Series 7 Top-off - Chapter 20 **copy**

The consensus of most analysts on Wall Street is that the market is entering a very favorable period. A broker/dealer is planning a major sales effort to recommend small growth companies to all of its customers. Which of the following is true? [A] This is allowable under FINRA Rules without any restrictions. [B] This is allowable provided all of the trades are immediately initialed by a FINRA principal. [C] This practice is inherently inconsistent with FINRA Rules. [D] The wholesale recommendation of certain types of securities to all of its customers is allowed since most of the analysts are bullish.

[C] This practice is inherently inconsistent with FINRA Rules. Small growth companies would not be suitable for all of the broker/dealer's customers, therefore making that blanket recommendation would violate the FINRA Rules.

A registered representative has thoroughly researched a wide variety of sector funds and has found one that he believes has a very high potential for growth. The RR may recommend the fund to [A] customers whose primary investment objective is safety of principal. [B] any high net worth customers. [C] customers with experience in sector fund investments. [D] customers whose primary investment objective is diversification.

[C] customers with experience in sector fund investments.

Normally the older the investor, the greater percentage of assets are placed in which of the following? [A] equity securities [B] options [C] fixed income securities [D] growth funds

[C] fixed income securities Older investors are generally interested in safety of principal and income which means they should consider Bonds (fixed income securities).

All of the following are considered assets EXCEPT a [A] closed-end fund [B] negotiable certificate of deposit [C] line of credit that has yet to be used [D] convertible bond

[C] line of credit that has yet to be used A line of credit is not a legal commitment by the bank to make a loan to a customer. It is only a moral commitment. Therefore, it is not something owned by the customer like other assets. The other choices all have commercial value as assets.

Which of the following activities are violations of the duty of a broker/dealer to deal fairly with his customers? [A] Recommending a low-priced security without making inquiry as to the financial condition of the company. [B] Inducing the purchase of a low-priced security by predicting growth where information to support the recommendation is not available and this fact is not disclosed to the customer. [C] Sale of a security at a price not related to the market. [D] All of the above

[D] All of the above

It would be MOST important to discuss the risk of loss of principal and fluctuations in payments from investing in mutual funds with an investor who is switching to mutual funds from which of the following portfolios? [A] An account focused in speculation in options and small-cap stocks [B] An account focused in blue-chip stocks and bonds [C] An account focused in corporate bonds [D] An account focused in US Treasury Bills and Certificates of Deposit

[D] An account focused in US Treasury Bills and Certificates of Deposit Though it would be important to discuss the risks of a mutual fund with all investors, it would be MOST important to discuss these risks with investors who may not be familiar with them. For investors who are switching from an account that is focused in US Treasury Bills and Certificates of Deposit, the agent MUST discuss the additional risks that are taken when investing in a mutual fund, versus the securities listed. A fund will have a higher risk of fluctuations and potential loss of principal, as well as less-dependable payout in the form of dividends and capital gains distributions.

One of your clients is seeking tax-exempt income with principal protection and stability for his portfolio. Which of the following would be the MOST appropriate investment choice for this client? [A] Government Bonds [B] Preferred Stock [C] Common Stock [D] Municipal Bonds

[D] Municipal Bonds

A broker's recommendation to purchase a speculative security on the basis that its price will triple in six months is not fraudulent if [A] delivered a prospectus to the customer prior to execution of the purchase. [B] delivered a prospectus to the customer with the confirmation of the purchase. [C] made representations based on statements contained in the prospectus. [D] RR never makes the recommendation

[D] RR never makes the recommendation

An existing client comes into the office to discuss her portfolio. The client's risk tolerance is currently mid-level and she discusses her desire to add some diversification to her portfolio during the meeting. Her primary investment objective is total return with as much tax advantage as possible. Which of the following would be the MOST appropriate recommendation by the registered representative in this case, considering the information given? [A] The rep should advise the client to split the allocation of the portfolio 50/50 between corporate bond issues and municipal bond funds that are specific to the client's state of residence. [B] The rep should advise the client to split the allocation of the portfolio 50/50 between equity mutual funds and corporate bond mutual funds. [C] The rep should advise the client to use an asset mix of 50% corporate bond mutual funds, 25% cash and cash equivalents, 7.5% municipal bonds, 7.5% equity securities, 10% sector ETFs. [D] The rep should advise the client to use an asset mix of 50% municipal bond mutual funds, 45% equities and the remainder in cash and cash equivalents.

[D] The rep should advise the client to use an asset mix of 50% municipal bond mutual funds, 45% equities and the remainder in cash and cash equivalents.

A customer is investing for his child's education. He is seeking reasonable income and growth of capital. His investment objective is best described as seeking which of the following? [A] Capital gains only [B] Speculative profits [C] Maximum current income [D] Total return (growth plus income)

[D] Total return (growth plus income) Since we are looking for an overall increase in value (both income and appreciation), we would consider the total return of the investment.

When a portfolio is established which consists of 90% equities and 10% money market instruments would be most appropriate for which of the following investors? [A] an investor wanting preservation of capital and current income [B] a married couple with three children in or nearing college [C] a couple in their retirement years [D] a single 28 year old with sizable income and assets

[D] a single 28 year old with sizable income and assets A young single person with substantial assets and income would be interested in the growth and appreciation they could receive from a portfolio heavily weighted in equity securities (stocks)

One of your clients is seeking safety, stability, income, and principal protection for his portfolio. Which of the following would be the MOST appropriate investment choice for this client? [A] Government Bonds [B] Preferred Stock [C] Common Stock [D] Municipal Bonds

[A] Government Bonds When an investor's investment objective includes "safety," generally, the first recommendation to the client would be Government securities because the principal and interest are guaranteed by the federal government and the U.S. has never defaulted on any of its debt.

An RR has a client who is 28 years old and has saved up $25,000 with her spouse for a down payment on a home. They haven't found a home yet so they decide to invest their funds with an expectation of a strong return until they find the right place. All of the following statements about the clients' investment goal are true EXCEPT: [A] Because the couple intends to buy soon, their options for investing the money are limited. [B] Because they are seeking a return on their investment, capital appreciation would be the major investment objective. [C] Because they will need the money for the down payment, safety and preservation of principal are the major investment considerations. [D] Because the couple intends to buy soon, a high level of liquidity is necessary for whatever investment they choose.

[B] Because they are seeking a return on their investment, capital appreciation would be the major investment objective. The couple plans to buy soon, so even though they are seeking a higher level of return than that which they would achieve in a savings account, the couple's main investment objective is safety and preservation of capital. It would not be capital appreciation. Also, because of their intention to buy in the near future, the couple limits available investments and requires a high level of liquidity so they can get a hold of the money quickly once they find the desired property.

A customer has $90,000 to invest which he will need in about three years to pay educational expenses for his son. All of the following would be appropriate for the customer EXCEPT: [A] Treasury Bills [B] Equity Securities [C] Money Market Funds [D] Zero Coupon Bonds maturing in three years

[B] Equity Securities All choices except equity securities would be appropriate - when you invest in stock, the market value of the stock could decline to zero and the investor would have lost the money needed for their child's education.

A 23-year-old client is considering a growth fund as an investment for the bulk of her net worth. Which factor is most important when considering suitability? [A] The tax status, including bracket, of the client [B] The client's income [C] The client's marital status [D] The extent of the client's education

[B] The client's income

When a portfolio is established which consists of 50% bonds, 10% equities and 40% money market instruments it would be best suited for which of the following investors? [A] a single 45 year old investor who owns his own small business [B] a couple nearing retirement [C] a young married couple investing in their 3 year old child's college fund [D] a single 25 year old with sizeable income and assets

[B] a couple nearing retirement A couple nearing retirement would be most interested in preservation of capital and income which would cause the portfolio to be heavily weighted in Bonds and light on equity securities.

Which of the following asset allocations is the MOST appropriate recommendation for a single, 25 year old investor with a high tolerance for risk, no need for current income and who is investing for retirement at age 65? [A] 0% common stock, 100% bonds [B] 50% common stock, 50% bonds [C] 100% common stock, 0% bonds [D] 100% in money market funds

[C] 100% common stock, 0% bonds

An investor has funds set aside for investments. The investor's primary objective is capital appreciation. What should you recommend to the investor? [A] Money Market Fund [B] Corporate Bonds [C] Common Stock [D] Municipal Bonds

[C] Common Stock When an investor's investment objective is "Capital Appreciation," which means an expected increase in the market value of the investment, the best recommendation of the four choices presented is common stock because common stock historically has provided superior returns.

A 50-year old client calls her RR and tells him that her investment objectives are stability and a source of tax-exempt interest income on a long-term basis. Which of the following would be the MOST appropriate recommendation? [A] Zero-coupon bonds [B] Treasury bonds [C] Municipal bonds [D] Treasury bills

[C] Municipal bonds Municipal bonds would give the investor stability, AND tax-exempt interest income they were looking for. Zero-coupon bonds are too volatile, and Treasury bonds are safe, but do not offer tax-exempt income. Treasury bills are short-term investments for investors who need their principal back within 12 months or less.

Which of the following would be appropriate for an investor who feels that real estate value will soon appreciate and wants to participate in the appreciation without exposing himself to liquidity risk? [A] Real Estate DPPs [B] The purchase of an apartment complex [C] REITs [D] The purchase of a strip mall

[C] REITs Because this investor wants to participate in the expected increase in the real estate market but does NOT want to be exposed to the liquidity risk (not being able to sell the asset quickly), the best choice offered would be the common stock shares of a Real Estate Investment Trust (REIT). REITs issue shares of common stock which trade in the market and are liquid, but would also participate in the increased value of real estate.