an initial public offering (IPO). How many days must the firm's research analyst wait before issuing a research report in this IPO?

25 days Explanation: If a firm is involved in an underwriting of an initial public offering and is the manager or comanager, it must maintain a quiet period of 40 days following an IPO or 10 days following a secondary offering. During this time, the firm may not issue research reports on its investment banking clients' stock. If the firm was a syndicate member or selling group member, the firm would need to wait 25 days.

Use the following quote to answer this question. ABC 25.13 + .25 B 25 A 25.25 Excluding any markups, what price will a customer pay to purchase the security?

25.25 Explanation: When purchasing stock, a customer will pay the ask (offer) price. A customer selling stock will receive the bid price.

A registered representative is provided with the following financial information concerning a company: Debt of $225 million, par value of the common stock $40 million, paid-in capital of $70 million, and retained earnings of $750 million. The debt-to-equity ratio is:

26% Explanation: The debt-to-equity is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). The debt-to-equity ratio is 26% ($225 million / [the par value of the common stock is $40 million + paid-in capital of $70 million + retained earnings of $750 million = $860 million]). The debt-to-equity ratio is used to analyze the capital structure of a company.

A convertible bond is convertible at $25 and is selling in the market at 108. At what price should the common stock be selling for it to be at parity with the bond?

27 Explanation: To find the number of shares the bond is convertible into (i.e., the conversion ratio), divide the conversion price into the par value ($1,000 divided by 25 = 40 shares). To be at parity, the 40 shares must be equal to the value of the bond which is 108 or $1,080. Dividing 40 shares into $1,080 gives the parity price of the stock of $27.

An investor purchases a British pound 160 put at 4 when the British pound is at 157. The intrinsic value of the option is:

3 Explanation: Intrinsic value is defined as the in-the-money amount of the contract. A foreign currency put option is in-the-money when the spot price is less than the strike price. Since the spot price (157) is less than the strike price (160), the contract is in-the-money by 3 points.

Ashton purchased 100 shares of XYZ common stock in January 2003, at a price of $25 per share. XYZ pays a quarterly dividend of $.25 per share. Today, XYZ closed at $30 per share. What is the dividend yield of XYZ common stock?

3.33% Explanation: The dividend yield for a stock is equal to the annualized dividend divided by the current market price. Since dividends are paid quarterly, the annual dividend is $1 per share ($.25 x 4). The annualized dividend of $1 divided by the current market price of $30 per share results in a dividend yield of 3.33%.

An investor buys an STC May 30 call @ 8 and sells an STC May 40 call @ 2. The investor's breakeven point is:

36 Explanation: The breakeven point for a call spread is the lower strike price plus the net premium (30 + 6 = 36). If the market price is 36 at expiration, the May 30 call purchased will be in-the-money by 6 points and the May 40 call sold will expire. The investor will make six points on the May 30 call, which is equal to the amount paid for the spread.

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

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

An investor purchases a municipal bond on Monday, June 6. The bond's interest payment dates are November 1 and May 1. The buyer will need to pay the seller of the bond the purchase price plus accrued interest for:

38 days Explanation: Accrued interest is calculated from the last interest payment date (May 1) up to but not including the settlement date. The purchase is made Monday, June 6. The settlement date is three business days later, which is Thursday, June 9. Accrued interest is calculated up to but not including the settlement date, which is from May 1 to June 8. This equals 38 days as follows. May 1 to May 30 30 days June 1 to June 8 8 days Total 38 days Municipal and corporate bond interest is computed on a 30-day month and a 360-day year. If the interest payment date is on the fifteenth of the month, the first month will have 16 days because the fifteenth of the month is counted. If the interest payment date is on the first of the month, the first month will have 30 days.

An individual wishes to sell stock according to Rule 144 requirements. There are 3,500,000 shares outstanding. The individual decides to sell on January 30. The trading volume for the stock is as follows. Week ending January 1 20,000 shares Week ending January 8 48,000 shares Week ending January 15 30,000 shares Week ending January 22 36,000 shares Week ending January 29 40,000 shares How many shares may be sold?

38,500 Explanation: The individual may sell the greater of 1% of the outstanding shares or the average weekly trading volume for the preceding four weeks. The average is 38,500 [(40,000 + 36,000 + 30,000 + 48,000) divided by 4]. This is greater than 1% of the outstanding shares (1% of 3,500,000 equals 35,000).

Listed equity options stop trading at:

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

XYZ Corporation has $20 million of convertible bonds outstanding. Each bond is convertible into 20 shares of common stock. If all the bonds were converted into common stock, how many additional shares of common stock would be outstanding?

400,000 Explanation: $20 million par value ($1,000) bonds, which equals 20,000 bonds ($20,000,000 divided by $1,000 equals 20,000), multiplied by the 20-to-1 conversion ratio results in 400,000 shares of additional common stock outstanding (20,000 bonds x 20 = 400,000).

Public orders on a designated market maker's book show an inside market comprised of Broker A bidding for 100 shares of ABC Corporation at 42.25. Broker B is offering to sell 300 shares of ABC at 42.63. If the designated market maker wanted to offer stock, what is the highest price at which he may offer the stock?

42.62 Explanation: On the offer side, the DMM must be willing to sell for at least one cent lower than the offer on his book. There is an offer of 42.63 on his book. He must offer at least one cent lower, which is 42.62.

A customer sells short 400 shares and the company declares a 10% stock dividend. When the customer covers the short position, the customer will be required to deliver:

440 shares Explanation: When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends declared are the responsibility of the customer who sold the stock short. In this example, the company declares a 10% stock dividend. Therefore, a customer who sold short 400 shares will be required to deliver 440 shares (400 shares x 10% = 40 additional shares) when he covers the short sale.

On Monday, June 15, an investor purchases for regular-way settlement, $20,000 face value of 8% municipal bonds that mature on November 1, 2035. How many days of accrued interest is the investor required to pay?

47 Explanation: Since the bonds mature on Nov. 1, we know the semiannual interest payments are made on Nov. 1 and May 1. The bonds were purchased in June, so accrued interest must be calculated from the last interest payment date, (May 1, up to but not including settlement.) Since the transaction will settle on June 18, we count 17 days in June. So the total number of days of accrued interest is 30 days for May (remember, in calculating accrued interest for municipal bonds, a 30-day month and 360-day year are used) and 17 days for June. Accrued interest of 47 days is owed to the seller.

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

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

The market price of ABC Corporation common stock is $56. The quarterly dividend is 75 cents. What is the current yield of the stock?

5.3% Explanation: The current yield of a stock is found by dividing the yearly dividend by the market price of the stock. The market price is $56. The yearly dividend is $3 ($.75 x 4 = $3.00). Therefore, $3 divided by $56 equals 5.3%.

The quarterly dividend of ABC company is 32 1/2 cents. The market price is $24.00 a share. What is the current yield?

5.41% Explanation: The formula for computing current yield (also known as the dividend yield) is: Annual Dividend / Market Price of the Stock Since the quarterly dividend is 32 1/2 cents, the annual dividend is $1.30 (32 1/2 x 4 = $1.30). $1.30 divided by the $24 market price equals 5.41%.

An investor who is currently in the 15% tax bracket receives a promotion that puts her in the 33% tax bracket. If an RR offers to sell her a 3.75% tax-free municipal bond, what yield would the investor need in a taxable bond to receive the same after-tax yield as the municipal bond?

5.60% Explanation: If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is now in the 33% tax bracket. (The 15% rate is no longer relevant). The municipal bond has a yield of 3.75%. 3.75% (Municipal Bond Yield) / 67% (100% - 33%) = 5.60% Equivalent Taxable Yield

An individual has an IRA account. He is 75 years old, but has not withdrawn funds from the plan. What is the penalty that the individual will be subject to for not withdrawing funds from the plan?

50% penalty on the actuarial amount Explanation: The individual will be subject to a penalty of 50% of the actuarial amount (the amount specified by the IRS that should have been withdrawn). This is the penalty for not making withdrawals from the plan. Distributions must start after the planholder reaches age 70 1/2.

A customer purchased a municipal bond with a 6.50% coupon rate that was priced at a 6.95 basis. If the bond is currently trading at $945, the current yield is:

6.88% Explanation: The current yield is found by dividing the yearly interest payment of $65 by the market price of $945. This equals 6.88%. The fact that the bond was purchased at a 6.95 basis is not relevant.

An investor owns a $1,000,000 diversified portfolio of stocks with a beta of 1.5. He wishes to hedge his portfolio by buying S&P 100 Index options. He can accomplish this by buying:

60 S&P 100 puts with a strike price of 250 Explanation: Beta is a measure of a stock's (or portfolio of stock) volatility in relation to the market as a whole. The market as a whole (represented in this question by the S&P 100 Index) is assigned a beta of 1. The portfolio's beta of 1.5 means the portfolio's price will change 1 1/2 times as much as the market. Buying puts provides a hedge since a decrease in the value of the portfolio can be offset by a profit in the puts. A strike price of 250 represents an overall value of $25,000 (250 strike price x $100 multiplier). Therefore, 40 puts represent a total value of $1,000,000 (the value of the portfolio). Since the portfolio will change by $1.50 for each $1 change in the market (beta = 1.5), 60 puts (1 1/2 x 40) will be necessary to effectively hedge the portfolio.

According to current regulations, if a client redeems his mutual fund shares, the fund company must send the payment within:

7 days Explanation: Federal regulations require that funds send payment for the redemption of mutual fund shares within seven days.

An investor buys T-bonds on Friday, January 16 for cash settlement. This transaction will settle on:

January 16 Explanation: Cash settlement for all securities takes place on the trade date.

An investor in the 28% tax bracket can buy a 5.10% tax-free municipal bond at par. What yield would the investor need in a taxable corporate bond to receive the same after-tax yield in the municipal bond?

7.08% Explanation: If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a corporate bond, it is necessary to find the equivalent taxable yield. The formula is: Municipal Bond Yield = Equivalent Taxable Yield divided by 100% - investor's tax bracket The customer is in the 28% tax bracket. The municipal bond has a 5.10% coupon rate and since it is purchased at par, the yield is also 5.10%. 5.10% (municipal bond yield) divided by 72% (100% - 28%) = 7.08% (Equivalent Taxable Yield). If the individual was to buy the 7.08% corporate bond, the tax liability for the interest received would be $19.82 ($70.80 interest income x 28% tax bracket = $19.82 tax liability). This would give the investor an after-tax return of $50.98 which is the same return he could receive if he purchased the 5.10% ($51.00) municipal bond.

A municipal 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 to maturity is:

7.60% Explanation: The term priced at a 7.20 basis refers to a serial bond that is priced to yield 7.20 or a YTM of 7.20%. If the bond's basis increased by 40 basis points, the new yield to maturity is 7.60%. The 6% coupon rate is relevant if the question asked about whether the bond was trading at a discount or a premium. Since the YTM is greater than 6%, the bond is trading at a discount.

An investor has a federal tax rate of 35% and a state tax rate of 6% and is offered a 4.90% in- state municipal bond. What yield would the investor need in a taxable bond to receive the same after-tax yield as the municipal bond?

8.31% Explanation: The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. Since the investor is purchasing an in-state bond, we use the combined rate of 41%. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 41% tax bracket. The municipal bond has a yield of 4.90%. 4.90% (Municipal Bond Yield) / 59% (100% - 41%) = 8.31% Equivalent Taxable Yield

Keystone Chocolate Co. plans to sell, only in the state of Pennsylvania, shares of a new issue. In order to qualify for a registration exemption under Rule 147, what percentage of the corporation's assets must be located in Pennsylvania, and what percentage of its revenues must be derived from Pennsylvania sources, at the time of the offering?

80% Explanation: Keystone is eligible to offer shares in Pennsylvania (PA) under the intrastate exemption (Rule 147) if 80% of its assets are located in PA, 80% of its revenues are derived from PA sources, and 80% of the proceeds from the sale are used in PA. In addition, to qualify for the exemption, 100% of the purchasers of the offering must be residents of PA.

A customer purchases a municipal bond for settlement on Tuesday, October 10. The bond pays interest on January 15 and July 15. The number of days of accrued interest the buyer owes to the seller is:

85 days Explanation: Interest is figured from the last interest payment date, July 15, up to but not including the settlement date (which is given as October 10). Therefore, accrued interest is figured up to and including October 9. The customer buying the bonds needs to pay accrued interest for 85 days. Corporate and municipal bond interest is computed on the basis of a 30-day month and a 360-day year. If interest is paid on the first of the month, there will be 30 days of accrued interest to calculate. If interest is paid on the fifteenth of the month, there will be 16 days of accrued interest to calculate for that particular month. July 16 days August 30 days September 30 days October 9 days 85 days

Ms. Jones, a shareholder of XYZ Corporation, reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows: 1. 10 rights plus $10.50 are required to subscribe to one new share of stock 2. Fractional shares become whole shares 3. The record date is Friday, October 17 4. JPMorgan Chase and Bank of America are the transfer agents 5. Goldman Sachs and Morgan Stanley are the standby underwriters Ms. Jones owns 87 shares of the XYZ Corporation. How many shares can she subscribe to and how much will it cost her?

9 shares plus $94.50 Explanation: Ms. Jones can subscribe to nine shares at a cost of $94.50. The terms of the rights offering indicate that 10 rights plus $10.50 are needed to subscribe to one new share of stock. Fractional shares become whole shares. She will receive 87 rights. It takes 10 rights to get one new share of stock. 10 rights divided into 87 rights equals 8.7 shares. Since fractional shares become whole shares, Ms. Jones can subscribe to nine shares at a cost of $10.50 a share for a total of $94.50 (9 x $10.50 = $94.50)

There are 2,600,000 shares of XYZ Corporation outstanding, which are listed on the NYSE. Mr. Smith owns 300,000 shares of restricted securities, which he has held for more than six months. He is not an affiliate of XYZ. Mr. Smith would like to sell some of his securities under Rule 144. The weekly trading volume for the last six weeks is: 1 week ago 25,000 shares 2 weeks ago 26,000 shares 3 weeks ago 27,000 shares 4 weeks ago 28,000 shares 5 weeks ago 27,000 shares 6 weeks ago 27,000 shares According to Rule 144, Mr. Smith would need to file with the SEC a notice of intent to sell which is valid for:

90 days Explanation: The notice of offering for a Rule 144 sale is valid for 90 days.

A municipal bond pays interest on February 1 and August 1. A customer purchasing the bond on Monday, April 30 will need to pay the seller the purchase price plus accrued interest for:

92 days Explanation: The trade date is Monday, April 30. The bond pays interest on February 1 and August 1. Accrued interest is calculated from the last interest payment date, up to but not including the settlement date. The settlement date is Thursday, May 3. The following calculation illustrates the answer. February 30 days March 30 days April 30 days May 2 days 92 days

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:

A $500 capital gain Explanation: 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.

Accrued interest for municipal bonds is computed on:

A 30-day month and a 360-day year Explanation: Accrued interest for municipal bonds is computed in the same manner as for corporate bonds, which is based on a 30-day month and a 360-day year. Accrued interest for U.S. government bonds is figured on a 365-day year counting actual days elapsed. Accrued interest on all bonds is calculated from the last interest payment, up to but not including the settlement date.

A customer has a federal tax rate of 35% and a state tax rate of 7%. Which of the following investments would afford him the BEST after-tax yield?

A 6.25% in-state municipal bond Explanation: The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The mortgage bond is a type of corporate bond, therefore, choices (c) and (d) are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 42% for the in-state bond and the federal rate of 35% for the out-of-state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 42% combined tax rate. The municipal bond has a yield of 6.25%. 6.25% (Municipal Bond Yield) / 58% (100% - 42%) = 10.78% Equivalent Taxable Yield The out-of-state municipal bond has the same coupon but the equivalent taxable yield is 9.62% (6.25% / 65%). The in-state municipal bond has the best or highest after-tax yield.

A customer has a federal tax rate of 35% and a state tax rate of 7%. Which of the following investments would afford him the BEST after-tax yield?

A 7.10% out-of-state municipal bond Explanation: The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The mortgage bond is a type of corporate bond and both are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 42% for the in-state bond and the federal rate of 35% for the out-of-state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 42% combined tax rate. The municipal bond has a yield of 6.25%. 6.25% (Municipal Bond Yield) / 58% (100% - 42%) = 10.78% Equivalent Taxable Yield The out-of-state municipal bond has a yield of 7.10% and the equivalent taxable yield is 10.92% (7.10% / 65%). The out-of-state municipal bond has the best or highest after-tax yield.

Which of the following orders would you place for a customer who wants to hold her auction rate security if the interest rate is set at 3.4% or higher?

A bid order Explanation: A current holder of an auction rate security may indicate she wants to continue to hold the security only if the rate is set at or above a specified rate. If the clearing rate sets below the interest or dividend rate that the holder or prospective holder specifies in her bid, the holder will be required to sell the securities subject to her bid, and the prospective buyer will not acquire the securities. Auction dealers refer to bids by prospective holders as buy orders and bids by holders as roll-at-rate orders.

If a put or call option expires, the amount of the premium paid by the purchaser of the option is considered for tax purposes to be:

A capital loss at the time the option expires Explanation: If a put or call option expires, the amount of the premium paid by the purchaser of the option is considered for tax purposes to be a capital loss at the time the option expires.

A municipal bond issue is called due to an event beyond the control of the issuer that affects the use of property (e.g., earthquakes, hurricanes, condemnation of property). This is known as:

A catastrophe call Explanation: A catastrophe call allows an issuer to call an entire issue in situations that are beyond its control, such as a condemnation.

When reading a research report on an automobile company, a registered representative's use of fundamental analysis determines that the stock is a good investment. When attempting to determine the best time to execute orders to buy the stock, the registered representative could refer to:

A chart showing a recent history of the market price of the stock Explanation: The fundamental analyst will use the balance sheets and income statements of companies to determine which security to purchase but may use technical analysis (i.e., reviewing the chart pattern of the stock's market price) to assist in determining when to make a purchase (timing).

An investor writes an ABC June 70 put at 4. If the option is exercised, the investor will have:

A cost basis of $6,600 for the stock acquired in the exercise Explanation: When a put is exercised, the premium received by the writer is treated as a reduction in the cost of the underlying stock. The strike price of the put (70), minus the premium received by the writer (4), equals the writer's cost basis in the underlying stock (66). The writer will have a gain or loss depending on the stock's price when it is sold.

In which of the following retirement plans is an actuarial calculation used to determine the employer's contribution?

A defined benefit plan Explanation: A defined benefit plan promises to pay the employee a specified amount of money each year once the employee retires. This benefit payment is usually based on age, years of service, and salary history. Actuarial calculations are used to determine the amount of money that an employer must deposit each year in the plan to provide for the retirement benefit specified by the plan.

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

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

Which of the following securities may NOT be purchased in a discretionary account without prior written approval by the customer? a. An exchange-traded note b. A variable-rate demand obligation c. A direct participation program d. A collateralized mortgage obligation

A direct participation program Explanation: A registered representative may not purchase a direct participation program in a discretionary account without prior written approval by the customer.

Which of the following calculations describes the payout on a variable annuity? a. A fixed number of annuity units multiplied by a fixed dollar amount b. A fixed number of annuity units multiplied by a variable dollar amount c. A variable number of annuity units multiplied by a fixed dollar amount d. A variable number of annuity units multiplied by a variable dollar amount

A fixed number of annuity units multiplied by a variable dollar amount Explanation: When a variable annuity is annuitized, the annuitant will be assigned a fixed number of annuity units based on several factors, including the value of the investment, assumed interest rate, age and gender of the annuitant, and payout option chosen. This fixed number of annuity units is then multiplied by the net asset value of the separate account at each payout period to determine the dollar amount the annuitant will receive each pay period

Which of the following choices is NOT considered of material value by FINRA if given by a mutual fund underwriter to a registered representative? a. A gift of $100 b. A gift of $200 c. Overrides in excess of commissions as stated in the prospectus d. A gift of $500

A gift of $100 Explanation: According to industry rules, a gift of more than $100 is considered substantial or of material value.

A corporation is in the 34% tax bracket. Which of the following choices provides the BEST return if the corporation wanted to invest some of its surplus cash? a. A preferred stock paying a 5 1/2% dividend b. A corporate bond yielding 7% c. A common stock paying a 5% dividend d. A municipal bond yielding 5.5%

A municipal bond yielding 5.5% Explanation: According to the corporate dividend exclusion, corporations may exclude from taxation 70% of eligible dividends received from investments in stock of other corporations. For those corporations owning 20% or more of another corporation's outstanding common or preferred shares, the exclusion increases to 80% of dividends received. To find the after-tax return of each investment, multiply the return on the security by the complement of the tax rate. For the taxable non-equity position, this rate is 66% (100% minus 34%) or .66. For each taxable equity position, we assume an exclusion of 70%. The corporation's effective tax rate on the residual 30% of income from an equity investment, can be calculated by multiplying the corporation's statutory tax rate of 34% by the residual percentage (34% x 30% = 10.2%). The amount the corporation would earn after tax is the complement of 10.2%, which equals 89.8% (.898). The municipal bond interest is tax-free to the corporation. Now we can compare the after-tax return on each security. The after-tax return on the preferred stock is 4.94% (5.5% x .898). The after-tax return on the common stock is 4.49% (5.0% x .898). The after-tax return on the corporate bond is 4.62% (7.0 % x .66) since the corporation must pay the full statutory 34% rate on this non-equity security. The after-tax return on the municipal bond is 5.5% since no taxes are due on the coupon.

A woman will be retiring in 2020. She is interested in income and having her principal available at retirement. Of the following municipal bonds, you would recommend a(n): a. Aaa-rated 8.5% G.O. maturing in 2017 b. Aa-rated 10% G.O. maturing in 2039 which is callable in 2018 at 105 c. Aa-rated 8.5% G.O. maturing in 2020 d. Ba-rated revenue bond maturing in 2023

Aa-rated 8.5% G.O. maturing in 2020 Explanation: Since the woman wants her principal available at retirement, a bond maturing in 2020 (the year of her retirement), regardless of the yield, would be the best choice

The MOST appropriate buyer(s) for a variable life insurance policy is/are: a. A person who requires the discipline of forced savings b. Parents with a modest income who have young children c. A person who wants the assurance of a guaranteed cash value d. A person with an understanding of investments who can tolerate market risk

A person with an understanding of investments who can tolerate market risk Explanation: Similar to a variable annuity, the cash value of a variable life insurance policy increases or decreases in relation to the performance of the separate account. A person who is knowledgeable about investments may be a candidate for variable life insurance because common stock and bonds are the foundation of the policy. As the market values of the securities fluctuate, the cash value changes and is not guaranteed. Therefore, the insured must be able to tolerate market risk. There are other methods by which an investor may achieve forced savings and the product may not be suitable for parents with a modest income who have young children.

A notice is published stating that RMO 5% convertible preferred stock will be called at $60 per share. The preferred is convertible into 1/2 share of common and is selling in the market at $56 per share. RMO common stock is selling in the market at $110 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at:

A price near $60 Explanation: Converting the preferred stock has a value of $55 ($110 per common share x 1/2 conversion ratio). Since the call price of $60 is more beneficial to the preferred stockholder, the market price of the preferred stock will most likely rise to near $60 (the call price).

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

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

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

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

A municipal bond issued at par is purchased at a discount and later sold at par or above. This transaction will result in:

A taxable gain Explanation: If a municipal bond is purchased at a discount in the secondary market (not an original issue discount), there will be a taxable gain at maturity. A taxable gain will also result if the bond is sold prior to maturity, above the original cost.

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

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

Which of the following stocks would most likely be considered a defensive stock? a. An aerospace stock b. A utility stock c. An airline stock d. An automobile stock

A utility stock Explanation: Utility, food, beer, candy, pharmaceutical, tobacco, and soft drink stocks would be considered defensive stocks. They offer the investor a greater amount of safety because in periods of recession and adverse economic conditions these companies are the last to be affected.

One of your clients who makes a comfortable living, has set aside funds in a money-market account in case of emergency and has contributed the maximum amount to her company's 401(k) and her IRA. She is looking to set aside additional funds for retirement and would like a vehicle that does not subject her to taxation on any growth until she begins taking distributions. Which of the following choices would be most suitable for your client?

A variable annuity Explanation: Since your client has already contributed the maximum to her retirement plans, contributing to a variable annuity would be her remaining retirement option. While the contributions would be after-tax, the account will grow tax-deferred and will not be taxed until she begins taking distributions. She would not be eligible to contribute to a Roth IRA. While variable life insurance has investment characteristics, it is used to provide death benefits and not for retirement purposes. 529 plans are used to satisfy the need to cover higher education expenses

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

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

ABC Brokerage, a broker-dealer, purchases 600 shares of stock from a market maker to fill a customer's buy order. ABC has acted as a:

Agent Explanation: When a broker-dealer buys a security from a market maker (dealer) on behalf of its customer, it is acting as a broker (agent).The client is charged a commission on the transaction. If the firm bought the security for its own account, or sold the security to a client from its inventory, it is acting as a dealer (principal). The client in this case is charged a markup or markdown.

An accumulation unit in a variable annuity contract is:

An accounting measure used to determine the contract owner's interest in the separate account Explanation: An accumulation unit in a variable annuity contract is an accounting measure used to determine the contract owner's interest in the separate account. The separate account is the portfolio in which the customer's contributions are invested. Some separate accounts consist of several subaccounts, with differing objectives and portfolios.

According to FINRA, the maximum sales charge on a variable annuity contract is:

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

Which of the following securities is NOT suitable for an investor with $80,000 who will need the funds in three months to purchase a house? a. A 13-week Treasury bill b. An auction rate preferred stock that resets its rate every three months c. A three-month CD that is yielding 20 basis points above the prime rate d. A money-market fund

An auction rate preferred stock that resets its rate every three months Explanation: An auction rate security is a long-term security that resets its interest rate periodically through an auction process. Since the client will need the funds in three months, any investment should be free from potential loss of principal. There is no guarantee he will be able to sell this security at the price at which it was purchased. The other three investments will offer this client very little or no principal risk.

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

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

Which of the following direct participation programs is associated with low costs to obtain the property and high up-front costs?

An exploratory oil and gas program Explanation: A wildcatting program, also called an exploratory program, searches for oil in unproven areas. This results in a lower cost of acquiring the land or mineral rights. In order to extract oil and gas, the program will incur significant start-up or up-front costs. A developmental program drills for oil in proven, surveyed sites and the cost for the land is more expensive. An income oil and gas program acquires interests in already-producing properties. These sites are acquired from oil and gas operators who have completed the drilling and prefer to sell the reserves rather than hold the property for the life of the production. These programs would have higher mineral rights costs and lower up-front costs.

In a dispute between a registered representative and his employer, the dispute typically must be settled by:

Arbitration Explanation: Any dispute between firms, a firm and its registered representative, or a firm and a clearing corporation must go to arbitration. A dispute between a firm and one of its customers can go to arbitration at the option of the customer.

Your client is president of XYZ Corporation and is selling XYZ shares pursuant to Rule 144. A filing must be made with the SEC:

At the time of the sale Explanation: The filing must be made at the time of the sale and is effective for 90 days.

A client owns shares of stock purchased at $46 a share. If the current market price is now $70 and the client wants to protect her profit if the price should fall 10%, the RR should recommend which of the following orders? A) A market order B) Sell stop $63 C) Sell limit $63 D) Sell stop-limit $63

B) Sell stop $63 Explanation:This client only wants to sell her position if the stock declines by 10% or $7.00. The RR should recommend a sell stop at $63. A market order is not suitable since the client does not want to sell unless the price declines. A market order will not allow the client to receive further profits if the stock increases above $70. A sell limit is an order to sell at a specified price or higher and is usually placed above the current market price. Therefore, a sell limit at $63 is not suitable. Since the client never mentioned a specific limit selling price she is willing to accept, a stop limit order should not be recommended. In addition, a stop limit order may be activated but never executed, and the client would not be able to protect her profit

Roundville Bank is considering an investment in Roundville County bonds. The bonds contain a provision that permits banks to deduct 80% of the interest cost being paid to depositors on the funds used to purchase the bonds. These securities are known as:

Bank-qualified bonds Explanation: Bank-qualified municipal bonds allow banks to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds. This is done to encourage banks to invest in municipal securities. To qualify, a municipality may only issue up to $10,000,000 annually.

Which of the following securities is an example of a collateralized time draft?

Bankers' acceptances Explanation: A BA (banker's acceptance) is used to facilitate foreign trade. It is a time draft that has been guaranteed (collateralized) by a bank.

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

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

When the underlying common stock sells ex-dividend, a GTC buy limit order will:

Be reduced Explanation: All GTC (good-until-cancelled) orders entered below the current market are automatically reduced by the amount of the dividend on the ex-dividend date (unless they are market DNR -- Do Not Reduce). A buy limit order is entered below the current market and is reduced.

Super Entertainment Inc., a publicly traded firm on the NYSE, spins off its domestic syndication division, creating 1,000,000 new shares. To receive the new shares, investors must exchange 25% of their old shares. Investors who receive shares of the new company will:

Be required to receive a prospectus under the Securities Act of 1933 Explanation: This scenario is an example of an offering regulated by Rule 145. Rule 145 defines certain types of reclassifications of securities as sales subject to the registration and prospectus requirements of the Securities Act of 1933. Shares acquired through mergers, consolidations, and spinoffs involving exchanges of stock are all covered under the rule. The amount of shares is irrelevant.

A person hired by a municipal dealer must be registered:

Before effecting a transaction with a customer Explanation: A person must qualify as a municipal representative prior to effecting a transaction with a customer. To become qualified, the individual must pass a qualifying exam and serve a 90-day apprenticeship. There is no requirement that the person be registered within a specific period after hire. However, the person may only act as an apprentice for a maximum of 180 days.

If a customer wants to purchase securities in an account that has been frozen, when must he deposit the required cash in the account?

Before the purchase transaction is made Explanation: A frozen account requires the full amount of money to be deposited in the account before the order is accepted. If the client wants to sell securities in a frozen account, the securities must be in the account before the sale is made.

Required minimum distributions (RMDs) from a traditional IRA account must:

Begin by April 1 of the year following the one in which the individual turns 70 1/2 Explanation: Required minimum distributions from a traditional IRA must begin by the year following the calendar year in which the individual turns 70 1/2

A sell stop order most likely will be entered by a technical analyst or chartist:

Below a support level for the stock Explanation: Sell stop orders are entered below the current market. The order will most likely be entered by a technical analyst (chartist) below a support level for the stock. If the price of the stock goes below the support level, it will be a breakthrough on the downside. This is a bearish indication. Once the stop price has been reached, the stock will be sold at the market.

When trading equity securities, the term dark pool is BEST defined as trading:

Between investors, allowing them to buy and sell securities anonymously without quotes being displayed Explanation: A dark pool is a source of liquidity for large institutional investors and high-frequency traders, and this system would not disseminate quotes. The system can be operated by broker-dealers or exchanges, and allows these investors to buy and sell large blocks of stock anonymously. The objective is to allow these investors to trade with the least amount of market impact, with low transaction costs. Some dark pools provide matching systems and can also allow for participants to negotiate prices. Normal market hours are 9:30 a.m. to 4:00 p.m. and trading outside these times is referred to as extended-hours trading

A real estate limited partnership that does not specify the actual properties to be purchased is known as a:

Blind pool Explanation: If a real estate program's prospectus does not specify the actual properties to be purchased, it is known as a blind pool (or nonspecified property) program. An oil and gas program may also be considered a blind pool if the properties to be drilled are not specified in the prospectus.

The additional bonds covenant for a revenue bond is found normally in the: a. Official notice of sale b. Prospectus c. Bond indenture d. Syndicate agreement

Bond indenture Explanation: All protective covenants for a revenue bond are found in the bond's indenture. Also included in the indenture are the rights and obligations of the issuer and the bondholders. The official notice of sale contains the information and procedures necessary for syndicates that wish to bid on a competitive issue of bonds. The syndicate agreement is a contract among the underwriters that defines their working relationship and addresses such items as the priority of orders and sharing of the underwriting spread. A prospectus is a disclosure document for issues that are registered under the Securities Act of 1933. Municipal revenue bonds are exempt from that Act.

The purpose of a sinking fund is to redeem a corporation's:

Bonds Explanation: A sinking fund is used by an issuer to set aside funds that will be used for the purpose of redeeming a corporation's bonds prior to or at maturity.

A portfolio's mix of investments and two potential investors are described below. 50% municipal debt 30% blue-chip common stock 10% equity mutual funds 10% money-market funds Investor A: A 45-year-old single mom who just received a $5,000,000 inheritance. Her current salary pays her living expenses and she also contributes the maximum amount to her employer's retirement plan. She is very conservative, wants to maintain the value of her portfolio as she ages, and is concerned about the tax implications of investing her inheritance. Investor B: A 65-year-old single male who receives a significant pension as well as continuing income from the residuals in a previous business relationship. He is concerned with generating too much taxable income, but is still willing to assume some risk in his portfolio

Both Investor A and Investor B Explanation: Although Investor A is conservative, she should still maintain a moderate percentage of equities in her portfolio, which this mix provides. Additionally, she should be concerned about the tax implication of her investment returns after the $5,000,000 inheritance. The inclusion of municipal bonds in the portfolio provides that benefit. Investor B seems financially secure and is willing to assume some risk in his portfolio, therefore, maintaining a portion of the portfolio in equities would be suitable. The municipal bonds would also provide a source of tax-free income for him as he ages.

Two brothers open a joint account to trade options. Who will be required to sign the options agreement?

Both brothers Explanation: In a joint options account, it is necessary for both parties to sign the options agreement. It is also necessary to record financial information for both parties.

Which of the following types of debt BEST defines a municipal issuer's total bonded debt? a. Long-term debt only b. Both short-term and long-term debt c. Both long-term and short-term debt plus overlapping debt d. Long-term debt plus overlapping debt

Both long-term and short-term debt plus overlapping debt Explanation: Total bonded debt is the sum of both long-term and short-term debt of a municipality plus its applicable share of overlapping debt. Overlapping debt is that portion of the debt of other government units for which residents of a particular municipality are responsible, such as services or facilities shared by several municipalities.

An investor purchases a Canadian dollar September 80 call and writes a Canadian dollar September 82 call. This position is a

Bullish spread Explanation: A spread is the simultaneous purchase and sale of options of the same class (both calls or puts), on the same underlying security, with different strike prices and/or expiration months. A debit spread is created when the premium of the option purchased is greater than the premium of the option sold. The September 80 call, which is the right to buy the Canadian dollar at 80, is more valuable than an option that provides the right to buy at 82. Therefore, the call purchase will be the controlling factor in the spread. Since buying calls is bullish, a call debit spread is a bullish strategy.

A customer is willing to accept a partial execution on an order to buy up to 800 shares of XYZ stock at 30. If the client does not want the unexecuted portion to be left open, this order should be entered as:

Buy 800 XYZ at 30 IOC Explanation: An immediate-or-cancel (IOC) order must be executed immediately but does not need to be executed in its entirety. Part of the order may be executed. The unexecuted portion of a day order or a GTC order is placed on the designated market maker's book. A not-held (NH) order gives the floor broker discretion as to when to execute the order.

Reports have been released discussing the instability of the Japanese economy. Imports from the U.S. have been decreasing. The rate of inflation in the U.S. has dropped and the U.S. GDP has increased. Given this information, what investment strategy is most appropriate?

Buy Japanese yen puts Explanation: Given this information, it appears the value of the Japanese yen is decreasing and the value of the U.S. dollar is strengthening. Since options on the U.S. dollar are not available, the only viable choice is to purchase Japanese yen puts.

A Swiss company that is expecting payment from a customer in U.S. dollars is concerned that the dollar will decline in value. To hedge against a decline in the U.S. dollar, the Swiss company should:

Buy Swiss franc calls Explanation: If the value of the U.S. dollar declines, the value of the Swiss franc will increase. The company should buy Swiss franc calls since it will profit on the calls if the U.S. dollar declines, leading to a Swiss franc increase. The profit on the call could help to offset the loss on the U.S. dollars it is expecting to receive as payment.

An investor has sold stock short at $60. The current market price of the stock is $40 and the investor believes the stock will recover somewhat before going lower. The investor should:

Buy a call Explanation: The stock is currently trading at $40 and the investor is concerned that the price will rise. An investor who wants to limit the losses on an underlying short stock will buy a call.

An individual who is short stock and wants protection against an upside move in the market will probably:

Buy a call option Explanation: An individual who is short stock will buy a call option. If the market advances, the individual will exercise the call option to limit the loss if the market value of the short stock increases.

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

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

A designated market maker has an order on its book from a public customer to buy stock at $34.70 and another order from a public customer to sell stock at $34.90. The designated market maker may: a. Buy stock for its own account at $34.65 b. Buy stock for its own account at $34.75 c. Sell stock from its own account at $34.90 d. Sell stock from its own account at $34.95

Buy stock for its own account at $34.75 Explanation: A designated market maker is not permitted to compete with public orders when trading for its own account. The DMM may buy stock at a higher price or sell stock at a lower price. In doing so, the DMM has narrowed the spread (the difference between the bid and ask). The DMM, buying stock at $34.75, is permitted since this price is higher than the price of the public order ($34.70). The other choices would result in the DMM buying lower or selling at a price equal to or higher than the public customer's order.

An article in The Wall Street Journal states that yields on Treasury bills have declined in the past month to 4.58% from 4.61%. This indicates that:

Buyers of new bills paid more than buyers paid the previous month Explanation: Treasury bills are purchased at a discount from the dollar amount on its face. The larger the discount, the higher the discounted yield to maturity. In this example, the discounted yield to maturity has gone down to 4.58% from 4.61% from the previous month. This indicates that buyers of new bills paid more for the Treasury bills (meaning the discount was less) than buyers paid the previous month.

A customer is considering writing an XYZ June 70 call for a $4 premium but is concerned about the risk of an unlimited loss. Which of the following positions, when added, provides the BEST protection?

Buying an XYZ June 75 call for a premium of 1 Explanation: The short call position has unlimited risk since there is no limit to where the underlying stock can increase to. If, however, in addition, the customer buys an XYZ June 75 call for 1, it creates a credit spread. The maximum risk is reduced to $200, which is the difference between the strike prices 5 (75 - 70) and the net premium received 3 (4 - 1).

Foremost Corporation has declared a quarterly dividend of 25 cents payable to stockholders of record on Friday, December 1. The dividend will be paid to all stockholders whose names appear on the record books of Foremost Corporation on:

December 1 Explanation: The dividend will be paid to all stockholders whose names appear on the record books of Foremost Corporation on the record date, which is given in this example as December 1.

Relative to stock index options, which of the following statements is NOT TRUE? a. There are options expiring each month b. If traded, settlement is the next business day c. If exercised, settlement is in cash in three business days d. The settlement amount is based on the closing index price on the day of exercise

C. If exercised, settlement is in cash in three business days Explanation: When exercised, a stock index option settles in cash on the next business day. (Equity options, if exercised, would settle in three business days.) The settlement amount is determined by the difference in strike price and the closing value of the index on the day of exercise. Index options expire each month. Option trades settle on the next business day.

A bond is still considered in good deliverable form when missing the:

CUSIP numbers Explanation: If the CUSIP numbers are not legible, the bonds are still in good deliverable form. All of the other items listed would need to be legible for a partially mutilated security to be in good deliverable form. CUSIP numbers are used to identify securities and to distinguish them from other securities of the same issue.

When a bond is called, the bondholder receives the:

Call price plus accrued interest Explanation: The bondholder receives the call price (either at par or at a premium) plus accrued interest earned up to the call date.

Decisions of the District Business Conduct Committee regarding complaints:

Can be appealed to the National Adjudicatory Council Explanation:Decisions of a Hearing Panel regarding complaints can be appealed to the National Adjudicatory Council. Arbitration decisions are final.

If a customer is short 1,000 shares of RST stock, the customer:

Can use a buy stop order to limit losses if the stock advances Explanation: 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.

A registered representative receives an order from her customer to sell 600 shares of BWGF to be executed in her IRA account. The RR mistakenly executes the order in the wrong account. What action should be taken to correct the error?

Cancel the transaction and reenter it in the correct account after receiving approval by a registered principal Explanation: If a trade is executed in the wrong account due to an error on the part of the registered representative, the best course of action is to cancel the trade and reenter it to the correct account. This action must be approved by a registered principal or supervisor.

On a when-issued municipal bond transaction, the interim confirmation will show the:

Capacity in which the broker-dealer acted Explanation: A bond trades when-issued (WI) when a final settlement date has not been established. 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. Without a settlement date, accrued interest cannot be calculated and, therefore, the final money amount cannot be calculated. The broker-dealer must disclose the capacity (principal or agent) in which it acted.

Investors who are seeking income may invest in all of the following securities, EXCEPT: a. Special tax bonds b. Lease rental bonds c. Moral obligation bonds d. Capital appreciation bonds

Capital appreciation bonds Explanation: A capital appreciation bond (CAB) has a similar structure to a zero-coupon bond. CABs do not pay periodic interest and are NOT suitable for investors who seek income.

A registered representative, when selling a limited partnership, is NOT required to:

Certify that the customer is an institutional investor as defined by SRO rules Explanation: A registered representative would be required to certify that she informed the customer of all relevant facts relating to the lack of marketability and liquidity of the limited partnership. In addition, after obtaining information about the customer's investment objectives, financial and tax status, other investments, and future financial needs, the RR must have reasonable grounds to believe the customer has sufficient net worth and income to lose his entire investment, or has other liquid assets. The RR must certify that the customer is suitable, and is in a financial position to be investing in this limited partnership. There is no requirement to certify that the customer is an institutional investor. There is a difference between an accredited investor (having at least $1,000,000 net worth or $200,000 of annual income), which is defined under Regulation D, and an institutional investor (a financial institution or an account with at least $50,000,000 of invested assets), which is defined by FINRA.

The recommendation to purchase a private activity bond would NOT be appropriate for a:

Client who is subject to the alternative minimum tax Explanation: A private activity bond is a type of municipal bond in which the funds being raised will be used to benefit a non-public (private) company (e.g., an airport terminal for an airline). If the person receiving the bond's interest payment is subject to the alternative minimum tax (AMT), the interest is taxable at the federal level. For this reason, these bonds are the least suitable for a client who is subject to the AMT.

A customer wishes to close out a short option position by liquidating the option. The registered representative should mark the order ticket:

Closing purchase Explanation: The client initially had an opening sale transaction. To liquidate the short option position, the client must purchase the option contract. The registered representative should, therefore, mark the order ticket closing purchase.

Co. A Co. B Co. C Co. D Earnings per Share $2.00 $6.50 $5.20 $7.80 Dividends $0.10 $2.50 $2.60 $6.00 Percentage of Retained Earnings 95% 62% 50% 23%

Company A Explanation: Company A would best suit those needs as it is probably a growth company since it has the smallest dividend payout ratio and the largest percentage of retained earnings. The company pays out only 5% of its earnings in the form of dividends, retaining 95% to finance its growth.

Co. A Co. B Co. C Co. D Earnings per Share $2.00 $6.50 $5.20 $7.80 Dividends $0.10 $2.50 $2.60 $6.00 Percentage of Retained Earnings 95% 62% 50% 23% An investor has decided to diversify her portfolio into a more defensive position by including utility stocks. Which of the above companies is probably a utility?

Company D Explanation: Company D is probably a utility since utility companies usually have a high dividend payout ratio and a low percentage of retained earnings.

You discover that one of your clients is on the OFAC list. You must:

Contact federal law enforcement authorities immediately Explanation: You must contact the federal law enforcement authorities immediately if you discover that a client is on the list of suspicious persons and entities maintained by the Office of Foreign Assets Control (OFAC). You must also freeze the account and block further transactions.

If an auction for auction rate securities were to fail, the holder would:

Continue to hold the securities and the interest rate would be set to the maximum rate Explanation: A failed auction occurs when there are not enough bids to cover the amount of auction rate securities being sold. In this situation, the holders will continue to hold the securities and the interest rate will be set to the maximum rate allowed in the program documents. This rate is normally higher than the rate that would have cleared a successful auction.

Which of the following statements regarding the Roth IRA is NOT TRUE?

Contributions are tax-deductible Explanation: While contributions to traditional IRAs are tax-deductible under certain conditions, contributions to a Roth IRA are nondeductible. Individuals may contribute up to $5,500 per year if they have earned income and if they meet certain income eligibility requirements. Qualified distributions are tax-free and are not subject to the 10% early withdrawal penalty.

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

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

If an analyst wanted to determine a company's ability to pay those debts that will be maturing in one year, he will be most interested in the:

Current ratio Explanation: The current ratio is a comparison of current assets to current liabilities for a one-year period. The acid-test ratio excludes the inventories and usually is for a one- to three-month period.

A customer gave his registered representative an order to buy 1,000 shares of GM at the market. If the execution report from the floor of the exchange states that 1,200 shares were purchased at 78, the:

Customer is obligated to accept only the amount ordered, not executed Explanation: The customer is not required to accept more than the original order for 1,000 shares. However, the order should not be cancelled. Since an error was made, the registered representative should speak with his supervisor to determine how to handle the situation. Entering a new order to buy 1,000 shares does not solve the problem because, if it is executed, the firm will then be long 2,200 shares of stock.

In determining if additional margin is required in a customer's account, the broker-dealer will mark the account to the market:

Daily Explanation: The term marked to the market refers to the adjustment made in a customer's account due to a change in the market value of the securities. A margin account is marked to the market once a day (daily) to make sure the account is above the maintenance requirement. Any change may result in the customer being required to deposit additional funds into the account.

The dividend policy of most money-market funds is to declare dividends:

Daily and pay, credit, or reinvest the dividends on a monthly basis Explanation: Most money-market funds will declare dividends daily and pay, credit, or reinvest the dividends on a monthly basis. This information is usually found in the prospectus of the money-market fund.

Municipal securities Dealer A quotes a price for a block of bonds to Dealer B for one hour with a five-minute recall. This means:

Dealer A may recall Dealer B within the one-hour period and demand a decision of Dealer B in five minutes Explanation: When municipal bonds are offered on a firm basis to Dealer B for one hour with a five-minute recall, the offering dealer, Dealer A, may not offer the bonds to anyone but Dealer B without giving Dealer B the first opportunity to take the bonds. Since the recall period is five minutes, if Dealer A recalls Dealer B, Dealer B then has five minutes to take the bonds or else Dealer A is free to sell the bonds to someone else.

A secondary market exists for:

Dealer-placed commercial paper Explanation: A secondary market exists for owners of commercial paper to sell their investments to dealers or other investors. There is no secondary market for federal funds, repos, or U.S. savings bonds.

A municipality's debt limit is the maximum amount of:

Debt a municipality may incur Explanation: A municipality's debt limit is the maximum amount of debt a municipality may incur and is important in the credit analysis of a general obligation bond. Choice (d) would be relevant for a revenue bond.

Morris Investments is working a leveraged buyout deal to purchase Simon Entertainment Group. The fundamental financing for the deal will consist mostly of:

Debt issued using the assets of Simon Entertainment Group as collateral Explanation: A leveraged buyout (LBO) is the acquisition of a company primarily using debt to finance the purchase. The assets of the acquired company are generally used as collateral for the borrowed funds. This type of acquisition allows the acquiring company, which is referred to as a private equity (PE) firm, to make the purchase without using much of its own equity. In many circumstances, since a large amount of borrowed funds are used to make the purchase, they are usually non-investment-grade.

An analysis of a revenue bond issue normally addresses the: a. Per capita debt of the municipality b. Per capita income of the municipality c. Assessed valuations of the municipality d. Debt service coverage ratio

Debt service coverage ratio Explanation: The debt service coverage ratio indicates the number of times pledged revenues cover interest and principal payments due on a bond. This is important for the analysis of a revenue bond, which is backed by a revenue producing facility. The other choices are important for the analysis of a general obligation bond, which is backed by the full faith, credit, and taxing power of the issuing municipality.

The official statement for a revenue bond issue states that the bonds are backed by a pledge of the project's net revenues. This means that the:

Debt service is the first item paid after operating and maintenance expenses Explanation: Most municipal revenue bonds are net revenue pledge bonds. This means that bond (debt) service is paid from net revenue (revenue after operating and maintenance expenses).

Municipal term bond quotes are based on:

Dollar price Explanation: Municipal term bonds (bond issues that have one maturity date) are quoted based on a dollar price. Term bonds are also known as dollar bonds. Municipal serial bonds (that have several maturity dates) are quoted on a yield-to-maturity basis.

A corporation declares a 2-for-1 stock split payable on November 30 to holders of record on November 1. The ex-date is December 1. The first day that the stock will trade without a due bill attached is:

December 1 Explanation: Whoever is the stockholder of record on the record date (Nov. 1) will be credited with the additional shares resulting from the split. If that person liquidates the position prior to the ex-date (Dec. 1), the buyer must receive a due bill upon settlement of that trade. This is because on Dec. 1 the value of the stock will be cut in half. If the buyer does not receive the additional shares, then the position loses half its value on the ex-dividend date. The first day that the purchaser is not entitled to the additional shares is the ex-date, and this is the first day the stock will not trade with a due bill.

From the issuer's perspective, when comparing term bonds and serial bonds, serial bonds have:

Declining interest payments and declining principal amounts Explanation: Serial bonds have different maturity dates with lesser amounts of debt outstanding as time goes by. The bonds have declining interest payments and principal amounts. Term bonds, by comparison, mature at the same time and have stable interest payments with the principal paid on one maturity date.

During a deflationary period, interest rates:

Decrease, causing bond prices to rise Explanation: A deflationary period is characterized by a sluggish economy where goods and services decline in value. Interest rates tend to trend downward, causing bond prices to rise.

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

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

Buyers of municipal bonds would normally NOT include:

Defined benefit plans Explanation: A defined benefit plan is a type of pension fund. Pension funds and other tax-deferred accounts would not benefit from the tax exemption provided by municipal bonds. As a result, unless the bonds are taxable and offer yields equivalent to other taxable bonds, pension funds would not include municipal bonds in their portfolio. The exception would be Build America Bonds (BABs), which are taxable municipal bonds

An announcement in the financial section of the newspaper states that the money supply (M1) has dropped for the week. This means that:

Demand deposits and currency in circulation in the banking system have declined Explanation: M1 is demand deposits, (checking accounts) checkable deposits, and currency in circulation in the economy, and constitutes what is called the money supply. If the announcement in the financial section of the newspaper states that M1 (the money supply) has dropped for the week, this means that demand deposits (checking accounts) and currency in circulation have declined.

If a registered representative receives information that a client has recently received a large sum of money, the proper course of action is to:

Determine if the customer's investment objectives have changed Explanation: Registered representatives have a responsibility to update customer information periodically in case something has changed that would alter a customer's goals and objectives. Given that the customer has just experienced a financial windfall, the representative should check to see if the customer's investment objectives have changed before making any recommendations.

An investor wishes to establish a tax loss but still wants to own the same security. The customer sells the security and repurchases it two weeks later. The tax loss is:

Disallowed Explanation: The tax loss is disallowed. The customer must wait more than 30 days before repurchasing the same security or any security convertible into the security (a right, option, warrant, or convertible bond). The customer repurchased the same security two weeks later. This is considered a wash sale for tax purposes by the IRS and the loss is disallowed.

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

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

A customer at your firm has an online trading account. If the customer places a limit order for a Nasdaq-listed stock and your firm is a market maker in this security, the order will be:

Displayed only if it improves the market maker's quote Explanation: The SEC Order Handling Rules require that a customer's limit order be displayed in a market maker's quote if it improves that quote. This is true even if the customer's order does not improve the inside market. The order may (not will) be sent to an electronic communication network (ECN). The order will be executed automatically only if the price and size of the order can be matched in the Nasdaq trading system.

A married couple both have full-time jobs and are covered by their employers' pension plans. If they file a joint tax return and each wanted to open an IRA:

Each may do so in separate accounts and may contribute up to $5,500 in each account Explanation: Since they both have earned income, they may each establish an IRA and contribute $5,500 to each account. Joint accounts are not permitted for IRAs. A person who is covered by a corporate pension plan may continue to make contributions to an IRA.

Mr. Jones has a margin account in which there is activity each month. The firm sends Mr. Jones an account statement:

Each month when there is activity during the month Explanation: Brokerage firms send customer statements monthly for accounts with activity during that month. For inactive accounts, statements must be sent at least quarterly.

Dynasty Corporation is planning to acquire Regal Corporation. If a trader purchased 12,000 shares of Regal Corporation and sold short 4,000 shares of Dynasty Corporation, the trader is:

Engaging in a risk arbitrage Explanation: When there is an acquisition or merger taking place, traders will try to take advantage of the activity between the common stocks of the two companies. The trader or risk arbitrageur will go long the company being acquired and sell short the shares of the acquiring company. This process is known as risk arbitrage. If the acquisition is successful, Regal Corporation's stock will increase and Dynasty Corporation's stock will decline.

The Order Audit Trail System tracks the:

Entire life of an order that is accepted by a member firm Explanation: The Order Audit Trail System (OATS) enables FINRA to effectively review market activity in regard to customer orders within a member firm, to conduct surveillance, and to enforce rules. OATS records the life of an order from receipt, to routing, to modification if applicable, and cancellation or execution.

Total operating costs divided by average net assets is the formula used to find the expense ratio of a(n):

Equity mutual fund Explanation: The expense ratio of any mutual fund is the percentage of a fund's assets that is used to pay its operating costs. It is determined by dividing total expenses by the average net assets in the portfolio. Thus, a fund with $500 million in average net assets and total expenses of $5 million will have an expense ratio of 1% ($5 million divided by $500 million equals .01 or 1%). Expense ratios typically range between .20% and 2.0% of a fund's average net assets and must be disclosed in the fund's prospectus. The formula is: Expense Ratio = Total Expenses / Average Net Assets

U.S.-denominated currency held in foreign banks is BEST defined as:

Eurodollars Explanation: Eurodollars are defined as U.S. dollars on deposit in all foreign banks, not just banks in Europe.

A municipal bond will be accepted for delivery without a legal opinion if it is identified as:

Ex-legal Explanation: A municipal bond is expected to be delivered with a legal opinion unless the bond is identified as ex-legal at the time of the purchase.

Which of the following statements is TRUE concerning the suitability of a Section 1035 exchange?

Exchanges made within 36 months of a previous exchange are generally considered inappropriate Explanation: In order for a 1035 exchange to be considered appropriate, the individual must benefit from the new contract, and the representative must sign off on its suitability. Exchanges made within 36 months of a previous exchange are generally considered inappropriate. Higher returns do not guarantee suitability. Surrender periods on the new contract are one of the major factors in determining suitability.

The City of Fremont, Nebraska is issuing revenue bonds to increase its electric power generating facilities and to replace outstanding bonds. Interest on the bonds will be:

Exempt from federal income tax Explanation: For individual investors, the interest derived from state and municipal bonds is exempt from federal income tax. The investor may need to pay state taxes, depending on the tax status of the investor's home state.

When interest rates are trending upward, the economy will normally be in which phase of the business cycle?

Expansion Explanation: Increasing interest rates, along with increased costs and lower unemployment, are frequently associated with an expanding economy where there is an increasing demand for goods. As demand overtakes supply, prices begin to rise due to the scarcity of goods. This rise in prices is known as inflation. The Federal Reserve will look to raise interest rates in an attempt to curb demand and combat inflation.

The call feature on callable bonds is most relevant when the economy is:

Experiencing a slowdown and the FRB is trying to stimulate growth Explanation: The call feature on callable bonds is most relevant when the general level of interest rates is declining. Rates will tend to decline when the FRB is trying to stimulate the economy by increasing the money supply. The goal is to bring down interest rates to allow the economy to grow. Rising inflation usually causes the FRB to decrease the money supply in order to drive up interest rates. If the economy is growing and inflation is stable, this is a beneficial situation and the FRB may simply leave rates unchanged.

A person age 63 has an IRA with total assets of $275,000. The maximum amount this person can withdraw from this account without incurring a penalty is:

Explanation: An investor who withdraws money from an IRA before reaching the age of 59 1/2 will pay a 10% tax penalty on the taxable amount withdrawn, and is also liable for ordinary income taxes on the withdrawal. Since this person is over the age of 59 1/2, there is no penalty for withdrawing the funds, but the taxable amount withdrawn, above cost basis, will be added to the investor's taxable income for that year.

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?

Explanation: 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.

When opening an account for a customer, MSRB rules do not require the dealer to obtain the customer's: a. Financial condition b. Investment history c. Investment objectives d. Date of birth

Explanation: MSRB rules specifically state that a dealer should make every effort to obtain all of the information listed except the customer's date of birth. The dealer should determine that the customer is not a minor, but not specifically his date of birth.

Compared to selling short, buying a put option:

Explanation: Short selling requires the deposit of margin, whereas the premium on a put is usually substantially less than the Regulation T margin requirement. On a short sale, the seller's risk is unlimited, whereas on a put purchase, the risk is limited to the premium. Although a short sale may be effected only if the stock can be borrowed under Regulation SHO, a put may be purchased at any time. Puts can be purchased in a cash account, while selling short requires a margin account.

The U.S. government does NOT guarantee the payment of interest and principal for which of the following securities?

FHLMC (Freddie Mac) securities Explanation: The U.S. government guarantees the payment of interest and principal on all Treasury securities, savings bonds, and securities issued by the Government National Mortgage Association (GNMA or Ginnie Mae). Securities issued by the Federal Home Loan Mortgage Corporation (FHLMC [Freddie Mac]), a government-sponsored enterprise (GSE), are not guaranteed or backed by the U.S. government.

Closing spot prices for foreign currencies are disseminated daily by the:

FRB Explanation: The Federal Reserve Board disseminates closing spot prices of foreign currencies daily.

Use the following calendar to answer this question. February S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Stock index options will stop trading on:

February 21 Explanation: All options stop trading on the third Friday of the month which is February 21.

A customer purchases a municipal bond with 25 years remaining to maturity. The bond has been prerefunded to its first call date. The issue is callable in 7 years at 108, declining to par in 14 years. It also has a sinking fund call provision that begins in 17 years at par. For confirmation purposes, the bond should be priced to the:

First call date Explanation: When a bond is prerefunded, the only applicable date is the first call feature. Therefore, the bond must be priced to the first call date.

The payout on a variable annuity is based on a:

Fixed number of annuity units with a fluctuating value per unit Explanation: When payments begin on a variable annuity, the annuitant is credited with a specific number of annuity units. This number will remain fixed. The annuitant's monthly payment will vary according to the value of the securities representing the units.

Ms. Ralana elects a withdrawal plan from a mutual fund where enough shares will be liquidated to provide her with $500 each month. This plan is called:

Fixed-dollar Explanation: In this case, Ms. Ralana wants to receive the same (fixed) dollar amount each month. Under the fixed-share method, a specified number of shares are redeemed each month. The amount received depends on the value of the shares at that time.

A broker-dealer is underwriting an initial public offering (IPO) for a company that is not eligible to be listed on an exchange. The broker-dealer is required to deliver prospectuses:

For 90 days after the effective date Explanation: When a company that is the subject of an IPO is listed, on the effective date of the offering, prospectuses must continue to be delivered on all purchases in the aftermarket for 25 days. The prospectus delivery requirement for an IPO that will not be listed on an exchange continues for 90 days after the effective date.

Which of the following choices helps the U.S. balance of payments? a. U.S. corporations building plants abroad b. Lending money to foreigners at high interest rates c. U.S. investment in foreign securities d. Foreign investment in the U.S.

Foreign investment in the U.S. Explanation: Foreign investments in the U.S. will direct money into the country, helping the U.S. balance of payments.

A mutual fund buys stock from the portfolio of an insurance company. This is a trade executed in the:

Fourth market Explanation: When an institutional investor such as a mutual fund buys stock from the portfolio of an insurance company (another institution), it is considered a trade executed in the fourth market. This is the name given to the so-called market where institutions trade with other institutions.

A charity has received restricted stock from the director of a corporation. The director owned the stock for two years before giving it to the charity. According to SEC Rule 144, the charity may sell the stock:

Freely under Rule 144 Explanation: The charity may sell the stock freely (immediately) since the required holding period for restricted stock has already been met by the director. Since the charity is a not affiliated with the issuer (a nonaffiliated person), it is not subject to the volume restrictions. However, the stock is still restricted (unregistered) and must be sold under Rule 144. Rule 144A, not Rule 144, requires the purchaser to be a qualified institutional buyer.

Mr. Smith is associated with two other partners in an insurance partnership. He opens a cash account for the partnership. If Mr. Smith dies, what will the firm do as far as the partnership account is concerned?

Freeze the assets of the account Explanation: If Mr. Smith died, the firm would freeze the assets of the account. The firm would then await the proper legal documents needed to release the assets.

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

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

In an undivided (Eastern) municipal syndicate account, the remaining liability of an account member is computed:

From the number of bonds that are unsold in the account Explanation: An Eastern account is undivided as to liability. As long as any bonds in the account are still unsold, each member of the account is liable for his proportionate share of the unsold amount. If the member has a 10% participation in a $10,000,000 issue, originally his liability is for $1,000,000 of those bonds. If there is a balance of bonds unsold by other members, he will still have a liability of 10%, whether he sold all or none of his bonds.

An RR has received an order to purchase a block of securities for an institutional client. Prior to executing the client's trade, the RR purchased call options on the same security. This activity is referred to as:

Front-running Explanation: Placing proprietary orders (orders for the account of the RR or broker-dealer) ahead of customer orders is a prohibited practice that is referred to as front-running. An institutional buy order has the potential of moving the market price of a security higher. Having advance knowledge of the order would allow the broker-dealer to purchase the security or a derivative for that security prior to executing this order and profit when the market reacts to the institutional order. The other choices are examples of market manipulation or prohibited activities.

A tombstone ad states that the McGee Oil Company is offering $200,000,000 of 8 1/2% bonds due July 1, 2038 at 99 1/2% of par value. The yield to maturity on the bonds is:

Greater than 8 1/2% Explanation: The 8 1/2% bonds are being offered at a discount at 99 1/2% of their $1,000 par value. An investor who purchased the bonds at the offering (at $995) and held the bonds to maturity will receive the par value of $1,000. The investor will, therefore, have a yield to maturity that is greater than the coupon rate (nominal yield) of 8 1/2%

A put option may be written in a cash account if the investor:

Has a cash balance in the account equal to the total exercise value of the contract Explanation: To write a covered put option in a cash account, the customer must have cash in the account equal to the total exercise value of the contract. If the writer is short the underlying stock, the put is considered covered for margin purposes, but this transaction may not be written in a cash account, only in a margin account.

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

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

An investor purchasing a reverse convertible security would be MOST interested in:

High current income Explanation: An investor purchasing a reverse convertible security is seeking an above-market coupon rate. Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of her principal (the most beneficial option). The investor will not be able to participate if the underlying asset increased. If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.

A high net worth investor seeking safety of principal would MOST likely invest in which of the following securities?

High-grade general obligation bonds Explanation: Safety of principal refers to a customer being able to preserve or retain the initial amount of, the investment over its life. Many bonds offer investors this feature. The higher the rating, the greater the likelihood the investor will achieve safety of principal. High-grade generally refers to an investment-grade or highly rated bond. A general obligation bond would also offer a high net worth investor tax-exempt income. High-yield refers to non-investment- grade or junk bonds that would expose the investor to the risk of not achieving safety of principal.

A municipal bond issue with an inverted yield scale has:

Higher yields on the shorter maturities than on the longer maturities Explanation: A municipal bond issue with an inverted yield scale will have higher yields on the shorter maturities and lower yields on the longer maturities.

When telemarketing, a registered representative is NOT required to provide a prospect with:

How he obtained the prospect's home number Explanation: Registered representatives, when telemarketing, are not required to tell prospects how their names were obtained. However, an RR must disclose his name, contact information, and the purpose of the call.

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

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

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

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

Which TWO of the following actions must be completed at or prior to an options trade? I. Send the customer a current copy of the risk disclosure document II. Have the ROP approve the account for options trading III. Deposit the customer's money in the account IV. Have the customer sign an options agreement

I and II Explanation: At or prior to the approval of an options account, a registered representative must send the customer a copy of a current risk disclosure document. Also, trades will not be executed until the account is approved for options trading by a registered options principal (ROP). Customers must sign and return the options agreement within 15 days of account approval.

A municipal broker's broker may: I. Deal with broker-dealers II. Deal with dealer-banks III. Underwrite new issues IV. Trade from its own inventory

I and II only Explanation: A municipal broker's broker is a broker (agent) that deals only with other municipal securities brokers or dealers. The broker's broker never deals with individual investors or establishes an inventory position, and is not involved in the underwriting of a new issue.

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

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

Regulation T applies to: I. Cash accounts II. Margin accounts III. Commodity accounts IV. Municipal bond margin accounts

I and II only Explanation: Regulation T of the Federal Reserve Board applies to cash accounts and margin accounts. Regulation T does not apply to commodity accounts or municipal bond margin accounts. For municipal bond accounts, industry rules require a margin deposit of 7% of the market value of the bond. Margin requirements for commodity accounts are set by the individual commodity exchanges.

The Bond Buyer's 30-day visible supply includes: I. Competitive municipal bond issues II. Negotiated municipal bond issues III. Treasury bill issues IV. Corporate bond issues

I and II only Explanation: The Bond Buyer's 30-day visible supply is an indication used to reflect the amount of new offerings coming to the marketplace in the next 30 days. It carries figures for both competitive and negotiated municipal bond issues and notes maturing in 13 months or more.

According to the Telephone Consumer Protection Act, the recipient of a telephone solicitation must be: I. Told the identity of the broker-dealer on whose behalf the call is made II. Included on the caller's Do Not Call list upon request III. Sent the broker-dealer's most recent financial statements IV. An existing customer of the firm

I and II only Explanation: The Telephone Consumer Protection Act requires that the recipient of a telephone solicitation be told the name of the caller and the firm on whose behalf the call is being made. Those who do not wish to be called in the future must be included on a Do Not Call list. These rules apply to calls made to potential clients and not existing clients. However, an existing client may sever the relationship and request not to receive future calls. The Act does not require the mailing of financial information.

When a stock sells ex-rights, which of the following orders on a designated market maker's book will be reduced? I. Buy limit order II. Sell stop order III. Buy stop order IV. Sell limit order

I and II only Explanation: When a stock sells ex-rights (similar to ex-dividend), the designated market maker will reduce those orders on his book that were entered below the market. A buy limit order and a sell stop order will be reduced by the amount the stock sells ex-rights since these orders are entered below the market.

Which TWO of the following statements are TRUE concerning a Health Savings Account? I. The contribution is made in pretax dollars II. The contribution is made in after-tax dollars III. The funds grow tax-free if used to pay qualified medical expenses IV. The funds grow tax-deferred if used to pay qualified medical expenses

I and III Explanation: A Health Savings Account (HSA) is a tax-advantaged account that can be used by individuals to pay for qualified medical expenses. An HSA is not open to all individuals. It is generally open only to those persons who are not enrolled in any type of health plan other than a qualified, high-deductible health plan. Contributions are made in pretax dollars (which are limited under IRS guidelines), grow tax-free, and withdrawals are tax-free if used to pay qualified medical expenses. All funds withdrawn that are used for nonqualified medical expenses are taxable and subject to a 20% IRS tax penalty.

When raising capital, which TWO of the following securities are required to be registered with the SEC under the Securities Act of 1933? I. Common stock in a software company that will be listed on Nasdaq II. Debentures issued by a finance company sold only to qualified institutional buyers III. An American Depositary Receipt issued by a Canadian company IV. A revenue bond issued to finance a stadium

I and III Explanation: There is no specific exemption under the registration provisions of the Securities Act of 1933 for ADRs or shares of a software company that will be listed on Nasdaq. Both securities, if sold to the public in the U.S., require SEC registration. A security sold only to qualified institutional buyers (QIBs) is exempt and may be resold under a 144A exemption. Also exempt are municipal securities, which include both revenue bonds and general obligation bonds.

Mr. Jones is a small business owner who has purchased Treasury bills and other short-term securities during times when he has excess funds available in the business. He likes the aspects of liquidity and safety. A friend has told him he can get higher rates from auction rate securities. He wants to know why you have not recommended this investment to him. Which TWO of the following explanations would you cite as your reasons? I. Auction rate securities are long-term investments II. Interest or dividend rates are reset at established intervals based on a Dutch auction III. If the auction fails, the client may not have immediate access to his funds IV. The interest or dividend rate is set as the lowest rate to match supply and demand at the auction

I and III Explanation: Although auction rate securities are usually sold as an alternative to other short-term securities, they are long-term securities. An RR must disclose to a client that, if the auction fails, the client may not have immediate access to his funds. The RR also has a duty to disclose to clients any material fact relating to the specific features of the auction rate securities and the customer's need for a liquid investment when recommending this type of product. The fact that the interest or dividend rate is reset at specified intervals is a material fact, but is not a reason to avoid recommending the investment. The same reasoning applies to the fact that the rate is set at the lowest rate that matches supply and demand. These investments may not be suitable for investors who have a need for liquidity.

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

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

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

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

Which TWO of the following statements are TRUE concerning the auction process of Treasury bills? I. The 4-week bill is offered every week II. The 13-week and 26-week bills are auctioned every month III. The 4-week-bill is auctioned on a Tuesday IV. The 13-week and 26-week bills are auctioned on a Thursday

I and III Explanation: The 4-week Treasury bill is auctioned each week on Tuesday and is issued Thursday of that same week.13-week and 26-week T-bills are auctioned weekly on Monday and are issued on Thursday of that same week. All T-bills are issued (and traded) at a discount. Noncompetitive tenders are awarded first, but the price they will pay (the lowest accepted price of the competitive tenders) cannot be determined until after the competitive tenders are awarded.

Which TWO of the following statements concerning The Bond Buyer 20-Bond Index are TRUE? I. It is compiled weekly II. It consists of 20 GO and revenue bonds, with an average rating of AA III. It is used to show a trend in interest rates IV. It is used as an indication of the primary market in municipal securities

I and III Explanation: The Bond Buyer 20-Bond Index is compiled each week. It is calculated from the yields on 20 specific general obligation issues with an average rating of AA. There are no revenue bonds in the 20-Bond Index. The purpose of this index is to show trends in interest rates.

Which TWO of the following option positions combined will create a debit spread? I. Buy an ABC June 30 call at 5 II. Buy an ABC June 30 put at 3 III. Sell an ABC June 35 call at 2 IV. Sell an ABC June 35 put at 4

I and III Explanation: The only choice given that will create a debit spread is the purchase of an ABC June 30 call at 5 and the sale of an ABC June 35 call at 2. This spread is executed for a net debit of 3. This is a debit spread because the option being purchased has a larger premium than the option being sold.

A dividend has been declared on ATT common stock. Which TWO of the following investors are entitled to the dividend? I. The owner of an ATT call option who exercised the option prior to the ex-dividend date II. The owner of an ATT put option who exercised the option prior to the ex-dividend date III. The writer of an ATT put option that exercised prior to the ex-dividend date IV. The writer of an ATT call option that was exercised prior to the ex-dividend date

I and III Explanation: The owner of a call and the writer of a put are entitled to receive the dividend if the option is exercised before the ex-dividend date. In both cases, the exercise results in the individual buying stock. To be entitled to a dividend, stock must be purchased prior to the ex-dividend date.

Which TWO of the following statements are TRUE concerning the Securities Act of 1933? I. Registration provisions apply if the securities beings sold are listed on the NYSE II. Antifraud provisions do not apply if the securities being sold are listed on the NYSE III. Registration provisions do not apply to securities issued by a municipality IV. Antifraud provisions do not apply to securities issued by a municipality

I and III Explanation: The registration provisions of the 1933 Act apply if securities sold are listed on the NYSE or Nasdaq, but do not apply to securities issued by a municipality. The antifraud provisions of the Securities Act of 1933 apply to all securities, even those exempt from registration.

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

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

Which of the following statements are TRUE relating to the auction of T-bills? I. Three- and six-month T-bills are auctioned weekly II. Three- and six-month T-bills are auctioned on a discount-yield basis but one-month T-bills are auctioned on a coupon equivalent yield basis III. Noncompetitive tenders are awarded at the highest yield of the accepted competitive tenders IV. The purchaser must hold the securities until maturity

I and III Explanation: Three- and six-month T-bills are auctioned weekly. All T-bills are auctioned on a discount-yield basis with noncompetitive tenders awarded first and receiving the highest yield (lowest price) of the accepted competitive tenders. These securities are highly liquid and may be sold by a purchaser anytime prior to maturity.

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

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

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

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

A broker-dealer sending details of a trade to another broker-dealer would expect to receive either one of which TWO of the following in return? I. A confirmation II. A Regulation T margin call III. A DK notice IV. A loan consent agreement

I and III Explanation: A broker-dealer sending details of a trade (confirmation) to another broker-dealer would expect to receive either a confirmation or a signed don't know (DK) notice. In other words, either confirm the trade or send a notice regarding why the broker-dealer disagrees or otherwise has no knowledge of the trade.

Which TWO of the following statements are TRUE under the Uniform Transfers to Minors Act (UTMA) regarding a custodian account in which an individual is custodian for her son? I. The securities purchased must be suitable for the minor II. The mother's Social Security number is used for purposes of reporting and paying taxes III. The custodial relationship is terminated when the son reaches majority IV. The securities will be registered in the mother's name until the son reaches the age of majority

I and III Explanation: A custodian under the Uniform Transfers to Minors Act is required to act under the Prudent Man Rule in the handling of the account. The custodian may make any transactions that a prudent man or woman would make for her own account. The transaction, however, must be suitable for the minor. All stock in the account must be registered in the name of the custodian as custodian for the minor. The account would be registered, for example, as "Mary Jones as custodian for Robert Jones under the New York Uniform Transfers to Minors Act." The custodial relationship is terminated when the minor reaches the age of majority.

When reviewing a company, a fundamental analyst will look at which TWO of the following choices? I. Financial reports II. Trading volume III. Management of the corporation IV. Short interest

I and III Explanation: A fundamental analyst is interested in the company, not technical factors relating to the stock. He would look at financial reports and the company's management.

Which TWO of the following types of securities may a municipal securities representative sell? I. General obligation bonds II. Treasury notes III. Variable-rate demand obligations (VRDOs) IV. Municipal unit investment trusts

I and III Explanation: A municipal securities representative may sell municipal bonds. General obligation bonds and VRDOs are types of municipal securities. The municipal securities representative, according to the MSRB, is not properly registered to sell government bonds, municipal unit investment trusts, or any type of corporate securities.

Penny stock rules apply under which TWO of the following conditions? I. The stock is priced below $5.00 per share II. The customer is an active trader of penny stocks III. The broker-dealer is a market maker in the security IV. The customer is an institutional investor

I and III Explanation: A penny stock, according to SEC rules, is a stock that sells for less than $5.00 that is not listed on Nasdaq or the NYSE. A stock quoted on the OTC Bulletin Board or OTC Pink Market (Pink Sheets) that has a bid price of less than $5.00 is defined as a penny stock. Penny stock rules would not apply under the following conditions. - The customer is defined as an existing customer, who is a person who has maintained an account with a broker-dealer for more than one year, or has previously engaged in 3 or more transactions involving penny stocks (i.e., an active trader of penny stocks) - In nonrecommended or unsolicited transactions - In transactions by a broker-dealer that is not a market maker in that security - In transactions by an institutional accredited investor

A corporation is planning to issue new stock to the public and has filed a registration statement with the SEC. As a registered representative of the firm that is expected to do the underwriting, you are permitted to: I. Obtain indications of interest from prospective purchasers II. Receive monies from customers who intend to purchase the issue III. Send a preliminary prospectus to retail investors IV. Guarantee a customer that he will be able to purchase 1,000 shares of the issue

I and III Explanation: A registered representative is permitted to send a preliminary prospectus to any type of investor and obtain nonbinding indications of interest. The RR cannot accept money nor guarantee a customer that he would receive a particular amount of the issue. If the corporation has not filed a registration statement with the SEC, none of the choices listed would be acceptable.

Which TWO of the following statements are TRUE when a broker-dealer creates a retail communication concerning the characteristics of exchange-traded funds (ETFs)? I. A principal is required to approve the communication prior to use II. The communication should be reviewed, but is not required to be approved by a principal III. The communication must be filed with FINRA IV. The communication does not need to be filed with FINRA

I and III Explanation: A retail communication is any written or electronic communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period. If the retail communication makes a recommendation, or promotes a product or service, prior principal approval is required. In addition, if the retail communication is created by the member firm and performance comparisons with other investment companies are used, it must be filed with FINRA at least 10 business days prior to first use. If the retail communication concerning investment companies does not included the member firm's performance comparisons, it still must be filed with FINRA, but it can be filed within 10 business days of first use. An ETF is a type of investment company and, since the communication does not contain any performance comparisons by the member firm, it can be filed within 10 business days of first use.

Which TWO of the following currency movements will cause U.S. exports to become more competitive than foreign exports? I. The U.S. dollar weakens when compared to foreign currencies II. The U.S. dollar strengthens when compared to foreign currencies III. Foreign currencies strengthen against the U.S. dollar IV. Foreign currencies weaken against the U.S. dollar

I and III Explanation: A weakening or devaluation of the dollar will make U.S. exports more competitive with foreign exports. The U.S. dollar will be worth less in relation to foreign currencies. Foreigners will then spend a relatively smaller amount of their currency to purchase U.S. products, making U.S. products more competitive. Likewise, a strengthening in foreign currencies to the U.S. dollar also causes U.S. products to become more competitive.

In order to have an issuer of securities exempt from the provisions of the Securities Act of 1933 under Regulation D, which TWO of the following statements are TRUE? I. The purchasers must sign an investment letter restricting the resale of the securities II. The size of the offering must be limited III. The number of accredited buyers is unlimited IV. The issuer must file an offering document with the SEC

I and III Explanation: According to Regulation D, certain conditions must be met for the securities to be exempt from the provisions of the Securities Act of 1933. The offering must be restricted to persons who are knowledgeable and experienced in business and financial matters and who are able to afford the economic risks involved. The issuer must provide the buyer with detailed financial information (this offering document does not need to be filed with the SEC). The number of nonaccredited purchasers must be limited to 35, and the offering must be made in direct negotiations between the issuer and the buyer or his purchaser representative. Also, the buyer must sign an investment letter stating that the purchase was made for investment and not for short-term trading purposes. The size of the offering is not limited and there is no limit as to the number of accredited investors.

PSE & G Utility is offering $975,000,000 worth of 4.30% subordinated debentures at a price of 99.25% of par value. An investor purchasing these bonds is: I. Subject to state income tax II. Exempt from state income tax III. Subject to federal income tax IV. Exempt from federal income tax

I and III Explanation: An issuer of debt offering subordinated debentures is a corporation, not a municipality. Therefore, interest paid on its debt obligations is subject to federal and state income tax.

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

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

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 Explanation: 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.

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

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

When comparing high-grade bonds to low-grade bonds, lower-grade bonds have which TWO of the following choices? I. Higher yields II. Lower yields III. Higher market prices IV. Lower market prices

I and IV Explanation: One of the basic principles of investing is the greater the risk, the greater the return, and the lower the risk, the lower the return. Since lower-grade bonds are riskier than higher-grade bonds, they will have higher yields and lower market prices.

Which TWO of the following choices are characteristics of GNMA pass-through certificates? I. Interest and principal payments are received monthly II. The investor will receive her principal back at maturity III. Timely payment of interest and principal is guaranteed by the U.S. government IV. Interest is subject to federal tax but exempt from state and local tax

I and III Explanation: GNMA pass-through certificates are guaranteed by the U.S. government. Interest and principal payments are received monthly and, therefore, the investor will receive principal payments before, not at maturity. The interest is subject to federal, state, and local taxes.

Lucretia has a significant gain in Jaymont shares that she has held for 10 months. If she buys a put on Jaymont, which TWO of the following statements are TRUE? I. She still has upside potential in the stock II. She can achieve a long-term gain by holding the put and stock for three months III. She terminates the holding period IV. She cannot suffer a loss on the investment

I and III Explanation: If a stock is held short-term (one year or less) and a put is purchased, the holding period is terminated and will not resume until the put is sold or expires. When the holding period resumes, it will do so as if the stock was purchased on that day. If a long-term holding period were established on the stock, then the acquisition of the put will not affect the investor's holding period. If the stock and the put are purchased on the same day, that is termed a married put. In that case, the price of the put will be added to the price of the stock to arrive at a cost basis for the entire position. When the put expires, there will not be a taxable event, since the stock must be sold to trigger a capital gain or loss. The purchase of the put will create a hedge by allowing the investor to sell at the strike price, but this does not necessarily mean there will be no loss. There is still potential for the stock to rise and for Lucretia to achieve large gains.

Which TWO of the following situations will cause U.S. exports to become more competitive than foreign exports? I. The U.S. dollar weakens when compared to foreign currencies II. The U.S. dollar stengthens when compared to foreign currencies III. Foreign currencies strengthen against the U.S. dollar IV. Foreign currencies weaken against the U.S. dollar

I and III Explanation: If the U.S. dollar weakens and foreign currencies strengthen, foreign consumers with strong foreign currencies can purchase more U.S. exports. This would have the effect of making U.S. exports relatively less expensive as compared to foreign goods and, therefore, more competitive.

Which TWO of the following documents are required to be sent to the purchaser of a new issue of a municipal bond? I. A confirmation II. The offering document that was filed with the SEC III. An official statement of the issuer IV. A complete list of the syndicate members

I and III Explanation: MSRB rules require that a copy of the official statement be sent to each purchaser of a new issue. A confirmation must be sent on every transaction whether on a new issue or on a secondary market trade. There is no offering document filed with the SEC (municipal securities are exempt) and a list of the syndicate members does not need to be sent. MSRB rules require underwriters of new municipal issues to submit a final official statement to the Electronic Municipal Market Access (EMMA) system. Investors can also access the official statement through EMMA.

A customer has purchased a new municipal issue during the underwriting period. According to MSRB rules, the customer must receive which TWO of the following documents? I. The final confirmation showing the aggregate price II. A copy of the notice of sale III. A copy of the official statement, if prepared IV. A list of syndicate members

I and III Explanation: MSRB rules require that a copy of the official statement be sent to each purchaser of a new issue. A confirmation must be sent on every transaction, whether a new issue or a secondary market trade. A copy of the indenture and a list of the syndicate members do not need to be sent.

A woman wishes to open an account at a municipal securities firm. She identifies herself as the spouse of a trader at another municipal securities firm. Which TWO of the following are TRUE? I. The representative must follow all instructions from the trader's employer II. The MSRB must be notified III. The carrying broker-dealer must send written notification of each transaction to the trader's employer IV. The trader's employer must approve all transactions of the spouse

I and III Explanation: MSRB rules require that when opening an account for an employee of another municipal firm, a municipal registered representative must: Notify the employer and follow all instructions (effectively receiving the employer's permission) Send duplicate confirmations to the employer Included in the definition of employee is spouse, minor children, and anyone else dependent on the employee. The MSRB need not be notified and the trader's employer is not required to approve each trade.

Which TWO of the following investors would NOT be permitted to purchase shares of an IPO of KMF? I. An attorney involved in the new issue of KMF II. An investment company registered under the Act of 1940 that has some restricted persons as shareholders III. A portfolio manager of an investment company buying for his personal account IV. The general account of an insurance company

I and III Explanation: Restricted persons include finders and fiduciaries (such as attorneys and accountants) involved in the new issue as well as portfolio managers who buy and sell securities on behalf of institutional investors. The New Issue Rule also provides a number of general exemptions. The exemptions allow a new issue defined under the rule to be sold to the following accounts. - Investment companies registered under the Investment Company Act of 1940 - The general or separate account of an insurance company - A common trust fund - An account in which the beneficial interest of all restricted persons does not exceed 10% of the account. (This is a de minimis exemption that allows an account owned in part by restricted persons to purchase a new issue if all restricted persons combined own 10% or less of the account.) - Publicly traded entities other than a broker-dealer or its affiliates that engage in the public offering of new issues - Foreign investment companies - ERISA accounts, state and local benefit plans, and other tax-exempt plans under IRS Code 501(c)(3)

Regulation NMS applies to which TWO of the following choices? I. Listed equity trades II. Listed debt trades III. Quotes available for manual execution IV. Quotes available for electronic execution

I and IV Explanation: One of the provisions of Regulation NMS (National Market System) requires a broker-dealer to provide its clients with the best price available for listed equity trades available for electronic execution. The best price is defined as the highest bid or lowest offer (inside market) from all available market centers. Reg NMS does not apply to securities subject to manual execution. Nor does it apply to debt securities, whether electronically or manually executed.

A customer contacts her registered representative concerning the bid and offer prices of mutual funds listed in various financial publications and Web sites. Which TWO of the following statements are TRUE? I. The bid price is equal to the net asset value II. The bid price is equal to the net asset value plus the redemption fee III. The offer price is equal to the net asset value plus the sales charge IV. The offer price is equal to the net asset value minus the sales charge

I and III Explanation: The bid price of a mutual fund is also equal to the net asset value (NAV) and is the price a customer will receive if shares are sold. It does not include the redemption fee, which may be charged when the customer sells her shares. The offer price is equal to the NAV plus the sales charge, if any, and is the price a customer pays to purchase shares of a mutual fund.

A municipal dealer purchased $100,000 face value of 6.00% bonds at a 6.00 basis. If the dealer reoffered the bonds, which TWO of the following choices will be considered reasonable? I. 101 II. 108 III. 5.80 basis IV. 4.00 basis

I and III Explanation: The dealer purchased the bonds at par (6% coupon at a 6.00 basis). When reoffering the bonds, the dealer's markup should be reasonable. A one-point markup (101) is considered reasonable, whereas an eight-point markup (108) is not. An offering of 5.80 represents a reduction in yield of 20 basis points and is considered reasonable. A reduction in yield of 200 basis points (6.00 basis minus 4.00 basis reoffering) is excessive.

In May, a customer sells an STC July 40 listed call for a $6 premium and buys an STC July 30 listed call for $10. The customer has created a: I. Bullish spread II. Bearish spread III. Debit spread IV. Credit spread

I and III Explanation: The investor bought the more expensive call. Therefore, this is a debit spread. A call debit spread is a bullish strategy.

The term fast market is characterized by which TWO of the following descriptions? I. An imbalance of orders II. A very low number of trades III. Highly volatile prices IV. The quotes of market makers being updated very quickly

I and III Explanation: The term fast market is characterized by very heavy trading, fast moving prices, and high volatility. There also may be an imbalance in the number or shares clients are willing to buy or sell. For example, there are 500,000 shares to buy and only 100,000 shares to sell. Quotes may take a long time to update since prices and trades are moving so quickly. A client's order may take a longer time to execute, and if a market order is entered by a client, the price received may be significantly higher or lower then the quoted price.

Foreign currency options: I. Are quoted in U.S. dollars II. Are quoted in the underlying foreign currency III. Expire on the third Friday of the expiration month IV. Expire on the last Friday of the expiration month

I and III only Explanation: Foreign currency options are quoted in U.S. dollars (U.S. currency). Beginning February 15, 2015, the expiration date for foreign currency options is the third Friday of the expiration month, at 11:59 p.m. Eastern Time.

Rising inflation tends to: I. Negatively impact the stock market II. Positively impact the stock market III. Negatively impact the bond market IV. Positively impact the bond market

I and III only Explanation: Rising inflation tends to have a negative impact on both the bond and stock markets. In the bond market, when there is rising inflation, bond investors look to trade out of fixed-income investments, which will have their returns eroded by rising consumer prices. This selling pressure negatively affects bond prices in the market. In the stock market, rising inflation often translates into an assumption that the Fed will raise interest rates to curb consumer borrowing and consumer demand. Rising rates should, in theory, lead to decreased economic activity and shrinking corporate earnings. This also tends to lead to some form of a sell-off and a falling stock market. From a technical perspective, the dividend discount model would project falling stock prices during inflationary times because the discount rate applied when calculating the present value of the projected dividend cash flows would be higher. This would lead to a lower present value.

On September 14, a customer purchases an ABC December 60 call and sells an ABC November 60 call. The customer: I. Has engaged in a debit spread II. Has engaged in a credit spread III. Wants the spread to widen IV. Wants the spread to narrow

I and III only Explanation: To determine whether the customer wants the spread to widen or narrow, it is necessary to determine whether the spread is a debit or credit spread. The premium for an option is determined by two factors—the in-the-money amount of the option (intrinsic value) and the time value. Since both options have the same strike price, the intrinsic values (in-the-money amount) are equal. Therefore, any difference in premium is the result of a difference in time value. Since the December contract has longer to go until expiration than the November contract, it has more time value. Therefore, the premium for the December contract will be larger than for the November contract. Since the customer purchased the December contract (higher premium), it is a debit spread and will profit if the spread widens.

An investor purchases Swiss francs in the spot market at 61. As a hedge, the investor buys a Swiss franc June 60 put at 0.50. This strategy will be profitable if: I. The U.S. dollar weakens II. The U.S. dollar strengthens III. The spot price for the Swiss franc is 61.75 IV. The spot price for the Swiss franc is 59.25

I and III only Explanation: An investor who buys Swiss francs would purchase a put to provide protection if the U.S. dollar strengthens (which would cause the Swiss francs to decrease). If the Swiss francs decline, the investor could exercise the put or sell the put at a profit. The investor will break even when Swiss francs increase to a value equal to his cost (61) plus the premium paid (0.50). This makes the breakeven point 61.50 or $.6150 (since strike prices and premiums for Swiss franc options are in cents per unit, the decimal must be moved two places to the left). The investor will have a profit if the Swiss franc rises above the breakeven point (61.50) which would occur if the U.S. dollar weakens.

The Bond Buyer Revenue Bond Index is: I. A 30-year index II. A 20-year index III. A 25-bond index IV. A 30-bond index

I and III only Explanation: The Bond Buyer Revenue Bond Index (commonly referred to as the Revdex) is an index of the yields on 25 revenue bonds. It is compiled on a weekly basis by The Bond Buyer and contains 30-year maturity bonds with an average rating on S&P of A+ and on Moody's of A1.

When examining an earnings report for National Corporation, a registered representative sees that earnings per share is reported on both a primary and fully diluted basis. This indicates that: I. The company has convertible bonds or convertible preferred stock outstanding II. The company has cumulative and participating preferred stock outstanding III. Earnings per share is calculated using current shares outstanding and also assuming that all convertible securities were converted IV. Earnings per share is calculated on a pretax and after-tax basis

I and III only Explanation: The calculation for earnings per share on a primary basis (before the possible dilution of convertible bonds, convertible preferred stock, stock options, or warrants) is computed based on the number of outstanding common shares only. The calculation for earnings per share on a fully diluted basis includes the outstanding shares if convertible bonds and preferred stock are converted into common stock.

A corporation would choose to refinance its debt for which TWO of the following reasons? I. To reduce its overall interest costs II. To be able to borrow funds at a higher rate III. To be able to reduce the number of persons on the board of directors IV. To remove restrictive provisions from the indenture

I and IV Explanation: A corporation would most likely refinance its debt to reduce its overall interest cost. This is most likely to happen when interest rates have declined and/or the credit strength of the issuer increases. It may also refinance to remove a restrictive provision from a bond's indenture. This restriction may have been included when the issuer sold bonds and it was not easy for the issuer to borrow funds. Refinancing does not alter the number of persons on the board of directors.

Which TWO of the following statements are TRUE regarding a variable annuity accumulation unit? I. It is an accounting measure used to determine an owner's interest during the pay-in phase II. It is an accounting measure used to determine an owner's interest during the payout phase III. The value of the units will remain fixed IV. The value of the units will fluctuate

I and IV Explanation: Accumulation units are an accounting measure used to determine an owner's interest in the separate account during the accumulation or pay-in phase. Their value will vary based on the performance of the separate account. (Annuity units are used during the annuity or payout phase.)

When a registered representative makes a recommendation to a customer involving a leveraged exchange-traded fund (ETF), he will consider which TWO of the following factors to be MOST important? I. The security may be recommended to at least some investors II. The security may be able to produce a profit over a long period III. The security may be able to be sold quickly IV. The security may be a good investment for a specific customer

I and IV Explanation: Although all of the choices are important factors for determining the suitability of a recommendation, the FINRA suitability rule has listed three main suitability obligations. The reasonable-basis obligation requires a member firm and an RR to have a reasonable basis to believe that the recommendation is suitable for at least some investors. If the firm or its RRs do not understand the product, it should not be recommended to customers. The customer-specific obligation requires the member firm and an RR to have a reasonable basis to believe that the recommendation is suitable for a particular customer based on that customer's investment profile. A customer's investment profile would include, but is not limited to, the customer's age, other investments, financial situation and needs, tax status, investment objectives and experience, investment time horizon, liquidity needs, risk tolerance, and any other information the customer may disclose. Even though a customer is not obligated to provide all of this information, the RR should try to obtain the information necessary to make a suitable recommendation. The quantitative obligation requires the member firm and an RR to have a reasonable basis for believing that a series of recommended transactions, even if suitable for a customer, are not excessive when taken together in light of the customer's investment profile.

Blue-Sky laws apply to which TWO of the following choices? a. Registered representatives b. Securities issued by the City of Chicago c. Commercial paper d. Securities issued by a REIT

I and IV Explanation: Blue-Sky laws are state securities laws. These laws apply to the registration of sales personnel (registered representatives), the registration and sale of nonexempt securities. REITs (real estate investment trusts) are considered nonexempt securities and are, therefore, regulated by state laws. Municipal securities and commercial paper are considered exempt securities.

Which TWO of the following events may be reasons for a revenue bond issue to be called? I. There is a change in the tax status of the issuer II. Surplus funds are not available III. Interest rates rise dramatically IV. The facility is destroyed by fire

I and IV Explanation: Destruction by fire would be included in a catastrophe call provision and permit the issue to be called. If surplus funds are available (choice [II] states they are not available), the monies may be used to retire a portion of the outstanding bonds. If the tax status of an issuer is in doubt at the time of issuance, there is usually a provision requiring that the issue be called if the tax status of the issuer changes and the bonds become taxable. An issuer may refund an outstanding issue if interest rates are declining, not rising.

A registered representative has purchased two tickets to a football game for which he paid $85 per ticket. If the face value of the tickets is $45 per ticket, the RR may take which TWO of the following actions? I. Give one ticket to a customer II. Give two tickets to a customer III. Purchase two additional tickets and have two customers attend the game with their spouses IV. Give the two tickets to two different customers of the same firm

I and IV Explanation: Member firm personnel may not give, or permit to be given, a gift of material value exceeding $100 per recipient per year to personnel employed by another member firm. The gifts should be valued at the higher of the cost or market value. Since the tickets have a face value of $45 each, but the tickets were purchased at a value of $85 each, the higher value would be used. One ticket can be given to a customer, but two tickets exceed $100. If gifts are given to more than one customer, a prorated amount should be used, so the two tickets may be given to two different customers. If the RR attended the event with the customer, it would be a business expense and not a gift.

JULY 20XX S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Use the calendar to answer this question. If a customer bought stock for cash (on a cash contract basis) on Friday, July 5, when will the trade settle?

July 5 Explanation: Securities bought or sold for cash or a cash trade have a same-day settlement for payment and delivery. The settlement date is July 5, which is the same day the trade was made.

ABC Corporation bonds are convertible at $50. If the bonds are selling in the market for 90 ($900) and the common stock is selling for $43, which TWO of the following statements are TRUE? I. The stock is selling at a discount to parity with the bond II. The stock is selling at a premium to parity with the bond III. Liquidating the stock after converting the bond would be currently profitable IV. Liquidating the stock after converting the bond would not be currently profitable

I and IV Explanation: The conversion ratio, which is not given, is found by dividing the par value of the bond ($1,000) by the conversion price ($50). This equals 20 to 1 ($1,000 divided by $50 equals 20). The market price of the common stock is $43 per share. The stock is selling at a discount to parity with the bond ($43 stock x 20 shares = $860 which is below the $900 market price of the bond). If the bonds were converted and the stock was then sold at the market price, the investor would have a loss.

An investor takes the following position. Long 1 GHI Nov 65 put Short 1 GHI Nov 55 put Which TWO of the following statements are TRUE regarding this position? I. The investor paid money to create the position II. The investor received money to create the position III. The investor is bullish IV. The investor is bearish

I and IV Explanation: This position is referred to as a debit put spread. It cost the investor more than was received since the long put has a strike price greater than the short put. As a result, the long put is exercised first (since it has a higher strike price), allowing the investor to make money if the stock declines in value (a bearish move).

When a stock sells ex-dividend, which TWO of the following orders on a designated market maker's (DMM's or specialist's) book will be reduced? I. Buy-limit order II. Sell-limit order III. Buy-stop order IV. Sell-stop order

I and IV Explanation: When a stock sells ex-dividend, the DMM (specialist) will reduce those orders on his book that were entered below the market. A buy-limit order and a sell-stop order will be reduced by the amount the stock sells ex-dividend since these orders are entered below the market.

A convertible debenture is convertible at $25. It has a nondilutive feature in its indenture. If a stock dividend is distributed, which TWO of the following statements are TRUE? I. The conversion price will be reduced II. The conversion price will be increased III. The conversion ratio will be reduced IV. The conversion ratio will be increased

I and IV Explanation: A nondilutive feature means that if there is a stock split or stock dividend, the bond's conversion features must be adjusted. The bondholder would receive more shares upon conversion because the conversion ratio would be increased. The conversion price would be reduced to permit this increase in the conversion ratio.

Which TWO of the following statements are TRUE concerning the tax consequences of investing in a limited partnership or direct participation program (DPP)? I. Tax credits will reduce a customer's taxes directly II. Tax deductions will reduce a customer's taxes directly III. Tax credits will reduce a customer's taxable income IV. Tax deductions will reduce a customer's taxable income

I and IV Explanation: A tax credit will reduce the amount of taxes owed by a customer directly. A tax deduction reduces the customer's taxable income. A tax credit is more beneficial and may be found in a DPP, which specialized in low income housing. An example of a tax deduction is depreciation and depletion.

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

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

Which TWO of the following new issues may be purchased by an employee of a broker-dealer under the New Issue Rule? I. An exchange-traded fund II. An initial public offering in which the RR's firm is not an underwriter III. A new issue of common stock in which the broker-dealer is the managing underwriter IV. Convertible debt

I and IV Explanation: An employee of a broker-dealer is considered a restricted person and may not purchase new issues under FINRA rules. New issues under the rule are defined as initial public offerings (IPOs) of equity securities sold under a registration statement. Exemptions from the definition of an IPO include all debt offerings, investment company offerings such as mutual funds and exchange-traded funds, and preferred stock. Whether the broker-dealer is participating as an underwriter does not alter the restrictions.

An investor has been saving for her child's college education using a 529 plan. If her child will be attending college in a few years, which TWO of the following actions are MOST suitable? I. Moving money from equity and bond investments to money-market funds II. Moving money from money-market funds to equity funds III. Moving money from bond funds to equity funds IV. Moving money from equity funds to bond funds

I and IV Explanation: As a child approaches college age, a suitable investment strategy is to move from growth-oriented securities, such as equities, to income-oriented securities, such as bonds, and money-market funds. Once a child begins to attend college, most of the funds should be invested in money-market funds or other types of short-term investments that are liquid with very little risk of capital.

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

I and IV Explanation: Dividends and interest paid to a U.S. investor on foreign securities may be subject to withholding tax by the country from which they were paid. If the investor has securities that paid dividends and/or interest that were subject to foreign tax, the broker-dealer will send the investor a form that will report the gross amount of the dividends or interest, and the amount of tax withheld by the foreign government.

Which TWO of the following activities are typically performed during the cooling-off period of an initial public offering (IPO)? I. A preliminary prospectus is prepared by the issuer II. The issuer will publish research on the securities to be offered III. The SEC reviews the issuer's registration statement and evaluates the investment merit of the issue IV. The issuer and underwriters hold a due diligence meeting

I and IV Explanation: During the cooling-off period, the SEC will review the issuer's registration statement for completeness. The SEC does not evaluate (pass on) the investment merits of the issue. Also, during the cooling-off period, the issuer will blue-sky the issue, send out a preliminary prospectus, and hold a due diligence meeting. Research is not permitted to be published by a broker-dealer until after the effective date of an IPO.

The federal funds rate may be described as: I. A money-market rate II. A long-term rate III. The most stable rate IV. The most volatile rate

I and IV Explanation: Federal funds are excess reserves that one bank loans to another (usually overnight) when the borrowing bank must make up a deficit reserve position. The rate of interest charged is called the federal funds rate. The federal funds rate fluctuates daily, making it the most volatile money-market (short-term) rate.

Which TWO of the following statements regarding straddles are TRUE? I. An investor who does not anticipate that the price of the stock will change may sell a straddle II. An investor who anticipates a substantial advance in the price of a stock will buy a straddle III. An investor who anticipates a substantial decline in the price of a stock will buy a straddle IV. An investor who anticipates substantial fluctuations in the price of a stock will buy a straddle

I and IV Explanation: If investors wish to generate premium income, they will consider selling a straddle in order to generate income on both the put and the call. They will sell the straddle only if they do not anticipate significant price changes in the market price of the underlying security. The investor who anticipates significant changes in the price of a stock, but does not know if the price will advance or decline, will buy a straddle in order to be able to profit on both sides of the market. An investor who anticipates a substantial advance in the price of a stock will buy a call. An investor who anticipates a significant decline in the price of a stock will buy a put. Neither investor will buy a straddle if they anticipate that a price will move in only one direction, since the premium will be lost (assuming they are right) on the other side of the market. For example, an investor anticipates that XYZ stock will advance from $50 to $80. If a straddle is bought and the price did advance, there would be a profit on the call but there would be a loss of the entire put premium.

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 III. An 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 IV Explanation: In a custodian account, the minor is technically liable for taxes. Depending on the amount of income generated in the account and the age of the minor, taxes are calculated at the parents' rate. Therefore, parents may consider the purchase of municipal bonds in the custodian account for tax advantages. The zero-coupon bond will not produce cash flow during the holding period. This would be desirable for those who do not need cash income. (Funds are needed at a later date in the custodian account.) The zero-coupon municipal bond would be suitable for other accounts besides the custodian account, such as upper tax bracket earners during their peak earning years. Zero-coupon bonds are subject to annual accretion of the investor's cost basis. As such, at maturity, the investor's cost basis equals the par value of the bond. (There are no capital gains.) The accretion of the municipal bond is treated as interest income which, in the case of the municipal bond, is federally tax-free. This is a tax advantage, but it is not a long-term capital gain.

An employee of a corporation is enrolled in a noncontributory pension plan. Relative to the plan, which of the following statements are TRUE? I. Earnings in the plan accrue tax-deferred II. Earnings in the plan are taxed each year III. Benefits are taxed as a capital gain when received IV. Benefits are taxed as ordinary income when received

I and IV Explanation: In a noncontributory pension plan, the employee does not make contributions. Earnings in the plan accrue tax-deferred (are not taxed until received by the employee) and benefits received are taxed as ordinary income.

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

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

Which TWO of the following choices given to or shared with a customer are NOT a violation of MSRB rules? I. A gift of $100 II. A yearly financial magazine subscription worth $150 III. A gift of basketball tickets worth $200 IV. A business lunch that costs $125

I and IV Explanation: MSRB rules allow gifts of $100 or less. There is no limit on legitimate business expenses so the business lunch of $125 is not a violation even though it is more than $100. A subscription to any magazine in excess of $100 or a gift of tickets in excess of $100 is considered violations.

Which TWO of the following statements are TRUE concerning the characteristics of preferred stock? I. The securities do not have a fixed maturity date II. The price of these securities is more volatile than common stock III. The dividend will be paid annually IV. The price will fluctuate based primarily on changes in interest rates

I and IV Explanation: Most preferred stock does not have a maturity date and, therefore, one of the risks of purchasing this type of security is that there is no fixed date when you will receive your principal back. These securities are less volatile than common stock, and the prices of preferred stocks are inversely related to the movement of interest rates, as are bonds. The dividend usually is paid quarterly, not annually.

If the Fed's open market trading desk enters into a repurchase agreement, which TWO of the following statements are TRUE? I. The money supply will be increased II. The money supply will be decreased III. Interest rates will tend higher IV. Interest rates will tend lower

I and IV Explanation: On a repurchase agreement, the Fed initially purchases securities. Therefore, money is added to the banking system. This tends to loosen credit and allows interest rates to decline.

Which TWO of the following investment companies are NOT open-end? NAV Offered I. $8.00 $ 7.00 II. $9.20 $10.00 III. $7.00 $ 7.00 IV. $8.00 $10.00

I and IV Explanation: Open-end companies are not offered below their current net asset value. According to the Conduct Rules, the maximum sales charge permitted for an open-end company is 8 1/2%. Choices (I) and (IV) must be closed-end companies. Choice (I) is a closed-end company because it is offered below its net asset value. Choice (IV) must be a closed-end company because when doing the sales charge calculation (sales charge divided by offering price), the result is a 20% sales charge, which is above the allowable maximum. Therefore, choice (IV) is a closed-end fund trading at a 25% premium to NAV.

When evaluating two CMOs backed by GNMAs, one having a 6% yield and the other having a 10% yield, which TWO of the following statements are TRUE? I. Prepayment risk is greater for the CMO with the 10% yield II. Prepayment risk is greater for the CMO with the 6% yield III. Credit risk is greater for the 10% CMO IV. Credit risk is the same for both securities

I and IV Explanation: Prepayment risk measures the possibility that homeowners will refinance (prepay) their mortgages. Historically, the speed of prepayment increases when interest rates fall. If this happens, payments will flow into the CMOs at an accelerated rate, forcing investors to reinvest these monies at lower-than-anticipated rates. Therefore, the CMO with the higher interest rate will have higher prepayment risk. GNMA-backed CMOs are highly rated and, therefore, have little credit risk. Since both CMOs are backed by GNMAs, credit risk is minimal for both pools.

A broker-dealer is preparing sales literature on CMOs. Which TWO of the following statements must be disclosed? I. The term collateralized mortgage obligation must be included within the name of the product II. The basis point spread above a comparable Treasury security the client will receive in interest must be included III. The lower of the yield to call or yield to maturity must be included IV. The government agency backing only applies to the face value of the securities

I and IV Explanation: Retail communications (e.g., sales literature) and correspondence about collateralized mortgage obligations (CMOs) are subject to special rules. The term collateralized mortgage obligation must be included within the name of the product and it must disclose that the government agency backing only applies to the face value of the securities (not any premium paid). If the client paid a premium to purchase a CMO, only the par value would be backed by the entity backing the security. The actual coupon rate, not the spread above Treasuries, needs to be disclosed. Due to the prepayment risk of CMOs, the yield to average life would be disclosed, not the yield to maturity or yield to call.

A bond is convertible into stock at $50 per share. The market price of the stock is 65. The market price of the bond is 120. To profit from this arbitrage opportunity, an investor should: I. Buy 5 bonds II. Buy 100 shares of stock III. Sell 5 bonds short IV. Sell 100 shares of stock short

I and IV Explanation: Since the bond is convertible into 20 shares of stock ($1,000 par divided by $50) and the bond is priced at 120, the parity for the stock is $60 per share ($1,200 bond price divided by 20 shares). An arbitrage situation exists because the stock is selling at a 5-point premium to parity (65 market price versus 60 parity price). An investor can profit from this situation by purchasing bonds at 120 and shorting the stock at 65. Each bond may be converted into 20 shares of stock at a cost of $60 per share. These shares may then be used to cover the short sale, establishing a 5-point profit (65 short sale price - 60 cost).

An individual is in the third year of accumulating an interest in a variable annuity with a deferred sales charge. A registered representative recommends a switch to a newly created variable annuity with a larger number of subaccount choices, also offered with a deferred sales charge. Which TWO of the following statements are TRUE of this switch? I. FINRA will probably consider the switch unsuitable II. FINRA will probably not consider the switch unsuitable, since both annuities are offered with a deferred sales charge III. The switch is taxable if it qualifies as a 1035 exchange IV. The switch is not taxable if it qualifies as a 1035 exchange

I and IV Explanation: Since the investor is in the third year of accumulation, there will be a deferred sales charge incurred. By switching to another variable annuity, the individual will now be subject to the highest deferred sales charge, thus making the switch unsuitable. If a registered representative recommends that a client switch from one annuity to another within a three-year period, the representative may be considered to be churning. An exchange of annuities that qualifies for IRS Section 1035 treatment is not a taxable event.

Structured products may: I. Offer returns linked to equity securities II. Not offer returns linked to commodities III. Not offer returns linked to interest rates IV. Be formulated to provide principal protection

I and IV Explanation: Structured products are prepackaged securities that often combine securities, such as a bond with a derivative. The structured security may be linked to equity securities, commodities, or interest rates. The products may also be structured to provide principal protection. Structured products are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed by an RR when offering this product to clients.

A customer contacts her registered representative concerning the bid and offer prices of mutual funds listed in various financial publications and Web sites. Which TWO of the following statements are TRUE? I. The bid price is equal to the net asset value II The bid price is equal to the net asset value minus the redemption fee III. The offer price is equal to the net asset value plus a commission IV. The offer price is equal to the net asset value plus the sales charge

I and IV Explanation: The bid price of a mutual fund is also equal to the net asset value (NAV) and is the price a customer will receive if shares are sold. It does not include the redemption fee, which may be charged when the customer sells her shares. The offer price is equal to the NAV plus the sales charge, if any, and is the price a customer pays to purchase shares of a mutual fund. The term commission is not used in the mutual fund industry as the term sales charge or sales load is used, and is built into the price the customer pays for the fund.

Variable annuities sold by insurance companies must be registered with: I. The SEC II. The FRB III. FINRA IV. The State Insurance Commission

I and IV only Explanation: Variable annuities are generally sold by agents of insurance companies. In recent years, more and more brokerage firms and banks have begun selling variable annuities. Variable annuities are considered securities by the SEC and, therefore, must be registered with the SEC. Variable annuities must also be registered with the State Insurance Commission. The agents that sell variable annuities must be registered representatives with a Series 6 or Series 7 registration and must be licensed insurance agents.

A customer buys 10 ABC January 50 calls paying a $3 premium and 10 ABC January 50 puts also paying a $3 premium when the market price of the stock is $49 per share. The buyer's TWO breakeven points are: I. $44 II. $47 III. $53 IV. $56

I and IV Explanation: The customer has the right to call the stock at $50. The customer paid a $600 premium per straddle. The breakeven point on the call is determined by adding the $50 strike price to the premium of $6. This equals a breakeven of $56. The customer also has the right to sell the stock to the writer at $50, but has paid a $600 premium. The breakeven point on the put would be six points below the strike price of $50, which equals $44. The buyer's breakeven points, therefore, will be $44 and $56.

If the FRB engages in repurchase agreements, which TWO of the following statements are TRUE? I. The money supply is being increased II. The money supply is being decreased III. The fed funds rate could rise IV. The fed funds rate could decline

I and IV Explanation: The immediate result of an FRB repo is an increased money supply, which would have the effect of lowering interest rates.

When considering the credit strength of a municipal issuer, which TWO of the following choices are the MOST important? I. The condition of the local economy II. The current financial status of the U.S. economy III. Money supply figures IV. The general capability of the fiscal officers of the municipality

I and IV Explanation: The state of the local economy is an important factor in determining a municipality's creditworthiness. For example, communities at different stages of growth may require more or less debt, and this must be understood in the analysis. The current financial status of the U.S. economy is not as important as the local economy in determining the credit strength of a municipality. The management capability of the fiscal officers is also important to insure they are able to implement the plans of the municipality. Money supply figures, which are published by the Federal Reserve Board, are irrelevant with regard to the credit strength of a municipality.

Which TWO of the following statements are TRUE regarding the buyer and writer of a combination? I. The buyer of a combination expects the market to be volatile II. The writer of a combination expects the market to be volatile III. The buyer of a combination expects the market to remain stable IV. The writer of a combination expects the market to remain stable

I and IV Explanation: The writer (seller) of a combination (a call and a put) believes the underlying security's price will remain stable. The buyer of a combination expects that the market price of the underlying security will be volatile.

Which TWO of the following statements are TRUE regarding the buyer and writer of a straddle? I. The buyer of a straddle expects the market to fluctuate II. The writer of a straddle expects the market to fluctuate III. The buyer of a straddle expects the market to remain stable IV. The writer of a straddle expects the market to remain stable

I and IV Explanation: The writer (seller) of a straddle (call and put) believes the stock's price will remain stable. The buyer of a straddle expects that the market price of the underlying stock will be volatile.

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

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

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

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

The bond counsel for a new municipal revenue bond issue may render a qualified legal opinion in which TWO of the following situations? I. The issuer does not have clear title to the property II. Construction of a competing facility may cut projected revenue flow III. The underwriting syndicate has not provided information that the MSRB requires IV. The project potentially could impact a national historic site

I and IV Explanation: When situations exist that could create potential problems for a proposed facility, the bond counsel will render a qualified legal opinion. These situations include (I) and (IV) in that both subject the issuer to potential legal action, whereas (II) and (III) do not deal with the legality, validity, enforceability, or tax-exempt status of the issue.

A call is purchased in February and exercised in June. The following April, the stock is sold. Which TWO of the following statements are TRUE? I. The resulting gain or loss is short-term II. The resulting gain or loss is long-term III. The cost basis of the stock is the same as the strike price IV. The cost basis of the stock is the call premium plus the strike price

I and IV Explanation: When the buyer exercises the call option, the holding period for the stock begins. In this case, the period from February to June is ignored. The subsequent sale of the stock in April makes the holding period short-term (one year or less). The cost basis for the stock is the call premium plus the strike price.

A customer's account does not require approval to trade penny stocks if the: I. Trade is recommended II. Trade is not recommended III. Account is established IV. Account is new

II and III only Explanation: The approval of an account to trade penny stocks is not required if the account has been in existence for more than one year or if all transactions in penny stocks are nonrecommended.

Briana Corporation, an existing public company, is offering 500,000 shares of common stock to the public through an underwriting syndicate. The prospectus states that 250,000 shares are being offered by selling stockholders and 250,000 shares are being offered by Briana Corporation. The effect of this offering will be: I. A dilution in the earnings per share II. An increase in the earnings per share II. The number of shares outstanding will increase by 500,000 IV. The number of shares outstanding will increase by 250,000

I and IV only Explanation: After the offering is completed, there will be 250,000 new shares outstanding (The shares sold by the selling stockholders were already outstanding.) This will result in the earnings per share being diluted because the earnings will now be divided by a greater amount (250,000 shares) of new outstanding stock.

A registered representative writes a letter to see if his clients have any interest in trading options. The letter is generic and describes the advantages and disadvantages of options trading. This letter: I. Must be approved prior to use by a ROP II. Need not be approved prior to use as long as it does not contain recommendations III. Must be accompanied by a risk disclosure document IV. Need not be accompanied by a risk disclosure document

I and IV only Explanation: All retail communications concerning options must be approved by a ROP prior to being sent to a customer. Since there are no specific recommendations, the OCC disclosure document does not need to precede or accompany the letter. However, the customer must receive the risk disclosure document at or before the account is approved for options trading.

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 IV only Explanation: 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.

A municipal securities representative does an analysis of an official statement and prepares a summary report. The report must be approved by: I. A municipal securities principal II. FINRA III. The Issuer IV. The MSRB

I only Explanation: The preliminary and final official statements are not considered advertising since they are prepared by or for the issuer. However, a summary of an official statement is considered advertising since it is prepared by the municipal representative and, therefore, must be approved by a municipal principal.

Which TWO of the following time limitations must be complied with regarding the delivery of a risk disclosure document? I. A brokerage firm must deliver a risk disclosure document to a customer at the time the account has been approved for options trading II. A brokerage firm must deliver a risk disclosure document to a customer prior to the time the account has been approved for options trading III. A brokerage firm must deliver a risk disclosure document to a customer after the account has been approved for options trading IV. A brokerage firm must deliver a risk disclosure document to a customer after the first order has been entered

I or II Explanation: According to the rules of the exchanges where options are traded, a brokerage firm must deliver a risk disclosure document to a customer at or prior to the account being approved for options trading.

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

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

Which of the following securities can be traded in the over-the-counter market? I. Municipal bonds II. Treasury bonds III. Treasury bills IV Corporate bonds

I, II, III, and IV Explanation: All of the securities listed can be traded in the over-the-counter market.

A municipal bond swap may be executed to: I. Establish a loss for tax purposes II. Increase cash flow III. Improve maturities IV. Improve yields

I, II, III, and IV Explanation: Municipal bond swaps may be executed to establish a loss, increase cash flow (increase income from larger coupon), improve maturities, improve yield, and improve quality.

A securities firm is permitted to charge customers a fee for: I. Collecting dividends and/or interest II. Appraisal of securities III. Holding securities in safekeeping IV. Transfers and/or exchanges

I, II, III, and IV Explanation: Securities firms may charge customers for all services they provide as long as the charge is fair and reasonable.

A registered options principal (ROP) must review: I. Retail communication concerning options II. General options prospecting letters III. Option seminar transcripts IV. Allocation of exercise notices

I, II, III, and IV Explanation: The registered options principal (ROP) is specifically responsible for the firm's compliance program with respect to its options activities. The ROP performs an audit function to determine that these activities are conducted in compliance with current applicable regulations and rules. Some of the ROP's principal duties include establishing guidelines for options retail communication, and reviewing all such material before it is used. The ROP also reviews the method of allocation of exercise notices.

An uncle is a custodian for his nephew's account. The account receives rights to subscribe to additional stock held in the account. As custodian, the uncle may: I. Sell the rights II. Subscribe to the stock III. Buy additional rights to subscribe if additional rights are needed IV. Do whatever he considers to be in the best interest of the minor

I, II, III, and IV Explanation: The uncle may sell the rights, subscribe to the stock, or buy additional rights to subscribe if additional rights are needed. The uncle may do whatever he considers to be in the best interest of the minor.

Dealer A offers bonds on a firm basis to Dealer B with a recall. What does this mean? I. Dealer B has the right to buy the bonds before anyone else II. The price of the bonds has been set III. A time to sell the bonds has been set IV. A recall time has been established

I, II, III, and IV Explanation: When a dealer wants to buy bonds, such as Dealer B, he asks Dealer A to make a firm offer which will hold good for a specified time. The bonds are said to be out firm. Dealer B has the option or right to buy the bonds from Dealer A and sell the bonds before anyone else within the set time. A recall privilege can be set, which gives Dealer A the right to notify Dealer B that he has only a set time (for example, five minutes) to buy the bonds, after which time the firm pricing is cancelled.

If a broker-dealer goes bankrupt, the trustee appointed under the Securities Investor Protection Act is responsible for: I. Notifying the firm's customers that the firm is in the process of being liquidated II. Distribution of securities owned by customers that are held by the firm III. Seeing that the distribution of cash and securities are administered in an orderly manner

I, II, and III Explanation: If a corporation goes bankrupt, it is the responsibility of the SIPC trustee to follow through on all of the items listed.

Which of the following persons are entitled to participate in a Keogh plan? I. A self-employed doctor II. A security analyst who made $2,000 giving public lectures on technical analysis III. An engineer of a corporation who made $5,000 making public speeches on his specialization IV. An executive of a corporation who received $5,000 in stock options from his corporation

I, II, and III only Explanation: An individual with self-employed income may establish a Keogh. Of the choices given, a doctor may participate because he is self-employed. The security analyst and the engineer could set up a plan for the income they derive from outside, self-employed activities. An executive of a corporation who received $5,000 in stock options may not participate because he is not self-employed.

Which of the following actions must a municipal dealer disclose on a confirmation? I. The municipal dealer acted as a agent II. The municipal dealer acted as a principal III. The municipal dealer acted as an agent for a third party IV. The municipal dealer acted as a bona fide market maker

I, II, and III only Explanation: The MSRB requires a municipal dealer to indicate to a customer through a written confirmation the capacity in which the dealer acted. The municipal dealer must disclose if it acted as an agent for the customer, as a principal for its own account, or as an agent for a third party. If the municipal dealer acted as an agent for a third party, the municipal dealer must disclose the name or promise to provide the name of the third party. Also, the amount of money received from the third party by the municipal dealer is required. A bona fide market maker is one who makes a market in over-the-counter stocks.

The Securities Exchange Act of 1934: I. Created the SEC II. Provided for the regulation of credit III. Provided for the regulation of exchanges IV. Provided for the regulation of new issues

I, II, and III only Explanation: The Securities Exchange Act of 1934 created the SEC and provided for the regulation of credit and exchanges. The Securities Act of 1933 provided for the regulation of new issues.

Which of the following choices may write calls covered by XYZ stock? I. The president of XYZ Corporation II. The trustee of XYZ Corporation's pension fund III. XYZ Corporation IV. ABC Corporation

I, II, and IV only Explanation: Individual stockholders may write calls on stock they own, regardless of their position as an insider. Trustees of pension funds are permitted by ERISA to write covered calls provided the strategy meets the objectives of the fund. Corporations may write calls covered by stock of other companies. However, a corporation may not write calls covered by its own stock.

Which TWO of the following statements are TRUE concerning Section 457 plans? I. These plans are state-sponsored and used to fund higher education expenses II. These plans are used to fund retirement III. These plans grow tax-deferred IV. These plans grow tax-free

II and III Explanation: A Section 457 plan is a type of qualified retirement plan used by many public sector workers. 457 plans grow on a tax-deferred basis and are generally subject to the same contribution limits as 401(k) and 403(b) plans. Each has similar tax features and contribution allowances. The difference between the plans is the type of employee who may use them. A 401(k) plan is used primarily by for-profit employees, a 403(b) plan by nonprofit employees, and a 457 plan by some local government workers. State-sponsored, higher education savings plans that may be opened by an investor are referred to as Section 529 plans, not 457 plans.

Rule 145 applies to a(n):

Merger or acquisition Explanation: Rule 145 applies to mergers, consolidations, reclassifications of securities, or transfers of corporate assets. Rule 145 requires a company to provide written disclosures to shareholders in connection with the previously listed corporate actions. Stock splits, dividends, and the resulting changes in par value are specifically exempted from filing under Rule 145.

A securities market is considered efficient if which TWO of the following conditions are present? I. Large differences between the bid and offer prices II. Small differences between the bid and offer prices III. A large number of transactions IV. A small number of transactions

II and III Explanation: An efficient secondary market for securities will exist if a large number of buyers and sellers are willing to pay similar prices. This will help to keep the difference between the quoted prices (the spread) small and will attract a large number of buyers or sellers willing to execute transactions

A buyer of a call option is subject to which TWO of the following choices? I. Unlimited risk II. Protection for a short position III. A position that provides leverage IV. An obligation to buy stock

II and III Explanation: Buying a call option provides leverage because the buyer controls 100 shares of stock for a relatively small cost (the premium). The risk is limited to the premium since that is the maximum potential loss. If an investor is short stock, he risks a loss if the market price of the stock increases. Buying a call provides protection against this situation since he could buy stock at a set price by exercising the call. A buyer of a call option has a right to buy stock, not an obligation.

A Web site is being designed for a registered representative of a member firm. Which TWO of the following statements are TRUE regarding the design of this Web site? I. The FINRA logo must be displayed II. The registered representative's firm name must be displayed III. A reference to FINRA membership is permitted IV. Links to other Web sites are not permitted

II and III Explanation: Care should be taken in the design of Web sites. The name of the member firm with whom the registered representative is associated must be displayed. While the use of the FINRA logo is NOT permitted, the registered representative's association with a FINRA member firm is allowed. However, when a reference to FINRA membership is used, the Web site must provide a hyperlink to FINRA's home page. Links to other Web sites are allowed but care should be taken that these sites do not provide fraudulent or misleading information

Which TWO of the following securities will MOST likely be subject to a withholding tax? I. A bond issued by a U.S. company but sold to U.S. investors II. A bond issued by a foreign company but sold to U.S. investors III. Stock issued by a foreign company but sold to U.S. investors IV. Stock issued by a U.S. company but sold to U.S. investors

II and III Explanation: Choice (II) is an example of a Yankee bond and choice (III) is an example of an ADR. Dividends and interest paid to a U.S. investor on foreign securities may be subject to a withholding tax by the country from which they were paid. If the investor has securities that paid dividends and/or interest that were subject to a foreign tax, the broker-dealer will send the investor a form that will report the gross amount of the dividends or interest, and the amount of tax withheld by the foreign government.

A registered representative wants to open a new account for a client who is a resident of Mexico. Which TWO of the following statements are TRUE? I. Customer verification of the client's personal information is not required if the customer was referred by an existing client II. Customer verification of the client's personal information is required under any circumstances III. The client may have either a taxpayer identification number or a passport number and country of origin IV. The client must have a taxpayer identification number to open the account

II and III Explanation: If a non-U.S. citizen wants to open a new account, the member firm is required to obtain certain information as part of its AML procedures under its customer identification program (CIP). For non-U.S. citizens, the firm must obtain the client's name, address, date of birth and one of the following: passport and country of issuance, taxpayer identification number, or any other government issued document with a photograph. An RR always needs to verify the client's personal information regardless of whether the customer was referred by an existing client.

Which TWO of the following choices are types of securities issued by the Federal Home Loan Bank? I. Discount notes with maturities between 2 and 10 years II. Discount notes with maturities of less than 1 year III. Consolidated bonds with maturities of up to 30 years IV. Consolidated bonds with maturities ranging from 20 to 40 years

II and III Explanation: The Federal Home Loan Bank issues two types of securities to raise capital, discount notes with maturities of less than 1 year, and consolidated bonds with maturities of up to 30 years. These funds are used to lend funds to FHLB member banks that, in turn, lend these funds to their customers.

Which TWO of the following offerings are subject to the Trust Indenture Act of 1939? I. An offering of municipal revenue bonds II. An offering of convertible securities by a company listed on the NYSE III. An offering of corporate notes with a maturity of three years IV. A private placement of bonds issued by a corporation, sold by a broker-dealer

II and III Explanation: The Trust Indenture Act of 1939 regulates the public issuance of corporate securities that are sold interstate. It does not cover exempt securities such as U.S. government securities, municipal securities, or private placements. A sale of corporate convertible securities and an offering of corporate notes are subject to the 1939 Act. Corporate debt with a maturity of 270 days or less (commercial paper) is exempt from the 1933 Act and the 1939 Act.

The market price of XYZ Company's stock is $60. The price-earnings ratio is 10 and earnings per share is $6.00. If the stock were to split 2-for-1, which of the following statements are TRUE? I. The price-earnings ratio will be reduced to 5 II. The price-earnings ratio will remain at 10 III. The earnings per share will be reduced to $3.00 IV. The earnings per share will remain at $6.00

II and III Explanation: A stock split will increase the number of shares outstanding while decreasing the market price of the stock. The split will also have the effect of reducing earnings per share since the number of shares outstanding will increase. The 2-for-1 split will reduce the market price to $30 ($60 x 1/2) and the earnings per share to $3.00 ($6.00 EPS x 1/2). However, the price-earnings ratio (market price/EPS), which was 10 before the split, will remain the same since both the market price and the earnings per share are reduced by the same percentage ($30/$3.00 EPS = 10).

An investor purchased 100 shares of ABC stock at $53 and on the same day purchased an ABC June 50 put at 2. After the put expired, the investor sold the ABC stock at $60. The investor's: I. Cost basis for tax purposes was 53 II. Cost basis for tax purposes was 55 III. Profit was $500 IV. Profit was $700

II and III only Explanation: When a married put (stock and put purchased on the same day) expires, the premium is added to the cost basis of the stock. The cost basis, therefore, will be $55 (53 + 2). The sale at $60 results in a profit of $5 per share (60 - 55), for a total of $500.

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

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

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

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

A client is seeking a mutual fund that will maximize its return by limiting expenses. As a result, he wants to invest in a portfolio that is passively managed. Which TWO of the following choices will help achieve this goal? I. A portfolio that invests only in fixed income securities II. An exchange-traded fund based on the Nasdaq 100 Index III. A mutual fund that tracks the S&P 500 Index IV. An account managed by an investment adviser

II and III Explanation: Passive investing or management is designed to minimize transaction costs and capital gains. This is accomplished by a portfolio manager trying to mirror an index, not outperfom an index. An exchange-traded fund or mutual fund that follows and is designed to replicate an index such as the S&P 500 or the Nasdaq 100 will accomplish this objective. Active management is a situation where the portfolio manager frequently trades the securities in a portfolio to achieve results that will outperform an index. The portfolio could be invested in equity or fixed-income securities.

XYZ Corporation has a 6 1/2% convertible bond outstanding that is convertible into 40 shares of common stock. The bond is currently selling in the market at 85 ($850) and the common stock is selling at 21. The XYZ Corporation is offering its existing bondholders a new straight (nonconvertible) bond paying 6 1/2% that matures at the same time as the convertible bond. The effect of the successful completion of the proposal would be to: I. Reduce interest costs II. Reduce potential dilution III. Have no effect on interest costs IV. Increase dilution

II and III Explanation: Prior to the refunding, if all of the bonds were converted into common stock, outstanding shares would increase causing earnings per share to decrease (dilute). The effect of the successful completion of the proposal (refunding) would be to reduce potential dilution because the conversion provision is being eliminated. There would be no reduction in interest costs since the new bonds are paying the same rate of interest as the old bonds (6 1/2%).

Which TWO of the following situations require written notification to an employer? I. A registered person is leaving the country on a business trip for more than three months II. A registered principal is serving on the board of directors of a private company III. A registered person wants to act as a consultant for a private placement of a security that is not being offered by her broker-dealer IV. A registered principal intends to purchase corporate securities in a personal account established at her employing broker-dealer

II and III Explanation: Registered personnel who pursue outside business interests and who will be compensated, or who participate in private securities transactions, must provide their employers with prior written notification. The employer may then approve or disapprove the participation. A registered person who has an existing account at her firm does not need to provide written notification to her employer for each transaction.

Which TWO of the following statements are TRUE regarding the trading restrictions placed on a director of a publicly traded company? I. There is a limit on the amount of registered stock the director may purchase II. There is no limit on the amount of registered stock the director may purchase III. There is a limit on the amount of unregistered stock the director may sell IV. There is no limit on the amount of unregistered stock the director may sell

II and III Explanation: Restricted stock is stock that is not registered and is typically acquired by an individual through a private placement. With regard to restricted stock, the purchaser must hold the stock for six months before she may dispose of it. Control stock is registered stock that is acquired by an affiliate (control) person, such as an officer or director, in the secondary market. A control person who acquires stock through an open-market purchase may sell the stock anytime. There is no limit placed on the number of registered shares an insider may purchase. According to Rule 144, there is a restriction on the sale of both restricted and control stock.

Which TWO of the following statements are TRUE concerning revenue bonds? I. Revenue bonds may be issued only with voter approval II. Revenue bonds may be issued even though local debt limits have been reached III. Revenue bonds usually pay higher interest than general obligation bonds IV. Revenue bonds are not exempt from federal income taxes

II and III Explanation: Revenue bonds may be issued without voter approval and may be issued even though a local debt limit has been reached. They are backed by the revenue derived from a project and not the taxing power of a municipality. They usually pay higher rates of interest than general obligation bonds since they have no taxing power as do general obligation bonds. The interest from both GO and revenue bonds is exempt from federal income taxes.

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

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

An insider of XYZ Corp. buys company stock in the open market at $63/share. Ten months later, the insider wishes to sell the stock at the current market price of $68/share. Which TWO of the following statements are TRUE regarding this transaction? I. The sale is subject to the six-month holding period under Rule 144 II. This sale is not subject to the six-month holding period under Rule 144 III. The sale is subject to the volume limitations under Rule 144 IV. The sale is not subject to the volume limitations under Rule 144

II and III Explanation: Rule 144 requires that restricted (unregistered) stock be held for six months before it may be resold. Control stock (registered stock purchased by insiders) is not subject to a holding period requirement under Rule 144. Both restricted and control stock are subject to the volume limitations under the rule.

Which TWO of the following statements are TRUE about SIPC? I. It was created by an Act of Congress and is considered a U.S. government agency II. It is a nonprofit organization that broker-dealers join III. It provides insurance for customer accounts in the event of bankruptcy by a broker-dealer IV. It provides insurance for customer accounts for fraud, embezzlement, and counterfeiting

II and III Explanation: SIPC can borrow from the U.S. government, but it is not an agency of the U.S. government. SIPC provides insurance coverage for customer accounts in the event of a brokerage firm's failure. Each brokerage firm must take out a separate insurance policy (known as a fidelity bond) to insure itself for fraud, embezzlement, and counterfeiting. This bonding is not provided by SIPC.

A customer wishes to make a purchase based on his belief that interest rates will decline over the next 15 years. The recommendation of which TWO of the following securities is NOT consistent with the customer's belief? I. A 5-year noncallable bond II. A tax anticipation note (TAN) III. Floating rate notes IV. A 15-year bond with a 5-year put feature

II and III Explanation: Since the customer believes interest rates will decline, he wants to lock in a high yield for the next 15 years. A TAN is a short-term security and a floating rate note's interest rate would be adjusted downward with prevailing interest rates. Neither would lock in the high return. The 5-year noncallable bond would lock in a high return without the possibility of being called prior to maturity. The 15-year bond locks in the high return and the 5-year put feature permits the investor to redeem the bond after 5 years or keep it to maturity. This decision would depend on the prevailing rates in 5 years.

An investor buys a DEF April 35 put at 3 and simultaneously writes a DEF April 30 put at 1. The investor has created a: I. Bullish put spread II. Bearish put spread III. Put debit spread IV. Put credit spread

II and III Explanation: Since the investor is paying more for the option purchased than was received for the option sold, it is a debit spread. When analyzing a debit spread, look at the buy side of the spread. Buying a put indicates that the investor is bearish (believes the stock price will decline).

Under the provisions of the Securities Act of 1933, which TWO of the following securities are exempt? I. Securities issued by broker-dealers II. A general obligation bond issued by the city of San Francisco III. Corporate debt maturing in six months IV. Securities issued by an investment company

II and III Explanation: The Securities Act of 1933 exempts government securities (both direct and agency), municipal securities (e.g., a G.O. bond), and corporate debt with a maturity of 270 days or less.

A customer contacts her registered representative concerning the bid and offer prices of mutual funds listed in various financial publications and Web sites. Which TWO of the following statements are TRUE? a. The bid price is equal to the net asset value minus the redemption fee b. The bid price is equal to the net asset value and does not include the redemption fee c. The offer price is equal to the net asset value plus the sales charge d. The offer price is equal to the net asset value minus the sales charge

II and III Explanation: The bid price of a mutual fund is also equal to the net asset value (NAV) and is the price a customer will receive if shares are sold. It does not include the redemption fee, which may be charged when the customer sells her shares. The offer price is equal to the NAV plus the sales charge, if any, and is the price a customer would pay to purchase shares of a mutual fund.

A registered representative wants to open a joint account for the dentists in his office building. Dr. White and Dr. Enamel will each contribute equally to the account but each dentist wants his portion of the account to pass to his own estate. Which TWO of the following statements are TRUE? I. The account should be established as Joint Tenants with Right of Survivorship II. The account should be established as Tenants in Common III. All dividends and capital gains in the account will be reported by the brokerage firm under one Social Security number IV. All dividends and capital gains in the account will be reported by the brokerage firm on a percentage-of-ownership basis

II and III Explanation: The dentists should open a Tenants in Common account. If a Joint Tenants with Right of Survivorship account is used, all assets pass to the surviving owner upon the death of one of the participants. All joint accounts use only one Social Security number for tax reporting purposes. The dentists must indicate the percentage of dividends, bond interest, and capital gains they are responsible for on their individual returns.

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

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

Which TWO of the following metrics may be calculated by examining the income statement of a company? I. The debt-to-equity ratio II. The operating profit margin III. The bond coverage ratio IV. The current ratio

II and III Explanation: The operating profit margin is found by dividing the sales by the operating income or profit. The bond coverage ratio is found by dividing the interest expense by EBIT. All of this information can be found in the income statement. The debt-to-equity ratio and current ratio can be calculated by examining a company's balance sheet.

A pension fund manager is holding a large portfolio of common stock. Many of these securities are represented in an index that has listed options trading. If a general market downturn is anticipated, the pension fund manager can: I. Buy stock index call options II. Write stock index call options III. Buy stock index put options IV. Write stock index put options

II and III Explanation: The pension fund manager can hedge against a decline in the market by writing stock index call options and buying stock index put options. If the market did decline, the stock index call option will expire unexercised and the fund will generate premium income. The put index option's value increases as the index declines, and can be sold by the pension fund manager at a profit. This profit, along with the premium income received from writing call index options, can help offset the loss incurred by the common stock in the pension fund's portfolio.

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

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

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

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

Which TWO of the following statements are TRUE regarding brokered CDs sold by registered representatives? I. A callable CD gives the investor the right to redeem the security prior to maturity II. If the CD is called by the issuer, the client may not be able to receive a comparable rate of interest III. A callable CD that is called prior to maturity may offer a client a return that is less than the yield to maturity IV. Since the security is issued by a bank, a callable CD will provide no limit to the amount of FDIC insurance

II and III Explanation: When a client purchases a brokered or long-term CD issued by a bank, the broker-dealer offering the product is required to provide a client with certain disclosures. These disclosures will be based on the potential risk and investment considerations relevant to the client. The following disclosures should be made concerning callable CDs. - The issuer at its sole discretion may decide to call in the CD prior to maturity. Therefore, the client does not have the right to redeem the CD prior to maturity. - If the CD is called prior to maturity, the client may be unable to reinvest the funds and receive a comparable rate of interest (if rates have declined). - A CD that is called prior to maturity may offer a client a return that is less than the yield to maturity. - The CD may not be called by the issuer, requiring the client to hold the security until maturity. All brokered CDs carry limited FDIC insurance if the amount of the CD at one bank exceeds the regulatory limits established by the FDIC.

An investor owns stock that has increased in value. To protect his profit, he can: I. Enter a buy stop order II. Enter a sell stop order III. Buy put options on the stock IV. Buy call options on the stock

II and III only Explanation: A sell stop order can be used to protect a profit or limit a loss on an existing long position. It is not activated until the market declines to or below the stop price. By purchasing put options, the investor will have the right to sell his stock at a set price (strike price) and will establish a specific sales price

The French economy is on the verge of a recession. The Swiss government announces that there was another quarterly increase in its GDP figures. An investor wanting to act on this information will buy: I. Euro calls II. Euro puts III. Swiss franc calls IV. Swiss franc puts

II and III only Explanation: An increase in the Swiss GDP is a positive situation for the Swiss economy. This may cause the value of the Swiss franc to rise. If the Swiss franc rises, the holder of a Swiss franc call will profit. A looming recession in France may cause the euro to decrease in value. If the euro decreases, the holder of a euro put will profit.

Corporations repurchase their own stock in the open market to: I. Increase the number of voting shares that the corporation holds II. Increase earnings per share III. Have stock available for stock option plans for key employees IV. Make the stock more marketable

II and III only Explanation: Corporations repurchase their own stock in the open market to increase earnings per share and to have stock available for stock option plans for key employees. Stock repurchased becomes treasury stock, which does not have voting rights, and its marketability is very difficult to predict.

The tendering of equity securities is permitted if an individual is: I. Long investment-grade, nonconvertible securities II. Long call options or convertible securities that have been exercised III. Long a convertible security that has not been tendered for conversion IV. In possession of the securities by virtue of having borrowed them

II and III only Explanation: Short tendering of stock (i.e., tendering stock that a person does not own) is prohibited. Equity securities may be tendered only if the investor is long the stock, or long an equivalent security. Equivalent securities include rights, warrants, and other securities issued by the company that is the subject of the tender offer. All of these are immediately convertible into, or exchangeable or exercisable for, the subject security. Standardized call options are not equivalent securities, unless the option has been exercised.

The 5% markup policy applies to:

Nonexempt securities Explanation: The 5% markup policy does not apply to transactions requiring a prospectus (new issues, mutual funds, and registered secondaries) or transactions in certain exempt securities (such as municipal securities).

When an investor purchases a municipal fund security, she will pay a sales load that is stated in the official statement. Which TWO of the following statements are TRUE regarding an advertisement for this municipal fund security? I. The minimum sales load should be stated in the ad II. The maximum sales load should be stated in the ad III. Sales charges may not be reflected in performance data IV. Sales charges may be reflected in performance data

II and IV Explanation: A 529 College Savings Plan is a type of municipal fund security. If sales loads are depicted in municipal fund securities advertising, the maximum amount of the sales charge should be stated. Additionally, sales charges may be reflected in the performance data of the investment and, if they are not, a statement to that effect should be made.

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

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

Which TWO of the following taxes would best describe income taxes and estate taxes? I. Flat taxes II. Graduated taxes III. Regressive taxes IV. Progressive taxes

II and IV Explanation: A progressive tax is graduated (the tax rate increases as the taxable amount increases). Income taxes, estate taxes, and gift taxes are progressive. A flat tax is a situation where the tax rate remains constant regardless of the taxable amount. Flat taxes tend to be regressive in nature, which means that they have a greater effect on lower wage earners. Therefore, flat taxes are often categorized as regressive. Examples of regressive taxes are sales taxes and gasoline taxes.

Which TWO of the following statements are characteristics of REITs? I. They are formed as a limited partnership II. They provide limited liability for shareholders III. They invest only in mortgages IV. They are required to distribute a minimum percentage of their income

II and IV Explanation: A real estate investment trust (REIT) is organized as a corporation that offers stock to the public and, as such, provides investors with limited liability. REITs are not limited partnerships and, therefore, will not have a flow-through of losses. An investor's risk is limited to her investment. They can have an equity position in real estate (own the buildings) or be involved in mortgage activities (lend money). They must distribute 90% of their income in order to qualify for preferential tax treatment.

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

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

Which TWO of the following securities will enable an investor to both receive interest income and have a maturity date allowing their principal to be returned in one lump sum? I. A municipal bond fund containing mostly revenue bonds II. Municipal bonds that are subject to the alternative minimum tax III. A closed-end fund containing municipal bonds of one state IV. A portfolio of municipal bonds, some which have call provisions

II and IV Explanation: All of the securities listed will pay interest income to investors. The municipal bond fund and the closed-end fund invest in municipal bonds that pay interest. The funds will then pass through these payments to the holders of these securities, either monthly, quarterly, or semiannually. Only by investing in actual bonds will an investor be able to have her principal returned in one lump sum when the bonds mature. The type of municipal bonds, whether they are callable, or whether they are subject to the AMT, is irrelevant. One of the major differences between investing in actual bonds versus bond funds is that bonds will have a maturity date and bond funds will not mature. If a 20-year bond is purchased, 19 years later it will mature in one year. A 20-year bond fund will always have in its portfolio bonds that mature in approximately 20 years. In order for an investor to receive her principal with a bond fund, the investor is required to sell or redeem her shares of the fund.

Which TWO of the following statements are TRUE concerning an institutional communication? I. A principal is required to approve the communication prior to use II. The communication should be reviewed, but is not required to be approved by a principal III. The communication must be filed with FINRA IV. The communication does not need to be filed with FINRA

II and IV Explanation: An institutional communication is defined as any written or electronic communication that is distributed or made available only to institutional investors. Each broker-dealer is required to establish written policies and procedures to review institutional communications, but principal approval is not required. In addition, an institutional communication is not required to be filed with FINRA.

Which TWO of the following statements are TRUE concerning bank-qualified municipal bonds? I. To qualify, the municipality may only issue up to $10,000,000 every six months II. To qualify, the municipality may only issue up to $10,000,000 annually III. Commercial banks may receive a 70% tax deduction of the interest costs IV. Commercial banks may receive an 80% tax deduction of the interest costs

II and IV Explanation: Bank-qualified bonds are issued by small municipalities and, to qualify, a municipality may only issue up to $10,000,000 annually. This is done to encourage commercial banks to invest in locally issued municipal securities. Commercial banks that purchase this type of security are permitted to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds.

Which TWO of the following choices are differences between exchange-traded funds (ETFs) and exchange-traded notes (ETNs)? a. ETFs may be traded in the secondary market and ETNs cannot b. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note and ETFs do not have issuer credit risk c. ETF returns are based on the performance of an index and ETNs pay a fixed coupon rate d. ETNs have a maturity date and ETFs do not

II and IV Explanation: ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it could negatively impact the value of the ETN, regardless of how its underlying index performs.

Which TWO of the following statements apply for a new issue to be sold in its home state and neighboring states? I. The issuer must file a Rule 147 Form II. Registered representatives selling the stock must be registered in whatever states in which they plan to make sales III. FINRA must approve the sale in all the states IV. The Blue-Sky laws (state securities laws) of all the states in which the securities will be sold must be observed

II and IV Explanation: For the issue to be sold in its home state and neighboring states, individuals selling the new issue must be registered to sell the securities in those states. The Blue-Sky laws (state securities laws) of those states in which the securities will be sold must also be observed.

Which TWO off the following sources of income would MOST likely be used by a school district to meet its debt service for general obligation bonds that it issued? I. Income tax II. Real estate tax III. Sales tax IV. Traffic fines

II and IV Explanation: General obligation bonds are backed by the full faith, credit, and taxing power of the municipality that issues the bonds. The income to pay debt service on these bonds is derived from taxes and other general revenues. For smaller local governments, such as school districts, it would include primarily real estate taxes (also called property or ad valorem tax). In addition, traffic and other types of local fines may also be used. Income taxes and sales taxes would most likely be used to meet the debt service of larger issuers, such as states and large cities.

A customer owns a mutual fund that invests primarily in foreign securities. Which TWO of the following amounts will be reported to the customer concerning the tax treatment of interest and dividends? I. The net amount of dividends and interest II. The gross amount of interest and dividends III. The amount of tax paid to the Internal Revenue Service (IRS) IV. The amount of tax withheld by the foreign government

II and IV Explanation: If an investor owns a mutual fund that invests in foreign securities, and dividends and interest are paid to a U.S. investor, these earnings may be subject to withholding tax by the country from which they were paid. The broker-dealer will send the investor a form that will report the gross amount of the dividends or interest, and the amount of tax withheld by the foreign government.

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

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

Which TWO of the following statements are TRUE concerning long-term (brokered) CDs? I. They are considered highly liquid II. Investors may be subject to interest-rate risk III. The total amount of the investment will be FDIC-insured IV. They may be callable

II and IV Explanation: Long-term brokered CDs are not considered highly liquid since there is no active secondary market. Like most fixed-income securities they are subject to interest-rate risk. In addition, they may be callable and have other features such as floating rates. FDIC insurance may not apply to long-term CDs sold by broker-dealers if the face amount exceeds $250,000.

Which TWO of the following statements are TRUE concerning gifts and gratuities? I. Gifts should be valued at the lower of the cost or the market value II. Gifts should be valued at the higher of the cost or the market value III. The rule would apply to a personal gift for the birth of a child IV. The rule would not apply to a personal gift for the birth of a child

II and IV Explanation: Member firm personnel may not give, or permit to be given, a gift of material value exceeding $100 per recipient per year to personnel employed by another member firm. The gifts should be valued at the higher of the cost or market value. For example, if tickets to a concert have a face value of $90, but the tickets were purchased at a value of $150, the higher value would be used. The rule does not apply to personal gifts such as the birth of a child or a wedding gift, provided these gifts are not related to the business between the recipient and the broker- dealer.

The State of North Carolina is offering $50,000,000 of 5 1/2% sewer improvement bonds. Which TWO of the following choices apply to the bonds? I. They are subject to the margin requirements of Regulation T II. They are subject to the antifraud provisions of the Securities Act of 1933 III. They are subject to the Trust Indenture Act of 1939 IV. They are exempt from the registration requirements of the Securities Act of 1933

II and IV Explanation: Municipal bonds are exempt from the registration provisions of the '33 Act, but are subject to the antifraud provisions. They are also exempt from Regulation T and the Trust Indenture Act of 1939.

A municipality issues revenue bonds for which TWO of the following reasons? I. To finance the building of a high school II. To finance the construction of a power plant III. To pay the salaries of police and firefighters IV. To pay the salaries of transit workers

II and IV Explanation: Revenue bonds are usually issued to construct and operate some type of revenue producing facility. Examples include power plants, transit systems, turnpikes, colleges, bridges and tunnels, hospitals, sewer systems, and stadiums. General obligation bonds are issued to finance public schools (elementary school and high school) and to pay the general expenses of running a municipality (e.g., police and firefighters).

A client is notified by his broker-dealer that certain trades may be executed by an Electronic Communication Network (ECN). Which TWO of the following choices are risks of using this type of system? I Trades are not subject to SRO regulations II There may be a limited ability to execute transactions III Higher commissions are possible IV The system may only accept certain types of orders

II and IV Explanation: Some broker-dealers use ECNs to execute customer orders. ECNs act as matching systems to execute orders from subscribers. Some broker-dealers will use a market maker during normal business hours and an ECN to execute trades after normal business hours (after 4 p.m.). If the system cannot match a buyer and seller, a client's order may have a limited ability to be executed. Some ECNs will accept only certain types of orders, such as limit orders. Trades are subject to SRO regulations and the commissions clients are charged generally are not higher if a broker-dealer uses an ECN.

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

II and IV Explanation: 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.

New Issue $50,000,000 City of Denver, Colorado Pollution Control Bonds Par Value $1,000 Amount Rate Maturity Date Price $50,000 5 1/2% July 1, 2027 101 $60,000 6 1/2% July 1, 2028 101 Based on the above information, which of the following statements may be made about the bonds maturing in 2027? I. The yield to maturity will be greater than 5.50% II. The yearly interest payment is $55 per bond III. The amount of principal the investor will receive at maturity will be greater than $1,000 IV. An investor holding the bond until maturity will have a yield of less than 5.50%

II and IV Explanation: The bonds maturing on July 1, 2027 have a nominal yield of 5 1/2% and have been issued at 101, which is 101% of their par value of $1,000, or $1,010. The yearly interest payment is 5 1/2% of par, or $55. The bonds are offered at a premium and an investor paying $1,010,will receive $1,000 at maturity. A bond offered at a premium and held to maturity will have a yield of less than the coupon (nominal yield) of 5.50%.

A corporation intends to sell 1,000,000 shares of stock through an underwriter. The prospectus states that 500,000 shares are being sold by the corporation from authorized but unissued stock. Also, 500,000 shares are being sold by officers and directors of the corporation. Which of the following statements are TRUE? I. This is a primary distribution for 1,000,000 shares II. This is a combined primary and secondary distribution of 1,000,000 shares III. All of the proceeds of the offering will go to the corporation IV. The proceeds of the offering will be divided between the corporation and selling officers and directors

II and IV Explanation: The corporation is selling 500,000 shares from authorized but unissued stock which is a primary distribution. The officers and directors are selling 500,000 shares that were previously issued to them and are already outstanding. This is a secondary distribution. The proceeds of the offering will, therefore, be divided among the corporation and the selling officers and directors of the corporation.

Which TWO of the following metrics can be calculated by examining the balance sheet 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

II and IV Explanation: The debt-to-equity ratio is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings). Working capital is found by subtracting current liabilities from current assets. All of these numbers may be found in a company's balance sheet. EBIT and the operating profit margin can be calculated by examining the income statement.

Which TWO of the following choices would be included in a subscription agreement for a direct participation program (DPP)? I. The priority provisions if the partnership is liquidated II. A statement indicating the purchaser understands the risks of this investment III. A statement listing the amount of tax credits or deductions the investor will receive IV. A statement that attests to the investor's ability to meet the financial requirements of this investment

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

Bergen County has issued Build America Bonds to improve its transportation system. Which TWO of the following statements are TRUE concerning these bonds? I. The bonds are federally tax-free II. The bonds are federally taxable III. The issuer will receive a federal tax credit IV. The issuer will receive a federal reimbursement

II and IV Explanation: These are an example of Direct Pay Build America Bonds (BABs). BABs are a type of municipal bond that pays taxable interest but the Treasury will reimburse 35% of the interest paid on the bonds to the issuer, which reduces the cost of borrowing. This would allow municipal issuers to compete with corporate issuers when raising capital.

In which TWO of the following situations is a customer NOT considered covered when writing a put option? I. The customer has cash equal to the exercise value of the contract II. The customer is long a call option III. The customer is short the underlying security IV. The customer is long the underlying security

II and IV Explanation: To write a covered put option in a cash account, the customer must have cash in the account equal to the total exercise value of the contract. If the writer is short the underlying stock, the put is considered covered for margin purposes, but this transaction may not be written in a cash account, only in a margin account. Since the question did not specify the type of account, both choices (I) and (III) allow the customer to be considered covered.

An investor has been making payments to a variable annuity for the last 20 years. The investor decides to annuitize and selects a straight-life payout. Which TWO of the following statements are TRUE? I. The investment risk is assumed by the insurance company II. The investment risk is assumed by the customer III. The amount of the payment to the customer is guaranteed by the insurance company IV. The amount of the payment to the customer is not guaranteed

II and IV Explanation: Unlike a fixed annuity, the customer assumes the investment risk in a variable annuity. The amount of the payment depends on the performance of the separate account. The payment may increase, decrease, or remain the same, since the amount of the payment is not guaranteed. In addition, since a straight-life settlement option was chosen, payments will stop when the investor dies, regardless of the amount left in the contract.

When determining the position limit, the member firm will aggregate which TWO of the following positions? I. Long calls and long puts II. Long calls and short puts III. Short calls and short puts IV. Short calls and long puts

II and IV Explanation: When determining a customer's position in relation to the exchange's position limit, the member firm will consider all positions on one side of the market. The position may not exceed the limit on either the long side of the market or the short side of the market. When determining which is the long side of the market, it is NOT correct to aggregate long calls and long puts, or to aggregate short calls and short puts. Instead, the long side of the market is the side on which the investor acquires stock and the short side is the side on which stock is sold. We will examine first the long side of the market. If investors are long calls, they have the option to call away stock. They would, therefore, acquire stock. If investors are short puts, they have the obligation to accept stock if the put is exercised. In both instances, they will acquire stock. Therefore, long calls and short puts are on the long side of the market and are aggregated to determine the total position. In regard to the short side of the market, if investors are long puts, they have the option to sell stock by exercising the puts. If investors are short calls, they have the obligation to sell stock if the calls are exercised. In both instances, they will sell stock. Therefore, long puts and short calls are on the short side of the market and are aggregated to determine the total position.

A municipal securities broker's broker will complete transactions for a: I. Retail customer II. Dealer bank III. Municipality IV. Municipal broker-dealer

II and IV only Explanation: A broker's broker works only for other professionals in the industry, executing trades for dealer banks or other broker-dealers, but not for retail customers or municipalities. The purpose of a broker's broker is to provide anonymity to market participants.

Retail communications regarding options: I. Must be submitted to the exchange 15 days prior to initial use II. Must be submitted to the exchange 10 days prior to initial use III. Must be kept on file by the member firm for six years IV. Must be kept on file by the member firm for three years

II and IV only Explanation: Retail communications regarding options must be submitted to the firms option regulator (an exchange or FINRA) for approval at least 10 days prior to initial use. All retail communications must be maintained on file by the member firm for three years.

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

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

If convertible bondholders convert their bonds into the common stock of a corporation, the effect on the balance sheet of the corporation will be: I. An increase in current assets II. A decrease in total liabilities III. A decrease in stockholders' equity IV. An increase in stockholders' equity

II and IV only Explanation: The conversion of bonds to common stock reduces the total debt of the corporation while increasing stockholders' equity (additional shares of common stock). The answer, therefore, will be a decrease in the total liabilities and an increase in stockholders' equity

When opening a new account, what is the order in which the following actions should take place? I. Obtain approval from the ROP II. Obtain essential facts from the customer III. Obtain a signed options agreement IV. Enter the initial order

II, I, IV, and III Explanation: When opening an account, the first step is to obtain the essential facts regarding the investor's investment objectives and financial means. The account is then approved by the manager and the initial order can be entered. The member firm has 15 days to obtain the signed options agreement.

In terms of the number of stocks in each category, rank the components of the Dow Jones Composite Index from greatest to least. I. Utilities II. Industrials III. Transportation

II, III, I Explanation: The Dow Composite is comprised of 30 industrial stocks, 20 transportation stocks, and 15 utility stocks.

Which of the following statements regarding the opening of a new municipal account are TRUE according to MSRB rules? 1. An employee of a municipal securities firm may open a new account with another municipal securities firm without the employer being notified II. An employee of a municipal securities firm may open a new account with another municipal securities firm as long as the employer is notified and duplicate confirmations are sent to the individual's employer III. A bond attorney may open a new account without restriction IV. An officer of a municipal issuer may open a new account without restriction

II, III, and IV only Explanation: MSRB rules only place restrictions on opening an account for an employee of another MSRB member firm. When opening an account for an employee of another MSRB member firm, the employer must be notified and duplicate confirmations of all trades must be sent to the employer.

Which TWO of the following securities pay a dividend that is NOT eligible for the corporate dividend exclusion? I. Common stock II. Preferred stock III. A real estate investment trust IV. A money-market fund

III and IV Explanation: 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.

Which TWO of the following arrangements is NOT considered a joint account? I. Two unrelated individuals as tenants in common II. Husband and wife as tenants with right of survivorship III. An investment club managed by an investment adviser IV. A mother and her minor child in an account under the UGMA

III and IV Explanation: Only individuals are permitted to have joint accounts. The account may be established as tenants in common or tenants with right of survivorship. A custodian account may be established for the benefit of only one minor. An account for an investment club would not be a joint account.

Which TWO of the following statements are TRUE regarding mutual funds? I. The maximum sales charge is 7% II. Investors can receive a reduced sales charge if they sign a 10-month letter of intent to purchase a certain dollar amount of mutual fund shares III. Under the right of accumulation, investors can receive a reduced sales charge on new purchases when a breakpoint is reached IV. No-load funds may charge a liquidation fee when an investor sells the fund

III and IV Explanation: The only true statements regarding mutual funds that are listed are that under the right of accumulation option, mutual fund investors can receive a reduced sales charge on new purchases when a breakpoint is reached, and no-load funds may charge a liquidation fee when an investor sells the fund. Under industry rules, the maximum sales charge for a mutual fund is 8 1/2%, not 7%. A letter of intent for a reduced sales charge is for 13 months, not 10 months.

According to MSRB rules, the delivery of a mutilated certificate is considered a good delivery:

If the certificate is authenticated by the issuer or transfer agent Explanation: A mutilated certificate may be authenticated by the issuer or an agent of the issuer (e.g., a transfer agent or paying agent). If authenticated, it is considered a good delivery. A mutilated coupon may be guaranteed by any commercial bank as well as the issuer or its agent.

A customer who has purchased an exchange-traded fund (ETF) may be extended credit by a broker-dealer:

Immediately Explanation: Some investment companies, such as mutual funds, are marginable under Reg. T. However, they are considered new issues of securities. The Securities Exchange Act of 1934 prevents a dealer from extending credit on a new issue for at least 30 days. Once the mutual fund shares have been held for 30 days, these securities may be used as collateral for a loan in a margin account at the dealer. In this question, the client is purchasing an ETF, which is not considered a new issue. In this case, credit may be extended immediately.

Various tranches of a long-term speculative bond issue are called by the issuer. The effect on the remaining outstanding bonds is likely to be:

Improved quality Explanation: When part of an issue of long-term speculative bonds is called, the effect on the remaining outstanding bonds will be an improvement in their quality. The issue will have less debt outstanding and there will be less interest charges to pay, which improves the quality of the issue.

A customer purchases a step-up, long-term certificate of deposit. The initial interest rate:

Is lower than current market rates Explanation: A long-term (maturity exceeding one year), step-up CD offers an investor an interest rate that is initially lower than current market rates will pay for that maturity period. The rate will then be adjusted upward at predetermined intervals established by the offering bank. Since they are traded in the secondary market, changes in interest rates will cause the price of this security to fluctuate. Some long-term CDs will be callable by the issuing bank, and the investor may be required to reinvest the funds at prevailing lower interest rates.

Margin requirements established by the FRB may be:

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

Repurchase agreements (repos) and reverse repos would MOST likely be used by:

Institutions that have a need to borrow on a short-term basis, or have money to lend on a short-term basis Explanation: In a repurchase agreement, a firm sells securities to another firm and agrees to repurchase them at a specific time and a specific price, which produces an agreed-upon rate of return. In effect, one firm is borrowing money from the other with securities as collateral.

During the first year, an investment in an oil and gas drilling program will generate the largest deduction from:

Intangible drilling costs Explanation: Intangible drilling costs may be taken as an expense item. Therefore, these costs provide a large deduction in the first year. Depletion and depreciation provide deductions that are spread out over a period of years. Production is an income item, not a deduction.

When evaluating numerous mutual funds, what is meant by net investment income?

Interest + dividends - expenses Explanation: Net investment income of a mutual fund is derived from the total interest plus dividends earned by the fund's portfolio minus the expenses of the fund.

What is the intrinsic value and the time value of the call premium if ABC is trading at 43 and the ABC April 40 call is trading at 4.50?

Intrinsic value is 3 and the time value is 1.50 Explanation: The call is in-the-money (has intrinsic value) since the market price is above the strike price. The in-the-money amount of 3 points is intrinsic value, and the balance of the premium is time value (1.50).

A portfolio's mix of investments and two potential investors are described below. • 20% investment-grade corporate bonds • 30% blue-chip common stock • 20% variable annuity • 20% equity mutual funds • 10% money-market funds Investor A: A 35-year-old single individual, who earns a good salary, makes the maximum contribution to his employer's 401(k), and is willing to assume a moderate degree of risk. Investor B: A 40-year-old married female, who along with her spouse works and earns a good salary. She chooses not to contribute to her employer's 401(k). She is willing to assume a moderate degree of risk

Investor A only Explanation: The fact that this portfolio includes an investment in variable annuities is the determining factor for which investor is the most suitable. Generally, an annuity should only be considered after a person contributes the maximum amount to the qualified plans that is sponsored by his employer since it provides for deductible contributions, tax-deferred growth, and the potential for a company match. Investor A has contributed the maximum amount to his employer's 401(k) plan and could use the variable annuity as an additional retirement vehicle. Since Investor B is not contributing to her employer's pension plan, she should probably not include a variable annuity in her portfolio.

TUV Sep 5.00 puts trade on the CBOE. With the approval of its shareholders, TUV Corporation will reduce its outstanding shares by a factor of 20, which has the effect of increasing its market price 20-fold. What effect will this have on the TUV Sep 5.00 put?

Investors who previously owned 1 TUV Sep 5.00 put will now own 1 TUV Sep 100 put Explanation: TUV Corporation has executed a reverse stock split. When a corporation's stock has a reverse or forward stock split, all associated options contracts are adjusted. When a reverse stock split occurs, the number of shares underlying each option will be reduced and the strike price will increase. In the case of a 1-for-20 reverse split, the number of shares underlying the contracts will be reduced to 5 (100 / 20), and the strike price will be increased by the inverse of the split ($5 x 20 = $100). The contract's aggregate exercise price will remain the same after the adjustment. The number of contracts does not change with a reverse split.

Mr. Green is the manager for an asset allocation fund. In May, the fund's portfolio is allocated as follows. Cash (including T-bills) 5% Convertibles 12% Corporate Bonds 18% Common Stock 65% During the first week of June, Mr. Green shifted the assets in the portfolio to reflect: Cash (including T-bills) 65% Convertibles 5% Corporate Bonds 12% Common Stock 18% The reason for the change is most likely that Mr. Green:

Is bearish on bonds and stocks Explanation: The portfolio shift reflects significantly lower emphasis on stocks and a reduced position in bonds. If the manager anticipated a decrease in interest rates, he would be bullish on bonds. The bond allocation would then be expected to increase. Fundamental analysts are not market timers.

The following dividend information for New York Stock Exchange listed common stocks is reported in The Wall Street Journal. Quarterly Company Dividend Record Date Payable Date Cummings Corp. 50 cents 4/10 5/15 Federal Corp. 85 cents 4/13 5/25 General Electric 95 cents 4/8 5/21 A buyer of Cummings Corporation on May 10:

Is not entitled to receive the 50-cent quarterly dividend Explanation: A buyer of Cummings Corporation is not entitled to receive the 50-cent quarterly dividend because the purchase was made on May 10. This was after the stock had already sold ex-dividend (without the dividend). The ex-dividend date is not given but the record date of April 10 is. Stocks sell without the dividend (ex-dividend), on the second business day preceding the record date. This would be two business days prior to April 10, which is more than one month before the customer bought the stock. Even if the purchase was made for cash, which requires a same-day payment, it is still one month too late for the buyer to receive the dividend.

Which of the following statements BEST describes a banker's acceptance (BA)? a. It facilitates the trading of foreign stocks in the United States b. It helps to finance foreign trade between importers and exporters c. It is used by a municipal issuer in raising funds to meet a seasonal need for cash d. It is issued by nondomestic banks and is secured by Eurodollar deposits

It helps to finance foreign trade between importers and exporters Explanation: Bankers' acceptances (BAs) help facilitate foreign trade. ADRs permit the trading of foreign stocks in the U.S.

If the FOMC enters into a repurchase agreement, what is the immediate effect on the amount of money in the banking system?

It increases the amount Explanation: In a repurchase agreement (Repo), the Federal Open Market Committee first buys the government securities. This action adds money to the banking system. A short time later the dealer repurchases the securities from the Fed. Whether the transaction is a repo or reverse repo is determined by considering the dealers point of view.

Which of the following statements is TRUE regarding TRACE? a. It is a reporting system for corporate bonds b. It is a reporting system for U.S. government bonds c. It is a reporting system for stocks listed on Nasdaq d. It is a reporting system for municipal bonds

It is a reporting system for corporate bonds Explanation: TRACE is a reporting system that was created to provide greater transparency in the corporate bond market. RTRS is the reporting system for municipal bonds and the TRF is the reporting system for stocks listed on Nasdaq. There is no reporting system for U.S. government bonds.

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 position and the potential dilutive effect on the common stock Explanation: 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.

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

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

A customer purchases 1,000 shares of ATT stock at 30, requiring a $15,000 deposit in her margin account. On the payment date, ATT is selling at 35 per share but the customer has not paid for the transaction. Which of the following actions is considered free-riding?

Liquidating the stock at 35 and using the sale proceeds to pay for the $15,000 margin requirement Explanation: The customer would not be permitted to liquidate the stock and use the sale proceeds to pay for the margin requirement. This illegal practice is known as free-riding. To satisfy the $15,000 margin requirement, the customer may deposit the full amount in cash or twice the amount in marginable securities. If there is a legitimate reason for the customer not paying, an extension may be requested.

If the Federal Reserve Board increases the discount rate, you would expect:

Long-term bonds to decrease more in price than short-term bonds Explanation: If the FRB increases the discount rate, the general level of interest rates increases. The prices of long-term bonds decreases more in price than the price of short-term bonds.

If interest rates are expected to rise over a given period, a municipality that must raise money would probably issue securities with:

Long-term maturities Explanation: By issuing securities with long-term maturities, the municipality can lock in the rate of interest it needs to pay on the bonds. Therefore, if interest rates are expected to rise over a given period, the municipality would not be subject to these changes. This would provide the municipality with the capital it needs, without borrowing again at higher rates of interest, as it would need to do if it issued shorter-term or intermediate-term securities.

Rosewood Securities LLC has been accused of buying and selling securities for the purpose of creating artificial trading activity. Which of the following choices BEST describes this activity? a. Churning b. Matched orders c. Capping d. Stabilization

Matched orders Explanation: A matched order is also known as painting the Tape. It is an illegal activity based on a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity. The intention of this activity is to lure unsuspecting investors into trading the stock because of the appearance of unusual trading volume. The manipulators have already taken a position in the stock, and hope to influence the market (illegally) to make their position profitable through this fake heavy trading volume. Churning is a violation in which a salesperson effects a series of transactions in a customer's account that are excessive in size and/or frequency in relation to the size and investment objectives of the account. A salesperson churning an account is normally seeking to maximize her income (in commissions, sales credits or markups) derived from the account. Capping is a situation where a manipulator is attempting to stop a securities price from rising. Stabilization is a practice used in connection with certain public offerings in which an underwriter posts an open bid for securities at a stated price. Stabilization is intended to maintain an orderly market for the securities during the underwriting and to prevent sharp fluctuations in the market for the securities due simply to supply factors. Properly disclosed, this is an acceptable practice.

Which of the following statements is NOT TRUE regarding negotiable CDs?

Maturities of more than one year are prohibited Explanation: Negotiable CDs are traded in the secondary market in minimum denominations of $100,000 but typically trade in $1,000,000 denominations. They are issued by commercial banks and are secured only by the bank's credit. Maturities of less than one year are common but there is no time limit.

A municipal tombstone ad shows bonds maturing serially from 2012 through 2030. The 2030 maturity is a 6.00% bond offered at a 6.75 basis. The bonds maturing in 2020 and thereafter are callable beginning in 2018 @ 102, at 101 in 2019, and at par on any interest date after 2019. The bonds maturing in 2030 should be priced to the:

Maturity Date Explanation: The bonds are being offered at a discount since the yield to maturity (6.75%) is greater than the coupon rate (6.00%). A discount bond is always priced to maturity.

Pickette Financial Services is participating in the IPO of Swank Tanks, Inc., as the managing underwriter. If a research analyst at Pickette wants to initiate coverage on Swank Tanks, she:

Must wait 40 calendar days after the offering date Explanation: A research analyst of Pickette Financial Services must wait 40 days after the date of the offering to publish a research report, or make a public appearance. This quiet period is applied to members that have agreed to participate as a manager or comanager of the IPO. Other participants, such as syndicate and selling group members, must wait 25 days to publish a research report or make a public appearance after the IPO date.

Under what circumstances may a variable annuity be recommended as a short-term investment?

Never, since this practice is prohibited under industry rules Explanation: Under industry rules, mutual funds or annuities may not be recommended as short-term investments or trading vehicles. The fact that a product is no-load does not change this SRO prohibition. There is no such thing as a CDSC reduction agreement.

Which of the following scenarios will have a negative effect on the U.S. balance of payments? a. An increase in U.S. exports to foreign countries b. Foreign purchases of U.S. securities c. New U.S. investments abroad d. New foreign investments in the U.S.

New U.S. investments abroad Explanation: New U.S. investments abroad will tend to increase the basic deficit in the U.S. balance of payments because dollars are leaving the U.S. and are being invested in foreign countries.

A municipal dealer would violate MSRB rules if it gave a quote that is:

Nominal and not specified as such Explanation: MSRB rules require that any quote be bona fide (firm at the time given). Nominal or subject quotes are permitted if they are identified as such at the time given.

An investor purchased $200,000 of 6% general obligation bonds on margin. The customer has a debit balance of $50,000 and is paying interest of 10% yearly on the debit balance from the purchase of the municipal bonds. How much interest expense may the investor use as a deduction for federal income tax purposes?

None Explanation: The investor may not use any of the interest expense as a deduction against ordinary income. Interest charges on money borrowed to purchase federally tax-exempt municipal securities may not be used as an interest expense deduction for federal income tax purposes. The investor is already receiving the benefit of tax-free interest income from the municipal bond and the IRS will, therefore, not allow the interest expense to be deducted as well.

A customer has funded her IRA with pretax contributions. The account has total assets of $350,000. How much may be withdrawn from this account tax-free?

None of the funds Explanation: The earnings on an IRA account grow tax-deferred. If only pretax contributions are made, the entire withdrawal is taxable as ordinary income. None of the funds may be withdrawn tax-free. If an investor maintains an IRA account that has pretax and after-tax contributions and makes withdrawals, the IRS considers withdrawals to come from both sources. Therefore, a portion of the withdrawal is taxable and the other portion is tax-free. Withdrawals from a Roth IRA are tax-free if certain conditions are met.

Sipcar is a stock listed on Nasdaq. The inside market is $3.40 - $3.45. A client contacts an RR and wants to place an order to buy the stock at $3.425. The BEST course of action for the RR is to:

Not accept the order Explanation: According to Regulation NMS, broker-dealers are prohibited from accepting bids, offers, or indications of interest for NMS stocks priced at $1.00 or more, in increments smaller than $0.01 and, for NMS stock less than $1.00, in increments smaller than $0.0001 (a hundredth of a penny). The RR is not permitted to accept an order to buy or sell in subpennies (more than two decimal places) if the stock is trading at or above $1.00. The RR is not permitted to accept this order.

John Jones, a shareholder of XYZ Corporation, reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows: 1. 10 rights plus $10.50 are required to subscribe to one new share of stock 2. Fractional shares become whole shares 3. The record date is Friday, October 17 4. JPMorgan Chase and Bank of America are the transfer agents 5. Goldman Sachs and Morgan Stanley are the standby underwriters John chose to subscribe to the rights offering and purchased additional XYZ Corporation common stock on October 16. Based on his latest stock purchase, he will:

Not be permitted to subscribe because the stock traded ex-rights on October 15 Explanation: John would not be permitted to subscribe to the rights offering for the new shares because he purchased the stock on October 16. The stock sold ex-rights on October 15. Therefore, he would not be a stockholder of record for these shares on the record date of October 17.

An option that is about to expire will automatically be exercised by the OCC if no instructions are given and if it is in-the-money by at least:

One Cent Explanation: The Options Clearing Corporation will automatically exercise an option that is about to expire if it is in-the-money by at least one cent.

The tool most commonly used by the FRB to regulate the amount of money and credit in the banking system is: a. Open market operations b. The discount rate c. Moral suasion d. Reserve requirements

Open market operations Explanation: Of all the tools of the Federal Reserve Board listed, the one most commonly used is open market operations. This is the most flexible tool and can be changed or fine-tuned very easily by buying or selling more or less U.S. government securities in the open market. The other choices are not as flexible, but are used to implement FRB policy. The margin requirement is another tool the FRB can use, but the margin requirement is the least likely tool the FRB would use since it affects only a small segment of the economy.

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

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

A client buys 100 shares of XYZ Corporation at $27 per share and writes an XYZ October 30 call at a $3 premium.The option order ticket would be marked:

Opening sale, covered Explanation: The question states that the individual writes an option after buying the underlying stock. The initial sale of the option would be an opening sale. Since he is long the underlying stock, he is covered. If he did not own 100 shares of XYZ stock, his position would be uncovered and must be executed in the margin account.

All of the following can be bought on margin, EXCEPT: Common stocks listed on an exchange Preferred stocks listed on an exchange Stocks on Nasdaq Options with nine months or less to expiration

Options with nine months or less to expiration Explanation: Options expiring in nine months or less may not be bought on margin. They do not have loan value and, therefore, must be paid in full. However, credit may be extended to purchase LEAPS with more than nine months to expiration.

When a stock is at its resistance price, a technical analyst will most likely say that it is:

Overbought Explanation: A stock is overbought at its resistance level and oversold at its support level.

Money received by a corporation when it sells its stock above its par value is called:

Paid-in capital Explanation: Money received by a corporation when it sells its stock above its par value is called capital surplus or paid-in capital. This is different from earned surplus (retained earnings), which is profits that have been retained by the company and have not been paid as dividends.

A registered representative is taking over the business of another RR who is leaving the firm. Upon examining the accounts, the RR notices that the variable annuities owned by many of the clients have high expenses, mediocre performance, and few investment options. The RR decides that her first action will be to recommend that these customers redeem the old annuities and invest in the new Platinum One variable annuity that has substantially lower expenses, higher long-term performance, and many more subaccounts with varying investment strategies. This activity is:

Potentially acceptable if the benefits of the new annuity outweigh the possible taxes and additional sales charges the client might incur Explanation: The practice of recommending that a client redeem one annuity or mutual fund and invest the proceeds in another annuity (or fund) is called switching. When redeeming the first annuity, the investor might incur deferred sales charges and a tax liability. (The tax liability can be avoided if the switch is eligible to be treated as a Section 1035 exchange.) The reinvestment in another annuity might also involve sales charges or might subject the investor to an additional period when surrender charges could be imposed on redemptions. These disadvantages mean that switching is frowned on by regulators, who suspect the RR involved is often motivated by the prospect of additional commissions rather than the client's best interests. However, when the new annuity is clearly superior to the old product, the additional benefits might outweigh the disadvantages.

Ms. Jones, a shareholder of XYZ Corporation, reads in the newspaper that XYZ Corporation intends to issue new shares through a rights offering. The terms of the rights offering are as follows: 1. 10 rights plus $10.50 are required to subscribe to one new share of stock 2. Fractional shares become whole shares 3. The record date is Friday, October 17 4. JPMorgan Chase and Bank of America are the transfer agents 5. Goldman Sachs and Morgan Stanley are the standby underwriters Ms. Jones also owns 87 shares of the preferred stock of the XYZ Corporation. How many additional shares can she subscribe to and at what cost?

Preferred stockholders are not permitted to participate in a rights offering Explanation: Preferred stockholders are not permitted to participate in a rights offering. Only the common stockholders are permitted.

Which of the following risks is considered unique to an investor holding a CMO?

Prepayment risk Explanation: The risk that an investor will receive her principal earlier than projected (prepayment risk) is the most important risk concerning mortgage-backed securities such as CMOs. Although all fixed-income securities will have interest-rate risk, prepayment risk is unique to CMOs. Most CMOs are highly rated due to the underlying mortgages backing these securities.

The proceeds of the sale of a municipal bond issue are invested in U.S. government securities that are sufficient to cover interest, principal, and call premiums on an outstanding bond issue. The outstanding bonds are called:

Prerefunded bonds Explanation: The outstanding bonds are called prerefunded or advance-refunded bonds. The new issue is called a refunding issue. This is usually done when the issuer can borrow funds at lower rates, thereby reducing its interest costs.

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

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

An announcement in The Wall Street Journal states that New York State plans an advance refunding of its 7 1/2% Dormitory Bonds through the issuance of a special $50,000,000 bond issue. This means that:

Proceeds from the sale of a new bond issue will be put in an escrow account to retire the existing bond issue Explanation: Advance refunding means that proceeds from the sale of the new bond issue will be put in an escrow account to retire the existing bond issue. If a municipality wants to engage in advance refunding, as is the case in this example, the municipality will sell the new issue with the proceeds of the sale going into an escrow account containing U.S. government securities. The U.S. government securities would be purchased with a maturity date that coincides with the issue's call date. This allows the refunded issue to be retired using the proceeds from the matured government securities.

A variable annuity contract holder dies during the accumulation period. In this situation, which of the following statements is TRUE regarding the tax consequences? a. All proceeds pass to the beneficiary tax-free b. Proceeds in excess of cost are taxable as capital gains to the beneficiary c. Proceeds in excess of cost are taxable as ordinary income to the beneficiary d. 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 Explanation: When a variable annuity contract holder dies during the accumulation period, the proceeds in excess of cost are taxable to the beneficiary as ordinary income.

A client would like to open a numbered account. An RR may open the account:

Provided the broker-dealer has a written statement on file signed by the client Explanation: 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.

A term bond has a mandatory sinking fund call feature. What method will be used to determine which specific bonds will be called?

Random selection Explanation: Random selection is the method used to call term bonds

The system used to report municipal securities transactions is called the:

Real-Time Transaction Reporting System Explanation: Broker-dealers are required to report transactions in municipal securities to the Real-Time Transaction Reporting System (RTRS), which is operated by the MSRB.

A stop order will NOT be used to: a. Protect a gain when a long stock position appreciates b. Limit a loss if the market price of a short position increases c. Receive a specific price when buying or selling d. Limit a loss if the market price of a long stock position decreases

Receive a specific price when buying or selling Explanation: A knowledgeable investor will use a sell stop order to protect a profit (or limit a loss) in a long position and a buy stop order to limit a loss in a short position. A sell stop order is entered below the current market and becomes a market order when the stop price is reached or penetrated on the downside. A buy stop order is entered above the current market and becomes a market order when the stop price is reached or penetrated on the upside. Since it becomes a market order when the stop price is hit or penetrated, there is no guarantee as to execution price.

Warrants will most likely be issued to:

Reduce the interest rate on an issue of debentures Explanation: Debentures may be issued with warrants attached. This allows the corporation to pay a lower interest rate on the debentures.

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

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

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

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

A customer, who is going on vacation, enters a GTC order to buy a stock. The order is executed. The customer tells the registered representative that he wants the stock but will not return in time to pay for the security by the payment date. The customer states he will send in a check a few days late. The registered representative should:

Request an extension Explanation: The customer has indicated that he wants to purchase the stock but will not be able to pay for it in time because he will be on vacation. The order was a good-until-cancelled (GTC) order, so the customer did not know if and when the order would be executed. The reason for the late payment is due to the customer being on vacation. This is a valid reason, and the registered representative should request an extension.

Which of the following choices is Standard and Poor's (S&P's) best rating for a municipal note?

SP-1 Explanation: Standard and Poor's best rating for notes is SP-1 and its worst rating is SP-3. AAA is S&P's best rating for bonds

Which of the following choices is Standard and Poor's (S&P's) lowest rating for a municipal note?

SP-3 Explanation: Standard and Poor's best rating for notes is SP-1 and its worst rating is SP-3. AAA is S&P's best rating for bonds and D is its lowest rating for bonds.

Your customer is bullish on U.S. equities and wants to participate in an upward movement of the S&P 500 Index. Which of the following investments would you recommend? a. Diamonds b. ADRs c. SPDRs d. VRDOs

SPDRs Explanation: Spiders (SPDRs) is an investment that replicates the S&P 500 Index. The product is organized as a unit investment trust and is classified as an exchange-traded fund (ETF). Diamonds are an exchange-traded fund that mirrors the performance of the DJIA. ADRs are American Depositary Receipts, which may be issued as proxies for many different types of individual foreign shares. VRDOs are variable-rate demand obligations that are a type of municipal security structured for tax-free money-market and high-net-worth investors.

Mrs. Jones is interested in selling 500 shares of her REIT. The sale will be handled in a manner similar to the:

Sale of a closed-end fund listed on the NYSE Explanation: There is a secondary market for REITs (real estate investment trusts). The vast majority of REITs trade on the NYSE with prices determined by supply and demand. Closed-end funds are funds that are often bought and sold on the NYSE that trade in a similar manner.

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

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

A customer buys $10,000 worth of stock in a cash account. Two business days after the transaction settles, the customer calls the broker and tells the broker he does not have sufficient funds to pay for the stock. The brokerage firm will:

Sell him out and freeze the account according to Regulation T of the FRB Explanation: According to Regulation T of the Federal Reserve Board, the brokerage firm must sell out the securities in the account and freeze the account for 90 days.

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

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

A municipal bond trader does NOT: a. Request bids b. Accept bids c. Commit to underwritings d. Negotiate settlement dates in the secondary market

c. Commit to underwritings Explanation: A municipal bond trader is not involved in underwritings of new issues.

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

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

ABC Corporation has filed a registration statement with the SEC. A registered representative may:

Send a preliminary prospectus to clients to obtain indications of interest Explanation: During the registration period, a registered representative may not send research reports to clients nor accept orders and payments for new issues from clients. The registered representative may send a preliminary prospectus and receive indications of interest from his clients.

When opening an account for an employee of FINRA, the member firm is required to:

Send duplicate account statements only Explanation: A member firm is required to send duplicate account statements to FINRA when a customer of the firm is an employee of FINRA. The member firm would need written instructions from the employee of FINRA when opening an account in order to send the duplicate account statements. There is no requirement to send duplicate confirmations or have the account approved by a chief compliance officer.

Which of the following transactions is not prohibited under the Securities Exchange Act of 1934?

Short sales of municipal bonds Explanation: All of the choices listed are prohibited according to the Securities Exchange Act of 1934 except short sales of municipal bonds. Short sales of securities are subject to the borrowing requirements of Regulation SHO. This makes choice (c) a violation. Municipal bonds are exempt securities and are not subject to the borrowing requirements of Regulation SHO. Any person that buys or sells a security for the purpose of attempting to stop the price from falling (pegging) or rising (capping) is engaging in a manipulative action. Persons who enter into transactions to increase volume, without ownership changing, have engaged in painting the Tape. This is a manipulative act and is a violation.

A covered call writer can be described as being:

Short the call, and long the stock Explanation: When writing (or selling) the call, the investor is said to be short the call. A covered call writer will currently own the underlying securities, and hence be long the stock.

A client creates an opening sale in a LEAP and closes out the position 15 months later by buying back the option. The tax consequence is a:

Short-term gain or loss Explanation: A LEAP is a long-term option that can have an expiration of up to 39 months. The client held the position for more than one year, but any gain or loss on a short position is treated as short-term. The IRS does not recognize a holding period on a short sale of a stock or an opening sale of an option. If the client created an opening purchase by buying a LEAP and held the position for 15 months before closing it out, the resulting gain or loss would be long-term.

A client wants to purchase 10 RSR July 45 calls and 10 RSR July 45 puts. This transaction:

Should be executed on one order ticket Explanation: This type of option transaction is a long straddle. Advanced option strategies such as spreads and straddles should be executed on one order ticket. They do not need to be approved in advance by a registered options principal (ROP).

A customer requests that a broker-dealer sell stock that she owns and use the proceeds of the sale to purchase a different stock. In determining the amount of markup that he will charge, the broker-dealer:

Should only consider the amount of money involved in the sale to the customer Explanation: When the proceeds of the sale of one stock are used to purchase another stock from the same broker-dealer, the transaction is called a proceeds transaction. In determining the markup the broker-dealer will charge, industry rules state that the firm should consider only the amount of money involved in the sale to the customer.

The Taft Food Company intends to distribute shares of its grocery business to existing stockholders. The shares of this company will be traded separately from Taft. This is an example of a(n):

Spinoff Explanation: Spinoff transactions occur when a company is seeking to divest a division. In a spinoff, each shareholder of the parent retains her original shares, but is also given shares in the newly created entity. There are no immediate tax consequences to the recipient of the new shares. Spinoffs are used by sellers in the hopes that the combined valuation assigned by the market to the two (now) separate companies will be greater than that of the single combined entity. A stock dividend is a situation where each shareholder is given additional shares of the existing company. When a company with no shares currently trading publicly begins trading in the public market, it is an initial public offering (IPO). In a reverse merger, a private company buys a public company with the acquirer's shareholders swapping their shares for a majority stake in the publicly traded shell corporation. This technique allows a private company to obtain publicly listed status quickly, and to avoid much of the regulatory expense incurred with an IPO.

On Tuesday, the S&P 500 Index closed at 1,600. At 11:30 the next morning, the S&P 500 Index is at 1,488. All NMS stocks will:

Stop trading for 15 minutes Explanation: If the S&P 500 Index falls by 7% from the previous trading day's closing price, it is defined as a Level 1 Market Decline and triggers a 15-minute trading halt. In this question, the drop from the closing price of 1,600 to 1,488 the next day (112 points) is a 7% decline.

A customer has sold stock but has failed to complete the transaction by delivering the securities. The latest date the broker-dealer may buy in the securities is:

Ten business days from the settlement dat Explanation: SEC Rule 15c3-3 (the Customer Protection Rule) sets forth rules for broker-dealer reserve requirements and custody of securities. Under the custody of securities section, a brokerage firm must buy in securities within 10 business days from settlement when a customer has failed to deliver securities that were previously sold.

A bank or brokerage firm is applying to become a primary dealer in government securities. Which government body appoints the financial institution as a primary dealer? a. The Treasury Department b. The SEC c. FINRA d. The Federal Reserve Board

The Federal Reserve Board Explanation: The Federal Reserve Board appoints primary dealers in government securities.

To whom may a registered representative appeal a finding by a Hearing Panel?

The National Adjudicatory Council Explanation: The first appeal of the finding of a Hearing Panel must be made within 25 days after service of a decision, to FINRA's National Adjudicatory Council (NAC). The NAC findings may then be appealed to the SEC, whose findings may be appealed to the federal court system.

Listed options are issued and guaranteed by:

The Options Clearing Corporation Explanation: Options that are listed on exchanges are issued and guaranteed by the Options Clearing Corporation. The exchange on which the option trades sets the terms of the option contract.

A brokerage firm would like to increase its marketing efforts in option transactions through the use of certain retail communications. All of the following methods are considered forms of retail communications, EXCEPT: a. Newspapers and magazines b. The Options Clearing Corporation risk disclosure document c. Radio, telephone messages, and television d. Newsletters, sales material, and research reports

The Options Clearing Corporation risk disclosure document Explanation: All are forms of retail communications when referring to options except the Options Clearing Corporation (OCC) risk disclosure document. The OCC risk disclosure document discusses the rules and regulations of options trading, as well as the risks involved in options trading. The OCC risk disclosure document must accompany or precede certain types of printed or written communication by firms concerning options. Also, the method of acquiring an OCC risk disclosure document must be mentioned in options retail communications used prior to an options disclosure document being delivered. Newspapers, magazines, radio, telephone messages, television, newsletters, sales material, and research reports are ways to advertise about options. They all must mention the risks involved with options and be in good taste, as well as adhere to generally accepted standards of truthfulness.

A registered representative discovers that one of her customers is on the Office of Foreign Assets Control (OFAC) list. The RR or someone else at her firm must notify:

The Treasury Department Explanation: Firms are prohibited from transacting business with individuals and entities on the Office of Foreign Assets Control (OFAC) list. If a registered representative discovers that one of the owners or beneficiaries of an account is on the OFAC list (or if someone on the list tries to open an account with his firm), the RR or someone else from her firm should contact the U.S. Treasury Department immediately. The Financial Crimes Enforcement Network (FinCEN) and OFAC are part of the Treasury Department.

A registered representative is preparing to leave her firm. Her clients will be assigned to another representative at the same firm. To accomplish this:

The account records must be amended to reflect the change Explanation: Account records must be amended whenever an internal transfer of an account is made. This change does not require approval of the customer, the completion of a new account form, or the notification of any regulatory authority.

If a customer enters an order that is good for one month only, who is responsible for cancelling the order at the end of the month if the order is not executed?

The brokerage firm that entered the order Explanation: A customer can enter an order good for a week, a month, or any specified time. If the order is not executed by the end of the specified time, the brokerage firm is responsible for cancelling the order.

Municipal bond unit investment trusts do NOT include which of the following characteristics?

The certificates have coupons attached and are in bearer form Explanation: All of the characteristics listed are true, except that the certificates have coupons attached and are in bearer form. Some unit investment trusts are funds that buy bonds for a portfolio and usually hold the bonds until maturity. The life of these funds is usually limited to the life of the bonds in the portfolio. Units can be bought in multiples of $1,000. The units can be redeemed at any time. If the general level of interest rates change, so will the price of the units. The funds are issued in book-entry form and registered form

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

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

A client expresses an interest in purchasing a mutual fund. The client already has a joint account with her spouse and a UTMA account for her son that has assets in the same fund family held at another broker-dealer. Which of the following statements is TRUE?

The client is entitled to a reduced sales charge based on the other two accounts Explanation: A client is entitled to a reduced sales charge (breakpoint) based up the value of the accounts of other family members within the same fund family. Examples include joint accounts, minors' accounts, and certain retirement accounts. The accounts can be held at multiple broker-dealers.

Industrial development revenue bonds are backed by:

The corporate guarantor Explanation: The corporation that uses the facility that was built by the industrial development revenue bond becomes the party that is backing the bonds. The credit rating of these bonds is dependent on that corporation, not on the municipality issuing the bonds.

Which one of the following persons is permitted to purchase an equity IPO in her personal account?

The cousin of a registered representative Explanation: The prohibition against IPO purchases by restricted persons includes: Member firms and any associated person (i.e., an employee) of the member firm. An immediate family member of an employee of a member firm if the equity IPO is purchased from the employee's firm or there is material support between the immediate family member and the employee of the member firm. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm. Portfolio managers, which include persons who can buy or sell securities on behalf of institutional investors (e.g., banks, investment companies, investment advisers, insurance companies, savings and loan institutions), as well as anyone whom they materially support. These are people who are in a position to direct future business to the firm, which is the reason for their restricted status. They also may not purchase equity IPOs in their personal accounts. Since, under the rule, a registered representative's cousin is not considered an immediate family member, she is permitted to purchase an equity IPO.

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

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

A customer contacts a registered representative and wants to invest a large sum of money in four different mutual fund families. Which of the following statements is the MOST important disclosure the RR should make to the client? a. The customer will not be able to diversify his assets b. The customer will not be able to switch mutual funds within each family c. The customer will not be able to receive a single account statement d. The customer will not be able to receive sales breakpoints

The customer will not be able to receive sales breakpoints Explanation: The term fund family or fund complex is used to define a single investment company or mutual fund company with many different types of mutual funds that a customer may choose to purchase. The objective is to provide a large number of mutual funds providing a broad range of suitability for investors. A customer may be able to invest a large sum of money with one fund family, receive a sales breakpoint (reduced sales charge), diversify his assets, and have the ability to switch between mutual funds. The most important disclosure that should be made to the client is that there is no advantage to allocating his investment in four different fund families, thereby losing the possibility of receiving a reduced sales charge (sales breakpoints). The ability to receive a single account statement is not an important disclosure and this information is usually provided to clients that have different fund families with a single broker-dealer.

The Founders Income Fund has declared a dividend payable to stockholders of record Friday, May 29. This mutual fund would typically sell ex-dividend on:

The date set by the fund or its principal underwriter (sponsor) Explanation: Mutual funds sell ex-dividend whenever the fund or its principal underwriter (sponsor) determines. The ex-dividend date for a mutual fund is usually the same day as the record date.

An individual purchases 600 shares of BAZ preferred stock. One week later the stock pays a dividend of $1.20 per share and the investor sells the stock the next day. For tax purposes, how will the dividends be taxed?

The dividend will be taxed as ordinary income Explanation: Currently, dividends paid on stock held by individuals for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date are taxed at a maximum rate of 20%. This is the same maximum tax rate as long-term capital gains. Since the individual held the stock less than the 60-day period, the dividend is taxed as ordinary income. The corporate dividend exclusion allows a corporation to exclude from taxation 70% of the dividends it receives from other corporations.

A floor broker goes to a trading post to execute an order. When told of the floor broker's order, the designated market maker replies, "you're stopped at 21." This means:

The floor broker is guaranteed a price of 21 Explanation: When a designated market maker stops stock, the price is guaranteed. Stopping stock may be done only for a public order.

The Barge Towing Corporation has announced in a tombstone ad that it will issue $500,000,000 of 6 1/2% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2040 and are being issued at a $1,000 par value. The bonds are secured by:

The full faith and credit and no specific collateral of the Barge Towing Corporation Explanation: The tombstone ad states the bonds to be issued are subordinated debenture bonds, which are unsecured bonds. The bonds are secured by the full faith and credit and no specific collateral of the Barge Towing Corporation

Which of the following parties is subject to the MOST risk in a limited partnership?

The general partner Explanation: The general partner has the most risk in a limited partnership. The general partner directs all management affairs of the partnership. He is responsible for all the liabilities of the partnership. The limited partner has no management capacity in the partnership. The limited partner's risk is his investment. Most direct participation programs are set up as limited partnerships, which provide for the flow-through of tax consequences and benefits to their investors (limited partners).

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

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

A sales breakpoint of a mutual fund is:

The minimum dollar amount of a purchase of a mutual fund where a volume discount is given Explanation: A sales breakpoint of a mutual fund is the minimum dollar amount (not the share amount) of a purchase of a mutual fund where a volume discount is given. The percentage of the sales charge declines when certain minimum dollar amounts are reached.

According to SRO rules, what information must be obtained when an RR opens an account in which mutual fund shares will be purchased?

The name of the RR responsible for the account and the manager who approved the account Explanation: Under industry rules, the following items MUST be obtained when opening an account. 1. The customer's name and residence 2. Whether the customer is of legal age 3. The name of the registered representative introducing the account and the signature of the member or partner, officer, or manager who accepted the account 4. If the customer is a corporation, partnership, or other legal entity, the names of any persons authorized to transact business on behalf of the entity The name of the beneficiary is not required when opening an account.

An investor purchases a U.S. Treasury bond in the secondary market. When is settlement?

The next business day Explanation: Transactions for Treasury securities in the secondary market settle on the next business day.

In which of the following documents are bid limitations for a new municipal bond issue found?

The notice of sale Explanation: The notice of sale is published by the issuer. It announces the issuer's intention to sell an issue and invites securities firms to compete for the issue. All information pertaining to the bidding would be contained in the notice of sale.

A technical analyst does NOT review:

The price-earnings ratio of the Dow Jones stocks Explanation: The price-earnings ratio of the Dow Jones stocks is an indicator that a fundamental analyst will examine. A technical analyst will review the advance-decline theory, short interest, and the trendline theory.

Which of the following statements is TRUE concerning the responsibilities of a principal at a broker-dealer?

The principal must approve retail communications prior to use Explanation: Principal approval is required for retail communications prior to use, not within 10 days of use. All trades must be reviewed by a principal promptly. Any RR who has outside employment must notify his employer, but principal approval is not required

Because of its multiplier effect on the economy, the Federal Reserve Board is reluctant to change:

The reserve requirement Explanation: Changing bank reserve requirements has a multiplier effect. This means that a small change in the reserve requirement can have a large effect on the money supply and the economy. This makes the results of changing the reserve requirement difficult to control, and the FRB is hesitant to use this tool.

Rockland County has issued industrial development revenue bonds for the benefit of the Hudson Nail and Screw Co. In evaluating the credit quality of these bonds, an investor should look primarily at:

The revenue stream of Hudson Nail and Screw that will be committed to meet the lease payment obligation to Rockland County Explanation: The security backing the industrial development revenue bond is the lease payment made by the corporation. An investor must assess whether Hudson Nail and Screw can meet this obligation by generating sufficient revenues from its primary business

Equity options will expire on:

The third Friday of the expiration month, at 11:59 p.m. Eastern Time Explanation: Beginning February 1, 2015, the expiration date for equity options is the third Friday of the expiration month, at 11:59 p.m. Eastern Time.

Which of the following choices best represents the placement ratio?

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

The penny stock rules would apply under which of the following circumstances? a. The stock is listed on the NYSE b. The broker-dealer is not a market maker in the stock c. The transaction is recommended by the broker-dealer d. The customer is an active trader in penny stocks

The transaction is recommended by the broker-dealer Explanation: A penny stock, according to SEC rules, is a stock that sells for less than $5.00 that is not listed on Nasdaq or the NYSE. A stock quoted on the OTC Bulletin Board or OTC Pink Market (Pink Sheets) that has a bid price of less than $5.00 is defined as a penny stock. Penny stock rules would not apply under the following conditions. - The customer is defined as an existing customer, which is a person who has maintained an account with a broker-dealer for more than one year, or has previously engaged in 3 or more transactions involving penny stocks (i.e., an active trader of penny stocks) - In nonrecommended or unsolicited transactions - In transactions by a broker-dealer that is not a market maker in that security - In transactions by an institutional accredited investor

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

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

Richard Smith, a variable life insurance policyholder, dies. Which of the following statements best describes the tax consequences of his variable life insurance policy? a. There are no tax consequences to his beneficiary and the death benefit is not included in his taxable estate b. There are gift taxes due from his beneficiary in the year he died c. The value of the policy will be included in Richard's estate for tax purposes d. The policy proceeds are federally taxable to the beneficiary

The value of the policy will be included in Richard's estate for tax purposes Explanation: Although there are no tax consequences to Richard Smith's beneficiary, the death benefit is included in his estate for tax purposes.

On February 10, an investor sold 100 shares of ABC short at $50/share. The investor covers the position on November 1 by purchasing 100 shares of ABC at $58/share, establishing an 8-point loss. If, on November 15, the investor shorts 100 shares of ABC at $56/share:

The wash sale rule has been violated Explanation: Reinstating a position within 30 days of realizing a loss is a violation of the wash sale rule. The November 15 short sale creates a new short position in ABC only 15 days after establishing a loss on an original short position in ABC. Therefore, the loss may not be claimed at this time.

An RR sees that a CMO is yielding 5.95% while the comparable Treasury is yielding 5.10%. This means that:

The yield pick-up on the CMO is 85 basis points Explanation: If the yield on a CMO is 85 basis points higher (5.95 - 5.10) than a comparably maturing Treasury security, the CMO provides a yield pick-up or higher yield of 85 basis points.

When comparing an Albany, New York hospital revenue bond to a Buffalo, New York hospital revenue bond, you notice that they have similar maturities but the Buffalo bond has a higher yield. A possible reason for this is:

There are more hospitals located in Buffalo than in Albany Explanation: Competing hospitals could affect the project's revenue and, therefore, could reduce the bond's security. Each of the other choices relates to taxes, which do not secure revenue bonds.

As far as open-end investment companies are concerned, which of the following statements is TRUE regarding dividend and capital gain distributions? a. They may be combined to determine the total yield b. The taxes may be deferred if they are invested in additional mutual fund shares c. Dividends are taxed as long-term capital gains d. They may be reinvested automatically in additional shares if the fundholder chooses to do so

They may be reinvested automatically in additional shares if the fundholder chooses to do so Explanation: Of the choices listed, the only true statement regarding dividend and capital gain distributions from an open-end investment company (mutual fund) is that they may be reinvested automatically in additional shares if the fundholder chooses to do so. They may not be combined to determine yield. The taxes must be paid in the year that the distribution is realized, even if the distribution is reinvested. Dividends are always taxable as ordinary income regardless of how long the fund is held. Long-term capital gain distributions are taxable as long-term capital gains regardless of how long the fund shares are held.

A municipality issues a bond backed by revenue from a project. If the municipality also has bonds outstanding that have the same claim against revenue, which of the following statements is TRUE? a. This is a double-barreled bond b. This is a parity bond c. This type of bond requires voter approval d. This type of bond would be taxable if the investor was subject to the alternative minimum tax

This is a parity bond Explanation: This is an example of a parity bond where two or more issues of revenue bonds have the same claim against revenue or are backed by the same pledged revenues. A double-barreled bond is backed by a source of revenue and the full faith and credit of an issuer that has taxing power, i.e., a general obligation (GO) bond issuer. General obligation bonds, not revenue bonds, require voter approval. Only the interest received from certain municipal private activity bonds is taxable if an investor is subject to the alternative minimum tax.

If an investor had cash and securities in his account, why would the investor write call options against the securities?

To increase the overall rate of return of the portfolio Explanation: The purpose of writing calls against securities owned is to increase the overall rate of return of the portfolio. The premium the purchaser of the call pays the writer will be added to whatever dividends the writer was receiving to increase the yield of the portfolio to the writer. If the stock declines in value, the writer will make the premium on the expiring call. However, the investor is still exposed to large downside risk in the stock. Therefore, generating income for the portfolio is a better choice than to hedge.

Which of the following securities does NOT trade with accrued interest?

Treasury STRIPS Explanation: Securities that pay interest periodically or have a stated rate of interest (such as Treasury bonds, municipal bonds, corporate bonds, and certificates of deposit) trade with accrued interest. However, many money-market securities such as Treasury bills and bankers' acceptances trade at a discount and are, therefore, purchased without paying accrued interest. Zero-coupon bonds (e.g., Treasury STRIPS) do not pay periodic interest and are traded without accrued interest.

When a municipal bond is to be advance-refunded (prerefunded), an escrow account is set up to insure that the money will be available. Securities are deposited in the escrow account. The securities that are deposited in the escrow account are:

Treasury bonds Explanation: Only Treasury obligations are acceptable securities as escrow when a bond is advance-refunded.

A customer purchases a municipal security in the secondary market at a discount. At maturity the customer will:

Treat the discount as ordinary income Explanation: If a municipal bond is purchased at a discount in the secondary market and held to maturity, there will be reportable taxable income. The discount is taxed as ordinary income, not a capital gain. The investor may pay the tax each year or elect to report the entire amount at maturity. If a municipal bond is purchased at an original issue discount and held to maturity, there will be no federal tax liability.

Foreign currency spot transactions normally settle in:

Two business days Explanation: Settlement for foreign currency spot transactions is usually two business days.

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

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

All of the following trades may be executed in a cash account, EXCEPT the sale of a(n): a. Common stock b. Preferred stock c. Covered call option d. Uncovered call option

Uncovered call option Explanation: All of the trades listed may be executed in a cash account except the sale of an uncovered call option. If the option is exercised, the writer must buy stock at an unknown market price. The sale of uncovered options may be executed only in a margin account.

A municipal dealer may guarantee a customer against loss:

Under no circumstances Explanation: A municipal dealer may not guarantee a customer against loss under any circumstances.

Under what circumstances may a husband and wife both be custodians in one minor's account?

Under no circumstances Explanation: There may be only one custodian for a minor's account. Either the husband or the wife may be the custodian. However, they may not both be custodians for the minor's account.

An exercise limit is the maximum number of options contracts that a customer may exercise in a five-consecutive-business-day period for each:

Underlying stock on each side of the market Explanation: Exercise limits relate to the maximum number of contracts that an individual may exercise during a five-business-day period for each underlying stock on each side of the market. Exercise and position limits apply cumulatively to all accounts that a customer maintains at all brokerage firms, not for each account at each firm.

When purchasing a straddle, an investor's maximum profit is:

Unlimited Explanation: A long straddle consists of purchasing both a call and put with the same expiration and strike price. Since it involves purchasing a call, there is an unlimited profit potential

The potential loss when writing uncovered straddles is:

Unlimited Explanation: A straddle involves the sale (writing) of a call and put with the same expiration and exercise price. Writing an uncovered call involves unlimited loss potential.

What is a client's maximum loss if he is short KNP stock and short a KNP put?

Unlimited Explanation: This is an example of a covered put (short stock + short put). The maximum loss is unlimited since there is no limit as to how high the stock price can rise. For example, if a client sells short at $46 and writes a $40 put for a premium of $3 and the put expires unexercised, the client will have a $3 profit. If the market price of KNP rises, the put option will expire unexercised but the client will still need to cover the short sale (short stock). The maximum loss on a short sale is unlimited, since there is no limit on how high the stock price may rise.

An investor purchasing a corporate bond regular-way will need to pay the market price of the bond plus accrued interest. Accrued interest will be calculated:

Up to but not including the settlement date Explanation: Accrued interest on corporate bonds is calculated from the last interest payment date up to but not including the settlement date (which is the day delivery is due). A regular-way delivery on a corporate bond is three business days.

The turnover that a dollar experiences over a given period is known as the:

Velocity of money Explanation: The velocity of money represents the number of times that a dollar is spent over a given period. It is a measure of business activity in the marketplace. The multiplier effect, created by the reserve requirements placed on members of the Federal Reserve System, refers to the fact that small changes in bank deposits result in large changes in the money supply.

Donald has just received a document describing his employer's 401(k) plan. If Donald wants to know when he will own his employer's contribution to his plan, he will look in the section of the document that discusses:

Vesting Explanation: A plan's vesting rules describe when employees will own their employer's contributions into the plan. Employees immediately own (are 100% vested in) their own contributions to the plan.

The purchase of a new issue prior to settlement with the issuer can BEST be described as a:

When-issued transaction Explanation: The term when-issued covers the period of a new issue of municipal securities from the original date of sale by the issuer to the delivery of securities to the underwriter. The purchase or sale of new issue securities prior to registration may be a violation of the 1933 Act.

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

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

A customer opens a margin account and signs the basic customer agreement, which consists of a credit agreement, loan consent agreement, and hypothecation agreement. If the customer's first order is to buy 100 shares of XYZ stock at a price of 36, the customer:

Will pledge stock in order to receive a loan to buy the stock Explanation: Securities in a margin account are always held at the brokerage firm in street name to allow the firm to liquidate shares if necessary. Under the hypothecation agreement, the customer pledges securities as collateral for the loan. The loan consent agreement permits the firm to lend the securities to other customers or other broker-dealers. The credit agreement establishes the customer's responsibility to pay interest on the debit balance. Since the initial trade was for $3,600, industry rules require that the customer deposit at least $2,000 and may borrow up to $1,600.

A customer has a restricted margin account. The customer sells $7,000 worth of securities and on the same day buys $5,000 worth of other securities. The Regulation T margin requirement is 50%. The customer may:

Withdraw cash equal to the margin requirement on the net amount Explanation: When a customer buys and sells securities in a restricted margin account on the same day, it is called a same-day substitution and the transactions are netted against each other. In this question, the sale of $7,000 and the purchase of $5,000 result in a net sale of $2,000. The entire amount will be used to reduce the customer's debit balance, and the customer's SMA will be credited with an amount equal to the net sale proceeds multiplied by the Reg T requirement ($2,000 x 50% = $1,000). If desired, the customer may then borrow this amount.

An individual purchases $100,000 face value of a 6% municipal bond at a dollar price of 101 1/2. The bond's maturity is 7-1-27, but the issue has been called for redemption on the first call date of 7-1-15 @ par. The customer's confirmation should show the:

Yield to call Explanation: Since the bond has been called, the yield to the call must be shown because the maturity is no longer of importance. Taxable equivalent yield and after-tax yield are never shown since the investor's tax bracket and/or capital gains rate cannot be accurately predicted.

Municipal serial bonds are priced on the basis of:

Yield to maturity Explanation: Municipal serial bonds are quoted on a yield-to-maturity basis. Municipal term bonds are quoted on the basis of a dollar price.

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

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

SEC regulations state that a brokerage firm must provide a current financial statement (balance sheet) to: a. A customer when requested by the customer b. A noncustomer who requests it c. Both of the above d. Neither of the above

a. A customer when requested by the customer Explanation: SEC regulations states that a brokerage firm must provide a current financial statement (balance sheet with net capital computation) to a customer upon request. The customer has the right to know the financial condition of the company with which she is doing business.

For tax purposes, which of the following is NOT deducted from rental income in a real estate program? a. Depreciation b. Maintenance c. Mortgage amortization d. Property tax

c. Mortgage amortization Explanation: Expenses that are deducted from rental income in a real estate program include maintenance, property tax, depreciation, and mortgage interest. Paying off (amortizing) the principal of a mortgage is not an expense and may not be deducted from rental income for tax purposes.

A customer in her late 40s, who is currently in the 15% tax bracket, has recently inherited $6,000,000. She informs you that she considers herself a conservative investor and wants your advice in investing the inheritance. Which of the following choices would be the BEST method of investing the funds? a. 50% in equities, 25% in-state municipal bonds, 15% in Treasury bonds, and 10% in a money- market fund b. 100% in equities c. 50% in-state municipal bonds, 25% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in money-market funds d. 25% in-state municipal bonds, 25% in out-of-state municipal bonds, 25% in corporate bonds, and 25% in Treasury bonds

a. 50% in equities, 25% in-state municipal bonds, 15% in Treasury bonds, and 10% in a money- market fund Explanation: Although this investor is in her late 40s and considers herself a conservative investor, equities should be a part of her asset allocation. Many strategists recommend taking 100% and subtracting the investor's age as a guide to the percentage of the investor's portfolio that should be allocated to equities. As such, a 50% allocation in equities is reasonable with the remainder in various fixed-income securities and cash. Prior to inheriting the funds, she would not have been a suitable candidate for tax-exempt or municipal securities due to her low tax rate. After investing in these funds, the income/dividends/potential capital gains would have the effect of increasing her tax rate, so that municipal bonds would be an attractive investment. In-state municipal bonds would offer a higher after-tax return to this investor. Due to the potential of credit risk with municipal bonds, having a portion of the funds in Treasury securities would be a good recommendation. In addition, the investor should invest a portion of the funds in cash or cash alternatives. This is satisfied by allocating a portion of the funds to a money-market fund. Having 100% of the funds in equities or fixed-income investments does not offer the customer a balanced approach and, therefore, the other choices would not be the best mix of investing the funds.

A 28-year-old single investor has funds saved at a bank. He contacts an RR and wants to begin allocating funds to a retirement account. Which of the following choices is the most appropriate asset allocation? a. 80% stocks, 20% bonds b. 60% stocks, 40% bonds c. 50% stocks, 50% bonds d. 30% stocks, 70% bonds

a. 80% stocks, 20% bonds Explanation: Long-term, risk-tolerant investors, such as those saving for retirement, are usually looking for growth of capital as an objective. They are also usually concerned about the effects of inflation. Over long periods, stocks usually keep pace or offer higher returns as measured against inflation. Inflationary risk is also referred to as purchasing-power risk. Since the investor is many years from retirement, a large percentage of his portfolio should be allocated to stocks

A customer has a federal tax rate of 35% and a state tax rate of 7%. Which of the following investments would afford him the BEST after-tax yield? a. A 6.25% in-state municipal bond b. A 6.65% out-of-state municipal bond c. A 9.95% investment-grade corporate bond d. A 10.35% mortgage bond

a. A 6.25% in-state municipal bond Explanation: The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The mortgage bond is a type of corporate bond and both are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 42% for the in-state bond and the federal rate of 35% for the out-of-state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 42% combined tax rate. The municipal bond has a yield of 6.25%. 6.25% (Municipal Bond Yield) / 58% (100% - 42%) = 10.78% Equivalent Taxable Yield The out-of-state municipal bond has a yield of 6.65% and the equivalent taxable yield is 10.23% (6.65% / 65%). The in-state municipal bond has the best or highest after-tax yield.

Which of the following bonds results in the highest real interest rate? a. A bond yields 8% when inflation is at 3% b. A bond yields 12% when inflation is at 8% c. A bond yields 10% when inflation is at 7% d. A bond yields 6% when inflation is at 4%

a. A bond yields 8% when inflation is at 3% Explanation: The real interest rate, also called the real rate of return, refers to yields adjusted for inflation (yield minus inflation rate). Choice (a) provides the highest real interest rate (8% bond yield minus 3% inflation rate equals 5% real interest rate).

A variable annuity would be MOST suitable for which of the following customers? a. A client in a high tax bracket who is purchasing the annuity for his spouse's retirement needs b. A client in a high tax bracket who is purchasing the annuity for short-term liquidity needs c. A client who is purchasing the annuity in a 401(k) for his retirement needs d. A client who is purchasing the annuity in order to have the funds available by the age of 50

a. A client in a high tax bracket who is purchasing the annuity for his spouse's retirement needs Explanation: A variable annuity is most suitable for an investor seeking long-term, tax-deferred income for retirement. A tax-deferred investment, as with a variable annuity, becomes more advantageous for an investor with a higher tax bracket. A variable annuity is unsuitable for customers that have short-term needs since the insurance company may impose surrender charges if the annuity proceeds are withdrawn early. It would also be unsuitable for a client purchasing the annuity in a tax-qualified account such as a 401(k) or IRA, since these accounts already have the benefits of tax-deferred growth. If a client withdraws the proceeds of a variable annuity prior to age 59 1/2, a 10% tax penalty applies.

Which of the following statements is TRUE concerning periodic payment variable annuities? a. A client's number of annuity units never changes b. A client's number of accumulation units never changes c. Annuity contracts never have a beneficiary d. The monthly payout is fixed by the inflation index

a. A client's number of annuity units never changes Explanation: During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The monthly payout is determined actuarially and is based on the performance of the separate account.

Which of the following stocks would NOT be considered defensive? a. A construction company b. A tobacco company c. A food distributor d. A clothing manufacturer

a. A construction company Explanation: A defensive stock is the stock of a company that is not drastically affected by a downturn in the economy. Those companies involved in the necessary areas of life are considered defensive. In addition to the choices given-- tobacco, food, and clothing-- soft drink and candy companies are examples of defensive stocks. Construction, mining, steel, and heavy equipment manufacturing companies are dramatically affected by an economic downturn.

A customer contends that his registered representative made unauthorized trades in his account and will take this matter to an arbitration panel. Regarding the makeup of this panel, which of the following statements is TRUE? a. A majority of the arbitration panel must come from outside the securities industry b. A majority of the arbitration panel will come from within the securities industry c. All arbitrators must come from inside the securities industry or must be attorneys d. All arbitrators must come from outside the securities industry

a. A majority of the arbitration panel must come from outside the securities industry Explanation: Under the Code of Arbitration, if a public customer takes a member firm to arbitration to resolve a dispute, the majority of the panel must come from outside the securities industry, unless the customer requests a panel with a majority of industry arbitrators. Neither the broker-dealer nor the customer may actually pick the arbitrators and arbitrators do not need to be attorneys.

An investor is looking for an investment that will generate deductions but also provide the potential for future cash flow. Which of the following is NOT an appropriate investment? a. A raw land program b. An existing properties real estate program c. An oil and gas drilling program d. An oil and gas exploratory program

a. A raw land program Explanation: All of the choices provide potential for future cash flow and deductions except for a raw land program. In a raw land program, deductions are negligible and the profit potential comes in the form of capital appreciation, not cash flow.

An investor with an investment objective of speculation wants to purchase a security that will increase by the same percentage as a decline in the S&P 500 Index. Which of the following securities would you recommend? a. An inverse exchange-traded fund (ETF) b. A leveraged exchange-traded fund (ETF) c. A leveraged inverse exchange-traded fund (ETF) d. An exchange-traded fund (ETF)

a. An inverse exchange-traded fund (ETF) Explanation: An inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. An inverse ETF based on the S&P 500 Index seeks to deliver the opposite performance of that index. So, if the S&P 500 rises by 1%, an inverse ETF would decrease by 1%, and if the S&P 500 falls by 1%, the inverse ETF would increase by 1% before fees and expenses. Choice (b) would be suitable if the customer anticipated an increase in the S&P 500 and wanted a multiple of that increase. Choice (c) would be suitable if the customer wanted a return that was a multiple or higher return and anticipated a decrease in the S&P 500, and choice (d) would be suitable if the customer only wanted to track the return of the S&P 500.

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

a. An investor will buy VIX puts if he expects an increase in the volatility on the S&P 500 Index Explanation: The VIX (volatility index) is often referred to as a gauge of investors' fear. The index tends to move inversely with the S&P 500 Index. The VIX usually rises when the S&P 500 Index falls, and falls when the S&P 500 Index increases. An investor will buy calls when he expects the market to decline and volatility to increase. An investor will buy puts on the VIX if he expects the market to rise and volatility to decrease. Many investors will buy VIX call options as a hedge against a possible decline in the market. The VIX option can be used by investors who expect either an increase or a decrease in volatility.

Which choice BEST describes The Bond Buyer's Revenue Bond Index? a. Average yield on a list of bonds with 30-year maturities b. Average yield on a list of 11 bonds c. Average yield on a list of 20 bonds d. Average yield on a list of new revenue issues

a. Average yield on a list of bonds with 30-year maturities Explanation: The Bond Buyer publishes different indexes. They include: 1. The 20-Bond Index -- The average yield to maturity on a particular day of 20 specific GO bonds with 20-year maturities 2. The 11-Bond Index -- The average yield to maturity on a particular day of 11 of the 20 specific GO bonds from the 20-Bond Index 3. The Revenue Bond Index (Revdex) -- The average yield to maturity on a particular day of 25 specific revenue bonds with 30-year maturities

Which of the following securities assist in financing importing and exporting operations? a. Bankers' acceptances (BAs) b. Treasury bills c. Eurodollar CDs d. American Depositary Receipts (ADRs)

a. Bankers' acceptances (BAs) Explanation: Of the choices given, a banker's acceptance (BA) is the only instrument that is used as a means of financing foreign trade. Do not confuse a BA with an ADR (American Depositary Receipt), which facilitates the trading of foreign securities in U.S. markets. Eurodollar certificates of deposit pay interest and principal in Eurodollars (U.S. dollars deposited in nondomestic banks) and are not used to finance importing and exporting operations.

According to technical analysis, a head and shoulders top formation indicates a trend that is: a. Bearish b. Bullish c. Neutral d. Highly unpredictable

a. Bearish Explanation: A head and shoulders chart formation is one of the classical patterns agreed upon by technical analysts or chartists as being a reversal of a trend in the price of a stock. If the head and shoulders pattern appears at the top of an upward trend (head and shoulders top), as in this example, it indicates the reversal of an upward trend (bearish indicator). If the head and shoulders pattern appeared at the bottom of a downward trend (head and shoulders bottom), it indicates a reversal of a downward trend in the price movement of a particular stock (bullish indicator).

Which of the following option positions is an example of a spread? a. Buy an XYZ June 60 call and sell an XYZ June 65 call b. Buy an XYZ June 60 call and buy an XYZ June 60 put c. Buy an XYZ June 60 call and buy an XYZ June 65 put d. Sell an XYZ June 60 call and sell an XYZ June 60 put

a. Buy an XYZ June 60 call and sell an XYZ June 65 call Explanation: A spread is defined as the simultaneous sale and purchase of two options of the same class (same stock and same type of option), but it will have different strike prices and/or expirations. A long straddle is defined as the simultaneous purchase of two options that have the same expiration and strike price, but consist of one call and one put. A short straddle is defined as the simultaneous sale of two options that have the same expiration and strike price, but consist of one call and one put. Choice (b) is a long straddle and choice (d) is a short straddle. A combination is similar to a straddle, however, the strike prices and/or expirations must be different. Choice (c) is a long combination.

A customer has a nondiscretionary account at a broker-dealer. The customer has received a research report and has indicated that she may want to purchase a stock on the recommended list. Which of the following actions is MOST appropriate for the registered representative to take? a. Contact the customer and ask her to place an order to buy the security b. Purchase a small amount of the stock and contact the customer no later than the same business day c. Purchase a small amount of the stock and have the customer sign a written authorization form no later than the same business day d. Purchase the stock on behalf of the customer and have the order approved promptly by a principal

a. Contact the customer and ask her to place an order to buy the security Explanation: This is a nondiscretionary account and, therefore, no shares may be purchased unless the customer gives the broker-dealer an order to purchase the security.

A registered representative is sending an e-mail to 20 individual investors. This is defined as a(n): a. Correspondence b. Institutional communication c. Retail communication d. Public appearance

a. Correspondence Explanation: FINRA's Communications with the Public Rule defines different types of communication. - Correspondence, which is defined as any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. - Institutional communication, which is defined as any written or electronic communication that is distributed or made available only to institutional investors. This would not include any internal communication by the broker-dealer. - Retail communication, which is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period. - Public appearances are situations where employees associated with a broker-dealer or sponsor participate in a television or radio interview, seminar, or forum, or make a public appearance, or engage in speaking activities that are unscripted and are not otherwise considered retail communication. Social media sites, which permit real-time communication or interactive, electronic forums, fall under the guidelines of a public appearance (e.g., Facebook, Twitter, and LinkedIn). Since the e-mail is being sent to 25 or fewer individual (retail) investors, it is defined as a correspondence. It makes no difference whether the investors have an account with the RR or the member firm.

Which of the following choices is NOT present in an equipment leasing program? a. Depletion b. Depreciation c. Interest expense d. Possibility of recapture

a. Depletion Explanation: Depletion relates to natural resources only (oil and gas, for example).

Which of the following statements is NOT a characteristic of an electronic communication network (ECN)? a. ECNs act as market makers b. ECNs permit trading electronically c. ECNs permit trading anonymously d. ECNs permit trading after-hours

a. ECNs act as market makers Explanation: Electronic communication networks allow market participants to display quotes and execute transactions. These participants are referred to as subscribers and pay a fee to the ECN to trade electronically through the system. ECNs allow subscribers to trade after-hours, and to quote and trade without disclosing their names (anonymously). ECNs act in an agency capacity and will not buy or sell for their own account as with a market maker.

Which of the following statements is TRUE concerning a customer who purchases an original issue discount (OID) corporate bond? a. Each year the customer will pay both federal and state income tax b. Each year the customer will pay only federal income tax c. Each year the customer will not pay any tax d. The customer will only pay tax at bond maturity

a. Each year the customer will pay both federal and state income tax Explanation: The upward adjustment in the purchase price of an original issue discount bond is called accretion. The amount accreted each year is considered interest income, which may or may not be taxable depending on the type of security. The interest on corporate bonds is subject to both federal and state income tax.

A customer in his late twenties wants capital appreciation and is willing to take a moderate degree of risk in his initial investment. The customer is also concerned about the inflationary risk to his portfolio. Which of the following investments is MOST suitable? a. Equities b. Corporate debt c. Municipal debt d. Variable annuities

a. Equities Explanation: Since the investor is concerned about inflationary risk, and is willing to accept a moderate degree of risk to his initial investment, equities would be the most appropriate investment. If the investor wanted a tax-deferred investment with the same investment objectives, variable annuities would be the most suitable choice.

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

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

Which of the following statements is TRUE concerning gift and estate taxes paid by a husband and wife? a. Gifts between spouses are unlimited and no gift or estate taxes will be paid when one spouse passes away b. Gifts between spouses are unlimited and there is no gift tax, but estate taxes must be paid when one spouse passes away c. Tax-free gifts between spouses are limited to $14,000 per year, but taxes are not due on any excess until one spouse passes away d. Tax-free gifts between spouses are limited to $14,000 per year and taxes must be paid on any excess in the year the gift is given

a. Gifts between spouses are unlimited and no gift or estate taxes will be paid when one spouse passes away Explanation: There is no limit on the amount of a gift between spouses. A husband or wife may give any amount to a spouse without incurring a tax liability. An estate tax may be levied on the value of a decedent's assets, but there will not be any estate tax due when one spouse dies if all the assets are passed along to the surviving spouse. The entire estate may pass tax-free to the survivor. If assets are distributed to persons other than the decedent's spouse, the estate may be taxed if the amount exceeds the allowable limits established by current tax law. Gift taxes must be paid by a donor, not the recipient of the gift. An individual may give a gift of $14,000 per person, per year ($28,000 for joint returns) without incurring a gift tax. The donor must pay the gift tax on amounts given over this figure.

A corporation has raised money to use for expansion of its plant within the next six months. In which of the following securities should the corporation invest the funds until they are used? a. High-quality commercial paper b. Long-term municipal zero-coupon bonds c. U.S. Treasury bonds d. High-quality preferred stocks

a. High-quality commercial paper Explanation: The corporation intends to use the money in a short period and does not want to assume undue investment risks. Of the choices given, the most suitable investment is high-quality commercial paper since it is extremely safe and can be purchased with a short maturity to match the corporation's needs.

A customer has two children and wants to open one UTMA account which will be shared by the two of them. The RR should take which of the following actions? a. Instruct the customer to open two UTMA accounts, one for each child b. Instruct the customer that the account may be set up for both children provided it is preapproved by the firm's compliance department c. Instruct the customer that one UTMA account may be shared by both children as long as they are at least 14 years of age d. Instruct the customer that one UTMA account may be opened if the customer's spouse also signs the new account agreement

a. Instruct the customer to open two UTMA accounts, one for each child Explanation: A custodial account (UTMA or UGMA) may be established for the benefit of one minor only. In this question, the customer should open two UTMA accounts, one for each of his children.

Which of the following statements is NOT TRUE concerning the Student Loan Marketing Association (Sallie Mae)? a. It issues securities that can be redeemed to pay for college education b. It issues securities that are not backed by the U.S. government c. It purchases federally sponsored student loans d. It provides loans to educational institutions

a. It issues securities that can be redeemed to pay for college education Explanation: The Student Loan Marketing Association (known as SLMA or Sallie Mae) provides liquidity to student loan makers by purchasing federally sponsored student loans. It also lends funds directly to educational institutions. Sallie Mae securities are not backed by the full faith and credit of the U.S. government, but the SLMA maintains a direct line of credit with the U.S. government. It does not issue securities that can be redeemed to pay for college education.

James Hendricks wants to open a Coverdell Education IRA for his three-year-old son. Which of the following statements is TRUE? a. James may contribute up to $2,000 per year b. At least 50% of the investments in the account must be conservative c. The account becomes the property of the child upon reaching the age of majority d. Only parents or grandparents may contribute for the benefit of the minor child up to the age of majority

a. James may contribute up to $2,000 per year Explanation: Anyone may contribute to a Coverdell Education IRA for a child, but the total contributions to the account are limited to $2,000 per year. Choice (c) is true of a UGMA or UTMA account, not a Coverdell Education IRA. There is no percentage requirement for investments in the account.

Which of the following choices is Moody's BEST rating for a municipal note? a. MIG 1 b. MIG 3 c. Aaa d. AAA

a. MIG 1 Explanation: MIG stands for Moody's Investment Grade and is used to rate municipal notes. There are three MIG ratings, with the best rating being MIG 1 and the lowest rating being MIG 3. Aaa is Moody's best rating for bonds.

If the S&P 500 has been increasing on high volume for several days, what term would BEST define this situation? a. Market momentum b. An efficient market c. Market neutral d. A resistance level

a. Market momentum Explanation: The term market momentum is used to describe a situation where prices are moving in a certain direction and there is a high level of trading volume. There is also an expectation that this pattern will continue in the near future. For example, if the S&P 500 Index has been trading up or down significantly over a period of days along with heavy trading volume, some traders will anticipate this pattern may continue for a few more days. Market neutral is used to describe attempting to profit by buying some securities while at the same time selling short others. A resistance level is a point on a chart where the price of a security stops increasing. Efficient market is a term used to define that stock prices already represent all available information and there is no benefit that may be gained by using professional analysis.

Which of the following is considered a leading economic indicator? a. New orders for consumer goods and materials b. The index of industrial production c. The average prime rate charged by banks d. The average duration of unemployment

a. New orders for consumer goods and materials Explanation: Economic indicators are classified as leading, coincident, or lagging. Leading indicators precede the change in the economy as a whole. Coincident indicators change with the economy as a whole, and lagging indicators change after the economy as a whole. New orders for consumer goods and materials (also referred to as new orders for durable goods) are a leading economic indicator, and industrial production is a coincident indicator. The average prime rate charged by banks and the average duration of unemployment are lagging indicators.

Listed below are a group of mutual funds. Net Asset Value Offer Price Net Change Dreyfus 11.55 12.67 -.05 Wellington 12.70 13.85 +.07 Lenox 5.14 5.14 +.09 Sentry 13.42 14.63 -.08 Lenox fund is most likely a: a. No-load fund b. Closed-end fund c. Balanced fund d. Growth fund

a. No-load fund Explanation: The Lenox fund is a no-load fund. The net asset value (bid price) and offering price (asked price) of a no-load fund are the same. There is no sales charge.

Section 1035 of the Internal Revenue Code: a. Permits the tax-free exchange of one annuity contract for another b. Forbids the tax-free exchange of an insurance policy for a new life insurance policy c. Forbids the tax-free exchange of an insurance policy for a new annuity contract d. Permits the tax-free exchange of an annuity contract for a life insurance policy

a. Permits the tax-free exchange of one annuity contract for another Explanation: 1035 exchanges permit an individual to exchange one variable annuity contract for another, during the accumulation period, without tax consequences.

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

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

Which of the following risks for an agency-backed CMO is LEAST important to an investor in a rising interest-rate environment? a. Prepayment risk b. Credit risk c. Interest-rate risk d. Extension risk

a. Prepayment risk Explanation: Prepayment risk is associated with a falling interest-rate environment in which mortgage holders refinance or repay their mortgages at a faster rate. The holder of a CMO, therefore, receives a larger portion of the principal earlier than anticipated and is forced to reinvest at lower rates. Many CMOs are created from government agency mortgage-backed securities (MBS), which have a minimal amount of credit risk. Some CMOs are constructed without this backing and, therefore, credit risk is a greater concern. CMOs, as with most fixed-income securities, carry interest-rate risk. Extension risk is the opposite of prepayment risk, where interest rates are rising and the CMO holder receives a smaller portion of her principal back.

When must a customer be sent a current Options Clearing Corporation risk disclosure document? a. Prior to or at the time the account is approved for options trading b. Not later than the time the customer receives a confirmation of the initial option transaction c. Not later than 15 days following the time the account is approved for options trading d. At least 15 business days prior to the time an initial option transaction is executed

a. Prior to or at the time the account is approved for options trading Explanation: A customer must be sent a current Options Clearing Corporation risk disclosure document prior to or at the time the account is approved for options trading.

Which of the following methods is used by the Options Clearing Corporation in assigning exercise notices? a. Random selection b. First-in, first-out c. To the member firm holding a long position that first requests an exercise d. On the basis of the largest position

a. Random selection Explanation: The OCC assigns exercise notices on a random selection basis only.

An investor would purchase an inverse exchange-traded note if: a. She anticipates a decrease in the benchmark that is being tracked b. She anticipates an increase in the benchmark that is being tracked c. She is interested in obtaining a long-term capital gain d. She is interested in obtaining income on a regular basis

a. She anticipates a decrease in the benchmark that is being tracked Explanation: Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. These securities are not like traditional fixed-income securities since they typically do not make interest payments to investors. The returns are linked to the performance of an index, currency, or commodity and would be suitable for investors who want to speculate on the value of an index. An inverse ETN would pay the opposite of the benchmark that is being tracked and would be suitable for a person interested in short-term trading. Most ETNs are traded on a national exchange (NYSE) and, therefore, an investor can quickly sell the security to earn a short-term gain.

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

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

Which of the following factors is LEAST important when recommending a long-term brokered CD to a client? a. The CD was issued by a bank located in a different state from where the client lives b. The CD has a feature in which the interest rate is based on a percentage increase in an equity index c. The client will be purchasing the CD in a retirement account d. The firm may make a market in this CD, but is not obligated to do so

a. The CD was issued by a bank located in a different state from where the client lives Explanation: The state in which the client or issuing bank is located is not an important factor when recommending a long-term brokered CD. The features that establish the interest rate of the security, such as an index of fixed-income or equity securities, is relevant to the client. The amount of FDIC insurance and tax considerations are different depending on whether the CD is purchased in a retirement account. In addition, a broker-dealer is not required to maintain a secondary market or act as a market maker in a CD that was sold to the client. This will limit the liquidity of the security if the client needs the funds prior to maturity.

A registered representative is approached by an accountant who wants to receive a finder's fee for introducing her clients to the RR. Which of the following statements is TRUE? a. The RR is not permitted to pay a finder's fee to the accountant b. The RR is permitted to pay a maximum finder's fee of 5% to the accountant c. The RR is permitted to pay a maximum finder's fee of 8.5% to the accountant d. The RR is permitted to pay an annual referral fee to the accountant based on the amount of commissions generated by the referrals

a. The RR is not permitted to pay a finder's fee to the accountant Explanation: A broker-dealer is not permitted to compensate nonregistered persons in exchange for introducing clients to an RR or based on the amount of commissions or fees generated by the account. This would prohibit a firm from paying a finder's fee, rebate, or bonus based on commissions to any person who is not employed by a broker-dealer (an accountant or attorney, for example) unless that person was registered with the broker-dealer.

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

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

The initial FRB margin requirement is 50%. A customer purchases 1,000 shares of XOP at $48 per share and makes the necessary deposit. If XOP increases in value to $57 per share and later declines to $45 a share, which of the following statements is TRUE? a. The SMA in the account is $4,500 and the equity is $21,000 b. The SMA in the account is $4,500 and the equity is $33,000 c. There is no SMA and the equity is $21,000 d. The SMA is $9,000 and the equity is $33,000

a. The SMA in the account is $4,500 and the equity is $21,000 Explanation: First, determine the amount of the debit balance. If the customer purchased $48,000 worth of stock at a 50% margin requirement and deposited $24,000, the debit balance is $24,000 ($48,000 market value - $24,000 margin requirement = $24,000 debit balance). XOP increased to $57 per share, making the market value $57,000. The equity increases to $33,000. The excess equity (SMA) is found by subtracting the FRB-required equity of $28,500 (50% of $57,000) from the actual equity in the account of $33,000. The SMA is, therefore, $4,500. The SMA remains in the account until it is used. The SMA balance will never decrease because of market movements. Securities held in a margin account that increase in value can create excess equity (SMA) but, if these securities later decline in value, this will not decrease SMA. The equity decreases since the market value declined to $45 per share and is now $21,000 ($45,000 - $24,000).

A customer fails to pay for securities by payment date. Which of the following statements is TRUE? a. The account is frozen for 90 days b. The customer is prohibited from opening another account for 90 days c. The customer may trade after 30 days d. The account is closed because it is in violation

a. The account is frozen for 90 days Explanation: When a customer fails to pay for securities, the account is restricted (frozen) for 90 days. Before the customer may buy additional securities, the customer must deposit the full purchase price of the securities in the account. This is a Regulation T requirement. The other choices are incorrect.

Which of the following factors is NOT used in determining the value of an annuity unit? a. The assumed interest rate b. The value of the separate account c. Income distributions from securities held in the separate account that are reinvested d. Capital gain distributions from securities held in the separate account that are reinvested

a. The assumed interest rate Explanation: The assumed interest rate (AIR) is used to determine the subsequent payments made to the annuitant. The value of the annuity unit is determined by the value of the separate account, including all reinvested distributions.

A 3-month Treasury bill is issued at a discount to yield 9.5%, and a corporate bond is issued to yield 9.5%. The bond is to mature in 10 years. If both are offered on the same day on a bond equivalent yield basis, which of the following statements is TRUE? a. The bill has a greater yield than the bond b. The bond has a greater yield than the bill c. The yield is the same for both d. The bond equivalent yield and tax equivalent yield are equal

a. The bill has a greater yield than the bond Explanation: T-bills are issued and quoted on a discount yield basis, whereas corporate bonds are quoted on a yield-to-maturity basis. These yields are calculated in different manners. The bond equivalent yield of a T-bill is always higher than its discount yield.

A 6% bond is selling at a 6.25% basis. The bond will mature in 25 years and has 3 call dates. Which of the following bonds will give the investor the best return? a. The bond is called after 10 years at 103 b. The bond is called after 15 years at 102 c. The bond is called after 20 years at 101 d. The bond is held to maturity

a. The bond is called after 10 years at 103 Explanation: The bond is selling at a discount. The first call in 10 years at 103 will give the investor the best return. The investor receives the highest call price in the shortest number of years.

A client contacts an RR after reviewing the financial statements of the S-Works Carbon Company. The client is confused since the company paid a cash dividend but had a loss for the last fiscal year. Which of the following statements is TRUE? a. The company is permitted to pay a cash dividend even though it had a loss b. The company is not permitted to pay a cash dividend if it had a loss c. If the company has a loss in its last fiscal year, it may pay a cash dividend only with prior approval from shareholders d. If the company has a loss in its last fiscal year, it may pay a cash dividend only with prior approval from the SEC

a. The company is permitted to pay a cash dividend even though it had a loss Explanation: A company is permitted to pay cash dividends in excess of its net income even if it had a loss. In terms of financial accounting, cash dividends are paid out of retained earnings that are part of shareholders' equity. Therefore, cash dividends paid will reduce shareholders' equity. The company could have paid the cash dividend easily based on retained earnings from previous years.

Which item of the following information is NOT generally included on an options confirmation? a. The contrabroker b. The price of the option c. The month and the strike price of the contract d. The name of the underlying security

a. The contrabroker Explanation: The contrabroker is the broker on the other side of the trade. The contrabroker's name is not generally included on a confirmation. All of the other items are included on an options confirmation.

A director of BDG owns 180,000 shares of BDG stock, which were purchased in the secondary market. If the director wants to sell 17,000 shares of BDG that she has owned for nine months, which of the following statements is TRUE? a. The director is permitted to sell the shares if the trade is reported b. The director is permitted to sell the shares only if they are held for three additional months and the trade is reported c. The director is permitted to sell the shares and no report is required d. The director is permitted to sell the shares only if the transaction will result in a loss

a. The director is permitted to sell the shares if the trade is reported Explanation: An insider, as defined by the Securities Exchange Act of 1934, is a director, officer, or owner of more than 10% of the voting stock of a corporation. Immediate family members of the insider are also subject to the same limitations. An officer or director is required to register with the SEC regardless of her ownership levels in the company. The director as an insider is required to report the transaction to the SEC within two business days. Insiders are not permitted to make short-swing profits (based on ownership of six months or less in their own company's stock). Since the director owned the shares for nine months, there is no violation. Since the shares were purchased by the director in the secondary market, the shares are considered control, not restricted stock, and are not subject to the six months' holding.

Manny Ortiz, a registered representative with Red Sock Financial, has recommended the purchase of a variable annuity to Derek Pettitte, one of his clients. After agreeing to purchase the contract, which of the following actions must be taken? a. The information concerning the recommendation must be documented and signed by Manny b. The application must be forwarded by Manny directly to the issuing insurance company c. The principal only signs the recommendation if the purchase is approved d. The principal must review the application within five business days of receipt from Manny

a. The information concerning the recommendation must be documented and signed by Manny Explanation: If the purchase of a variable annuity is made after a recommendation by a registered representative, several steps must be taken before the application is submitted to the issuing insurance company. In this example, Manny must document and sign the recommendation before forwarding the application to the Office of Supervisory Jurisdiction (OSJ) of the member firm. The principal at the OSJ reviews the application to determine suitability. The principal must approve or reject the application within seven business days of receipt and must document and sign the approval or rejection.

A customer owns a municipal bond that has been escrowed to maturity. Which of the following statements is TRUE? a. The issuer has deposited money in an escrow account that will contain U.S. government securities used to pay off the municipal bonds at maturity b. The issuer has deposited money in an escrow account that will contain U.S. government securities used to pay off the municipal bonds prior to maturity c. The issuer has deposited money in an escrow account that will contain other municipal bonds used to pay off the municipal bonds at maturity d. The issuer has deposited money in an escrow account containing U.S. government securities that will create a tax liability for the municipal bondholder at maturity

a. The issuer has deposited money in an escrow account that will contain U.S. government securities used to pay off the municipal bonds at maturity Explanation: When interest rates fall, a municipality may want to engage in advance refunding. In this case, the municipality will sell a new issue with the proceeds of the sale going into an escrow account containing U.S. government securities. Since the municipal bond has been escrowed to maturity, the U.S. government securities would be purchased with a maturity date that coincides with the maturity date of the municipal bonds.

What information would NOT be found in a subscription agreement in a direct participation program (DPP)? a. The name of the limited partner's certified public accountant b. The suitability standards c. The signature of the limited partner d. To whom the check is made payable to

a. The name of the limited partner's certified public accountant Explanation: The subscription agreement will normally state the suitability standards for the program, specify who must sign the agreement, specify to whom the check must be made payable, and make inquiries of the purchaser to make sure that he understands the ramifications of the investment and can meet the financial requirements of this investment. The name of the limited partner's accountant would not need to be included in this agreement.

Which of the following statements is TRUE concerning periodic payment variable annuities? a. The number of a client's annuity units never changes b. The number of a client's accumulation units never changes c. They never have a beneficiary d. The monthly payout is fixed by the inflation index

a. The number of a client's annuity units never changes Explanation: During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The first monthly payout is determined actuarially and thereafter is based on the performance of the separate account.

Which of the following statements is NOT TRUE regarding a firm's anti-money laundering program? a. The program must comply with a blueprint or template supplied by the SEC b. The program requires an ongoing employee training program c. The program must provide for annual testing of the system d. The firm must designate a specific individual responsible for implementing the firm's anti-money laundering program and must identify the person to FINRA

a. The program must comply with a blueprint or template supplied by the SEC Explanation: There is no anti-money laundering blueprint or template supplied by either the SEC or FINRA to broker-dealers. However, any program implemented by the broker-dealer must be designed to comply with the provisions of the Bank Secrecy Act (BSA) and must provide for annual testing of the systems as well as ongoing employee training. Broker-dealers must appoint a compliance person to oversee anti-money laundering regulation compliance, and must identify that person to FINRA.

Which of the following statements is TRUE regarding a registered representative who has not completed the Continuing Education Regulatory Element training within 120 days of his registration anniversary? a. The representative will be placed in inactive status b. The broker-dealer must request an extension from an SRO c. The representative will be suspended d. The representative has 30 days to complete the requirement

a. The representative will be placed in inactive status Explanation: FINRA will notify a representative within 30 days of the second anniversary date of initial registration, and every three years thereafter. If the representative then fails to complete the required training within 120 days of the anniversary date, that person's registration will become inactive and any activity that requires registration, including receipt of commissions, will be prohibited.

Kyle, a client at TLC brokerage firm, anticipates a decline in the earnings of LPOP. LPOP is a thinly traded issue. Which of the following statements BEST describes what the RR should disclose to Kyle? a. The stock may be difficult to sell short because the shares may not be available to borrow b. All securities may be sold short provided the client has a margin account c. As long as the order ticket is marked sell long, the stock could be sold short d. Exchange-traded put options are available on all securities and are a less risky method to profit

a. The stock may be difficult to sell short because the shares may not be available to borrow Explanation: A client may sell short or buy a put to profit from a decline if the value of a security is anticipated. In order to sell short, the broker-dealer is required to borrow the security. Although short sales may be executed only in a margin account, if an issue is thinly traded, it may be difficult or impossible to borrow the security. A put option may be an attractive alternative to selling short. However, put options are unlikely to be available on a thinly traded security.

Which of the following deductions applies to oil and gas programs, but not to real estate programs. a. Depreciation b. Depletion c. Recapture d. Tax credits

b. Depletion Explanation: Depletion is a deduction available to programs that extract oil and gas and other types of wasting assets. It does not apply to real estate programs.

An investor establishes a long margin account and buys 1,000 shares of TMP at $55. The value of the securities increases and SMA is created. All of the following actions affect SMA, EXCEPT: a. The value of the securities declines b. The value of the securities increases c. Cash is withdrawn from the account d. The buying power of the accounts used

a. The value of the securities declines Explanation: The SMA remains in the account until it is used. The SMA balance will never decrease because of market movements. A decrease in the market value of the securities does not affect the SMA in a long account since, once created, SMA is reduced only when used. An increase in the market value of the securities can increase SMA, since equity increases. Withdrawing cash and buying of additional securities for the account will reduce the SMA since the SMA is used.

Investors may receive disclosure and secondary market information concerning municipal securities: a. Through the EMMA system b. Through the TRACE system c. Directly from the issuer d. From the OATS system

a. Through the EMMA system Explanation: The MSRB has established the Electronic Municipal Market Access (EMMA) system as the primary market disclosure service for official statements, other related primary market documents, and information. The EMMA system also contains information related to the continuing disclosure requirements submitted by municipal issuers and secondary market transactions submitted by municipal securities dealers. EMMA receives transactional information from the MSRB's Real-Time Transaction Reporting System (RTRS).

Which of the following choices best describes the primary cause of inflation? a. Too much money compared to the goods that are available b. Too many goods compared to the money that is available c. Foreign investments appreciating faster than U.S. investments d. U.S. investments appreciating faster than foreign investments

a. Too much money compared to the goods that are available Explanation: Inflation is a general rise in the prices of goods and services. If there is too much money in the economy, the demand for goods and services will increase, pushing up prices. This is sometimes described as too much money chasing too few goods.

Discretionary accounts require: a. Written authorization from the customer b. Oral authorization from the customer c. Written authorization from the client for each trade the registered representative executes d. The registered representative to send the client a letter detailing the proposed transaction

a. Written authorization from the customer Explanation: Discretionary accounts require written authorization from the customer. In addition, each discretionary order must be approved on the day the order is entered by a manager, partner, or authorized person.

Someone who wants to hedge a portfolio of long-term bonds will buy: a. Yield-based call options b. Yield-based put options c. VIX call options d. VIX put options

a. Yield-based call options Explanation: The prices of bonds are inversely related to the movement of interest rates. If the investor is concerned that rising interest rates will erode the value of the bond portfolio, the purchase of an option that does well when interest rates rise will provide an effective hedge. Yield-based call options increase in value when interest rates rise, creating a viable hedge. The VIX (volatility index) tends to move inversely with the S&P 500 Index. The VIX usually rises when the S&P 500 Index falls, and falls when the S&P 500 Index increases. An investor will buy VIX call options when he expects the market to decline and volatility to increase. An investor will buy put options on the VIX if he expects the market to rise and volatility to decrease. Many investors will buy VIX call options as a hedge against a possible decline in the stock market. VIX options can be used by investors who expect either an increase or a decrease in volatility. It is not used to hedge a bond portfolio.

An investor has sold a stock short. If the present market value is $2.00 per share, the minimum maintenance requirement will be: a. 50% b. $2.50 per share c. $2.00 per share d. 30%

b. $2.50 per share Explanation: When selling short securities that have a market value less than $5 per share, a minimum maintenance requirement of $2.50 per share or 100% of the market value, whichever is greater, applies. Since $2.50 a share is greater than $2.00 per share, this is the correct answer.

Lindsay Depaul is a client seeking a balance between income and capital growth. Which of the following investment strategies MOST closely achieves this goal? a. 30% corporate bond fund, 30% municipal bond fund, and 40% in a U.S. government bond fund b. 20% in a blue-chip fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a municipal bond fund, and 20% in a U.S. government bond fund c. 50% in an ETF that follows the S&P 500 and 50% in an equity foreign index fund d. 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund

b. 20% in a blue-chip fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a municipal bond fund, and 20% in a U.S. government bond fund Explanation: An investor seeking income and capital growth would want her assets allocated evenly between equity and fixed-income investments. Choice (b) has a 60%/40% mix of equity and fixed-income. Choice (a) is 100% fixed-income, choice (c) is 100% equity, and choice (d) is 80% equity and 20% in fixed-income.

Which of the following securities have the most interest-rate risk? a. 2X short-term bond leveraged ETFs b. 2X long-term bond leveraged ETFs c. Long-term bond leveraged ETFs d. Short-term bond leveraged ETFs

b. 2X long-term bond leveraged ETFs Explanation: An essential bond concept is that long-term bonds have a higher degree of interest-rate risk than short-term bonds. A leveraged ETF seeks to deliver a multiple of the performance of an index or other benchmark. Therefore, a 2X long-term bond leveraged ETF will have the highest degree of interest-rate risk of the answer choices.

A customer in her late 40s, who is currently in the 15% tax bracket has recently inherited $6,000,000. She informs you that she considers herself a conservative investor and wants your advice concerning investing the inheritance. Which of the following choices would be the BEST method of investing the funds? a. 20% in equities, 30% in Treasury bonds, and 50% in tax anticipation notes b. 40% in equities, a 30% mixture of in-state and out-of-state municipal bonds, 15% in Treasury bonds, 15% in revenue anticipation notes c. 30% in-state municipal bonds, 30% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in revenue anticipation notes d. 25% in-state municipal bonds, 25% in out-of-state municipal bonds, 25% in corporate bonds, and 25% in Treasury bonds

b. 40% in equities, a 30% mixture of in-state and out-of-state municipal bonds, 15% in Treasury bonds, 15% in revenue anticipation notes Explanation: Although this investor is in her late 40s and considers herself a conservative investor, equities should be a part of her asset allocation. Many strategists recommend taking 100% and subtracting the investor's age as a guide to the percentage of the investor's portfolio that should be allocated to equities. As such, a 40% allocation in equities is reasonable with the remainder in various fixed-income securities and cash. Prior to inheriting the funds, she would not have been a suitable candidate for tax-exempt or municipal securities due to her low tax rate. After investing in these funds, the income/dividends/potential capital gains would have the effect of increasing her tax rate, so that municipal bonds would be an attractive investment. In-state municipal bonds would offer a higher after-tax return to this investor. Due to the potential of credit risk with municipal bonds, having a portion of the funds in Treasury securities would be a good recommendation. In addition, the investor should invest a portion of the funds in cash or cash alternatives. This is satisfied by allocating a portion of the funds in short-term municipal securities such as tax or revenue anticipation notes. Choice (a) has only a 20% allocation in equities and a 50% allocation of funds in tax anticipation notes, offering no growth potential. Having 100% of the funds in fixed-income investments does not offer the customer a balanced approach and, therefore, the other choices would not be the best method of investing the funds.

A mother wants to set up an investment account to provide funding for her child to attend private elementary and secondary schools. Which of the following choices is most suitable? a. A custodial account b. A Coverdell ESA c. A 529 education plan d. A prepaid tuition plan

b. A Coverdell ESA Explanation: An advantage of ESAs (Education Savings Accounts) is the ability to make tax-free withdrawals to pay for private elementary, high school, and postsecondary school expenses. State-sponsored 529 plans allow tax-advantaged withdrawals only for postsecondary school (usually college) expenses.

The stock of which of the following companies is most likely considered cyclical stock? a. An oil and gas company b. A home appliance company c. A utility company d. A pharmaceutical company

b. A home appliance company Explanation: A cyclical company is one whose sales correspond to changes in the business cycle and, therefore, will be affected by a recession. Examples of cyclical stock includes the stock of household appliance companies, steel companies, and construction companies. A defensive company is one whose sales are not as affected by changes in the business cycle (i.e., it resists recession). Examples of defensive stock includes the stock of pharmaceutical, health care, tobacco, oil and gas, utility, and supermarket companies.

An investor with an investment objective of speculation wants to purchase a security that will increase three times as much the Russell 2000 Index. Which of the following securities would you recommend? a. An inverse exchange-traded fund (ETF) b. A leveraged exchange-traded fund (ETF) c. A leveraged inverse exchange-traded fund (ETF) d. An exchange-traded fund (ETF)

b. A leveraged exchange-traded fund (ETF) Explanation: A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. For example, a 3X leveraged ETF based on the Russell 2000 Index seeks to deliver three times the performance of that index. So, if the Russell 2000 Index rises by 1%, a leveraged ETF would increase by 3% before fees and expenses. Choice (a) would be suitable if the customer anticipated a decrease in the Russell 2000, choice (c) would be suitable if the customer wanted a return that was a multiple or higher return and anticipated a decrease in the Russell 2000, and choice (d) would be suitable if the customer only wanted to track the return of the Russell 2000.

An advertisement for municipal securities states the following: "15-year 10% tax-free bond priced to yield 12% to maturity. Call us now for more details." According to MSRB rules, this advertisement should also state that: a. The tax-free return is actually greater than 12% if the bond is held to maturity b. A portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12% c. The tax-free return is actually less than 10% if the bond is held to maturity d. A principal approved the advertisement

b. A portion of the yield to maturity is taxable if the bond is held to maturity, making the after-tax return between 10% and 12% Explanation: According to MSRB rules, the advertisement must state that a portion of the yield to maturity for a discount bond may be subject to taxation and, therefore, does not represent a fully tax-free yield. In this question, the bond is being offered at a discount because the yield to maturity (12%) is greater than the nominal yield (coupon rate 10%). At maturity, the discount would be subject to taxation as ordinary income, causing the net yield to be between 10% and 12%.

According to MSRB rules, which of the following documents need not be approved by a principal prior to being sent to a customer? a. An abstract of an official statement b. A preliminary official statement c. An advertisement regarding the firm's products and services d. A research report

b. A preliminary official statement Explanation: A preliminary official statement is prepared by or for the issuer. Since the MSRB does not have the power to regulate issuers, a preliminary official statement cannot be considered advertising under MSRB rules. However, an abstract (summary) of the official statement is prepared by a dealer and is, therefore, considered advertising. A final official statement and a firm's offering list are also not considered advertising.

A registered representative opens an option account for a customer on October 1 and buys 5 ABC November 30 calls at 4. On October 16, the premium of the calls has decreased to 2 and the registered representative has not received a signed options agreement. The registered representative may: a. Not accept any orders from the customer until the signed options agreement is received b. Accept an order to sell the 5 ABC November 30 calls that were previously purchased c. Accept an order to buy 5 additional ABC November 30 calls d. Accept an order to buy 5 XYZ December 40 calls

b. Accept an order to sell the 5 ABC November 30 calls that were previously purchased Explanation: If the customer does not return the options agreement within 15 days of the approval of the account, the customer is permitted only to close out existing positions. Since the account was approved on October 1, the customer must sign the options agreement and return it to the firm by October 16. As of October 16, the customer may only open new options positions after the signed form is returned to the firm.

Government-sponsored enterprise securities are comparable to direct government obligations with regard to all of the following statements, EXCEPT: a. They trade in the over-the-counter market b. All are government guaranteed c. Short-term securities are quoted on a discount yield d. Long-term securities are quoted as a percentage of par

b. All are government guaranteed Explanation: Government-sponsored enterprise securities are not guaranteed by the government. The other statements are true.

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

b. An S&P 500 Index mutual fund Explanation: Although all of these investments are suitable for a client seeking broad exposure to the U.S. equity market, the mutual fund is the most cost-effective method for an investor to accomplish this goal with $250 per month. The closed-end fund and ETFs are purchased on an exchange and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge (no-load). If the investor were to purchase a large dollar amount at one time, any of these funds may be appropriate.

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

b. An employee's contribution to his 403(b) plan Explanation: 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.

Which of the following securities may NOT be purchased in a discretionary account without prior written approval by the customer? a. An exchange-traded fund (ETF) b. An equipment leasing direct participation program (DPP) c. A private activity municipal revenue bond d. The PAC tranche of a collateralized mortgage obligation

b. An equipment leasing direct participation program (DPP)

A registered representative has a 33-year-old client with a stable income with no foreseeable need to access money. The client is looking for a long-term investment that will offer a guaranteed rate of return, that can also share in the performance of the stock market, and offers some form of death benefit. Which of the following investments is MOST suitable for this client? a. A fixed annuity b. An equity-indexed annuity c. A variable annuity d. A varialble life insurance policy

b. An equity-indexed annuity Explanation: An equity-indexed annuity will satisfy the objectives of this client. It is a hybrid investment which offers the benefits of a fixed annuity -- guaranteed rate of growth -- as well as those of a variable annuity -- growth potential in the market. These, like most annuities, are not designed as short-term investments. The variable life insurance policy is designed to provide death benefits that can increase because of growth in the market.

A mutual fund shareholder is NOT required to report which of the following events for tax purposes? a. Receiving a dividend that is subsequently reinvested in the fund at the net asset value b. Appreciation in the value of the shares c. Exchanging shares of one fund for another fund within the same family of funds d. Receiving a capital gains distribution that was not reinvested in the fund

b. Appreciation in the value of the shares Explanation: Dividends and capital gains distributions are taxable to the investor regardless of whether they are reinvested in the fund. Exchanging shares for another fund within the same family of funds must also be reported on the investor's tax return since shares of one fund are being sold to buy shares in another fund. Appreciation in the value of fund shares is not taxable until the shares are sold to establish a capital gain.

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

b. Approval by the state legislature Explanation: State legislative approval is required before a municipality can begin making payments on a moral obligation bond.

What information would an analyst be MOST concerned with when evaluating a revenue bond? a. The population growth of the municipality b. Debt to assessed valuation c. A rate covenant d. Property taxes

c. A rate covenant Explanation: An analyst would be most concerned with rate covenants. This is an agreement made by the municipal issuer to maintain rates high enough to cover maintenance and operating charges and to meet annual debt service requirements. The other terms are applicable to general obligation bonds.

Joseph Carlyle is a customer of a municipal securities firm. Based on his existing account documentation, he is clearly unsuitable for securities with a speculative credit rating. However, he has entered an order to purchase a bond that is rated BB by Standard and Poor's. His representative, Bob Thomas, has communicated to him that this transaction is not in his best interest based on the information that the firm has on file. Regarding this situation, which of the following statements is TRUE? a. Bob should process the order because a BB rating is not speculative b. Bob should process the order because MSRB rules allow the order to be filled if the representative explains to Joseph that the trade is unsuitable c. Bob should process the order because registered representative are not fiduciaries and, therefore, must always do what the customer says d. Bob should not process the order because MSRB rules prohibit the processing of a clearly unsuitable transaction

b. Bob should process the order because MSRB rules allow the order to be filled if the representative explains to Joseph that the trade is unsuitable Explanation: According to recent interpretations of the MSRB's suitability rule, Bob should process the customer's order as long as he takes the time to explain to Mr. Carlyle why he believes the investment is unsuitable for him.

Which of the following securities has the LEAST amount of capital risk? a. Options b. Bonds c. Warrants d. Stocks

b. Bonds Explanation: Capital risk is the risk of an investor losing her principal, the amount of funds invested in a security. When compared to the other securities, bonds have the least amount of capital risk. At maturity, the investor would receive the principal amount of the bond, thus minimizing the capital risk.

Which of the following choices is NOT TRUE about buying listed put options versus selling the underlying stock short? a. Buying a put will require a smaller capital commitment b. Buying a put has a larger potential loss than selling the stock short c. The put has time value that gradually dissipates d. Buying a put is not subject to the Regulation SHO requirement to borrow shares

b. Buying a put has a larger potential loss than selling the stock short Explanation: Choice (b) is not true. Buying a put has a smaller potential loss than selling the underlying stock short. The maximum loss when buying a put is limited to the premium paid. The loss when selling short is unlimited. All of the other statements are true. The cost for the premium of a put is substantially less than the Regulation T margin requirement for a short sale. The purchase of puts is not subject to the borrowing requirements of Regulation SHO, whereas short sales of equities are. An option's premium consists of intrinsic value and/or time value. Time value gradually dissipates as an option nears its expiration.

Junius Arbor purchased stock in 2002 for $24,000. In April 20XX, Mr. Arbor passed away. His estate valued the stock at $82,000. The stock was willed in equal amounts to his daughter Cathy and his son Bob. Cathy sold her stock on September 2, 20XX for $48,000. Bob sold his stock on May 8, 20XX for $56,000. Which of the following statements is TRUE? a. Cathy has a short-term gain of $7,000 and Bob has a short-term gain of $15,000 b. Cathy has a long-term gain of $7,000 and Bob has long-term gain of $15,000 c. Cathy has a short-term gain of $36,000 and Bob has a short-term gain of $44,000 d. Cathy has a long-term gain of $36,000 and Bob has a long-term gain of $44,000

b. Cathy has a long-term gain of $7,000 and Bob has long-term gain of $15,000 Explanation: 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. The capital gains or losses for Bob and Cathy are found as follows: The securities at the time of death were valued at $82,000. Bob and Cathy were willed equal amounts of $41,000 each, establishing a cost basis for both of $41,000. To determine the gain, compare the cost basis to the sales proceeds. Cathy sold her stock for $48,000, creating a $7,000 gain, while Bob sold his stock for $56,000, creating a $15,000 gain.

Class A shares of an open-end investment company are different from Class B shares in that: a. Class A shares are common shares, while Class B shares are preferred shares b. Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge c. Class A shares pay quarterly dividends, while Class B shares pay a monthly dividend d. Class A shares can be purchased directly from the fund, while Class B shares are offered through broker-dealers

b. Class A shares have a front-end sales charge, while Class B shares have a contingent deferred sales charge Explanation: The difference between Class A and Class B shares is normally the fact that A shares have a front-end sales charge while the B shares have a contingent deferred sales charge (CDSC). A CDSC is deducted only when the investor redeems shares. Generally, if the investor holds the B shares for a sufficient period, there is no sales charge deducted upon redemption.

An RR receives unsubstantiated information that a biotech company trading on Nasdaq has been approached by a large pharmaceutical company as a possible acquisition. The news seems to indicate that the price of the biotech company will increase greatly in value. Which of the following choices is the most inappropriate action for the RR to take? a. Take no action b. Contact clients and indicate that this biotech company is heading upward and that they should place a buy order c. Wait for the news to break and then see if the stock is worth buying d. Contact your firm's compliance department

b. Contact clients and indicate that this biotech company is heading upward and that they should place a buy order Explanation: If an RR receives unsubstantiated news (possibly a rumor), he should take no action until the information becomes public. At that time, the RR will be in a better position to be able to recommend whether clients should purchase the stock. If he received material, nonpublic information on a company, the best course of action is for the RR to contact a principal or compliance person associated with his firm. Please note that this question is asking for the most inappropriate action for the RR to take making the best answer, choice (b).

Which of the following option strategies is most suitable in a retirement account under ERISA guidelines? a. A long straddle b. Covered call writing c. A credit spread d. No strategies, since options are not permitted in retirement plans

b. Covered call writing Explanation: Options may be used in the investment strategies of retirement plans subject to ERISA provisions, but they tend to be limited to the most conservative approaches, such as the sale of covered call options.

A retail investor usually is NOT able to purchase: a. Money-market fund shares b. Dealer-placed commercial paper c. Municipal bonds d. Treasury STRIPS

b. Dealer-placed commercial paper Explanation: The minimum requirement for an investment in dealer-placed commercial paper is normally $100,000. Commercial paper is not typically purchased by retail investors. The minimum requirement for investment in Treasury STRIPS is usually $100 and the minimum denomination for municipal bonds is $1,000.

Which of the following statements is TRUE concerning a customer who purchases an original issue discount (OID) U.S. government security? a. Each year the customer will pay both federal and state income tax b. Each year the customer will pay only federal income tax c. Each year the customer will not pay any tax d. The customer will only pay tax at maturity

b. Each year the customer will pay only federal income tax Explanation: The upward adjustment in the purchase price of an original issue discount bond is called accretion. The amounted accreted each year is considered interest income, which may or may not be taxable depending on the type of security. The interest on U.S. government securities is subject to federal income tax, but exempt from state and local income taxes.

A company has chosen accelerated depreciation instead of straight-line depreciation. Which of the following statements is TRUE? a. Earnings are overstated in the early years and understated in later years b. Earnings are understated in the early years and overstated in later years c. Earnings are understated in both early and later years d. Earnings are not impacted by the method of depreciation

b. Earnings are understated in the early years and overstated in later years Explanation: Accelerated depreciation allows a company to take a larger amount of the cost of an asset as a deduction in the early years and less in the later years. Since large deductions are taken, earnings will be understated (reduced) in the early years. Small deductions in later years will overstate earnings.

Which of the following terms relates to the graph of optimal portfolios resulting from a comparison of risk and return? a. CAPM b. Efficient frontier c. Duration d. Alpha

b. Efficient frontier Explanation: According to modern portfolio theory, a graph of optimal portfolios can be created known as an efficient frontier.

Which of the following features is NOT a benefit of a laddered portfolio of bonds? a. A higher average yield b. Elimination of interest-rate risk c. Improved liquidity d. Lower reinvestment risk

b. Elimination of interest-rate risk Explanation: A laddered portfolio is created by investing in the same type of bonds with different maturity dates. This approach reduces, but does not eliminate, interest-rate risk. Some of the benefits of laddering include a higher average yield since there is a mix of both short-term and long-term bonds, improved liquidity since bonds will be maturing on a regular basis, lower reinvestment risk since proceeds will be reinvested each year rather than only reinvesting when all of the bonds mature.

If a bank holds funds above the amount required by the Federal Reserve Board, this is called: a. The federal funds rate b. Excess reserves c. The repo rate d. Excess margin

b. Excess reserves Explanation: Banks are required to keep a portion of their deposits on reserve with the FRB. By adjusting the amount banks must keep on reserve at the FRB, the Fed can tighten or ease the money supply. If reserve requirements are lowered, the banks are able to extend more credit. Thus, the money supply increases. The opposite effect occurs with an increase in reserve requirements. After meeting its reserve requirement, a bank will look to lend the remaining funds to borrowers. The amount above the reserve requirement is called excess reserves.

In order to implement a portfolio margin program, the firm must obtain approval from: a. The options exchange b. FINRA c. The SEC d. The OCC

b. FINRA Explanation: Firms establishing a portfolio margin program are required to obtain approval from FINRA.

An equity security that is distributed under Regulation S may be resold by: a. Immediate sale within the U.S. market b. Immediate sale in a designated offshore market c. Regulatory approval from SROs d. Waiting six months, then selling within the U.S. market

b. Immediate sale in a designated offshore market Explanation: An overseas investor who acquires securities pursuant to Regulation S may sell the securities overseas immediately through a designated offshore securities market. There is a distribution compliance period (holding period) of 40 days for debt securities and a one-year period before an equity security sold pursuant to Regulation S may be resold in the U.S.

According to CAPM, all of the following choices are examples of diversifiable, nonsystematic risk, EXCEPT: a. Credit risk b. Interest-rate risk c. Business risk d. Industry risk

b. Interest-rate risk Explanation: Interest-rate risk is the systematic risk for bonds just as beta measures the systematic risk for stocks. Systematic risk is market risk, which persists despite diversification.

Which of the following statements is TRUE regarding the Interbank market? a. It is the market for fed funds between banks b. It helps establish the spot prices for foreign currencies c. It administers loans to foreign countries d. It is the guarantor of foreign currency options

b. It helps establish the spot prices for foreign currencies Explanation: The Interbank market is the purchase and sale of foreign currencies among large banks. The market helps establish the cash (spot) prices for foreign currencies. Spot prices are often referred to as the spot rate.

Which of the following statements is TRUE about treasury stock? a. It receives dividends b. It is treated as a deduction from outstanding shares c. It has voting power d. It is part of unauthorized stock

b. It is treated as a deduction from outstanding shares Explanation: Treasury stock is issued stock that has been repurchased by the corporation and is retired. It is treated as a deduction from the outstanding shares of a corporation and is no longer part of the capitalization of the corporation. It has no voting rights and does not receive dividends.

JULY 20XX S M T W T F S 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Use the calendar to answer this question. If an investor bought a stock in a cash account on July 2, when will the settlement date be in a regular-way transaction? a. July 5 b. July 8 c. July 9 d. July 12

b. July 8 Explanation: July 8 is the settlement date. This is three business days after the trade date in a regular-way transaction in a cash or margin account. Thursday, July 4 is not a business day. It is a legal holiday and is not counted. The third business day after the trade date of July 2 is July 8.

Which of the following choices is Moody's lowest rating for a municipal note? a. MIG 1 b. MIG 3 c. Aaa d. C

b. MIG 3 Explanation: MIG stands for Moody's Investment Grade and is used to rate municipal notes. There are three MIG ratings, with the best rating being MIG 1 and the lowest rating being MIG 3. Aaa is Moody's best rating for bonds, and C is its lowest rating for bonds.

A customer contacts a registered representative and indicates her risk tolerance is to accept some risk to her initial principal in exchange for higher returns. The RR asks the customer if she understands that the account may lose value but may keep pace with or exceed inflation, and the customer agrees to these conditions. This customer's risk tolerance would BEST be defined as: a. Conservative b. Moderate c. Moderate conservative d. Moderate aggressive

b. Moderate Explanation: An investment risk tolerance in which the customer is willing to accept some risk to her initial principal, with some volatility and a possible loss of the funds invested in exchange for higher returns, is best defined as moderate. Moderate conservative includes low risk with an understanding there may be some volatility in exchange for a small amount of portfolio returns. Moderate or medium aggressive is a situation where the customer is willing to accept high risk and high volatility with a possible loss to her initial principal in exchange for high returns.

A customer who has invested historically in mutual funds is considering an investment in a hedge fund for the first time. When comparing mutual funds to hedge funds, which of the following statements is NOT TRUE? a. Mutual funds are subject to more regulatory oversight than hedge funds b. Mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each investor's assets separately c. Hedge funds often use higher degrees of leverage than mutual funds d. Mutual funds may be suitable for many customers, whereas hedge funds are generally suitable for sophisticated, wealthy investors only

b. Mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each investor's assets separately Explanation: Mutual funds and hedge funds both pool investors' money to manage the assets. Unlike mutual funds, hedge funds are often exempt from regulatory oversight, use leverage, and often employ aggressive financial strategies such as short selling and placing large bets on individual companies or sectors of the market. Hedge funds typically have high minimum investment requirements that make them suitable only for professional and wealthy investors.

What type of options will be used to hedge a portfolio of computer stocks? a. Interest-rate options b. Narrow-based index options c. Broad-based index options d. Yield-based options

b. Narrow-based index options Explanation: A portfolio containing only computer stocks represents just one segment of the market. A narrow-based index also contains stocks from only one segment of the market.

Which of the following choices is the formula for earnings per share? a. Current market price/ Earning per share of common stock b. Net income less preferred dividends/Number of shares of common stock outstanding c. Earnings before interest and taxes/ Net tangible assets d. Net income plus preferred dividends/ Number of shares of common stock outstanding

b. Net income less preferred dividends/Number of shares of common stock outstanding Explanation: The formula for earnings per share is net income less preferred dividends divided by the number of shares of common stock outstanding.

An investor has been following XYZ Corp. for several years and feels that the company is poised for some very profitable years. Since she wants to purchase a security that offers a consistent annual distribution and one that benefits from XYZ deciding to pay a significant cash dividend to its common stockholders, she should consider purchasing: a. Cumulative preferred stock b. Participating preferred stock c. Collateral secured bond d. Common stock

b. Participating preferred stock Explanation: Participating preferred stock allows the owners to share in the extraordinary earnings of a company. Essentially, participating preferred has a stated dividend, but these shareholders may receive more than that amount based on the profits of the issuing company. Cumulative preferred stock will add all unpaid dividends to a future payment if a cash dividend is to be paid to common shareholders. A collateral secured bond provides the holder with safety due to it being backed by a specific asset of the issuer; however, the issuer will pay no more than the bond's stated rate of interest. Common stock will pay only cash dividends if they are declared by the company s board of directors.

One of your clients anticipates a significant decline in XYZ stock. The client wants to establish a position to take advantage of a large decline, but not expose himself to significant risk. Which of the following actions best satisfies your client's needs? a. Short XYZ stock b. Purchase an XYZ put c. Purchase an XYZ straddle d. Establish an XYZ debit put spread

b. Purchase an XYZ put Explanation: A long put will allow your client to realize a gain determined by the amount the stock falls below the option's strike price, less the premium. The investor is at risk only for the amount paid for the put, i.e., the premium. In selling XYZ short, an investor exposes himself to unlimited risk. When purchasing a straddle, the investor pays a premium greater than when purchasing only one put on the stock. While the debit put spread is bearish, the gain is limited to the difference between the strike price on the long put and the strike price on the short put, less the net premium.

A customer has a nondiscretionary account at a broker-dealer. The customer received a research report and instructs the registered representative to purchase 500 shares of a specific stock on the recommended list. Which of the following actions is MOST appropriate for the registered representative to take? a. Contact the customer and ask her to place a limit order to buy the security b. Purchase the stock no later than the end of that business day c. Purchase the stock any day that you think is best d. Have the order preapproved by a principal and then purchase the stock

b. Purchase the stock no later than the end of that business day Explanation: This is a nondiscretionary account and, therefore, no shares may be purchased unless the customer gives the broker-dealer an order to purchase the security. In some cases, a registered representative may accept the customer's verbal authorization to make certain decisions without it being considered discretionary. If a customer (1) selects the specific security, (2) decides whether to buy or sell the security, and (3) specifies the number of shares, leaving discretion only as to time and/or price, it would not be considered a discretionary order and written authorization would not be required. The customer mentioned all three of these details. This time and price discretion concerning the order is limited to the trading day on the day the order was placed, and must be noted on the order ticket. The client is permitted to give her RR written instructions for a longer period. There is no requirement to have the order preapproved by a principal.

Which of the following individuals are NOT permitted to trade on the floor of the NYSE? a. Independent brokers b. Registered representatives c. Floor brokers d. Designated market makers

b. Registered representatives Explanation: Registered representatives of a broker-dealer are not permitted to trade on the floor of the NYSE.

Which of the following securities would be LEAST suitable for an investor interested in preservation of capital? a. Long-term CDs b. Reverse convertible bonds c. A corporate bond fund d. A floating rate bond maturing in five years

b. Reverse convertible bonds Explanation: Reverse convertible securities would not be suitable for an investor interested in preservation of capital. Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal (the most beneficial option). If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.

FINRA disseminates bond transaction information for all these securities, EXCEPT: a. Non-investment-grade corporate bonds b. Rule 144A securities c. Investment-grade corporate bonds d. GSE bonds

b. Rule 144A securities Explanation: TRACE is a reporting system that was created to provide greater transparency in the corporate bond market. It is not a quotation system or an execution system. Broker-dealers provide quotes and will execute transactions in corporate bonds. There is no regulatory quote or execution system as there is for equity securities. FINRA disseminates bond transaction information for publicly traded, TRACE-eligible securities (which include investment-grade and non-investment-grade bonds, and debt securities issued by a government-sponsored enterprise). Although transactions for securities issued under Rule 144A are reported to TRACE, the information is not disseminated.

Which of the following securities are considered nonexempt according to the Securities Act of 1933? a. U.S. government and municipal securities b. Securities of a publicly held finance company c. Securities of a small business investment company d. Securities of a nonprofit organization

b. Securities of a publicly held finance company Explanation: Nonexempt securities are those that are subject to the registration requirements of the Securities Act of 1933. Securities of a publicly held finance company are the only nonexempt securities. All of the other securities listed are exempt from the registration requirements of the Securities Act of 1933.

Which of the following choices is NOT considered a tax-preference item when calculating the alternative minimum tax (AMT)? a. Accelerated depreciation in excess of straight-line depreciation b. Straight-line depreciation c. Excess intangible drilling costs d. Excess mining, exploration, and development costs

b. Straight-line depreciation Explanation: Under AMT rules, taxpayers must compute their income taxes twice. An individual subject to the AMT must first calculate his taxes using the standard method, and then he must recalculate his tax liability using the AMT method. The taxes due are the greater of the two calculations. Tax-preference items are used in calculating the alternative minimum tax. Straight-line depreciation is not a tax-preference item.

According to MSRB rules, a municipal securities representative is NOT permitted to: a. Trade securities b. Supervise a branch office c. Structure new issues of revenue bonds d. Work in the syndicate department

b. Supervise a branch office Explanation: Under MSRB rules, any person in a supervisory position must qualify as a principal.

The Dow Theory states that a major trend is confirmed when which of the following indicators reach new highs or lows? a. The S&P 500 Index and the NYSE Composite Average b. The Dow Jones Industrial Average and the Dow Jones Transportation Average c. The Dow Jones Industrial Average and the Dow Jones Utility Average d. The Dow Jones Composite and the NYSE Composite Average

b. The Dow Jones Industrial Average and the Dow Jones Transportation Average Explanation: The Dow Theory holds that a confirmation of a bullish or bearish trend is made when the Dow Jones Industrial Average and the Dow Jones Transportation Average move in the same direction and reach new highs or new lows.

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? a. The LP is considered a limited partner for both the capital contribution and the loan b. The LP is considered a limited partner for the capital contribution and a creditor for the loan c. The LP is considered a creditor for the capital contribution and a limited partner for the loan d. The LP is considered a creditor for both the capital contribution and the loan

b. The LP is considered a limited partner for the capital contribution and a creditor for the loan Explanation: 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.

Which of the following items is NOT found by reviewing a company's balance sheet? a. The dollar value of the inventory b. The amount of interest paid on the company's bonds outstanding c. The amount of short-term debt d. The value of the treasury stock

b. The amount of interest paid on the company's bonds outstanding Explanation: The amount of interest paid on the company's bonds outstanding (interest expense) is found in a company's income statement. A company's assets (inventory), liabilities (debt or bonds), and shareholders' equity (treasury stock), are found on the balance sheet.

Which of the following parties is responsible for the safekeeping of the securities owned by a mutual fund? a. The registrar b. The custodian bank c. The sponsor d The transfer agent

b. The custodian bank Explanation: The custodian bank is responsible for the safekeeping of the securities owned by a mutual fund. The custodian bank has no responsibility relating to the management of the fund's portfolio.

Which of the following choices is NOT a reason for a broker-dealer to reject delivery of a municipal bearer bond? a. A mutilated coupon b. Lack of a legal opinion c. No endorsement by the owner d. Lack of a seal on the certificate

c. No endorsement by the owner Explanation: A municipal bearer bond does not require endorsement (signature) by the owner.

A registered representative is permitted to borrow from, or lend funds to, customers in all of the following situations, EXCEPT: a. The customer is an immediate family member of the registered representative b. The customer is an accredited investor c. The loan is based on a business relationship independent from the member firm customer relationship d. The customer has a personal relationship with the registered representative

b. The customer is an accredited investor Explanation: Registered personnel of a member firm are generally prohibited from borrowing money from, or lending money to, any customer. However, if the firm has written rules and procedures that allow borrowing and lending between registered personnel and their customers that meet one of the following conditions, the activities are permissible. - The customer is an immediate family member of the registered person. - The customer is a financial institution or other entity that engages in the business of providing credit, financing, or loans in the course of its business. - The customer and the registered person are both registered with the same member firm. - The customer has a personal relationship with the registered person wherein the loan would not have been solicited, offered, or given if the relationship did not exist. - The loan is based on a business relationship other than that of a member firm customer. There is no exception based on the type of customer, for example, an accredited investor.

Which of the following items is NOT found on a sell ticket? a. The customer's account number b. The customer's original purchase price of the stock c. The location of the securities d. Solicited or unsolicited

b. The customer's original purchase price of the stock Explanation: All order tickets must contain the customer's account number and whether the registered representative solicited the order or it was unsolicited. A sell ticket must indicate if it is a short sale or a sale of securities owned by the client. The location of the securities must be indicated (long in the customer's account or held by the customer).

If a cash dividend is paid, how does it affect a margin account? a. SMA is decreased b. The debit balance is reduced c. The market value is increased d. The equity is reduced

b. The debit balance is reduced Explanation: When a cash dividend is paid, the debit balance is reduced by the amount of the dividend. The SMA is also increased by the amount of the dividend. The market value changes due to fluctuations in the price of the security.

Which of the following situations requires a DK (don't know) notice? a. The firms do not have a clearing agreement b. The firms disagree on the amount of shares in the trade c. One of the firms is not a market maker d. The trade is executed on an ECN

b. The firms disagree on the amount of shares in the trade Explanation: A DK notice is used for a don't know trade. This occurs when one side does not recognize the trade or the firms disagree on the details. Choice (b) is the only situation that would require a DK notice.

Ted Wilson, a registered representative with Ralston Financial, has recommended to his client the purchase of a mutual fund as well as a variable annuity contract underwritten by the same sponsor, Slipstream Growth Fund and Slipstream Variable Annuity. The client has decided to purchase both investments, filling out the applications and forwarding them with one payment for both. Which of the following statements is TRUE regarding the purchases? a. The mutual fund and variable annuity may be purchased without a principal's approval, if suitable b. The growth fund may be purchased immediately but the variable annuity purchase must first be approved by a principal c. The variable annuity may be purchased immediately but the mutual fund must first be approved by a principal d. Both the mutual fund and the variable annuity purchases must be approved by a principal prior to initiating the purchases

b. The growth fund may be purchased immediately but the variable annuity purchase must first be approved by a principal Explanation: A lump-sum payment may be received for both purchases. The money for the variable annuity may be allocated only after a principal has approved the purchase in writing. The money for the mutual fund may be allocated immediately and does not require a principal's approval.

All of the following statements are TRUE concerning marketwide circuit breakers, EXCEPT: a. They are based on the S&P 500 Index b. The levels are calculated on a monthly basis c. A trading halt on one exchange applies to all exchanges d. A 7% decline will halt trading for 15 minutes

b. The levels are calculated on a monthly basis Explanation: Marketwide trading halts are based on the S&P 500 Index and are calculated daily (not monthly). A trading halt on one exchange applies to all exchanges that trade the same security. A Level 1 Market Decline (7%) and a Level 2 Market Decline (13%) will halt trading for 15 minutes. For a Level 3 Market Decline (20%), trading will be halted for the remainder of the day.

Which of the following statements about municipal revenue bonds is NOT TRUE? a. There is no debt limitation set by the issuing municipality b. The maturity of the revenue bond usually coincides with the useful life of the facility being built c. They can be issued by states, political subdivisions, interstate authorities, and intrastate authorities d. The interest and principal are paid from the revenue received from the facility

b. The maturity of the revenue bond usually coincides with the useful life of the facility being built Explanation: Municipal revenue bonds do not have maturity schedules that coincide with the usefulness of the facility being built. They mature prior to the useful life of the facility. Municipal revenue bonds do not have debt limitations as do general obligation bonds. A debt limitation is the statutory or constitutional maximum debt that an issuer may legally incur. Revenue bonds can be issued by states, political subdivisions (such as counties or townships), interstate authorities and intrastate authorities. The interest and principal are paid from the revenue received from the facility.

The purchaser of a variable life insurance policy bears which of the following risks? a. The death benefit may fall to zero due to poor market performance b. The policy may have no cash value if the separate account performance is negative c. The insurance company may increase the premiums if the investment performance of the separate account is poor d. The increasing cost of doing business may force the insurance company to raise expense charges against the separate account

b. The policy may have no cash value if the separate account performance is negative Explanation: The cash value of a variable life insurance policy increases or decreases in relation to the performance of the separate account. Poor performance could cause the cash value to decline to zero. Although the death benefit can also increase or decrease, it may never fall below a set minimum. The premiums for variable life policies are fixed for the life of the policy. An expense guarantee clause in life insurance contracts prevents the insurance company from raising expense charges for the administration of the policy.

Which of the following statements is TRUE regarding the purchaser of a call option? a. The purchaser has an obligation to sell stock if exercised b. The purchaser limits the amount of money he could lose if the underlying stock declines c. The purchaser benefits if the underlying stock declines d. The only way to profit is to exercise the option

b. The purchaser limits the amount of money he could lose if the underlying stock declines Explanation: The maximum loss that a purchaser of an option (call or put) can sustain is the amount of the premium paid. The purchaser of a call option will profit if the underlying stock increases in value, and exercises the call only if the stock is above the strike price. The investor can profit by either exercising or liquidating the call. A purchaser of a call option has the right to buy stock, not an obligation to sell stock.

Which of the following factors would be LEAST useful when analyzing the credit risk of an issuer of revenue bonds? a. Engineering reports b. The ratio of the amount of net overall debt to assessed valuation c. Debt service coverage ratio d. Special taxes

b. The ratio of the amount of net overall debt to assessed valuation Explanation: 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 bonds. A special tax bond is a type of revenue bond and, therefore, the amount of special taxes may be useful in analyzing the credit risk of an issuer of a revenue bond.

A retail salesperson has helped his firm win the role as the lead underwriter in a local municipal bond issue. If the underwriting was conducted on a negotiated basis, which of the following statements is TRUE? a. The retail salesperson would not be considered a municipal finance professional b. The retail salesperson could not have made a $300 political contribution to a local elected official in the past two years c. The retail salesperson is required to register as a municipal securities principal d. The action by the retail salesperson would be a violation of MSRB rules

b. The retail salesperson could not have made a $300 political contribution to a local elected official in the past two years Explanation: Since the retail salesperson has helped his firm obtain negotiated municipal bonds business, he is defined as a municipal finance professional (MFP). A two-year look-back period applies to municipal finance professional contributions. If an individual has made contributions to a political candidate that would have resulted in a violation of MSRB Rule G-37 (contributing more than $250 to a candidate for whom he is entitled to vote for), the firm that employs the individual is subject to the underwriting ban if the individual was employed in the role of an MFP within two years of the contribution. A retail salesperson is not required to register as a principal and is permitted to solicit elected officials of municipal bond issuers, provided the retail salesperson does not contribute more than $250 for the official for whom he is entitled to vote.

Which of the following statements is TRUE concerning the sale of restricted securities? a. If the company is listed on Nasdaq, there is no holding period b. The sale must conform to the provisions of SEC Rule 144 c. A brokerage firm may act only in an agency capacity d. The sale must be at the bid price as determined by the current quote of the outstanding securities

b. The sale must conform to the provisions of SEC Rule 144 Explanation: The sale of restricted securities must conform to the provisions of SEC Rule 144. There is a six-month holding period even if the securities are listed on Nasdaq or the NYSE. A brokerage firm may act in an agency or principal capacity. The sale does not need to be at the bid price as determined by the current quote of the outstanding securities. The sale can be made at whatever price is agreed upon between the buyer and seller.

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

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

Which of the following statements is TRUE concerning Rule 144A transactions? a. The securities may be offered only to accredited investors b. The securities may be offered only to qualified institutional buyers c. An investor buying these securities must hold them for six months d. Only domestic issuers may offer securities under this type of offering

b. The securities may be offered only to qualified institutional buyers Explanation: Rule 144A provides an exemption for the purchase of restricted securities by qualified institutions. Qualified institutional buyers (QIBs) are defined as financial institutions that have at least $100 million invested in securities of issuers not affiliated with the entity. These institutions may buy and sell directly with one another without meeting the requirement of Rule 144. The securities offered under Rule 144A may be debt or equity, may be offered by either a domestic or foreign issuer, and may be resold immediately to another QIB. There is no 6-month holding period, as with restricted stock. A private placement under Regulation D may be offered to an unlimited number of accredited investors. An accredited investor is defined as a person with either a net worth of $1,000,000 or annual income of $200,000.

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

b. The stock is quoted on the OTC Bulletin Board Explanation: A penny stock, according to SEC rules, is a stock that sells for less than $5.00, that is not listed on Nasdaq or the NYSE. A stock quoted on the OTC Bulletin Board or OTC Pink Market (Pink Sheets) that has a bid price of less than $5.00 is defined as a penny stock. Penny stock rules would not apply under the following conditions. • The customer is defined as an existing customer, which is a person who has maintained an account with a broker-dealer for more than one year, or has previously engaged in 3 or more transactions involving penny stocks (i.e., an active trader of penny stocks) • In nonrecommended or unsolicited transactions • In transactions by a broker-dealer that is not a market maker in that security • In transactions by an institutional accredited investor

Which of the following choices makes a financial commitment in the distribution of a new issue of securities? a. The selling group b. The underwriting syndicate c. A customer who provides an indication of interest d. The exchange on which the security will be listed

b. The underwriting syndicate Explanation: The underwriting syndicate makes a commitment to the issuer to purchase the entire offering. If the syndicate cannot resell the offering at the public offering price, it may suffer a loss. While the selling group also participates in the sale of the new issue, it does not run the risk of losses if the securities do not sell. Regarding choice (c), a customer who provides an indication of interest has no obligation of any kind

All of the following statements are TRUE regarding yield curves, EXCEPT: a. In an ascending curve, short-term rates are lower than long-term rates b. They are fixed and may only be changed by the Federal Reserve Board c. In a descending curve, short-term rates are greater than long-term rates d. In a flat yield curve, both short-term and long-term rates are equal

b. They are fixed and may only be changed by the Federal Reserve Board Explanation: Yield curves are ascending (upward sloping from the shorter to longer maturities) when money is easy. When this occurs, short-term rates are lower than long-term rates. A descending yield curve, which is indicative of a tight money situation, shows short-term rates higher than long-term rates. A flat yield curve indicates that short-term and long-term rates are approximately the same. FRB policies may influence yield curves, but they are not fixed and are influenced by a variety of factors.

Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)? a. They offer investors the same amount of liquidity as exchange-traded REITs b. They are required to distribute the same percentage of taxable income as exchange-traded REITs c. They are not required to make periodic disclosures that are required of exchange-traded REITs d. They are suitable for the same investors as exchange-traded REITs

b. They are required to distribute the same percentage of taxable income as exchange-traded REITs Explanation: Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.

Which of the following statements is TRUE concerning electronic communication networks (ECNs)? a. They can be used only by retail investors b. They can be used to obtain automatic execution c. They can be used only by institutional investors d. They can be used by clients that do not want to use a broker-dealer

b. They can be used to obtain automatic execution Explanation - Electronic communication networks (ECNs) are trading systems designed to match buyers with sellers of securities. They can be used by both institutional and retail investors. One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system. ECNs do not allow investors to trade directly with one another, but allow subscribers such as broker-dealers to use these systems to execute the orders sent to them by their clients

A registered representative who previously was the CEO of a cosmetics company wants to send a report to clients. She will include detailed information concerning individual equity securities of cosmetics companies she feels are good investments. Although the report analyzes different stocks she feels are attractive investments, it does not contain a recommendation. Which of the following statements is TRUE? a. This is not a research report since the report does not contain a recommendation b. This is a research report and requires approval c. This is not a research report since the RR does not hold the title of a research analyst d. This is a research report but does not need to be approved

b. This is a research report and requires approval Explanation: A registered representative does not need to hold the title of research analyst in order for the report to be considered a research report. If the report provides sufficient information concerning individual equity securities for a client to make an investment decision and is distributed to clients, it is considered a research report. A research report must be approved by a supervisory analyst and contain the proper disclosure.

An investor who owns 1,000 shares of ABC informs you that he wants to sell short against the box. Which of the following statements is TRUE? a. This type of transaction is only permitted by institutional investors b. This type of transaction is permitted if the order ticket is marked short c. This type of transaction is permitted if the order ticket is marked long d. This type of transaction is only permitted in a cash account

b. This type of transaction is permitted if the order ticket is marked short Explanation: In certain instances, a client (institutional or retail) that is long a security may want to sell the stock, but not deliver his long position. The client must borrow the security to effect delivery, requiring the order ticket to be marked short. This type of transaction is called selling short against the box. The term box is an old industry term referring to a safe deposit box. Short sales are permitted to be executed only in a margin account.

Gross Domestic Product (GDP) has declined for two consecutive quarters in the U.S. Which of the following industries will most likely be negatively affected by this downturn in the economy? a. Cosmetics b. Transportation c. Food d. Medical

b. Transportation Explanation: Two consecutive quarters of declining GDP figures would be considered recessionary by most economists. Transportation stocks (e.g., railroads, trucking, airlines) are cyclical and the performance of these companies will be affected directly by this event.

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

b. Variable annuities Explanation: 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.

Which of the following statements is NOT TRUE regarding the similarities between variable annuities and mutual funds? a. Mutual funds and variable annuities are regulated under the Investment Company Act of 1940 b. Variable annuity companies will retain any dividends paid, but the owner of the variable annuity must pay taxes on the dividends each year c. Both mutual funds and variable annuities are considered securities d. The payout of both mutual funds and variable annuities will depend on the performance of the securities owned in the portfolio

b. Variable annuity companies will retain any dividends paid, but the owner of the variable annuity must pay taxes on the dividends each year Explanation: All of the statements listed are true regarding variable annuities and mutual funds except variable annuity companies will retain any dividends paid but the owner of the variable annuity must pay taxes on the dividends each year. This statement is not true, since an owner of a variable annuity has the income tax deferred. An owner of a mutual fund will have to pay taxes on dividends received that year.

One of your clients, Kona Okemo, has a long-term objective of capital appreciation. Which of the following investment strategies will MOST closely achieve this goal? a. 30% corporate bond fund, 30% municipal bond fund, and 40% in a U.S. government bond fund b. 50% in an ETF that follows the S&P 500 and 50% in a diversified bond fund c. 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund d. 20% in an oil and gas fund, 20% in a technology fund, 20% in an emerging markets fund, 20% in a municipal bond fund, and 20% in a U.S. government bond fund

c. 30% in an ETF that follows the S&P 500, 20% in an emerging markets fund, 15% in a REIT fund, 15% in a biotechnology fund, and 20% in a U.S. government bond fund Explanation: The investor is seeking long-term capital appreciation (also referred to as capital growth). The best answer is based on the asset allocation mix. An investor seeking capital appreciation would want a large percentage of his assets invested in equities. Choice (c) has a mix of 80% equities and 20% fixed-income. The largest percentage of the other choices is choice (d) with 60% equities and 40% in fixed-income.

A customer in her late 40s, who is currently in the 15% tax bracket, has recently inherited $7,000,000. She informs you that she considers herself a conservative investor and wants your advice concerning investing the inheritance. Which of the following choices would be the BEST method of investing the funds? a. 20% in equities, 30% in Treasury bonds, and 50% in tax anticipation notes b. 80% in equities, a 10% mixture of in-state and out-of-state municipal bonds, 10% in corporate bonds c. 30% in equities, 20% in-state municipal bonds, 20% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in revenue anticipation notes, and 5% in tax-exempt money-market funds d. 20% in-state municipal bonds, 20% in out-of-state municipal bonds, 20% in corporate bonds, 20% in Treasury bonds, 10% in revenue anticipation notes, and 10% in tax-exempt money- market funds

c. 30% in equities, 20% in-state municipal bonds, 20% in out-of-state municipal bonds, 15% in Treasury bonds, 10% in revenue anticipation notes, and 5% in tax-exempt money-market funds Explanation: Although this investor is in her late 40s and considers herself a conservative investor, equities should be a part of her asset allocation. Many strategists recommend taking 100% and subtracting the investor's age as a guide to the percentage of the investor's portfolio that should be allocated to equities. As such, a 30% allocation in equities is reasonable (lower than 50%). However, since she is a conservative investor, this is reasonable with the remainder in various fixed-income securities and cash. Prior to inheriting the funds, she would not have been a suitable candidate for tax-exempt or municipal securities due to her low tax rate. After investing in these funds, the income/dividends/potential capital gains would have the effect of increasing her tax rate, so that municipal bonds would be an attractive investment. In-state municipal bonds would offer a higher after-tax return for this investor. Due to the potential of credit risk with municipal bonds, having a portion of the funds in Treasury securities would be a good recommendation. In addition, the investor should invest a portion of the funds in cash or cash alternatives. This is satisfied by allocating a portion of the funds in short-term municipal securities such as tax or revenue anticipation notes and tax-exempt money-market funds. Choice (a) has only a 20% allocation in equities and a 50% allocation of funds in tax anticipation notes, offering no growth potential. Having 100% of the funds in fixed-income investments does not offer the customer a balanced approach and, therefore, the other choices would not be the best method of investing the funds.

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

c. A real estate investment trust Explanation: Currently, dividends paid on both common and preferred stock are taxed at a maximum rate of 20% if the stock is held for more than 60 days. Dividends from a REIT are still taxed at the same rate as ordinary income since a REIT does not 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.

A customer has a federal tax rate of 35% and a state tax rate of 7%. Which of the following investments would afford him the BEST after-tax yield? a. A 6.25% in-state municipal bond b. A 7.10% out-of-state municipal bond c. A 11.65% investment-grade corporate bond d. A 10.85% mortgage bond

c. A 11.65% investment-grade corporate bond Explanation: The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The mortgage bond is a type of corporate bond and both are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 42% for the in-state bond and the federal rate of 35% for the out-of-state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 42% combined tax rate. The municipal bond has a yield of 6.25%. 6.25% (Municipal Bond Yield) / 58% (100% - 42%) = 10.78% Equivalent Taxable Yield The out-of-state municipal bond has a yield of 7.10% and the equivalent taxable yield is 10.92% (7.10% / 65%). The investment-grade corporate bond has the best or highest after-tax yield.

Which of the following short positions violates SEC rules? a. A customer short stock that he borrowed from the brokerage firm b. A customer short and long the same stock at the same time c. A customer borrowing stock in order to profit from a tender offer d. A customer short stock while owning bonds convertible into that stock

c. A customer borrowing stock in order to profit from a tender offer Explanation: A tender offer takes place when an entity offers to buy a corporation's shares at a premium to the current market price. It is normally done for the purpose of acquiring control of the company. According to SEC rules, a customer may not tender short (borrowed) shares.

Relating to a secondary market municipal joint account, which of the following choices is NOT relevant? a. The order period b. An account agreement c. A good faith deposit d. The takedown and concession

c. A good faith deposit Explanation: Two or more municipal securities dealers might form a joint acount in order to purchase and distribute a large block of securities and spread the risk of the transaction. Both new issue and secondary joint accounts act according to an account agreement that will contain the takedown and concession. An order period will also be used for both. Good faith deposits relate only to a new issue, since that is the amount that the syndicate gives to the issuer along with the bid.

A woman will be retiring in 2030. She is interested in income and having her principal available at retirement. Which of the following municipal bonds would you recommend? a. A highly rated GO bond maturing in 2025 b. A highly rated GO bond maturing in 2034, which is callable in 2023 at 105 c. A highly rated revenue bond maturing in 2030 d. A non-investment-grade revenue bond maturing in 2030

c. A highly rated revenue bond maturing in 2030 Explanation: Since the woman wants her principal available at retirement, a bond maturing in 2030 (the year of her retirement) would be the best choice. Since the revenue bond is highly rated, there is a higher probability the issuer will be able to pay off the principal at maturity compared to the non-investment-grade revenue bond.

Which of the following choices will qualify for a sales breakpoint on large purchases of mutual fund shares? a. A partnership formed to buy the securities b. A joint account formed between two unrelated individuals c. A husband and wife who are joint tenants with right of survivorship d. An investment club coordinated by a registered representative

c. A husband and wife who are joint tenants with right of survivorship Explanation: Quantity discounts are allowed only for individuals and individual entities such as corporations. Partnerships and investment clubs are not entitled to a quantity discount. Joint accounts normally do not qualify for breakpoints except in cases where there is a dependency relationship in the account (e.g., husband and wife).

An investor has recently rolled over his 401(k) into an IRA at your firm. Which of the following securities will be MOST suitable if the investor wanted diversification and a higher return? a. A municipal revenue bond b. A Treasury note c. A hybrid REIT d. An equity REIT

c. A hybrid REIT Explanation: Since this is a tax-deferred (retirement) account, the municipal security would not be suitable and, since the investor wants a higher return, the Treasury note would not be the best choice. Although either REIT may be suitable, the hybrid REIT is a better choice since the investor wants diversification. There are three types of REITs: mortgage REITs which provide funds to real estate owners in the form of lending them funds (i.e., a mortgage), equity REITs which own and operate income producing real estate (for example, apartment buildings, commercial property, shopping malls and other types of retail property, and vacation resorts), and hybrid REITs, which invest in both of these ventures. By purchasing a hybrid REIT, the investor can take advantage of buying a security that invests in actual equity ownership of real estate as well as investing in an interest-rate-sensitive security such as a mortgage REIT.

Which of the following persons may contribute to a 457 plan? a. A computer programmer employed by IBM b. A federal government employee c. A local government employee d. A self-employed IT consultant

c. A local government employee Explanation: A Section 457 plan is a type of retirement plan used by many public sector workers (state and local, not federal). These plans grow tax-deferred and are generally subject to the same contribution limits as 401(k) and 403(b) plans. Each has similar tax features and contribution allowances. The difference is in who may use them. 401(k) plans are used by for-profit employees, 403(b) plans by nonprofit and public school employees, while 457 plans are designed for the benefit of some local government workers

Which of the following would increase a partner's basis in a limited partnership? a. Cash distributions b. Losses c. A pro-rata portion of a recourse loan d. Assessments not met by the partner

c. A pro-rata portion of a recourse loan Explanation: A partner's basis in a limited partnership represents the maximum loss that the limited partner may sustain in the program. It is increased by income, additional contributions made by the partner, and the portion of a recourse loan for which the partner is responsible. The basis is reduced by cash distributions and losses. Assessments not met by the partner normally result in a dilution of the partner's ownership interest.

Which of the following choices best describes certificates of participation? a. A form of equity financing for a corporation. b. A type of REIT c. A type of bond, typically created through a lease agreement d. A type of bond based on payments from residential mortgages

c. A type of bond, typically created through a lease agreement Explanation: Certificates of participation (COPs) are lease financing agreements, issued typically in the form of a tax-exempt or municipal revenue bond. COPs have been used traditionally as a method of monetizing existing surplus real estate. This financing technique provides long-term funding through a lease that does not legally constitute a loan, thus eliminating the need for a public referendum or vote.

When calculating cost depletion for an oil program, all of the following items are necessary, EXCEPT the: a. Adjusted basis of the property b. Recoverable reserves c. Amount extracted and in storage d. Amount extracted and sold

c. Amount extracted and in storage Explanation: To calculate cost depletion, the adjusted basis, amount of recoverable reserves, and the amount extracted and sold are needed. Percentage depletion is based on a percentage of gross income from the property.

Which of the following securities is LEAST suitable for an investor seeking income as a primary investment objective? a. A convertible bond b. A high-yield bond fund c. An exchange-traded note (ETN) d. A corporate bond with an adjustable-rate coupon

c. An exchange-traded note (ETN) Explanation: Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. These securities are not like traditional fixed-income securities since they typically do not make interest payments to investors. The returns are linked to the performance of an index, currency, or commodity and would be suitable for investors who want to speculate on the value of an index. An investor seeking income as a primary investment objective would not be a suitable candidate for an ETN. The other investment choices carry some type of risk but would still typically pay interest.

A high net worth investor seeking safety of principal would MOST likely invest in: a. Corporate convertible bonds b. Non-investment-grade corporate bonds c. An investment-grade corporate bond fund d. A variable annuity

c. An investment-grade corporate bond fund Explanation: Safety of principal refers to a customer being able to preserve or retain the initial amount of the investment over its life. Many bonds and bond funds offer investors this feature. The higher the rating, the greater the likelihood the investor will achieve safety of principal. An investment-grade corporate bond fund would offer more safety of principal than non-investment- grade and convertible corporate bonds. A variable annuity may fluctuate in value based on the subaccounts chosen by the investor.

Which of the following investors would be LEAST suitable for an oil and gas direct participation program (DPP)? a. An investor in the highest federal tax bracket b. A retired investor who is in the highest federal tax bracket c. An investor who is concerned about the alternative minimum tax d. An investor who recently inherited $5,000,000

c. An investor who is concerned about the alternative minimum tax Explanation: An investment in an oil and gas limited partnership may have excess depletion and depreciation as well as excess intangible drilling costs. These are tax preference items and may result in an investor being subject to the alternative minimum tax (AMT). The other investors may or may not be suitable for an oil and gas DPP. It would depend on many other factors. However, an investor concerned about the AMT would not want to invest in a security that normally has tax preference items.

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

c. An order allowing all members to benefit Explanation: There are four types of orders that can be placed with a syndicate. 1. A presale order is any order placed before the syndicate that actually purchases the issue from the issuer 2. A group order is a situation where all members of the syndicate share in the profit 3. A designated order is usually placed by a large institution that designates two or more members to receive credit for the sale 4. A member order is an order placed by members for their customers

Claire, an attorney, has contributed to her IRA account for many years. Her new employer, Digiphone, has a pension plan. Which of the following statements is TRUE regarding further IRA contributions? a. Claire may contribute, but the growth in the account will be taxable in the year earned b. Whether she may continue to contribute depends on her income level c. Claire may continue to contribute as long as she has earned income d. Due to her participation in a pension plan, Claire may not continue to make IRA contributions

c. Claire may continue to contribute as long as she has earned income Explanation: As long as Claire has earned income, she can fund her IRA. However, based on her income level and tax filing status, she may not be able to deduct her contributions on her tax returns. Claire's participation in a pension plan has no bearing on her ability to contribute to her IRA.

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

c. Collateralized mortgage obligations Explanation: 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, in this question choice (b) covers the bonds of these issuers, which do not have prepayment risk.

Which of the following securities would you LEAST likely recommend to an investor requiring a fixed sum of funds to be received in 10 years? a. A zero-coupon municipal bond b. A high-yield corporate bond c. Collateralized mortgage obligations (CMOs) d. Treasury Inflation-Protected Securities (TIPS)

c. Collateralized mortgage obligations (CMOs) Explanation: The risk that an investor will receive her principal earlier than projected instead of at one time (i.e., prepayment risk) is the most important risk pertaining to mortgage-backed securities such as CMOs. Since the investor wants to receive a fixed amount of funds in 10 years, a CMO would be the least suitable of the securities listed.

A registered representative has sent a preliminary prospectus to various clients who have indicated an interest in a new issue his firm is underwriting. The registered representative is notified that he has been allocated 500 shares of the new issue. The registered representative should: a. Allocate the 500 shares to his most active client b. Allocate 100 shares each to his best clients c. Contact all clients who have received a prospectus asking them if they have made a decision to purchase the new issue that is now available d. Keep the 500 shares for himself

c. Contact all clients who have received a prospectus asking them if they have made a decision to purchase the new issue that is now available Explanation: The most appropriate action for the registered representative to take is to contact all clients who have received a prospectus and ask them if they have made a decision to purchase the new issue that is now available.

A client invested $35,000 in a mutual fund and receives a lower sales charge by signing a letter of intent based on a purchase level of $50,000. If, one year later, she has not contributed additional funds, which of the following choices is the BEST course of action for the RR handling the account? a. Ask the client to sign a new letter of intent for $15,000 b. Allow the client a 90-day extension from the date of the original letter of intent c. Contact the client and disclose that, if $15,000 is not deposited, a higher sales charge will be assessed d. Contact the client and disclose that she is obligated to deposit $15,000

c. Contact the client and disclose that, if $15,000 is not deposited, a higher sales charge will be assessed Explanation: A letter of intent (LOI) enables an investor to qualify for a reduced sales charge based on the breakpoint schedule of a mutual fund, without initially depositing the entire amount required. The LOI states the investor's intention to deposit the required money within 13 months of the inception of the letter. It may not be renewed for another 13 months. The letter of intent may be backdated for up to 90 days, but may not be extended for 90 days. Letters of intent are not binding on the investor. The investor is not obligated to contribute the additional $15,000. Investors who fail to make the additional investments are charged the amount that would equal the higher sales charge that applied to the original purchase. The fund insures that it will be able to recover the additional sales charge by withholding sufficient shares in escrow for this purpose.

The number of times the earnings of a municipal facility exceeds the interest charges and principal payments of a revenue bond for a period is called the: a. Working capital ratio b. EBITDA ratio c. Debt service coverage ratio d. Price-earnings ratio

c. Debt service coverage ratio Explanation: The number of times the earnings of a revenue bond of a municipal facility exceeds the interest charges and principal payments (debt service) for a period is the debt service coverage. Earnings before interest, tax, depreciation, and amortization (EBITDA) is a term associated with corporate bond issuers, not municipal bond issuers.

Which of the following choices would be the MOST advantageous tax benefit that an investor will receive from an oil and gas direct participation income program? a. Liquidity b. Depreciation of equipment c. Depletion d. Depreciation of land

c. Depletion Explanation: The most advantageous tax benefit that an investor will receive from an oil and gas program is the depletion deduction. These deductions normally last for as long as the program produces oil and gas. Depreciation of equipment lasts a limited number of years and land may not be depreciated.

When determining whether a CMO is suitable, an RR must offer to a client all of the following information, EXCEPT a: a. Glossary of terms b. Discussion on how changing interest rates may affect the prepayment rates c. Discussion on how changing currency rates may affect the value of the securities d. Discussion on the relationship between mortgage loans and mortgage securities

c. Discussion on how changing currency rates may affect the value of the securities Explanation: Broker-dealers must offer customers educational material about the features of CMOs. This material must include: A discussion of the characteristics and risks of CMOs. This includes: how changing interest rates may affect prepayment rates and the average life of the security, tax considerations, credit risk, minimum investments, liquidity, and transactions costs. A discussion of the structure of a CMO. This includes the different types of structures, tranches, and risks associated with each type of security. It is also important to explain to a client that two CMOs with the same underlying collateral may have different prepayment risk and different interest-rate risk. A discussion that explains the relationship between mortgage loans and mortgage securities A glossary of terms applicable to mortgage-backed securities Changing currency rates are not applicable to the risks associated with CMOs.

Of the following broad-based indicators, the one with the narrowest measure of the market is the: a. Standard and Poor's 500 Index b. Wilshire Associates Equity Index c. Dow Jones Composite d. New York Stock Exchange Composite Index

c. Dow Jones Composite Explanation: The Dow Jones Composite contains only 65 stocks. The Wilshire Associates Equity Index shows the dollar value of approximately 7,000 stocks. The S&P 500 Index contains 500 stocks. The NYSE Composite Index consists of all common stocks listed on the NYSE.

Which of the following statements is TRUE concerning a customer who purchases an out-of-state original issue discount (OID) general obligation bond? a. Each year the customer will pay both federal and state income tax b. Each year the customer will pay only federal income tax c. Each year the customer will pay only state and local income tax d. The customer will not pay any tax

c. Each year the customer will pay only state and local income tax Explanation: The upward adjustment in the purchase price of an original issue discount bond is called accretion. The amount accreted each year is considered interest income, which may or may not be taxable depending on the type of security. The interest on an out-of-state municipal security is exempt from federal tax, but subject to state and local income tax. The tax rate is based on the state in which the customer maintains his primary residence.

A customer may make a single, lump-sum contribution of which of the following amounts to a 529 college savings plan without incurring any taxes? a. An unlimited amount b. The annual gift tax exclusion c. Five times the annual gift tax exclusion d. Ten times the annual gift tax exclusion

c. Five times the annual gift tax exclusion Explanation: States that offer 529 plans determine the specific plan rules such as allowable contributions, investment options (e.g., mutual funds), and deductibility of contributions for state tax purposes. A person may contribute to a 529 college savings plan up to the federal annual gift tax exclusion ($14,000) without paying a gift tax, or the contributor may make a single, lump-sum gift of up to the five-year cumulative limit ($70,000) for tax-free gifting.

Buy-stop orders or sell-stop orders can provide all the following features, EXCEPT: a. Provide price protection for a short position b. Provide price protection for a long position c. Give a broker discretion when the order is activated d. Possibly cause a fluctuation in the market price of a stock

c. Give a broker discretion when the order is activated Explanation: Buy-stop or sell-stop orders do not give a broker discretion when the order is activated. When activated, the order becomes a market order and should be executed immediately. All of the other choices are correct.

A put option may be written in a cash account if the investor: a. Is long the underlying security in the account b. Is short the underlying security in the account c. Has cash in the account equal to the exercise price d. Is long a call option on the same underlying security

c. Has cash in the account equal to the exercise price Explanation: To write a put in a cash account, the customer must have cash in the account equal to the exercise price. If the writer is short the underlying stock, the put is considered covered for margin purposes, but this transaction may not be written in a cash account, only in a margin account.

If an options brochure containing projections is sent to a prospective customer, it must: a. Contain the annualized rate of return b. Disclose the representative's trading performance for the past three years c. Have an OCC risk disclosure document with it or be sent in advance d. Contain a schedule of commissions and markups

c. Have an OCC risk disclosure document with it or be sent in advance Explanation: Options retail communications containing projections that is sent to a prospective customer must be accompanied by or preceded by a risk disclosure document. An annualized rate of return may be included under certain circumstances. Trading performance, if included, must cover a one-year period. There is no requirement to include a schedule of transaction costs.

On June 21, 2011, a municipal securities salesperson decided to leave his job and try his hand at real estate sales. Although able to earn a good living, he decided that he liked municipal sales and rejoined the municipal securities firm on July 15, 2013. Which of the following statements is TRUE? a. He may resume selling municipal securities immediately b. He must wait 90 calendar days before he may sell municipal securities c. He must wait until he passes the MSRB examination for municipal representatives before he may sell municipal securities d. He must pass the MSRB examination for municipal securities representative and must wait a minimum of 90 calendar days

c. He must wait until he passes the MSRB examination for municipal representatives before he may sell municipal securities Explanation: His registration expired two years after he left the municipal securities firm. To requalify as a municipal representative, he must pass the qualifying exam. He will not need to wait 90 days, because once the apprentice period has been served, it does not need to be repeated.

A 60-year-old individual has been putting money in an annuity for 15 years and has been informed of another variable annuity that is offering higher returns. He is not in need of income at this time and is looking to defer income for several more years. Which of the following suggestions is most suitable in light of this individual's circumstances? a. He should use the provisions of a 1035 exchange to move the money from his current annuity to the new annuity offering higher returns b. An exchange would be suitable if he hasn't made an exchange within the last 36 months c. He should maintain his existing variable annuity and not begin taking distributions until such time as he needs them d. The individual can begin taking tax-free distributions from his existing annuity

c. He should maintain his existing variable annuity and not begin taking distributions until such time as he needs them Explanation: In most situations, senior citizens should not be starting, or exchanging into, a new variable annuity since they are designed primarily as long-term investments. Contributions grow tax-deferred and the earnings are taxable only when the annuitant starts taking distributions. While a 1035 exchange allows a person to move from one annuity to another without the exchange being taxable, the new annuity is subject to its own sales charges and the benefits of the original annuity contract will be lost. Exchanges done within 36 months of a previous exchange can be viewed as churning and being unsuitable.

A customer is considering an investment in a hedge fund since many of his business associates have been receiving high returns over the last few years. A registered representative may make which of the following statements? a. Mutual funds are subject to less regulatory oversight than hedge funds b. Mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each investor's assets separately c. Hedge funds often use higher degrees of leverage than mutual funds d. Hedge funds may be suitable for many customers, whereas mutual funds are generally suitable for sophisticated, wealthy investors only

c. Hedge funds often use higher degrees of leverage than mutual funds Explanation: Mutual funds and hedge funds both pool investors' money to manage assets. Unlike mutual funds, hedge funds are often exempt from regulatory oversight, use leverage, and often employ aggressive financial strategies such as short selling and placing large bets on individual companies or sectors of the market. Hedge funds typically have high minimum investment requirements that make them suitable only for professional and wealthy investors.

Dedicated Securities has been invited to join a syndicate selling a new offering of common stock. The head of the firm's syndicate department notices that the agreement among underwriters mentions a penalty bid. Which of the following choices is an example of a penalty bid? a. If Dedicated fails to sell its allotment, it will be liable for twice its normal commitment b. If Dedicated fails to solicit a certain number of indications of interest, it will be required to pay a fee to the syndicate manager c. If Dedicated sells some of the issue to a customer, who later sells the stock back to the syndicate at the stabilizing bid, Dedicated will forfeit the concession on those shares d. If Dedicated sells some of the issue to a customer, who later sells the stock back to the syndicate at the stabilizing bid, Dedicated could be penalized for failure to maintain the public offering price

c. If Dedicated sells some of the issue to a customer, who later sells the stock back to the syndicate at the stabilizing bid, Dedicated will forfeit the concession on those shares Explanation: A penalty bid is an arrangement that permits the managing underwriter to reclaim a selling concession from a syndicate member when securities originally sold are repurchased by the syndicate in stabilizing transactions.

Which of the following statements is NOT TRUE regarding the characteristics of options and warrants? a. Warrants are created by the corporation whose stock underlies the instrument, and options are created by contract between an option buyer and an option writer b. Both options and warrants can expire worthless if they are not exercised c. If options are exercised, a set price must be paid for the underlying security and, if warrants are exercised, the securities are received at no additional cost d. Both options and warrants can be bought and sold in the secondary market

c. If options are exercised, a set price must be paid for the underlying security and, if warrants are exercised, the securities are received at no additional cost Explanation: Both options and warrants have a strike price. If exercised, the transactions for the underlying security will occur at that set price. It is in the case of convertible bonds or convertible preferred stock that investors can convert the security into the underlying stock with no additional payment of money.

Regulation AC (Analyst Certification) does NOT apply to: a. Brokers b. Dealers c. Issuers d. Research analysts

c. Issuers Explanation: Under Regulation AC, a research analyst must certify that her research report accurately reflects her personal views. The analyst must also disclose whether she received compensation for her specific recommendation. Under this rule, broker-dealers are also required to obtain periodic certifications by research analysts regarding public appearances (attesting that a statement was made regarding the views she expressed being her own and a written certification documenting that she did not receive compensation to make positive comments). Issuers are not regulated under Regulation AC.

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

c. Issuers' official statements Explanation: 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.

Which of the following statements concerning a tax-qualified annuity is TRUE? a. It has a zero cost basis and grows tax-free b. It is not subject to contribution limits c. It has a zero cost basis and grows tax-deferred d. It may be subject to tax-free distributions, if qualified

c. It has a zero cost basis and grows tax-deferred Explanation: Tax-qualified annuities are employer-sponsored plans that are available to certain nonprofit organizations, public school, and/or state/city university/college employees. These annuities, sometimes referred to as TSAs may be placed into a 403(b) or a 501(c)(3) plan. Since these plans are funded on a pretax basis, contributions are deducted from an individual's taxable income. An investor's cost basis is considered to be zero since none of the contributions have been recognized for tax purposes. Income grows tax-deferred not tax-free. Upon distribution, every dollar is taxable as unearned ordinary income. Tax-free growth means that none of the distributions will be subject to taxation. This is not the case with these types of plans.

Briana Corporation, an existing public company, is offering 500,000 shares of common stock to the public through an underwriting syndicate. The prospectus states that 250,000 shares are being offered by selling stockholders and 250,000 shares are being offered by Briana Corporation. Which of the following statements is TRUE regarding this offering? a. It is an initial public offering b. A registration statement is not required c. It is a combined primary and secondary offering d. It is a private placement

c. It is a combined primary and secondary offering Explanation: Of the 500,000 shares being offered, 250,000 shares are being issued for the first time from authorized but unissued shares. This is considered a primary offering. The 250,000 shares being offered by the selling stockholders have already been issued by the corporation. This makes them a secondary offering. The offering is, therefore, a combined primary and secondary offering. A registration statement is required because the securities are being offered to the public.

For variable annuities, which of the following payout options provide the highest payout? a. Joint and last survivor life annuity b. Life annuity with period certain c. Life annuity d. Unit refund life annuity

c. Life annuity Explanation: Annuitants will receive the greatest cash flow from the life annuity payout option. This option allows an annuitant to receive payments for his lifetime. At death, the payments cease since no beneficiary is designated and, therefore, the insurance company is relieved of its obligation to make payments. The annuitant assumes the greatest degree of risk with this type of payout. (89732)

Mrs. Smith is short 100 shares of DEF stock. She is concerned that the stock is going to increase in price temporarily, but does not want to cover the short position. Which option position gives Mrs. Smith the BEST protection? a. Long 1 DEF put b. Short 1 DEF put c. Long 1 DEF call d. Short 1 DEF call

c. Long 1 DEF call Explanation: The best possible upside protection can be accomplished with the purchase of 1 DEF call. If Mrs. Smith is long a call, this allows her to buy the stock from the writer if the stock goes up, thus protecting the short position.

When comparing long-term bonds and short-term bonds, all of the following statements are TRUE, EXCEPT: a. Long-term bonds generally have higher yields b. Fluctuations in the dollar price of long-term bonds are usually greater than for short-term bonds when the general level of interest rates change c. Long-term bonds generally provide greater liquidity than short-term bonds d. There is more purchasing power risk with long-term bonds when compared to short-term bonds

c. Long-term bonds generally provide greater liquidity than short-term bonds Explanation: When comparing long-term bonds and short-term bonds, all of the choices listed are true except long-term bonds generally provide greater liquidity than short-term bonds. Short-term bonds do not suffer from as large a price movement as long-term bonds when interest rates are changing. Long-term bonds are open to greater market risk, interest-rate risk, and purchasing-power risk. Both individual and institutional investors alike are more willing to accept a lower return (yield) in favor of more stable principal (less severe price swings).

When a client buys a bond above par, the confirmations must indicate the: a. Rating b. Contraparty c. Lower of yield to call or yield to maturity d. Catastrophe call provisions

c. Lower of yield to call or yield to maturity Explanation: A bond's confirmation must disclose the lower of the yield to maturity or the yield to call. This is sometimes referred to as the yield to worst.

A registered representative finds that most of his customers are reluctant to buy stocks due to extreme market volatility. Until the volatility subsides, which of the following actions is NOT a suitable strategy to recommend to these nervous clients? a. Invest in money-market funds b. Invest in Treasury securities c. Offer to reimburse customers who lose money in stocks d. Invest in CDs

c. Offer to reimburse customers who lose money in stocks Explanation: Industry rules prohibit registered representatives from guaranteeing customers against loss. During times of uncertainty and extreme volatility, high quality and short-term investments are normally good recommendations for investors who are reluctant to buy stocks.

All of the following documents must be accompanied or preceded by an OCC risk disclosure document, EXCEPT: a. Options research reports b. A standardized options worksheet discussing straddles c. Options advertising that appears in the newspaper d. Options sales materials discussing projections

c. Options advertising that appears in the newspaper Explanation: Options advertising is a type of retail communication, which must make the offer to send the OCC risk disclosure document upon the customer's request. Options retail communications must be approved by a registered options principal (ROP) prior to use. Options-related retail communications that discuss projections, must be approved by a ROP prior to use and preceded or accompanied by a risk disclosure document.

Which of the following statements is TRUE about variable annuities? a. The dollar amount of payments is guaranteed b. Participants may not vote to change objectives c. Payout is based on a number of annuity units, which remains fixed for the duration of the payout period d. Annuity payments are of a constant dollar amount throughout the payout period

c. Payout is based on a number of annuity units, which remains fixed for the duration of the payout period Explanation: A variable annuity does not give an annuitant a fixed-dollar return over a fixed number of years. Variable annuities give the annuitant a variable return based on the value of the securities in the separate account of the annuity. Payout is based on the number of annuity units that an investor receives upon annuitizing. The number of units remains fixed for the duration of the payout period. The investor takes on all investment risk since payments are not guaranteed. Investors are allowed to vote on certain issues.

Which of the following choices is another way of expressing the earnings multiple? a. Debt-to-equity ratio b. Dividend payout ratio c. Price-earnings ratio d. Operating profit ratio

c. Price-earnings ratio Explanation: The earnings multiple is also called the price-earnings ratio.

In a discussion with a client, a registered representative refers to a bond yield that has been reduced by the inflation rate. This yield is known as the: a. After-tax yield b. Discount rate c. Real interest rate d. LIBOR

c. Real interest rate Explanation: The real interest rate is the yield of a security reduced by the inflation rate. While it represents earnings remaining once inflation is taken into account, the real interest rate does not factor in the tax consequences. The discount rate is the rate of interest that the Federal Reserve charges member banks for loans. LIBOR (the London Interbank Offered Rate) is the rate of interest that banks in London charge each other for short-term loans.

Taxable income normally includes: a. The interest on municipal bonds issued in the state in which the taxpayer lives b. The taxpayer's annual 401(k) contributions c. Reinvested dividends paid on a mutual fund investment d. Any unrealized capital appreciation on stocks that the taxpayer owns

c. Reinvested dividends paid on a mutual fund investment Explanation: Taxable income includes income from all sources after all applicable deductions and adjustments are made. Reinvested dividends must be declared as income and are thus taxable. Interest on municipal bonds issued in the state in which the owner resides is usually exempt from both federal and state income taxes. 401(k) contributions are made on a pretax basis and are not included in taxable income until the taxpayer begins taking distributions. Unrealized capital gains on stocks are not included in taxable income.

Which of the following money-market instruments does NOT trade in the secondary market? a. Directly placed commercial paper b. Eurodollar CDs c. Repurchase agreements d. Bankers' acceptances (BAs)

c. Repurchase agreements Explanation: Repurchase agreements typically are not traded in the secondary market. Eurodollar CDs are certificates of deposit payable in Eurodollars (U.S. currency on deposit in foreign banks). Eurodollar CDs, commercial paper, and BAs are traded in the secondary market

According to the Securities Exchange Act of 1934, a person who is on the board of directors of a public corporation and owns 3% of the company stock is: a. Required to sell shares of the company stock currently owned every three months b. Not permitted to purchase additional shares of the company stock c. Required to register as an insider of the corporation d. Not required to register as an insider of the corporation

c. Required to register as an insider of the corporation Explanation: An insider, as defined by the Securities Exchange Act of 1934, is a director, officer, or owner of more than 10% of the voting stock of a corporation and his immediate family members. Individuals who become insiders are required to report to the SEC within 10 days of becoming insiders. An officer or director is required to register regardless of the number of shares he owns of the public corporation. Insiders are not permitted to make short-swing profits in the stock of the corporation in which they are insiders. If an insider sells the stock at a profit within six months of its acquisition, or sells stock for a profit that was held six months or longer and then repurchases it within six months of the sale, the corporation may sue for recovery of the profit. Insiders are also not permitted to short the stock of the company in which they are shareholders. Insiders are never required to sell shares, but are permitted to buy additional shares as long as it is reported to the SEC.

A double-barreled municipal bond is backed by the: a. Revenues of a project b. Taxes of a municipality c. Revenues of a project and taxes of a municipality d. Revenues of the U.S. government

c. Revenues of a project and taxes of a municipality Explanation: A double-barreled municipal bond is backed by two sources of income, which would be the revenues of a project and the taxes of a municipality.

Which of the following investors is LEAST likely to purchase a collateralized debt obligation (CDO)? a. Agawam Commercial Bank & Trust Company b. Oakdale Pension Fund c. Robert & Susan Abramowitz, JTWROS d. Lincolnshire Hedge Fund

c. Robert & Susan Abramowitz, JTWROS Explanation: Due to their highly complex nature, CDOs are generally not suitable for retail investors. A CDO (collateralized debt obligation) is a sophisticated financial instrument that begins with an individual loan (such as a mortgage or corporate debt). These loans are placed in a pool, and investors then purchase a security (bond, tranche, slice) that represents an interest in that pool. Each of these securities has a different maturity and credit risk, depending on the nature of the collateral behind it. This type of investment carries many risks and considerations that make it largely unsuitable for a typical retail investor.

Lyle, Molly, and Seena have a joint account registered as Tenants in Common. In the event that Seena dies, which of the following statements is TRUE? a. The account would be liquidated as soon as the brokerage firm learns of Seena's death b. Lyle and Molly must change the arrangement to a Joint Tenants with Right of Survivorship c. Seena's estate has a claim on her portion of the account's assets d. Seena's share of the assets in the account are automatically transferred to Lyle and Molly

c. Seena's estate has a claim on her portion of the account's assets Explanation: Upon learning of Seena's death, the brokerage firm will freeze the account. Seena's executor will then provide documentation to establish authority to act on behalf of the estate. Typically, Seena's estate will become the third joint owner in the existing Tenants in Common

An investor does not expect the price of XYZ stock to change in the immediate future and wishes to generate income. The best strategy is: a. Sell a call b. Sell a put c. Sell a straddle d. Buy a straddle

c. Sell a straddle Explanation: If the market price does not change, neither side of the straddle will be exercised. The premium on both the put and the call will be income to the investor.

Under the partnership democracy provisions of a limited partnership, the limited partners are NOT permitted to: a. Petition the court to have the general partner removed b. Petition the court to have the partnership dissolved c. Sell assets owned by the partnership d. Sue the general partner

c. Sell assets owned by the partnership Explanation: Selling assets is a management decision and is, therefore, not the role of the limited partners. Democracy provisions would permit the other choices.

A customer wants preservation of capital and safety of income. Which of the following securities would best meet the customer's objectives? a. Income bonds b. Debentures c. Several municipal bonds rated AA or better d. One AAA-rated municipal bond

c. Several municipal bonds rated AA or better Explanation: Purchasing several AA- or better-rated municipal bonds with various maturity dates is more advantageous than purchasing just one municipal bond. The investor is diversifying his portfolio. If the investor purchased one bond and it were to default, he would no longer receive interest payments. The market value of the bond would decline considerably, causing a severe loss for the investor. Income bonds and debentures are not as safe as municipal bonds.

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

c. Short-term trading Explanation: Investors in mutual funds usually seek all of the objectives listed except short-term trading.

Which of the following activities does NOT take place during the cooling-off period? a. The due diligence meeting b. Issuing a red herring c. Stabilizing the issue d. Blue-Skying the issue

c. Stabilizing the issue Explanation: When a new stock issue is going to be offered, a registration statement must be filed with the SEC. After the filing, there is a period when the SEC reviews the information to ensure full disclosure. During the cooling-off period, a preliminary prospectus (red herring) is prepared to be used to receive indications of interest from the public. The issue must be registered in each state in which it will be sold according to state (Blue-Sky) laws. Prior to the completion of the final prospectus, a due diligence meeting is held where all concerned parties (issuer and underwriter) meet to insure that everything has been done properly. Stabilization of the issue takes place after the new security is selling in the market.

A type of order that becomes a market order when a round-lot trades at or through a particular price is called a: a. Market order b. Limit order c. Stop order d. Stop-limit order

c. Stop order Explanation: A type of order that becomes a market order when a round-lot trades at or through a particular price is called a stop order. A variation of a stop order is a stop-limit order, which is activated when a round-lot trades at or through a particular price, along with the requirement that the limit price be satisfied.

Which of the following statements is NOT considered misleading regarding a variable annuity communication? a. Telling a client that a variable annuity is a mutual fund b. Representing that a variable annuity will meet short-term liquidity needs c. Telling a client about the negative impact of an early redemption d. Making a representation that a death benefit guarantee applies to the investment return of the annuity

c. Telling a client about the negative impact of an early redemption Explanation: FINRA is concerned about misleading communications regarding product identification, liquidity, and claims regarding guarantees. A firm should not imply that the underlying account is a mutual fund. Annuities should be purchased with long-term goals in mind, not short-term liquidity needs. Death benefits may be guaranteed, but investment results may not. It would be advisable to inform a potential investor of surrender charges incurred as a result of early redemption.

Which of the following groups will approve an over-the-counter stock for purchase on margin? a. A State Securities Commission b. The Securities and Exchange Commission c. The Federal Reserve Board d. FINRA

c. The Federal Reserve Board Explanation: Under Regulation T, the Federal Reserve Board is responsible not only for setting margin requirements but also for determining which securities may be sold on margin.

XYZ Corporation borrows money at a rate of interest that is one point above LIBOR. Therefore, the rate is based on: a. A long-term bond index b. The U.S. prime rate c. The London Interbank Offered Rate d. A rate established by the Federal Reserve

c. The London Interbank Offered Rate Explanation: LIBOR is the London Interbank Offered Rate. It is the average rate that banks charge each other on loans for London deposits of Eurodollars.

A research analyst at a broker-dealer is preparing a research report recommending ABC common stock. Which of the following situations need not be disclosed? a. ABC Corp is an investment banking client of the broker-dealer b. The broker-dealer has a 1% or greater beneficial ownership in ABC common stock c. The broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds d. The broker-dealer makes a market in ABC common stock

c. The broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds Explanation: The broker-dealer is required to make certain disclosures in its research reports, such as whether the firm has an investment banking relationship or makes a market in the common stock of ABC. It must also disclose its ownership in a subject security if the ownership is equal to or greater than 1% beneficial ownership in common equity. Since nonconvertible debt is not considered common equity, disclosure is not required.

The CEO of a publicly traded company has inadvertently disclosed material, nonpublic information in a conference call with securities analysts. According to Reg FD, which of the following statements is TRUE? a. The CEO is guilty of insider trading b. The CEO and analysts are guilty of insider trading c. The company must make a public disclosure of this information within 24 hours d. The CEO has violated Rule 8K

c. The company must make a public disclosure of this information within 24 hours Explanation: Reg FD requires that material, nonpublic information disclosed to analysts or other investors must be made public. If the disclosure was intentional, the information must be simultaneously disclosed to the public. If unintentional, the public disclosure must be made within 24 hours. A Form 8K, filed with the SEC, is one method of meeting the public disclosure requirement.

Which of the following statements is NOT TRUE regarding accounts established under the Uniform Gifts to Minors Act? a. Taxes are the responsibility of the minor b. The custodian makes all investment decisions in the account c. The custodian may use account positions to cover short options positions in his own personal account d. The account must reflect the minor's Social Security number

c. The custodian may use account positions to cover short options positions in his own personal account Explanation: The custodian may not use securities in the custodian account to cover an options position in his own personal account. All securities in the custodian account must be used only for the benefit of the minor.

Upon written request, duplicate account statements would be required in all of the following circumstances, EXCEPT: a. The customer works in the operations area of a broker-dealer b. The customer works on the trading desk of a broker-dealer c. The customer is a senior executive of an investment advisory firm d. The customer is a principal of a broker-dealer

c. The customer is a senior executive of an investment advisory firm Explanation: Upon the written request by the employing member firm, duplicate account statements must be sent if an employee of a member firm opens an account at another member, investment adviser, bank, or other financial institution. The rule applies to any person employed by a member firm (broker-dealer). There is no requirement to send duplicate statements if the customer is an employee at a bank, investment adviser, or other financial institution.

When selling a security for a customer, all of the following items MUST be included on the sell ticket, EXCEPT: a. The number of shares or par value b. The location of the security c. The customer's Social Security number d. The customer's account number

c. The customer's Social Security number Explanation: An order ticket must include the customer's account number, number of shares or par value (for a bond), name of the security, limitations (limit, stop, etc.), and whether it is buy or sell. If it is a sell order, the location of the security (long or short) must be indicated. The customer's Social Security number is not needed on the order ticket.

Which of the following rates is set by the Federal Reserve Board? a. The broker loan rate b. The federal funds rate c. The discount rate d. The prime rate

c. The discount rate Explanation: Of the choices given, only the discount rate is set by the Federal Reserve Board. The prime rate is the rate of interest that commercial banks charge their best-rated customers and is established by each bank. The broker loan rate, which is the rate of interest charged to brokerage firms for margin loans, is set by each bank. The federal funds rate is the charge for overnight loans between banks and is set by each bank.

In a Rule 144A transaction, which of the following statements is NOT TRUE? a, The seller, or any person acting on its behalf, such as a broker-dealer, must reasonably believe that the purchaser is a qualified institutional buyer (QIB) b. The buyer must be able to establish its credentials as a QIB, through relevant documentation c. The only documentation acceptable for establishing that the purchaser is a QIB is audited financial statements (or their equivalent, for foreign issuers) d. If the seller has no reason to question the accuracy of documentation provided by the purchaser, it has no duty to inquire further about the purchaser's status as a QIB

c. The only documentation acceptable for establishing that the purchaser is a QIB is audited financial statements (or their equivalent, for foreign issuers Explanation: The SEC has provided several examples of documents that can be relied on by the seller when establishing its belief that a purchaser is a qualified institutional buyer. Audited financial statements and a certification from the issuer are common methods of demonstrating that the purchaser is a QIB.

An article in The Bond Buyer states that the placement ratio rose to 91.5%, up from 78.7% a week ago. Based on this information, which of the following statements BEST describes the placement ratio? a. The ratio between deals that have been announced previously and those that have already come to market b. The ratio between deals that have come to market and those that still remain on the calendar c. The percentage of bonds brought to market and placed with clients as compared to the total amount that was available for sale d. The percentage of bonds awaiting sale to the public compared to those that will be underwritten in the next 30 days

c. The percentage of bonds brought to market and placed with clients as compared to the total amount that was available for sale Explanation: The placement ratio is a means of gauging the amount of bonds that have been underwritten recently on a new-issue basis that have moved into the hands of the ultimate investor. In other words, it is the percentage of new bonds that were sold compared to those that were originally available for sale. The higher the placement ratio, the more bonds there are moving into the hands of investors.

All of the following statements are TRUE of covered call option writing, EXCEPT: a. The writer can increase the overall yield on his portfolio b. It is considered a conservative option strategy c. The premium received guarantees the writer cannot have a loss on the underlying security d. The writer will have a short-term capital gain if the option expires unexercised

c. The premium received guarantees the writer cannot have a loss on the underlying security Explanation: All of the choices listed are true except the premium received guarantees the writer cannot have a loss on the underlying security. The security can decline in price below the breakeven point (cost price of the stock minus the premium), causing the writer to have a loss on the stock. If the option expires, the writer will always have a short-term capital gain from the premium received.

When buying listed put options versus selling the underlying stock short, which of the following choices is NOT an advantage? a. Buying a put would require a smaller capital commitment b. Buying a put has a smaller dollar loss potential than selling the stock short c. The put has a time value beyond an intrinsic value that gradually dissipates d. Buying a put is not subject to Regulation SHO

c. The put has a time value beyond an intrinsic value that gradually dissipates Explanation: Choice (c) is a correct statement, but it is not an advantage for the buyer of a put. An options premium may consist of intrinsic value and/or time value. The portion of the premium represented as time value declines over time. For example, if an XYZ July 50 put is purchased for $5 when the market price is $47, the intrinsic value (in-the-money value) is $3 and the time value is $2. As the put nears expiration, the time value gradually dissipates, which is a disadvantage to the buyer. All of the other statements are advantages of buying a put as opposed to selling short. The premium of a put is substantially less than the Regulation T margin requirement for a short sale. In a put purchase, the potential loss is limited to the premium, while the potential loss on a short sale of stock is unlimited. The purchase of puts is not subject to the borrowing requirements of Regulation SHO, whereas short sales of equities are.

In a custodian account, which of the following choices would determine when a minor takes control of the account? a. FINRA b. The Internal Revenue Service c. The state in which the minor is a resident d. The state in which the account is held by the broker-dealer

c. The state in which the minor is a resident Explanation: In a custodian account, the minor would take control of the account when the child reaches the age of majority. This is determined by the state in which the minor is a resident. This is part of the Uniform Transfers to Minors Act (UTMA). Where the account is being held is not relevant.

When analyzing a general obligation bond, which of the following factors is NOT a positive indicator of the bond's quality? a. Voter registrations have increased over the last 18 months b. The department of motor vehicles reports that out-of-state drivers have been registering their cars in your state at an increasing rate c. The state increased the toll for the use of the turnpike d. A multiplex cinema, do-it-yourself store, and book-selling chain have all announced new franchises in your community

c. The state increased the toll for the use of the turnpike Explanation: An increasing population trend and a mixture of diverse businesses (both new and established) are positive demographic indicators that reinforce the quality of general obligation issues. User fees are generally associated with revenue bond issuers.

Fred Brick recently requested annuitization after contributing to a variable annuity for 12 years. The actuary applied an assumed interest rate of 3% and determined his first payment. The performance of the separate account on an annualized basis for the three months following annuitization is: 5%, 3%, and 4%, respectively. Which of the following statements can be made about Mr. Brick's payments? a. Payments rose in each of the three months b. Payments remained the same in each month c. The third payment was higher than the previous month's payment d. His total payments have increased by 12%

c. The third payment was higher than the previous month's payment Explanation: If the performance in the separate account is greater than the assumed interest rate (AIR), payments will increase. If performance is less than the AIR, payments will decline, and if performance equals the AIR, payments will remain the same. Comparisons are made to the previous month and not to the original month. In the third month, the performance of 4% was higher than the AIR, resulting in a payment that was greater than the previous month's payment.

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

c. Their credit rating is determined by an analysis of the municipal government issuing the bonds Explanation: 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.

Which of the following statements is NOT TRUE about defined benefit plans? a. Contributions are based on a predetermined distribution amount b. The employee does not know the amount her employer will contribute each year c. These plans provide tax-free distributions to participants d. These plans are ERISA-qualified retirement plans

c. These plans provide tax-free distributions to participants Explanation: An ERISA-qualified retirement plan is generally established as either a defined contribution or a defined benefit plan. In a defined contribution plan, a specific contribution is made each year and benefits are equal to the amounts provided by the total of contributions and earnings in the plan. A defined benefit plan promises specific benefits at retirement. Contributions to the plan are calculated to provide the promised benefits upon retirement and, therefore, the employee does not know the amount her employer will contribute each year. Distributions from a pension plan are not tax-free and are typically considered ordinary income.

Which of the following descriptions characterizes inverse exchange-traded funds (ETFs)? a. They are designed to deliver the same performance as an index or other benchmark b. They are designed to deliver a multiple of the performance of an index or other benchmark c. They are designed to deliver the opposite of the performance of an index or other benchmark d. They are designed to deliver a multiple of the opposite performance of an index or other benchmark

c. They are designed to deliver the opposite of the performance of an index or other benchmark Explanation: An inverse ETF is designed to deliver the opposite of the performance of an index or other benchmark. For example, an inverse ETF based on the DJIA seeks to deliver opposite performance of that index. So, if the DJIA rises by 1%, an inverse ETF would decrease by 1%, and if the DJIA falls by 1%, the inverse ETF would increase by 1% before fees and expenses. Choice (a) is a regular ETF, choice (b) a leveraged ETF that seeks to deliver a multiple of the performance of an index or other benchmark, and choice (d) is a leveraged inverse ETF.

Long-term certificates of deposit (CDs) have which of the following characteristics? a. They may only be sold by broker-dealers that are subsidiaries of banks b. They are considered risk-free investments c. They may be sold prior to maturity at a price that is different from the client's original cost d. They are not subject to interest-rate risk since the principal is insured by the FDIC

c. They may be sold prior to maturity at a price that is different from the client's original cost Explanation: Long-term CDs have a maturity of more than one year. Since the securities are traded in the secondary market, changes in interest rates will cause price fluctuations. If sold prior to maturity, a CD investor may have a loss or gain. Long-term CDs are issued by banks, but may be sold by any type of broker-dealer. The FDIC provides protection up to $250,000.

Which of the following choices BEST describes Eurodollars? a. U.S. dollars on deposit in U.S. banks b. U.S. dollars on deposit in European banks c. U.S. dollars on deposit in foreign banks d. European currency on deposit in U.S. banks

c. U.S. dollars on deposit in foreign banks Explanation: Eurodollars are defined as U.S. dollars on deposit in foreign banks, not just in Europe.

Supplemental documentation would NOT be required when opening which of the following types of accounts? a. Guardian b. Partnership c. Uniform Transfers to Minors d. Account for an estate

c. Uniform Transfers to Minors Explanation: A copy of the court appointment of the guardian is necessary for choice (a). To open a partnership account, a copy of the partnership articles should be obtained. In the case of an account for an estate, documentation should be obtained that shows the executor or administrator is properly authorized. Many new account forms contain UTMA/UGMA as one of the standard ownership choices, making additional documentation unnecessary.

Investment companies with no management fee and low sales charges, which invest in a fixed portfolio of municipal or corporate bonds, are categorized as: a. Open-end investment companies b. Closed-end investment companies c. Unit investment trusts d. Face amount certificate companies

c. Unit investment trusts Explanation: Investment companies with no management fee and low sales charges, which invest in a fixed portfolio of municipal or corporate bonds, are categorized as unit investment trusts (UITs). Investors can receive a reduced sales charge if they purchase a certain amount of a UIT.

To diversify a corporate bond portfolio, which of the following factors is NOT a concern? a. Coupon b. Maturity c. Price d. Geographic location

c. price Explanation: A corporate bond portfolio may be diversified with different issuers, coupons, maturities, and geographic locations. The price of the bonds does not help to diversify.

A customer in his early 50s who recently received a sizeable bonus has an investment objective of maximizing his tax-free income. He has two children attending college. Which of the following choices would be the BEST method of investing the funds? a. Contribute the maximum amount allowable to a 529 plan b. 50% equities, 20% general obligation bonds, 15% utility revenue bonds, and 15% Treasury Inflation-Protected Securities (TIPS) c. 20% high-yield corporate bonds, 20% airport revenue bonds, 20% general obligation bonds, 20% Treasury bonds, and 20% tax anticipation notes d. 30% general obligation bonds, 20% high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10% housing revenue bonds

d. 30% general obligation bonds, 20% high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10% housing revenue bonds Explanation: This customer is seeking to maximize his tax-free income and would like to invest in different types of municipal securities. A portfolio of 30% general obligation bonds, 20% high-yield municipal bonds, 20% hospital revenue bonds, 20% special tax bonds, and 10% housing revenue bonds would be suitable for this investor. There is no reason why a small percentage (20%) cannot be invested in high-yield municipal bonds. Choice (b) contains equities and Treasury Inflation-Protected Securities (TIPS), which are taxable, fixed-income securities. Choice (c) also contains taxable, fixed-income securities (corporate bonds and Treasury bonds) as well as short-term municipal securities (tax anticipation notes). Since the customer's children are already attending college, the tax-free growth available with a 529 plan would not be advantageous or a suitable investment when seeking tax-exempt income.

An investor buys a zero-coupon bond at 41. A few years later the bond's basis has been accreted for tax purposes to 46. If the bond is sold at 45, the investor will recognize: a. No gain or loss b. A 1-point capital gain c. A 4-point capital gain d. A 1-point capital loss

d. A 1-point capital loss Explanation: When selling a zero-coupon security, if the bond is sold above the accreted value (not the original cost), it is considered a capital gain and, if sold below, a capital loss. According to IRS rules, the accretion added each year to the cost basis for a zero-coupon security is treated as interest income for that year. If a zero-coupon security is sold for its accreted value, the investor will have no gain or loss.

A customer has a federal tax rate of 35% and a state tax rate of 5%. Which of the following investments would afford him the BEST after-tax yield? a. A 6.40% in-state municipal bond b. A 7.05% out-of-state municipal bond c. A 10.85% investment-grade corporate bond d. A 11.45% real estate investment trust (REIT)

d. A 11.45% real estate investment trust (REIT) Explanation: The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The investment grade corporate bond and REIT are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 40% for the in-state bond and the federal rate of 35% for the out-of- state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 40% combined tax rate. The municipal bond has a yield of 6.40%. 6.40% (Municipal Bond Yield) / 60% (100% - 40%) = 10.67% Equivalent Taxable Yield The out-of-state municipal bond has a yield of 7.05% and the equivalent taxable yield is 10.85% (7.05% / 65%). The REIT has the best or highest after-tax yield.

A customer has a federal tax rate of 35% and a state tax rate of 7%. Which of the following investments would afford him the BEST after-tax yield? a. A 6.40% in-state municipal bond b. A 7.10% out-of-state municipal bond c. A 10.95% investment-grade corporate bond d. A 11.50% mortgage bond

d. A 11.50% mortgage bond Explanation: The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The mortgage bond is a type of corporate bond and both are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 42% for the in-state bond and the federal rate of 35% for the out-of-state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 42% combined tax rate. The municipal bond has a yield of 6.40%. 6.40% (Municipal Bond Yield) / 58% (100% - 42%) = 11.03% Equivalent Taxable Yield The out-of-state municipal bond has a yield of 7.10% and the equivalent taxable yield is 10.92% (7.10% / 65%). The mortgage bond has the best or highest after-tax yield.

An investor is in the 35% tax bracket. Which of the following investments would afford him the BEST after-tax yield? a. A 3.50% general obligation bond b. A 4.10% Treasury bond c. A 5.25% investment-grade corporate bond d. A 5.75% non-investment-grade corporate bond

d. A 5.75% non-investment-grade corporate bond Explanation: The 3.50% general obligation bond (municipal bond) is exempt from federal income taxes. The other investments are subject to federal income taxes and 35% of the income received would be taxable. The taxable equivalent yield of the 3.50% municipal bond is 5.38%. This is calculated by dividing the 3.50% municipal yield by the complement of the tax bracket which is 65%. The highest (best after-tax yield) would be found in the 5.75% non-investment-grade corporate bond.

Which of the following choices is NOT allowed under MSRB rules? a. A gift of basketball tickets to a customer valued at $100 b. A business dinner with a client costing $135 c. Reserving a hotel room for a client at a municipal bond seminar costing $150 d. A Christmas gift to a client valued at $125

d. A Christmas gift to a client valued at $125 Explanation: MSRB rules prohibit gifts in excess of $100 per year to a person other than an employee or partner of the gifting individual, if such payments or services are in relation to the municipal securities activities of the employer or the recipient. (Therefore, a Christmas gift to the client valued at $125 would not be allowed.) However, costs incurred for business lunches or hotel accommodations for clients at business seminars are business expenses and are allowed as long as they are not frequent or excessive.

A customer asks an RR for a recommendation as to how to invest a $150,000 inheritance. The customer needs to preserve the capital since he wants to use the funds to start a new business within the next year. Which of the following funds is the LEAST suitable recommendation for this customer? a. A taxable money-market fund b. A tax-exempt money-market fund c. A short-term Treasury fund d. A balanced fund

d. A balanced fund Explanation: While all of these funds are somewhat conservative, the balanced fund will contain some equity investments and long-term bonds, which will expose the customer to market risk. Given the customer's short-time horizon and objective of preservation of capital, the balanced fund would be the least suitable of the choices listed.

A customer wants to purchase a security that invests primarily in private companies that have difficulty raising capital in public markets. Which of of the following investments would you recommend? a. A real estate investment trust (REIT) b. A collateralized mortgage obligation (CMO) c. A direct participation program (DPP) d. A business development company (BDC)

d. A business development company (BDC) Explanation: A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. A BDC will use the money it raises to invest mostly in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm.

Which of the following choices does NOT delegate power of attorney to a third party for the purpose of making securities transactions? a. A husband b. A wife c. A corporation d. A custodian

d. A custodian Explanation: Of the choices given, the only one that does not delegate power of attorney to a third party for the purpose of making securities transactions is a custodian for a minor. The custodian acts as the fiduciary for a minor's account and does not delegate a power of attorney.

Which of the following persons may not delegate power of attorney to a third party for the purpose of making securities transactions? a. A husband b. A wife c. A corporation d. A custodian for a minor

d. A custodian for a minor Explanation: Of the choices given, the only one that may not delegate power of attorney to a third party for the purpose of making securities transactions is a custodian for a minor.

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

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

Which of the following choices would be LEAST suitable for an investor seeking liquidity? a. Preferred stock of a financial services company b. A mutual fund that invests in international markets c. A real estate investment trust (REIT) d. A hedge fund using leverage

d. A hedge fund using leverage Explanation: Of the choices listed, the hedge fund would be the least suitable since it does not offer liquidity. Hedge funds are not subject to the same regulations for requiring access to their funds as are mutual funds. The shares are not redeemable on a daily basis and are not suitable for an investor requiring a certain degree of liquidity. The preferred stock and REIT are exchange-traded and may be sold at any time.

An investor who is in his late 80s wants tax-free income and the ability to provide funds for his children after his death. Which of the following choices should an RR recommend? a. An asset allocation mutual fund b. A portfolio of long-term municipal bonds c. A laddered corporate bond portfolio d. A laddered municipal bond portfolio

d. A laddered municipal bond portfolio Explanation: Through municipal bond purchases, investors receive tax-free income. A laddered portfolio is one that invests in the same type of bonds with different maturity dates. When the first bond matures, the proceeds are then reinvested in the long side (i.e., longest maturity) of the ladder. By laddering the portfolio, investors will have greater access to money if the need arises. For instance, if short-term funds are needed (e.g., a person wants to provide funds for his children), the investor may use the amount that is maturing rather than being forced to sell the longer term bonds in the secondary market.

For the following size transactions, ABC mutual fund has a bid price of $8.50 and an asked price of $9.26. Which of the following sales is allowed under the Conduct Rules? a. A member sells 250 shares of ABC fund at $9.10 to a nonmember firm b. A member sells 250 shares of ABC fund at $9.10 to another firm through a nonmember firm c. A member sells 250 shares of ABC fund at $9.10 to one of the firm's customers d. A member sells 250 shares of ABC fund at $9.26 to one of the firm's clients

d. A member sells 250 shares of ABC fund at $9.26 to one of the firm's clients Explanation: A FINRA member firm may not sell the fund at a discount ($9.10) to a nonmember firm or to one of the firm's customers (the public). According to the Conduct Rules, a member firm can only give a discount from the public offering price to another member firm. The discounts and selling concessions member firms give to each other are inducements for firms to be members of FINRA (the self-regulatory organization of over-the-counter broker-dealers) and to abide by its rules and regulations.

Which of the following securities would NOT be found on the Consolidated Quotation System (CQS)? a. An NYSE MKT stock b. An NYSE MKT warrant c. An NYSE-listed bond d. A non-Nasdaq stock

d. A non-Nasdaq stock Explanation: The Consolidated Quotation System (CQS) displays quotations on all common stock, preferred stock, warrants, and rights that are listed on the New York Stock Exchange (NYSE) or the NYSE MKT (formally NYSE Amex), and trading in the OTC market (third market). While an NYSE MKT stock, an NYSE MKT warrant, and a NYSE-listed bond typically appear on CQS, a non-Nasdaq stock does not appear.

Which of the following companies is LEAST affected by changes in the business cycle? a. A construction company b. A machine tool company c. An automobile manufacturer d. A pharmaceutical company

d. A pharmaceutical company Explanation: Changes in the business cycle will have the least effect on a defensive company (such as pharmaceuticals or utilities). The demand for the products produced by defensive companies will not be hurt by a downturn in the economy. The other choices are examples of cyclical companies. These companies tend to parallel the economy of the country. If the economy is expected to prosper, then you can expect a cyclical company to prosper. If the economy is expected to decline, then you can expect a cyclical company to be less prosperous.

Approval by a principal is NOT required when sending a customer which of the following documents? a. An abstract from an Official Statement b. A form letter c. A research report d. A red herring

d. A red herring Explanation: An abstract from an Official Statement, a form letter, and a research report are considered advertising or sales literature and must be approved. A red herring (preliminary prospectus) is used to provide a potential investor with information and is regulated by the SEC.

A type of money-market security usually collateralized by U.S. Treasury securities, in which an investor agrees to lend funds to a broker-dealer for a specified time and rate, is called: a. Federal funds b. A reverse repurchase agreement c. LIBOR d. A repurchase agreement

d. A repurchase agreement Explanation: In a repurchase agreement (repo), a dealer sells securities (usually T-bills) to an investor and agrees to repurchase them at a specific time, at a specified price. In effect, the dealer is borrowing funds from an investor and securing the loan with securities (a collateralized loan). The investor (the lender) receives the difference between the purchase price and the resale price of the securities in return for making the loan. If a dealer purchases securities and agrees to sell them back to an investor at a specific date and price, this is known as a reverse repo or matched sale. In this situation, the dealer lends funds (with securities as collateral) to the investor and earns the difference in sales prices. Many corporations and financial institutions, as well as dealers, engage in repos and reverse repos. Repos and reverse repos are typically short-term, with most being overnight transactions. In most cases the transaction is determined from the dealer's point of view. In other words, if the dealer is borrowing funds and the customer is lending, it is a repo. If the customer is borrowing funds and the dealer is lending it is a reverse repo. If the transaction is between two dealers, determination of whether the transaction is a repo or reverse repo depends on which dealer initiates the transaction.

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

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

A customer's account is currently frozen. A registered representative is NOT permitted to accept: a. An order in a cash account if all the money is in the account before the order is entered b. An order in a margin account if the total dollar amount of the purchase is in the account before the order is entered c. A sell order for a security in a cash account if the security is in the cash account before the order is entered d. A sell order for a security in a cash account if the security is not in the account before the order is entered

d. A sell order for a security in a cash account if the security is not in the account before the order is entered Explanation: When an account is frozen, the customer must have in the account what is required to complete the trade before an order may be accepted. This means that the required monies or securities must be in the account prior to accepting any purchase or sale orders. Choice (d) is not permitted as the securities are not held in the account at the time of accepting the sell order.

Which of the following positions exposes an investor to the most risk? a. A bullish call spread b. A bullish put spread c. Owning put options d. A short straddle

d. A short straddle Explanation: A short straddle consists of a short call and a short put, on the same underlying stock, with the same strike price and expiration month. The investor has an unlimited loss potential on the short call leg of the straddle. Spread positions limit the potential loss to the investor. For debit spreads (i.e., bullish call spreads and bearish put spreads), the loss is limited to the difference between the premiums. For credit spreads (i.e., bearish call spreads and bullish put spreads), the loss is limited to the difference between the strike prices minus the credit. The owner of a put option is only at risk for the premium paid to purchase the option.

When a broker-dealer sells a security to a client and charges a commission on the transaction, it is acting as the client's: a. Market maker b. Principal c. Designated market maker d. Agent

d. Agent Explanation: A broker-dealer that buys securities from or sells securities to a client without owning the securities is acting as the client's agent or broker. The broker-dealer does not have any risk and the client pays a commission on this type of transaction. When acting in a principal capacity, the client is charged a markup or markdown.

Which of the following choices is NOT approved by a municipal securities principal? a. A research report sent to a customer regarding municipal securities b. Each account engaging in municipal securities transactions c. All advertising relating to municipal securities d. All orders to buy municipal bond funds

d. All orders to buy municipal bond funds Explanation: A municipal securities principal must promptly approve (i.e., initial) all transactions for municipal securities but not municipal security bond funds, correspondence, and advertising. Research reports are considered advertising.

An investor purchases a two-year ABC call. Which of the following designations accurately describes the exercise of the option? a. European style, next business day settlement b. European style, three business days' settlement c. American style, next business day settlement d. American style, three business days' settlement

d. American style, three business days' settlement Explanation: Long-term anticipation securities (LEAPS) may be exercised on any day prior to expiration (American style). Exercise settlement is in the underlying stock, in three business days.

Pennsylvania Power Company has announced that it will refund $800 million of its outstanding 6 1/4% bonds that were to mature in 2040. The bonds will be refunded at 106.75% of par value using the proceeds of an $800 million refunding issue. The refunding issue has a 4 1/2% coupon rate and matures in 2030. The refunding will reduce all of the following items, EXCEPT the: a. Interest cost to the issuer b. Company's maturity schedule c. Company's annual debt service obligation d. Amount of outstanding debt

d. Amount of outstanding debt Explanation: Pennsylvania Power has reduced the interest charges (from 6 1/4% to 4 1/2%) by advancing the repayment of its existing debt. The company is paying off the 6 1/4% bonds, due in 2040, with the issuance of another bond. It is also improving its debt service by reducing the interest rate from 6 1/4% to 4 1/2%, thereby reducing its fixed charges each year. However, the amount of debt outstanding will remain the same at $800 million.

If a customer's objectives are safety of principal and income, you as the registered representative would NOT suggest: a. AA-rated corporate bonds b. High-grade preferred stocks c. A bond fund which invests in investment-grade municipal bonds d. An Exchange-Traded Fund that tracks the S&P 500 Index

d. An Exchange-Traded Fund that tracks the S&P 500 Index Explanation: An ETF that tracks the S&P 500 Index invests in common stocks that will not pay a high dividend and will fluctuate in value with the general equity market. This customer wants income and safety of principal, which may be found in the other three investment choices.

A registered representative has established a discretionary municipal bond account for Mr. Smith. Which of the following securities may the registered representative purchase for Mr. Smith's account? a. General obligation bonds only b. Bonds rated Baa or higher only c. Double-barreled bonds only d. Any suitable bonds

d. Any suitable bonds Explanation: A registered representative must be sure that the bonds purchased are suitable.

Which of the following Moody's ratings is the most speculative? a. Aa b. A c. Baa d. Ba

d. Ba Explanation: Of the choices given, Ba is the most speculative. The highest Moody's rating is Aaa.

An established customer has purchased penny stocks through a broker-dealer on five occasions. When making future recommendations to the customer regarding these securities, the broker-dealer must: a. Obtain a written statement from the customer for each trade b. Have the customer sign a suitability statement for each trade c. Have the trades preapproved by a principal d. Be sure that the recommendations take into account the customer's investment objectives

d. Be sure that the recommendations take into account the customer's investment objectives Explanation: The account approval requirements for penny stocks under SEC Rule 15g-9 do not apply to existing customers who have maintained an account with a broker-dealer for more than one year or have previously engaged in three or more transactions involving penny stocks. All recommendations to a customer should take into account the customer's investment objectives.

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? a. Mortgage bonds b. Commercial paper c. Debenture bonds d. Convertible bonds

d. Convertible bonds Explanation: The convertible bonds will fluctuate the most because they are convertible into common stock. The price fluctuates with the price movements of the common stock. The fact that interest rates are stable is another reason why convertible bonds is the best answer. If the question had stated that interest rates were moving sharply upward or downward, then all other bonds would fluctuate sharply in price to bring yields in line with interest rates. However, the question asks what will happen in a period of stable interest rates. Given that statement, the best answer is that convertible bonds will fluctuate the most.

Which of the following statements is TRUE regarding a defined contribution plan? a. It is designed to provide employees with a fixed monthly payout at retirement b. The employer bears all the investment risk c. Employees may deduct all employer contributions d. Each employee has a separate account within the plan

d. Each employee has a separate account within the plan Explanation: A defined contribution plan is one in which the employer makes contributions on behalf of employees, and the size of the retirement benefit depends on the amount of the contributions and the investment performance of the assets in the plan. In this type of plan, the employee assumes the investment risk and only the employer may deduct employer contributions. In addition, each employee has a separate account within the plan to easily track the growth of his retirement assets.

Under the Know-Your-Customer Rule, when a registered representative opens a new account for a customer, the registered representative should determine all of the following information, EXCEPT the customer's: a. Financial condition and needs b. Objectives c. Ability to assume risk d. Education level

d. Education level

A customer sells $1,000 worth of stock in a restricted margin account. All of the following statements are TRUE, EXCEPT the: a. Market value of the account will be reduced b. SMA will be increased c. Debit balance will be decreased d. Equity will be increased

d. Equity will be increased Explanation: When securities are sold in a restricted account, the customer is permitted to withdraw an amount equal to the FRB initial margin requirement (currently 50%). This amount is first credited to the SMA and may then be withdrawn. The full amount of the sale is used to reduce the debit balance. The market value will decrease since securities were sold. The equity will remain the same since the market price and debit balance were reduced by the amount of the sale. If the customer withdraws the amount credited to the SMA, the debit balance will increase and the equity will decrease.

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

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

Which of the following expenditures is a violation under industry rules concerning gifts and gratuities? a. Taking a client to a dinner valued at $80 per person b. Attending a concert with your client valued at $105 per ticket c. Giving a $300 wedding gift to your brother who is employed at a member firm d. Giving two tickets to your client to attend a basketball game valued at $65 per ticket

d. Giving two tickets to your client to attend a basketball game valued at $65 per ticket Explanation: Member firm personnel may not give, or permit to be given, a gift of material value exceeding $100 per recipient per year to personnel employed by another member firm. Exempt from the $100 limit are occasional meals, tickets to sporting and cultural events, reminder advertising (boxes of pens, key chains, etc.), and expenses related to legitimate business travel. In order for the activity to be considered an expense, the RR must attend the event, not give the tickets to another person or persons. The value of two tickets ($130) exceeds the $100 limit. An exemption is provided if the gift is given to another family member for an event related to a family relationship (e.g., a wedding).

Mr. Jones earns $40,000 per year and has contributed to his Individual Retirement Account (IRA) for each of the past two years. The company he works for has recently instituted a pension plan. Since he is now covered by a corporate pension plan, which of the following statements is TRUE regarding his IRA? a. He must liquidate the IRA by taking a lump-sum distribution b. He may keep the IRA but additional contributions are prohibited c. He may keep the IRA and may make a tax-deductible contribution of up to $18,000 this year d. He may keep the IRA and may make a tax-deductible contribution of up to $5,500 this year

d. He may keep the IRA and may make a tax-deductible contribution of up to $5,500 this year Explanation: An individual who is covered by a corporate pension plan may continue to make pretax contributions of up to $5,500 to an IRA providing the individual's income does not exceed specified levels.

When a corporation goes bankrupt, which of the following would be the last to be paid? a. Internal Revenue Service b. Debenture holders c. Preferred stockholders d. Holders of warrants

d. Holders of warrants Explanation: A holder of common stock is usually the last to be paid in a bankruptcy. A holder of a warrant has the right to purchase common stock and is paid after a holder of common stock. In practical terms, the common stock is worthless if a corporation declares bankruptcy.

All of the following statements are TRUE of Blue-Sky laws, EXCEPT: a. Broker-dealers are required to register in each state in which they do business b. Registered representatives are required to be registered in each state in which they do business c. When offering its shares to the public, an issuer is required to register in the states where it sells its securities d. If securities are exempt from state securities registration, they are also exempt from federal securities registration

d. If securities are exempt from state securities registration, they are also exempt from federal securities registration Explanation: All of the choices listed regarding Blue-Sky laws are true except the statement that if securities are exempt from state securities registration, they are also exempt from federal securities registration. The opposite is true. For example, securities listed on the NYSE are subject to federal securities registration, but exempt from state securities registration. Blue-Sky laws are state securities laws that are not part of the Securities Act of 1933. Blue-Sky laws regulate the issuance and trading of securities within the states (intrastate). The 1933 act is a federal act that regulates new securities issues that will be sold interstate. Issuers raising capital in a state, broker-dealers and RRs conducting business in a state must register in that state.

A client is interested in obtaining the expense ratio of a mutual fund recommended by the RR. Which of the following actions would be BEST for the RR to take? a. Instruct the client to obtain the information from FINRA b. Refer the client to the fund's sponsor since the RR may not be authorized to release this information c. Instruct the client to obtain that information from the SEC database of mutual fund prospectuses d. Inform the client that this information may be obtained by reviewing the front of the fund's prospectus

d. Inform the client that this information may be obtained by reviewing the front of the fund's prospectus Explanation: Mutual funds are required to disclose in the front of a prospectus a standardized fee table of all its fees. The fee table must include the expense ratio, which is the percentage of a fund's assets that is used to pay its operating costs. It is determined by dividing total expenses by the average net assets in the portfolio.

A husband and wife with children going to college in 2, 11, and 16 years are planning to set up an account to pay for their children's college education. Which of the following investments are most suitable for this purpose? a. Money-market funds b. Certificates of deposit maturing every 12 months c. Junk bonds with serial maturities coinciding with the children's college attendance d. Investment-grade corporate bonds with maturities coinciding with the children's college attendance

d. Investment-grade corporate bonds with maturities coinciding with the children's college attendance Explanation: Given these choices, the investment-grade bonds with serial maturities of 2, 11, and 16 years appear to be the most suitable investment. Money-market funds are used more as a parking place for funds until an investment decision can be made. CDs may be used, but are not as attractive as choice (d) since the CDs mature in 12 months. Junk bonds carry too much risk for their intended purpose.

A high net worth investor seeking safety of principal would MOST likely invest in: a. Non-investment-grade municipal revenue bonds b. Non-investment-grade corporate bonds c. The maximum amount allowable in a 529 plan d. Investment-grade municipal revenue bonds

d. Investment-grade municipal revenue bonds Explanation: Safety of principal refers to a customer being able to preserve or retain the initial amount of the investment over its life. Many bonds will offer investors this feature. The higher the rating, the greater the likelihood the investor will achieve safety of principal. Investment- grade municipal revenue bonds will offer safety of principal and will also offer a high net worth investor tax-exempt income. A 529 plan would be beneficial if the investor's objective were tax- advantaged funding for a child's college education.

Which of the following transactions may be executed in a cash account? a. Short 100 shares of XYZ stock b. Long 500 shares of ABC stock and short 500 shares of ABC stock c. Short 10 DEF May 50 call options d. Long 5 GHI Jan 15 put options

d. Long 5 GHI Jan 15 put options Explanation: A purchase of options may be transacted in a cash or margin account. Selling short stock and short option positions must be executed in a margin account.

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

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

A brochure from a broker-dealer sent to customers concerning collateralized mortgage obligations (CMOs) is permitted to contain: a. A comparison between CMOs and Treasury securities b. A comparison between CMOs and bank certificates of deposit c. A comparison between CMOs and municipal securities d. No comparison to other securities

d. No comparison to other securities Explanation: Any type of promotional communication made available to customers may not compare CMOs to any other security. This is due to the uniqueness of this product.

Which of the following choices is NOT a characteristic of a HOLDR? a. Diversification b. The right to vote c. The ability to control when you are taxed d. Once-a-day pricing

d. Once-a-day pricing Explanation: Holding Company Depository Receipts (HOLDRs) are created by depositing securities of a certain sector (e.g., Biotech, Internet, Retail) into a trust and selling interests in the trust to investors. HOLDRs offer investors diversification similar to an Exchange-Traded Fund (ETF). Unlike ETFs, the owner of a HOLDR has an ownership interest in the shares of the companies that the HOLDR is invested in and would retain the right to vote. Once the portfolio has been created, the makeup of the portfolio will typically not change, although if a company included in the portfolio goes bankrupt or merges with another company, the makeup of the HOLDR may be altered. Investors have the ability to control when they are taxed, since they determine when to hold or sell the HOLDR. An investor in a mutual fund does not have that benefit since the portfolio manager would determine when to hold or sell the securities in the fund. Benefits also include liquidity and pricing throughout the day (i.e., they are exchange-traded) as compared to an index or sector mutual fund, which has daily pricing and is purchased directly from the fund. HOLDRs have no management fees and are considered low-cost since there are only small transaction costs and custodian fees.

A registered representative tells a municipal bond fund manager that, in return for purchasing bonds for the fund, the representative will sell that bond fund exclusively to clients. This arrangement is: a. Permitted provided that it is disclosed to customers b. Permitted without restriction c. Permitted if approved by a principal d. Prohibited according to MSRB rules

d. Prohibited according to MSRB rules Explanation: MSRB rules prohibit a broker-dealer or registered representative from having reciprocal dealings with investment companies. A registered representative may promote the services of the firm (such as timely executions and quality research) to solicit business from a municipal bond fund manager, but may not offer to sell fund shares in return for brokerage business from the fund.

Which of the following advantages is NOT a benefit of owning a real estate investment trust? a. Stable dividend income b. The ability to buy and sell shares easily c. Diversification d. Protection against rising interest rates

d. Protection against rising interest rates Explanation: Real estate investment trusts (REITs) offer investors a stable dividend based on the income produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange, offering investors liquidity. Since investors usually purchase REITs for their high dividend yield, if interest rates increase, the value of their shares will usually decrease as other newly issued income earnings securities become more attractive.

A customer has a discretionary account at a broker-dealer. The customer has received a research report and has indicated that she may want to purchase a stock on the recommended list. Which of the following actions is MOST appropriate for the registered representative to take? a. Contact the customer and ask her to place an order to buy the security b. Purchase a small amount of the stock and contact the customer no later than the same business day c. Purchase a small amount of the stock and have the customer provide a written authorization form no later than the same business day d. Purchase the stock on behalf of the customer and have the order approved promptly by a principal

d. Purchase the stock on behalf of the customer and have the order approved promptly by a principal Explanation: This is a discretionary account and, therefore, shares may be purchased without additional written customer consent. A principal or supervisor of the broker-dealer is required to approve promptly in writing each discretionary order. There is no requirement to notify the customer on the same business day. The customer will, however, receive a confirmation of the trade.

A customer contacts his registered representative to purchase a security in a custodial account. The RR executed the transaction in the custodial account of the son, but the customer wanted to purchase the security in the account for her daughter. Which of the following actions should be taken? a. Request a cancel and rebill without principal approval b. Enter a new order c. Cancel the order and take no other action d. Request a cancel and rebill after receiving principal approval

d. Request a cancel and rebill after receiving principal approval Explanation: If a transaction is executed but the wrong account is used, the error can be corrected without placing a new order. This is done by transferring the transaction to the correct account number with the permission of a registered principal. This transfer process is sometimes referred to as a cancel and rebill. In some cases, an error is made using the correct customer but transferred to a different account (e.g., a wrong custodial account or a joint account instead of an individual account).

The MSRB performs all of the following functions, EXCEPT: a. Regulate municipal securities dealers b. Regulate municipal securities representatives c. Regulate municipal securities advertising d. Set fixed commissions for municipal dealer agency transactions

d. Set fixed commissions for municipal dealer agency transactions Explanation: The MSRB does not set fixed commissions for municipal dealer agency transactions. MSRB rules regarding commissions state that they shall be fair and reasonable and negotiated between buyer and seller.

A registered representative is the owner of a marina on the North Shore of Long Island. She wants to build an apartment complex on this property in order to increase the property's cash flow. If she receives a loan from family members, which of the following statements is TRUE? a. Her broker-dealer is required to approve the loan b. She is required to notify her firm of the loan c. She is required to notify FINRA d. She is not required to notify her firm about the loan

d. She is not required to notify her firm about the loan Explanation: Registered individuals may not borrow money from, or lend money to, a customer unless certain conditions are met. These conditions include implementing written procedures permitting such activity and satisfying one of the following provisions. 1. The customer and the registered person are immediate family members. 2. The customer is a financial institution regularly involved in the business of extending credit or providing loans. 3. Both parties are registered with the same firm. 4. The loan is based on a personal relationship between the customer and the registered person. 5. The loan is based on a business relationship independent of the customer-broker-dealer relationship. If the loan is based on provision 1 (borrowing from family members), firm notification or firm approval is not required. If the conditions indicated in provisions 3, 4, or 5 apply, the firm must approve the lending activity prior to the execution of the loan.

Which of the following statements is NOT TRUE concerning a structured product offered by an RR? a. They are usually registered with the SEC b. The principal that the investor would receive may be based on the value of a stock traded on an exchange c. The principal the investor would receive may be based on the value of a foreign currency d. Since this product is usually sold by a bank, the principal will be protected by the FDIC

d. Since this product is usually sold by a bank, the principal will be protected by the FDIC Explanation: Structured products may be linked to individual securities, commodities, foreign currencies, or indexes. These products are underwritten by most major financial services institutions and are usually registered as securities with the SEC. Structured products are not bank deposits and are not insured by the Federal Deposit Insurance Corporation (FDIC). This fact should be disclosed by an RR when offering this product to clients.

In which of the following situations does an investor have unlimited risk? a. Sold a call and is long the stock b. Sold a put and is long the stock c. Bought a call and is short the stock d. Sold a put and is short the stock

d. Sold a put and is short the stock Explanation: Selling a put and being short stock would be the only choice given where an investor would have unlimited risk. The short position would be the unlimited risk situation if the stock were to increase in value. If the market value of the stock is increasing, the purchaser of the put will not exercise the option. The short seller will lose money on the increase of the stock price. In choice (c), the short seller is protected against a rise in the stock by owning a call. In choice (a), the investor will have a loss if the price of his stock declined. However, the potential loss is limited since the stock's price can only decline to zero, creating a loss equal to the stock's cost minus the premium received for selling the call. In choice (b), the loss will again be limited to the stock's value declining to zero.

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

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

Which of the following securities will MOST likely be subject to a withholding tax? a. An initial public offering (IPO) b. A real estate investment trust (REIT) c. A bond issued by a U.S. company that earns income overseas d. Stock issued by a foreign company that earns income in the U.S.

d. Stock issued by a foreign company that earns income in the U.S. Explanation: Choice (d) is an example of an ADR, representing stock issued by a foreign corporation that is traded in the U.S. Dividends paid to a U.S. investor on foreign securities, such as an ADR, may be subject to a withholding tax by the country from which they were paid. If the investor has securities that paid dividends that were subject to a foreign tax, the broker-dealer will send the investor a form that will report the gross amount of the dividends or interest and the amount of tax withheld by the foreign government. The fact that the company earns income in the U.S. is not relevant.

Which of the following indexes is the broadest equity market indicator? a. The Nasdaq Composite Index b. The Major Market Index c. The NYSE Index d. The Wilshire Index

d. The Wilshire Index Explanation: The Wilshire 5000 Equity Index consists of more than 7,000 stocks that trade on the New York Stock Exchange and Nasdaq. The Index is referred to as the Wilshire 5,000 because, when created, it contained approximately 5,000 stocks. The Wilshire Index is considered the broadest of all indexes and averages.

To determine what would happen to the coverage of revenue bonds when more bonds are going to be issued in the future, one should examine: a. The rate covenants of the bond b. Feasibility studies c. The refunding procedure of the bond d. The additional bonds test

d. The additional bonds test Explanation: The additional bonds test sets a minimum level of coverage of debt service for interest and principal for all outstanding bonds and for future debt. The additional bonds test protects original bondholders against the dilution of the debt service coverage. Rate covenants insure that rates will increase in line with costs to insure proper revenues for the maintenance of the facility or project and payment of the debt service. Feasibility studies are conducted to insure the proper need of the project being developed. Refunding is used to lower interest expense on bonds through the issuance of new bonds at lower coupon rates. The proceeds of the new bond sale would be used to repurchase the already outstanding high-coupon bonds.

What information would NOT need to be disclosed by a broker-dealer in a research report? a. The broker-dealer received compensation for assisting the company in an acquisition b. The analyst provided a target price for the company c. The analyst is a director of the company d. The analyst had owned shares in the company one year before writing the report

d. The analyst had owned shares in the company one year before writing the report Explanation: A broker-dealer is required to make certain disclosures in its research reports. Any investment banking compensation paid during the last 12 months, the anticipated price target, and the fact that the analyst is a director of the company are all required disclosures. In addition, any ownership in the company held by the analyst or a member of the analyst's immediate family at the time the report is issued must be disclosed. The fact that the analyst formerly owned shares that were sold does not need to be disclosed.

A call option would be considered covered if it was written against all of the following choices, EXCEPT: a. The underlying common stock held in a cash account b. The underlying common stock held in a bank c. The underlying common stock held in a trust company d. The convertible bonds or convertible preferred stock of another corporation

d. The convertible bonds or convertible preferred stock of another corporation Explanation: The option would be considered covered if written against all of the choices listed except the convertible preferred stock or convertible bonds of another corporation. A security that is convertible into common stock is acceptable, but it must be of the same corporation and be convertible immediately into at least the same number of shares represented by the options written.

Which of the following proxy rules is TRUE regarding customer securities held in street name by a brokerage firm? a. The corporation sends the proxy to the customer b. The corporation sends the proxy to the NYSE, which then sends it to the customer c. The corporation sends the proxy to the SEC, which then sends it to the customer d. The corporation sends the proxy to the brokerage firm, which then sends it to the customer

d. The corporation sends the proxy to the brokerage firm, which then sends it to the customer Explanation: A publicly held company must provide a means for shareholders who cannot attend company meetings to vote on important matters. This is done through a proxy, which is a delegation of the shareholder's vote. The corporation will send the proxy to all stockholders of record who can then cast their votes without attending the meeting. When stock is held in street name (i.e., in the name of the brokerage firm), the corporation sends the proxy to the brokerage firm, which is the stockholder of record on the corporate books. The brokerage firm sends the proxy to the customer and the corporation then pays the additional expenses. The SEC regulates the solicitations of proxy material.

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

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

An employee of a municipal securities firm would like to open an account with another municipal securities firm. Which of the following statements regarding the employee and the account is NOT TRUE? a. The employer must receive duplicate copies of all transactions made in the account b. The employee must abide by all trading instructions from the employer regarding the account c. The employer must be notified in writing of the employee's intention to open the account d. The employee may not purchase new issues offered on a negotiated basis

d. The employee may not purchase new issues offered on a negotiated basis Explanation: MSRB member firm employees may open an account with a competing firm, provided they abide by the requirements addressed in choices (a), (b), and (c). The employee may purchase new issues or any other type of municipal security.

All of the following choices are characteristics of a Health Savings Account (HSA), EXCEPT: a. The amount a person may contribute each year is limited b. It is not open to individuals who are enrolled in their company's health insurance plan c. The funds may be invested in mutual funds d. The funds must be used each year and may not be carried over

d. The funds must be used each year and may not be carried over Explanation: A Health Savings Account (HSA) is a tax-advantaged account that can be used by individuals to pay for qualified medical expenses. An HSA is not open to all individuals. It is generally open only to persons who are not enrolled in any type of health plan other than a qualified, high-deductible health plan. Contributions are made in pretax dollars (which are limited under IRS guidelines), grow tax-free, and withdrawals are tax-free if used to pay qualified medical expenses. The funds may be invested in mutual funds, although the types of funds may be limited by an HSA trustee (a financial institution). The funds do not need to be used each year and may be carried over to be used in the future. Once you reach age 65, your funds can be withdrawn at any time and are subject only to ordinary income tax. (You avoid the 20% IRS penalty.) However, you may avoid any tax by continuing to use the funds for qualified medical expenses.

listing of coincident economic indicators includes: a. Expenditures for capital goods b. The S&P Index c. Housing starts d. The industrial production index

d. The industrial production index Explanation: The industrial production index is a coincident indicator. Coincident indicators tend to move directly with the business cycle and show what is currently happening in the economy.

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

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

When making a presentation on 529 plans, what information is NOT required? a. Discussing the risks and costs involved with the different types of plans b. A disclaimer stating that, prior to investing in a plan, you should read the official statement c. A disclaimer that the client should check with her home state to learn if it offers tax benefits to those clients who invest in its plan d. The name and contact information for the municipal securities principal who will approve the customer's investment in the plan

d. The name and contact information for the municipal securities principal who will approve the customer's investment in the plan Explanation: Under MSRB rules, an RR is required to disclose certain information when promoting 529 plans. The RR must discuss the risks and costs involved with the different types of plans, must provide a disclaimer stating that, prior to investing in a plan, the customer should read the official statement, and must provide a disclaimer that the client should check with her home state to learn if it offers tax benefits to those who invest in its plan. There is no requirement to provide the name and contact information for the municipal securities principal who will approve the customer's investment in the plan.

Which item need NOT appear on a customer confirmation for a municipal bond transaction? a. Existence of call features b. Whether the interest paid on the bonds is subject to the alternative minimum tax c. Whether the bonds are insured d. The name of the bond counsel

d. The name of the bond counsel Explanation: MSRB rules do not require that the name of the bond counsel be disclosed on a confirmation. The existence of call features, bond insurance, the applicability of the alternative minimum tax, or any special relationships between the issuer and the broker-dealer (such as financial advisory and control relationships) are among the numerous disclosures that must be made to customers on a confirmation.

Which of the following statements is NOT TRUE regarding the purchaser of a put option? a. The purchaser has a right to sell stock b. The purchaser limits the amount of money he could lose if the value of the underlying stock increases c. The purchaser benefits if the value of the underlying stock declines d. The only way to realize a profit is to exercise the option

d. The only way to realize a profit is to exercise the option Explanation: Choice (d) is not true. The investor could profit by either exercising or liquidating the put. The other choices are true statements. The purchaser of a put has a right to sell stock. The maximum loss that a purchaser of an option (put or call) can sustain is the amount of the premium paid. The purchaser of a put can profit if the underlying stock declines in value.

Which of the following BEST describes the term, payment for order flow? a. The concession paid to a member of a selling group b. The prohibited practice of mutual fund distributors paying kickbacks to registered representatives c. The portion of a mutual fund's 12b-1 fee that is paid to a third-party salesperson d. The payment to a broker-dealer by a market maker in return for routing orders to that market maker

d. The payment to a broker-dealer by a market maker in return for routing orders to that market maker Explanation: It is permissible for broker-dealers to receive payments from a market maker in return for executing orders through that market maker. Any payments for order flow must be disclosed to customers.

All of the following municipal bond transactions take place in the secondary market, EXCEPT: a. Submitting an offer to sell bonds to a sinking fund b. A tax swap c. Two municipal securities broker-dealers purchasing a block of bonds jointly d. The placing of a designated order

d. The placing of a designated order Explanation: All of the choices listed take place in the secondary market except the placing of a designated order. A designated order is an order directed to a syndicate manager by an institutional account designating two or more members of the underwriting account to receive credit for that order. This order is placed directly with the syndicate manager during the order period prior to the release of the bonds for secondary trading.

Which of the following choices is a violation of federal laws with regard to tender offers? a. The tender of stock from a cash account b. The tender of stock from a long margin account c. The tender of a minor's stock from a custodian account d. The tender of stock in a short margin account that has been borrowed by a customer

d. The tender of stock in a short margin account that has been borrowed by a customer Explanation: It is a violation of federal law for anyone to tender the stock that a customer borrowed in a short margin account. The stock has been temporarily borrowed and does not belong to the customer and may not be tendered.

Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)? a. They offer investors the same amount of liquidity as exchange-traded REITs b. They are not required to distribute the same percentage of taxable income as exchange-traded REITs c. They are not required to make periodic disclosures that are required of exchange-traded REITs d. They are not suitable for the same investors as exchange-traded REITs

d. They are not suitable for the same investors as exchange-traded REITs Explanation: Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.

Which of the following statements is TRUE regarding dividend and capital gain distributions of mutual funds? a. They may be combined to determine the total yield b. The taxes may be deferred if they are invested in additional mutual fund shares c. Dividends are taxed as long-term capital gains d. They can be reinvested automatically in additional shares if the shareholder chooses to do so

d. They can be reinvested automatically in additional shares if the shareholder chooses to do so Explanation: Of the choices listed, the only true statement regarding dividend and capital gain distributions from an open-end investment company (mutual fund) is that they can automatically be reinvested in additional shares if the fundholder chooses to do so. They may not be combined to determine yield. The taxes must be paid in the year that the distribution is realized, even if the distribution is reinvested. Qualified dividends are taxable at a maximum rate of 20% regardless of how long the fund is held and nonqualified dividends are taxed as ordinary income. Long-term capital gain distributions are taxable as long-term capital gains regardless of how long the fund shares are held.

A registered representative is sending an e-mail to all her customers in anticipation of a new product being offered by the firm. If her customers consist of a large group of individual investors with assets from $100,000 to $100,000,000, which of the following statements is TRUE? a. This would be defined as a correspondence b. This would be defined as an institutional communication c. This would be defined as both a retail and an institutional communication d. This would be defined only as a retail communication

d. This would be defined only as a retail communication Explanation: FINRA's Communications with the Public Rule defines different types of communication. - Correspondence, which is defined as any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. - Institutional communication, which is defined as any written or electronic communication that is distributed or made available only to institutional investors. This would not include any internal communication by the broker-dealer. - Retail communication, which is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period. - Public appearances are situations where employees associated with a broker-dealer or sponsor participate in a television or radio interview, seminar, or forum, or make a public appearance, or engage in speaking activities that are unscripted and are not otherwise considered retail communication. Social media sites, which permit real-time communication or interactive, electronic forums, fall under the guidelines of a public appearance (e.g., Facebook, Twitter, and LinkedIn). An institutional investor under this rule is any bank, S&L, insurance company, registered investment adviser or investment company (mutual fund), any person with total assets of at least $50 million, government entity, employee benefit plan, any member firm or registered person of the firm, and any person acting solely for any institutional investor. Since the e-mail is being sent to both retail and institutional investors, it is defined as a retail communication. If the communication is made available only to customers with total assets of at least $50 million, then it would be defined as an institutional communication.

Which of the following sources of revenue is NOT used to pay the debt service on general obligation bonds? a. Income taxes b. Property taxes c. Licensing fees and traffic fines d. Tolls collected at a tunnel located in the municipality

d. Tolls collected at a tunnel located in the municipality Explanation: A general obligation (GO) bond is backed by the full faith and credit of the municipality. Items that may be used to pay the debt service on GO bonds include fines, sales taxes, property taxes, income taxes, and licensing fees. Items such as tolls, concessions, and lease rental payments would be used to back a revenue bond.

Which of the following securities will probably have the greatest fluctuation in price when interest rates move up or down? a. Commercial paper b. Treasury bills c. Treasury notes d. Treasury bonds

d. Treasury bonds Explanation: Treasury bonds have the longest maturity of the choices listed and will have the greatest fluctuation in price. Since they have the longest maturity, they will be exposed to the risks of the marketplace for the longest period.

Which of the following statements is NOT TRUE of treasury stock? a. It is listed on the company's balance sheet b. Treasury stock has no voting rights and does not receive dividends c. It is outstanding stock that has been repurchased by the corporation d. Treasury stock has been issued by the U.S. Treasury and was purchased by a corporation

d. Treasury stock has been issued by the U.S. Treasury and was purchased by a corporation Explanation: Treasury stock is stock that has been issued and was outstanding but has been repurchased by the company. Treasury stock does not have voting rights nor the right to receive dividends.

Which of the following companies would probably be MOST leveraged? a. Software b. Biotech c. Consumer electronics d. Utilities

d. Utilities Explanation: A leveraged company has a large amount of outstanding debt (bonds) and would be the most leveraged. Of the choices given, utilities are the heaviest users of debt and have the greatest amount of interest charges (fixed charges). The percentage of debt in a utility company's capitalization is usually greater than that of the other companies listed.

Which of the following choices would be found in the subscription agreement for a direct participation program (DPP)? a. The sharing arrangement between the limited and general partners b. The amount of money that the general partner will contribute to the program c. The provisions for dissolving the partnership d. Who is required to sign this document

d. Who is required to sign this document Explanation: In order to purchase an interest in a direct participation program, the investor must complete the subscription agreement. It will specify who is required to sign the agreement. The other choices given are found in the offering documents.

Which of the following positions/strategies is NOT bullish? a. A married put b. A short put c. A long 40 call and a short 50 call d. Writing a straddle

d. Writing a straddle Explanation: Straddle writers expect a neutral market and obtain the maximum gain if each option expires. Each of the other choices has an opportunity for a profit if the underlying security rises in value.