STC Series 7 Final #1

Of the following broad-based indexes, the one with the narrowest measure of the market is the: A. Dow Jones Industrial Average B. The Wilshire Associates Equity Index C. Standard and Poor's 500 Index D. The New York Stock Exchange Composite Index

A. Dow Jones Industrial Average The Dow Jones Industrial Average contains only 30 stocks. The Wilshire Index represents the dollar value of all the stocks and is considered the broadest of all indexes and averages. The S&P 500 Index contains 500 stocks, while the NYSE Composite Index consists of all of the common stocks that are listed on the NYSE.

XYZ convertible debentures are convertible into 20 shares of XYZ Corporation common stock. If the bonds were selling in the market at $960, what would the common stock need to be selling for to be on parity? A. $48 B. $20 C. $19.20 D. $50

A. $48 To find the stock's parity price, divide the current market price of the bond ($960) by the conversion rate (ratio) which is given as 20 shares. This equals $48.

XYZ Corporation earned $4 per share and paid out $2 per share in dividends. XYZ Corporation is selling at $56 in the market. The price/earnings ratio of XYZ Corporation is: A. 14 to 1 B. 9.3 to 1 C. 2 to 1 D. 28 to 1

A. 14 to 1 The price/earnings ratio is computed by dividing the market price of $56 by the earnings per share of $4. This equals a price/earnings ratio of 14 to 1 ($56 divided by $4 equals 14).

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. 7 1/2% callable in 2023 @ 100 B. 5 1/2% callable in 2024 @ 103 C. 6 1/2% callable in 2023 @ 100 D. 7% callable in 2024 @ 103

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

A 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 business development company (BDC) B. A direct participation program (DPP) C. A real estate investment trust (REIT) D. A collateralized mortgage obligation (CMO)

A. A business development company (BDC) 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 statements is TRUE regarding the disclosure of back-end sales charges to customers? A. A confirmation should be sent disclosing that a sales charge may have to be paid upon redemption. B. A statement in the prospectus is sufficient. C. Disclosure is required in addition to that in the prospectus only if the broker-dealer and mutual fund are affiliated through common ownership. D. As long as the back-end charges are clearly disclosed, the fund may be represented as "no load".

A. A confirmation should be sent disclosing that a sales charge may have to be paid upon redemption. In addition to the disclosure in the prospectus, a confirmation sent by a member firm selling a fund with a back-end load (CDSC) must include a statement that a sales charge may be assessed upon redemption.

An investment banking principal has received a letter from a customer complaining about a recent new issue that declined substantially on its first day of trading. The client purchased the shares based on a recommendation by an associated person of the firm. The customer contends that the recommendation was unsuitable. Which of the following statements is TRUE? A. A memo must be prepared describing any action taken in response to the complaint B. The principal must review the complaint and submit a written response to the customer C. The firm must enter promptly into arbitration (or mediation) with the customer to determine whether a reimbursement is warranted D. The firm must keep a copy of the complaint for six years

A. A memo must be prepared describing any action taken in response to the complaint All written complaints must be reviewed by a principal and must be kept in a file, along with a memo describing any action taken in response to the complaint. There is no requirement to respond to the client in writing or to enter into arbitration or mediation. Under FINRA rules, records of complaints must be kept for a minimum of four years

When a firm's customer exercises a call option, the firm will submit an exercise notice to the Options Clearing Corporation. The Options Clearing Corporation, in turn, will select a firm to receive the exercise notice based on: A. A random selection basis B. The largest short position C. A first-in, first-out (FIFO) basis D. Any method that is fair and equitable

A. A random selection basis The Options Clearing Corporation selects a member firm on a ***random selection basis only***. Member firms can select customers with open short positions on a first-in, first-out basis, a random selection basis, or any method that is fair and equitable.

Which of the following would be considered the most volatile mutual fund? A. An emerging markets fund B. A U.S. government securities fund C. A municipal bond fund D. A balanced fund

A. An emerging markets fund Emerging markets funds invest in securities issued by countries with unsure economic, political, and social climates. This leads to significant volatility in share prices.

A mutual fund has the following breakpoints: Dollar Amounts Breakpoints $0 to $24,999 5.50% $25,000 to $49,999 4.50% $50,000 to $74,999 3.50% $75,000 to $99,999 2.50% $100,000 and above 1.50% A customer has signed a letter of intent for $100,000 and makes the following three investments: - $35,000 in April - $52,000 in June - $24,000 in September What's the sales charge percentage on each purchase? A. April 1.50%, June 1.50%, September 1.50% B. April 3.50%, June 2.50%, September 1.50% C. April 4.50%, June 3.50%, September 5.50% D. April 4.50%, June 2.50%, September 1.50% $35,000 in April$52,000 in June$24,000 in September What's the sales charge percentage on each purchase?

A. April 1.50%, June 1.50%, September 1.50% When signing a letter of intent (LOI), all purchases over a 13-month period are accumulated and the sales charge on the first and subsequent purchases are based on the letter of intent amount. In this example, the purchases total $111,000 and, as a result, the sales charge will be 1.50% on each purchase.

Which of the following Moody's ratings is the most speculative in the investment-grade category? A. Baa B. Ba C. A D. Aa

A. Baa The top-4 ratings in both Moody's and S&P are investment grade. The top-4 ratings are: Moody's. S&PA Aaa AAA Aa AA A. A Baa BBB If the question had asked for the most speculative, then Ba would be the answer.

An investor wants to buy a foreign stock that's trading at $540 per share and paying a $12.50 annual dividend. The investor's registered representative instead suggests purchasing an ADR which represents 10% of the value of the foreign stock. If the customer commits to buying 500 shares, what's his cost basis and his first semiannual dividend from the ADR? A. Cost basis of $27,000 and $312.50 in semiannual dividends B. Cost basis of $27,000 and $625 in semiannual dividends C. Cost basis of $270,000 and $3,125 in semiannual dividends D. Cost basis of $270,000 and $6,250 in semiannual dividends

A. Cost basis of $27,000 and $312.50 in semiannual dividends The ADR represents 10% of the foreign stock's value. As a result, the ADR per share value is $54 ($540 x 10%) and the annual dividend is $1.25 ($12.50 x 10%). If the customer purchases 500 shares of the ADR, the total investment will equal $27,000 (500 x $54) and the total annual dividend will be $625 (500 x $1.25). However, since the question asks about the semiannual dividend, the customer will receive $312.50 of dividends ($625 ÷ 2). Many foreign stocks and ADRs pay semiannual dividends rather than quarterly dividends.

When determining whether a CMO is suitable, an RR must offer to a client all of the following information, EXCEPT a: A. Discussion on how changing currency rates may affect the value of the securities B. Glossary of terms C. Discussion on how changing interest rates may affect the prepayment rates D. Discussion on the relationship between mortgage loans and mortgage securities

A. Discussion on how changing currency rates may affect the value of the securities 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.

Which of the following securities is NOT guaranteed by the U.S. government? A. Federal National Mortgage Association (Fannie Mae) bonds B. Treasury notes C. Government National Mortgage Association (Ginnie Mae) certificates D. Treasury bills

A. Federal National Mortgage Association (Fannie Mae) bonds Of the choices given, the only obligations that are not guaranteed by the U.S. government are FNMA (Fannie Mae) bonds. FNMA was created as a government-chartered private corporation. It borrows funds and uses the proceeds to purchase conventional residential mortgages. Although FNMA can borrow funds from the U.S. government, the securities it issues are not directly backed by the U.S. government.

Which TWO of the following choices are characteristics of reverse convertible securities? I. The coupon rate is usually above prevailing market rates II. The coupon rate is usually below prevailing market rates III. The investor may have an obligation to purchase shares of an equity security IV. The investor may have the right to sell shares of an equity security A. I and III B. I and IV C. II and IV D. II and III

A. I and III 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.

Which TWO of the following option recommendations are suitable for a sophisticated investor who expects the overall market to fall but is bullish on mining stocks? I. Buying narrow-based index calls II. Buying narrow-based index puts III. Buying broad-based index calls IV. Buying broad-based index puts A. I and IV B. I and III C. II and IV D. II and III

A. I and IV Since the investor is bullish on mining stocks, buying narrow-based index calls on mining stocks is appropriate. Since the investor expects the overall market to fall, buying broad-based index puts is appropriate.

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

A. II and IV

The correct order for the transfer of an account from one firm to another is: I. The carrying firm validates the transfer instructions II. The customer is informed of any nontransferable securities III. The carrying firm sends the customer's securities to the receiving firm IV. The customer provides a written transfer request to the receiving firm A. IV, I, II, III B. IV, I, III, II C. I, IV, III, II D. I, IV, II, III

A. IV, I, II, III If a customer wishes to transfer an account from one member firm (the carrying firm) to another member firm (the receiving firm), the customer must give written instructions to the receiving firm. The receiving firm must submit the transfer request to the carrying firm immediately upon receipt from the customer, and the carrying firm must either validate the instructions or take exception to the transfer within one business day. For assets that are not transferable, the carrying firm must request from the customer instructions as to what course of action to take, such as liquidation or retention by the carrying firm. Within three business days following the validation of a transfer instruction, the carrying member must complete the transfer of the account to the receiving member. Securities are typically transferred by the National Securities Clearing Corporation (NSCC), using the Automated Customer Account Transfer Service (ACATS).

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

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

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

A. It will be cancelled An at-the-opening order is an order placed for execution at the opening price of the day. If it is not executed, it will be cancelled. Do not confuse this type of order with an opening transaction, which is a trade to establish or add to an option position.

A syndicate is formed on an undivided (Eastern) account basis to sell $10 million of a new municipal bond issue. A dealer has committed to sell $1 million (10% of the issue). The dealer sells the $1,000,000 committed for, but $2 million of the issue remains unsold. The dealer is: A. Liable to sell 10% of the unsold bonds B. Liable to sell $1,000,000 of the unsold bonds C. Not liable to sell the unsold bonds D. Liable to sell all of the unsold bonds

A. Liable to sell 10% of the unsold bonds In an Eastern (undivided) account, the dealer is responsible for a proportionate amount of the bonds in the account. If the dealer sells all the bonds committed for, and there are bonds left unsold in the account, the dealer is liable for bonds based on his original commitment. In this example, the dealer is also responsible to sell 10% of the unsold bonds.

All of the following factors are of importance with regard to debt structure when analyzing a municipal bond, EXCEPT: A. Matured debt B. Total direct debt C. Overlapping debt D. Total bonded debt

A. Matured debt 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 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: A. May not accept the order because the wife does not have trading authorization to enter orders for the husband's personal account B. May not enter the order because the earnings report has not been released C. May enter the order because the husband had previously mentioned he would like to establish a position in XYZ D. May enter the order in the husband's account if the wife also has a joint account with her husband

A. May not accept the order because the wife does not have trading authorization to enter orders for the husband's personal account 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 customer would like to open an account designated by number. The registered representative should: A. Open the account if the customer signs a written statement acknowledging the account is the customer's B. Open the account C. Not open the account because it is a violation of industry rules D. Not open the account because it is a violation of SEC rules

A. Open the account if the customer signs a written statement acknowledging the account is the customer's 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 bond swap is done for all of the following reasons, EXCEPT to: A. Take advantage of a large amount of accrued interest B. Increase the overall yield of the bond portfolio C. Establish a tax loss to offset income D. Increase the current income of a bond portfolio

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

Which CMO tranche provides the greatest safety of principal? A. The A tranche B. The Z tranche C. The companion tranche D. The floating rate tranche

A. The A tranche Tranche A (the fast-pay tranche) is the first to receive principal, while the Z tranche only receives payments after all of the other tranches are paid. The companion or support tranche is considered a very volatile tranche. A floating rate tranche simply adjusts its interest rate based on an index (e.g., LIBOR).

Which of the following factors is NOT used in determining the value of an annuity unit? A. The assumed interest rate B. Capital gain distributions from securities held in the separate account that are reinvested C. The value of the separate account D. Income distributions from securities held in the separate account that are reinvested

A. The assumed interest rate It's FIXED dummy 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.

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

A. The financial condition of the customer All of the choices given must be taken into consideration except the financial condition of the customer.

Which of the following statements is TRUE regarding separate accounts and general accounts? A. The subaccounts of a variable annuity may include both types of accounts. B. Both types of accounts are registered under the Investment Company Act of 1940. C. Both types of accounts pay a guaranteed minimum return. D. General accounts hold bonds, while separate accounts hold equities.

A. The subaccounts of a variable annuity may include both types of accounts. A variable annuity may allow an investor to allocate funds between several subaccounts. One of these accounts may be the general account of the insurance company, which offers a minimum guaranteed rate of return. The other subaccounts may consist of various accounts, each with a different portfolio and investment objective. Some subaccounts hold equities, some hold bonds, and some actually may hold both. The return on a subaccount is not guaranteed; therefore, the purchaser assumes the investment risk. Only separate accounts are registered under the Investment Company Act of 1940.

Which of the following descriptions characterizes inverse exchange-traded funds (ETFs)? A. They are designed to deliver the opposite of the performance of 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 same performance as an index or other benchmark D. They are designed to deliver a multiple of the opposite performance of an index or other benchmark

A. They are designed to deliver the opposite of the performance of an index or other benchmark 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. A regular ETF is designed to deliver the same performance as an index or other benchmark. A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. A leveraged inverse ETF is designed to deliver a multiple of the opposite performance of an index or other benchmark.

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

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

Harriet purchased 1,000 shares of the Overseas Growth Fund several years ago for $9 per share. The shares are now worth $22.50 each. Harriet gives the shares to her nephew Bob as a college graduation present. What is Bob's cost basis for the shares? A. The NAV on the day Bob sells the shares B. $9 C. $22.50 D. 0

B. $9 In general, the cost basis of gifted shares is equal to the DONOR's basis AT the TIME of the GIFT. In this case, Harriet's basis is $9 per share, so this becomes Bob's basis as well. Note that the rule related to inherited shares is different. The basis of inherited shares is generally the value of the shares at the time of the decedent's death.

Which of the following indexes is the broadest equity market indicator? A. The NYSE Index B. The Wilshire Index C. The Major Market Index D. The Nasdaq Composite Index

B. The Wilshire Index The Wilshire 5000 Equity Index consists of approximately 3,500 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 still is considered the broadest of all indexes and averages.

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.) A. $858.20 B. $0.8582 C. $0.8418 D. $0.8500

B. $0.8582 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.

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

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

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

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

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? A. $25.00 B. $48.00 C. $30.00 D. $40.60

B. $48.00 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.

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: A. $35,000 B. $70,000 C. $60,000 D. $50,000

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

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

B. 5:30 p.m. Eastern Time on the expiration date of the option According to SRO rules a firm is permitted to accept from a customer, an exercise notice for a listed equity option no later than 5:30 p.m. Eastern Time on the expiration date of the option (the third Friday of the expiration month). Brokerage firms, however, may set an earlier deadline for notification of an option holder's intention to exercise.

If a New York resident is subject to the AMT and is considering the following bonds that have similar yields, which bond is MOST suitable? A. An Albany, NY bond that's not subject to the AMT B. A Buffalo, NY bond that's subject to the AMT C. A corporate bond D. A triple exempt bond that's subject to the AMT

B. A Buffalo, NY bond that's subject to the AMT Municipal bonds that are subject to the alternative minimum tax (AMT) will no longer offer federally tax-free interest to individuals who are subject to the AMT. As a result, the Albany, NY bond that's not subject to the AMT will provide federally tax-exempt interest. Since the yields are similar on each of these bonds, the Albany bond will provide a better yield than the corporate bond due to the corporate bond interest being subject to both federal and state tax.

A bond has a 5% coupon and is trading at a 5.55% basis. The bond is trading at which of the following price levels? A. Par B. A discount C. A premium D. 101 3/4

B. A discount Basis is a different method of expressing yield-to-maturity. In this case, the yield-to-maturity is greater than the coupon rate. The only time a bond's yield-to-maturity is greater than its coupon is when the bond has been purchased at a price that's less than par (lower price means higher yield). Therefore, the bond must be trading at a discount.

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 Treasury note B. A hybrid REIT C. An equity REIT D. A municipal revenue bond

B. A hybrid REIT 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.

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. The first price obtained B. A price that is fair and reasonable C. The average price obtained from all dealers contacted D. A price that does not exceed 5% of the last reported transaction

B. A price that is fair and reasonable MSRB rules require that transactions be executed at a price that is fair and reasonable.

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

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

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 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.

Which of the following choices is NOT a type of overlapping debt? A. The issuance of debt for an adjoining school district B. Debt issued between two states C. Debt issued between two counties D. The issuance of debt for an adjoining road district

B. Debt issued between two states Debt issued between two states is not considered overlapping debt. Overlapping debt is general obligation debt of other governmental units for which residents of a particular municipality are responsible. It is the debt shared by residents of a municipality for services or facilities shared by several municipalities. Examples of overlapping debt include debt for an adjoining road district or school district, or debt issued between two counties.

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

B. Education When opening a new account for a customer, education is not required information.

In an undivided (Eastern) municipal syndicate account, the remaining liability of an account member is computed: A. By dividing the number of bonds in a single maturity year by the total number of account members B. From the number of bonds that are unsold in the account C. From the number of the bonds he has sold D. By the syndicate manager who randomly selects a member to sell the remainder of the bonds

B. From the number of bonds that are unsold in the account 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.

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 A. I and III B. II and III C. III and IV D. I and IV

B. II and III 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%).

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

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

A broker who transacts an order for a customer must send a confirmation disclosing all of the following information, EXCEPT: A. If it acted as an agent for the customer and as an agent for another person B. If it acted as principal and that it prepares research on the security C. If it acted as a principal for its own account D. The yield computation employed

B. If it acted as principal and that it prepares research on the security If the broker-dealer acted as an agent for both the customer and for a third party, it must disclose this fact. A broker is not required to disclose on a confirmation whether it prepares research on the security. The yield computation employed (YTM or YTC) must be disclosed to the client.

The Dow Jones Industrial Average is considered an index of: A. NYSE stocks only B. Large-capitalized stocks C. Growth stocks D. Value stocks

B. Large-capitalized stocks The Dow Jones Industrial Average (DJIA) is considered one of the most widely quoted measurements of the U.S. equity market. The 30 stocks that comprise the Index are among the largest and most widely held companies in the U.S. The DJIA as well as the S&P 500 Index include companies that are referred to as large-cap. Most, but not all of the stocks, are listed on the NYSE.

Prior to the maturity of a variable-rate demand obligation, an investor has the right to receive the: A. Par value B. Par value plus accrued interest C. Current market value D. Par value less accrued interest

B. Par value plus accrued interest 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.

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

B. Priority provisions upon liquidation All sales for limited partnership interests are conditioned upon acceptance by the general partner. Typically, a limited partner is considered accepted into the program once the general partner signs the subscription agreement. The subscription agreement will normally state the suitability standards for the program, specify who must sign the agreement, specify to whom the check must be made payable, and make inquiries of the purchaser to make sure that he understands the ramifications of the investment. Priority provisions for liquidating a limited partnership are found in the Certificate of Limited Partnership.

Which of the following agencies would NOT be used to back a CMO? A. FNMA B. SLMA C. FHLMC D. GNMA

B. SLMA The Student Loan Marketing Association (SLMA), also known as Sallie Mae, provides liquidity to student loan makers and financing for state student loan agencies. Securities issued by SLMA are not backed by the U.S. government. Interest earned on Sallie Mae securities is subject to federal tax, but state and local taxes vary by state. Since SLMA does not deal in mortgages, it would not be used to fund a collateralized mortgage obligation (CMO). CMOs contain mortgage-backed securities issued by GNMA, FNMA, and FHLMC.

What type of bond would MOST likely be secured by an excise tax, cigarette tax, or gasoline tax? A. GO bond B. Special tax bond C. Special assessment bond D. Double-barreled bond

B. Special tax bond A special tax bond is a type of revenue bond and is usually financed by a tax on certain items such as cigarettes, liquor, or gasoline (excise taxes).

An investor must pay accrued interest for a secondary market purchase of: A. Series EE savings bonds B. Tax anticipation notes C. Zero-coupon bonds D. Treasury bills

B. Tax anticipation notes 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

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 nonconvertible bonds C. The broker-dealer has a 1% or greater beneficial ownership in ABC common stock D. The broker-dealer makes a market in ABC common stock

B. The broker-dealer has a 1% or greater beneficial ownership in ABC nonconvertible bonds 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.

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: A. FINRA B. The contrabroker C. The customer represented in the transaction D. The SEC

B. The contrabroker 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.

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

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

An increase in which of the following will cause the price of an existing bond to decline? A. The issuer's financial strength B. The general level of interest rates C. The bond's liquidity D. The bond's rating

B. The general level of interest rates Interest rates and existing bond prices are inversely related. When interest rates rise, bond prices will fall. Conversely, when interest rates fall, bond prices will rise. All other choices will usually have a positive effect on a bond's price.

To compute equity in a margin account with both short and long positions, the formula is: A. The long market value plus the debit balance minus the short market value minus the credit balance B. The long market value plus the credit balance minus the short market value minus the debit balance C. The long market value plus the credit balance plus the debit balance minus the short market value D. The long market value minus the credit balance minus the short market value minus the debit balance

B. The long market value plus the credit balance minus the short market value minus the debit balance The long market value plus the credit balance minus the short market value minus the debit balance equals the equity in both a long and short margin account.

Under what circumstances will the payout from a variable annuity increase? A. The rate of inflation exceeds the AIR B. The performance of the separate account exceeds the AIR C. The performance of the separate account exceeds the rate of inflation D. The performance of the separate account for the current period exceeds the performance of the separate account for the previous period

B. The performance of the separate account exceeds the AIR Whether the payment from a variable annuity changes depends on the relationship between the performance of the separate account and the assumed interest rate (AIR) in the contract. If the account performance exceeds the AIR, the payment will be greater than the last payment. If the account performance equals the AIR, the payment will be unchanged from the last payment. If the account performance is less than the AIR, the payment will decline from the last payment.

The determination of when the NAV of a mutual fund is calculated, is stipulated by: A. The SEC B. The prospectus C. The board of directors D. FINRA

B. The prospectus The net asset value of a mutual fund is calculated whenever stipulated in the fund's prospectus. Most funds calculate daily, at the end of the day's trading.

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

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

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

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

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

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

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

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

An individual received $500 in dividends from the common shares that she owns of an oil company. How much of this dividend income is subject to taxation? A. 0 B. $400 C. $500 D. $350

C. $500 Under current tax law, all cash dividends that individuals receive are fully taxable.

On October 25, Mr. Smith purchased 5 listed XYZ Corporation July 50 calls and paid a $3 premium on each call. The current market price of XYZ Corporation is $48 per share. What is the breakeven point for Mr. Smith per option? A. $58 B. $48 C. $53 D. $45

C. $53 The strike price plus the premium equals the breakeven point for the buyer of a call. The breakeven point is $53 ($50 strike price + the $3 premium = $53)

Windsor Corporation has 7,000,000 shares of common stock ($.01 par value) authorized, of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price is $20. The market capitalization of Windsor Corporation's common stock is: A. $5,000,000 B. $4,500,000 C. $90,000,000 D. $7,000,000

C. $90,000,000 Market capitalization is determined by multiplying the number of outstanding shares by the current market price per share. Outstanding shares include those held by institutions, retail investors, and restricted shares held by insiders, but does not include treasury stock (shares repurchased by the company). Therefore, there are 4,500,000 shares outstanding at a $20.00 market price for a total of $90,000,000.

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

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

A company, which has investors with registration rights, has recently conducted an initial public offering. Typically, how long must these investors wait to sell their shares after the IPO? A. One year B. Three years C. 180 days D. Two years

C. 180 days A lock-up agreement dictates the amount of time that pre-IPO investors, such as private placement buyers (private equity investors) and other insiders, typically must wait to sell their shares once the company has gone public. Although a lock-up agreement will generally expire six months (180 days) following the closing of the company's IPO, there's no statutory time limit. The lock-up is designed to prohibit management and venture capitalists that initially funded the company from immediately liquidating their shares once the issue goes public. The shares will then be sold under a Rule 144 exemption. Registration rights allow, but don't require, these holders to sell their shares along with the company when it conducts the IPO.

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

C. 6.25% The current yield is found by dividing the annual interest payment by the current market price. The bonds pay interest of $50 per year. The bonds are currently trading at a 20% discount to par; therefore, the bonds are priced at 80% of par, or $800 ($1,000 x .8). The current yield is 6.25% ($50 / $800). The fact that the bond will mature in 12 years is not necessary to find the current yield, although it is needed to find the yield to maturity.

A company has $50,000,000 par value convertible bonds outstanding. The coupon rate is 8%. The bonds are currently selling at 96. What is the current yield? A. 8.0% B. 7.5% C. 8.3% D. 7.0%

C. 8.3% To find the current yield of the bonds, divide the yearly interest paid on the bonds by the current market value of the bonds. Since each bond has a par value of $1,000 the yearly interest is $80 ( $1,000 x 8%). The market value of a bond is $960. Therefore, the current yield equals 8.3% ($80 divided by $960 equals 8.3%).

Which of the following circumstances is NOT a reason for rejecting a municipal bond delivery? A. A mutilated certificate B. The lack of a legal opinion C. A sudden change in market value D. A missing coupon

C. A sudden change in market value A municipal bond can be rejected if it is missing a legal opinion, has missing or mutilated coupons, or the certificate is mutilated. It may not be rejected because of a sudden change in market price.

Government-sponsored enterprise securities are comparable to direct government obligations with regard to all of the following statements, EXCEPT: A. Long-term securities are quoted as a percentage of par B. Short-term securities are quoted on a discount yield C. All are government guaranteed D. They trade in the over-the-counter market

C. All are government guaranteed Government-sponsored enterprise securities are not guaranteed by the government. The other statements are true.

Which of the following would be considered the most volatile mutual fund? A. A balanced fund B. A municipal bond fund C. An emerging markets fund D. A U.S. government securities fund

C. An emerging markets fund Emerging markets funds invest in securities issued by countries with unsure economic, political, and social climates. This leads to significant volatility in share prices.

Portfolio margin permits an investor to: A. Trade without depositing funds until the securities decline in value B. Trade directly with market makers C. Assume greater leverage D. Avoid margin deficiencies

C. Assume greater leverage Portfolio margin produces significantly lower margin requirements than strategy-based margin, affording an investor greater leverage.

An MIG rating applies to a(n): A. Prerefunded utility bond B. Convertible bond C. BAN D. ADR

C. BAN MIG (Moody's Investment Grade) ratings apply to municipal notes. A BAN (bond anticipation note) is the only municipal note listed

An investor purchases a fund that has a contingent deferred sales charge. The customer has traditionally purchased load funds in which the sales charge is deducted up front. In order to clarify the sales charge procedure, the customer should be told: A. To contact the fund distributor for more details B. "You pay when you exit" C. By means of a written disclosure: "On selling your shares you may pay a sales charge. For the charge and other fees, see the prospectus" D. The fund meets the definition of a no-load fund

C. By means of a written disclosure: "On selling your shares you may pay a sales charge. For the charge and other fees, see the prospectus" Conduct Rules require the written disclosure on confirmations for purchases of investment company shares that assess a contingent deferred sales charge.

Accrued interest on new municipal bonds is calculated from the: A. Purchase date B. Last interest payment C. Dated date D. Settlement date

C. Dated date Interest on new municipal bonds is calculated from the dated date, which is the date from which interest starts to accrue on a municipal bond.

Compared to selling short, buying a put option: A. Requires a larger capital commitment B. Has a larger loss potential C. Does not require the client to arrange to borrow the stock D. Requires a margin account

C. Does not require the client to arrange to borrow the stock 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.

Eurodollars are primarily used in: A. International payments B. Funding investments in the United States C. Financing investments outside of the United States D. Arbitrage

C. Financing investments outside of the United States

On Tuesday May 1, XYX Corporation's Board of Directors announced a dividend payable on Friday, May 25 to stockholders of record on Monday, May 14. The ex-dividend date is: A. Tuesday, May 1 B. Monday, May 14 C. Friday, May 11 D. Thursday, May 24

C. Friday, May 11 Stocks sell ex-dividend on the first business day preceding the record date. The record date is Monday, May 14. Therefore, the ex-dividend date would be one business day before, or Friday, May 11.

The prospectus for a variable annuity contract: I. Must be filed with the SEC II. May be delivered electronically III. Must provide full and fair disclosure IV. Must detail all sales charges and ongoing expenses of the contract A. I, II, and III only B. I and II only C. I, II, III, and IV D. I, III, and IV only

C. I, II, III, and IV Variable annuity products are subject to the provisions of the Securities Act of 1933 which requires delivery of a prospectus. The prospectus details all material facts of the contract and can be delivered electronically. However, if a person requests a printed copy one must be delivered.

A registered representative is sending out electronic communication that has been prepared by her firm to 75 of her existing retail customers. The communication explains to the customers that their account statements are now available online. Which TWO of the following statements are TRUE? I. This is considered correspondence II. This is considered retail communication III. This activity requires principal approval prior to use IV. This activity should be reviewed A. I and IV B. II and III C. II and IV D. I and III

C. II and IV This electronic communication is considered retail communication since the registered representative is distributing it to more than 25 retail customers. Retail communication is considered 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 financial recommendation or does not promote a product or service of the firm (which the electronic communication in this question does not), prior principal approval is not required. In other words, FINRA does not consider announcing the availability of online account statements as promoting a product or service of the firm. However, this activity should be reviewed and supervised by the broker-dealer.

A customer who purchases shares of an exchange-traded fund (ETF) may be extended credit by a broker-dealer: A. Under no circumstances B. If the position has been held for at least 30 days C. Immediately D. If the position has been held for at least 10 days

C. Immediately n this question, the client is purchasing shares of an ETF. ETF shares trade on an exchange and are not considered new issues; therefore, credit may be extended immediately. Some investment company securities, such as mutual fund shares, are marginable under Reg. T. However, since mutual fund shares are considered new issues, the Securities Exchange Act of 1934 prevents a broker-dealer from extending credit on them for at least 30 days. Once the mutual fund shares have been held for 30 days, they may be used as collateral for a loan in a margin account.

Which of the following statements is NOT a feature of GNMA pass-through certificates? A. They are backed by the U.S. government B. Interest and principal payments are made on a monthly basis C. Interest is subject to federal tax but is exempt from state tax D. Pools consist of fixed-rate residential mortgages

C. Interest is subject to federal tax but is exempt from state tax The Government National Mortgage Association (Ginnie Mae) is an agency of the United States government. It guarantees a pool of mortgages purchased by investors through Ginnie Mae pass-through certificates. These instruments pay interest and principal monthly at a stated rate on the remaining principal. The repayment of principal and interest is guaranteed by the United States government. Ginnie Mae pass-through certificates are purchased in $25,000 minimums. Interest received from Ginnie Mae pass-through certificates is subject to federal, state, and local taxes.

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

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

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. 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 D. 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 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 an option contract is exercised, the writer: A. May retransmit the assignment notice B. Will establish a capital loss C. Must fulfill the obligation to buy or sell the underlying instrument D. May close out the position upon receipt of the assignment notice

C. Must fulfill the obligation to buy or sell the underlying instrument The writer must fulfill the obligation to deliver the underlying instrument for the exercise of a call or cash for the exercise of a put.

A broker-dealer's privacy notice must include all the following information, EXCEPT the: A. Fact that clients may opt out of having their information shared with non-affiliates B. Type of personal information that the firm collects C. Names of any other financial institutions with which the firm is affiliated D. Types of third parties to which the firm may disclose information

C. Names of any other financial institutions with which the firm is affiliated A privacy notice is not required to include the names of any other financial institutions with which the firm is affiliated.

Ms. Jones 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: I. 10 rights plus $10.50 are required to subscribe to one new share of stock II. Fractional shares become whole shares III. The record date is Friday, October 17 IV. JPMorgan Chase and Bank of America are the transfer agents V. Goldman Sachs and Morgan Stanley are the standby underwriters If Ms. Jones currently owns 87 shares of the preferred stock of the XYZ Corporation, how many additional shares can she subscribe to and at what cost? A. 9 shares plus $94.50 B. 9 shares plus $91.35 C. Preferred stockholders are not permitted to participate in a rights offering D. 8.7 shares plus $91.35

C. Preferred stockholders are not permitted to participate in a rights offering Preferred stockholders are not permitted to participate in a rights offering. Pre-emptive rights are only made available to common stockholders. By participating in rights offerings, common stockholders are able to maintain their percentage of ownership.

A customer sells 500 shares of stock to a broker-dealer, a registered market maker in this stock. The broker-dealer acted in a(n): A. Principal capacity and charged the customer a commission B. Agency capacity and charged the customer a markup C. Principal capacity and charged the customer a markdown D. Agency capacity and charged the customer a commission

C. Principal capacity and charged the customer a markdown A broker-dealer that is always willing to buy and/or sell shares of stock is considered a market maker. A market maker will normally act in a principal capacity and charge the customer a markdown when buying stock from a customer and a markup when selling stock to a customer. When acting in an agency capacity, the broker-dealer will normally charge the customer a commission.

In regard to recruitment advertising by member firms, which of the following statements is TRUE? A. Recruitment advertising is subject to FINRA filing rules B. Recruitment advertising may be published only once per month C. Recruitment advertising may not contain exaggerated claims about opportunities in the securities business D. Recruitment advertising is not permitted

C. Recruitment advertising may not contain exaggerated claims about opportunities in the securities business Advertising by a member firm falls under the definition of retail communication. A member firm's recruitment advertisements may not contain exaggerated claims about opportunities in the securities business. The advertisement is not required to be filed with FINRA since it does not promote a product or service by the broker-dealer.

An investor purchased stock at $50 per share and the stock is now trading between $75 and $77. The investor doesn't want to eliminate the position unless the stock drops significantly. Which of the following orders is the MOST suitable for her to place? A. Sell stop at $75 B. Sell limit at $70 C. Sell stop at $70 D. Buy limit at $70

C. Sell stop at $70 Although the customer has a significant unrealized gain, there's still the possibility that it could trend higher. If the investor wants to protect a portion of the gain, he should enter a sell stop order, which will become a market order if the stop price is hit or traded through. Entering a sell stop at $70 will serve this purpose. If he enters the sell stop at $75, it may very easily be triggered by a small decrease in the stock's price, thereby eliminating his position. For that reason, the sell stop at $70 is a better choice. A sell limit order is one that's entered above the market price (i.e., not at $70). The customer is looking for an order that will result in selling his stock in the event that it declines significantly; therefore, a buy order is of no benefit.

The term that defines an arrangement in which an investment manager receives research or brokerage services in exchange for placing orders through that broker-dealer is called: A. Hard dollars B. Trading ahead of research C. Soft-dollars D. Front-running

C. Soft-dollars The term that defines an arrangement in which an investment manager receives research and/or brokerage services in exchange for placing orders through that broker-dealer is called soft dollars. It is a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its customer. Hard dollars would be the practice of paying for the services separately. For example, paying for research and commissions.

As it relates to convertible bonds, which of the following provides an arbitrage opportunity? A. Stock trading at a discount to parity. B. Bond trading at a premium to parity. C. Stock trading at a premium to parity. D. Stock trading at parity.

C. Stock trading at a premium to parity. Parity exists when a convertible security is trading at a price that's equal to the total value of the stock into which it's convertible. If the stock is trading at a premium to the parity price, the bond can be converted into the stock and then sold at the higher price. This results in an arbitrage opportunity. Conversely, if the stock is trading at or below the parity price, nothing can be gained through conversion. Finally, if the convertible bond is trading at a premium to parity, there's no reason to convert it into the stock.

Which of the following indicators is bullish? A. A breakout below a support level B. A decrease in the amount of short interest C. The bottom of a saucer pattern D. The top of an inverse saucer pattern

C. The bottom of a saucer pattern A saucer is a chart pattern used by technical analysts that indicates that a stock has formed a bottom in its trading cycle and is ready to rise. The bottom of the saucer pattern is a bullish indicator for the stock. The reverse of the saucer pattern is the inverse saucer, where the stock forms a top in its pattern and is expected to fall. Following the logic used in the saucer, this is a bearish indicator. A breakout below the support level is a bearish signal. The term short interest refers to the amount of a company's shares of common stock that have been sold short and have not yet been covered (closed out). An increase (not decrease) in short interest has historically been considered a bullish indicator by a technical analyst.

Which of the following is a benefit of purchasing variable life insurance? A. The premiums paid to purchase a variable life insurance policy are tax deductible. B. The minimum death benefit is based on the value of the subaccount products. C. The death benefit can exceed the guaranteed minimum based on the value of the subaccount products. D. The entire premium paid is invested in subaccount products.

C. The death benefit can exceed the guaranteed minimum based on the value of the subaccount products Variable life insurance policies provide a guaranteed minimum death benefit. However, the death benefit may be increased based on the performance of the subaccount products into which the owner directs the excess premiums. When an individual purchases a variable life insurance policy, a portion of the premium is used to pay for the minimum death benefit, with much of the balance directed to purchasing subaccount products. The premiums payments are not tax-deductible.

When determining whether a recommended transaction is suitable, which of the following factors is LEAST important? A. The tax status of the customer B. The customer's age C. The level of education the customer achieved D. The customer's liquidity needs

C. The level of education the customer achieved Broker-dealers have a suitability obligation to all customers. For noninstitutional or retail customers, the broker-dealer (or registered person at the firm) must have a reasonable basis for recommending a transaction based on information obtained from the customer concerning her investment profile. This would include the customer's age, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance. The educational level of the customer or what type of degree she has would be the least important factor listed.

Which of the following is NOT TRUE of private label CMOs? A. They may be issued by investment banking firms B. They are not considered obligations of the U.S. government C. They are subject to less credit risk than agency CMOs D. They typically do not carry a AAA rating

C. They are subject to less credit risk than agency CMOs Private label mortgage-backed securities are issued by financial institutions such as commercial banks, investment banks, and home builders and they contain some agency securities. However, a private label MBS typically contains 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 higher credit risk and is generally not given a AAA rating.

A customer sells 1,000 shares of stock and asks for the actual time of the execution. For a branch office manager, what is the appropriate action? A. To state that it is impossible to know the time of the trade B. To indicate that the customer should contact the equity trading desk C. To state that the firm is able to provide this information on written request D. To send the customer a copy of the order ticket

C. To state that the firm is able to provide this information on written request According to the SEC's confirmation rules, a broker-dealer must automatically disclose the time of execution or indicate that the time of execution is able to be furnished on written request by a customer.

While saving for her retirement, a variable annuity owner investing $1,000 per month will buy a: A. Fixed number of annuity units B. Fixed number of accumulation units C. Varying number of accumulation units D. Varying number of annuity units

C. Varying number of accumulation units When investors purchase a variable annuity contract, they are purchasing accumulation units. Once a contract has been annuitized, distributions are made by liquidating annuity units. Since the value of the ***subaccounts will fluctuate***, a client investing $1,000 per month will purchase a different number of accumulation units with each purchase.

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 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.

An individual purchased stock for $10,000 and has written calls against the stock over a two-year period. She received premiums totaling $1,500 in the first year and $2,000 in the second year, with all of the options expiring. What's her total cost basis on the stock after the second year? A. $8,500 B. $3,500 C. $6,500 D. $10,000

D. $10,000**** When covered calls expire*** (as in this question), the premium will be realized as a short-term capital gain and the cost basis for the stock will ***generally remain the same***. If the options were closed out prior to expiration, the result is either a capital gain or loss based on the difference in premiums. If an option was exercised, the premium would be added to the option's strike price to determine the sales proceeds and the gain/loss would be either short-term or long-term based on how long the stock had been held prior to its sale. Keep in mind, to find the breakeven point on a covered call, the premium received is subtracted from the cost to purchase the stock.

A municipal bond that was issued at par is purchased by an individual in the secondary market at a price of 90. What is the tax consequence if the bond is held to maturity? A. $100 capital gain B. $100 tax-free interest C. $100 capital loss D. $100 ordinary income

D. $100 ordinary income An investor purchasing a secondary market discount municipal bond will have ****ordinary income if the bond is held to maturity****. Since the bond was purchased at 90 ($900) and held to maturity when the investor receives par ($1,000), the investor will have a $100 gain, which is reported as ordinary income.

A customer's margin account is as follows. Long Market Value. $45,000 Debit Balance. $20,000 SMA $5,000 Credit Balance $15,000 Short Market Value $9,000 A. $6,000 B. $36,000 C. $25,000 D. $31,000

D. $31,000 The equity in the long margin account is $25,000 ($45,000 LMV - $20,000 DR). The equity in the short margin account is $6,000 ($15,000 CR - $9,000 SMV). The total equity is $31,000. SMA is not considered part of the equity.

A margin account with 50% equity has a long market value of $15,000. If $80 of interest is charged on the debit balance and $110 is credited in dividends, what's the revised debit balance? A. $7,390 B. $7,500 C. $7,580 D. $7,470

D. $7,470 This account has equity of $7,500 ($15,000 x 50%) and, as a result, has a $7,500 debit balance ($15,000 LMV - $7,500 equity). After the interest charge of $80, the debit balance is increased to $7,580. However, when the $110 of dividends is credited, the debit balance is reduced by this full amount and is now $7,470.

Listed equity options cease trading at: A. 5:30 p.m. Eastern Time on the expiration date B. 2:30 p.m. Eastern Time on the expiration date C. 11:00 a.m. Eastern Time on the expiration date D. 4:00 p.m. Eastern Time on the expiration date

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

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

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

Which of the following funds would typically have the LEAST amount of stability in NAV? A. A money-market mutual fund B. A short-term bond fund C. An S&P 500 Index fund D. A sector fund

D. A sector fund Sector funds focus their investments in specific areas of industry or geography. As a result the funds tend to have more risk and volatility (less stability), than money-market mutual funds, short-term bond funds or index funds that track the broad market indices such as the Standard & Poor's 500.

A customer is seeking a high risk, high reward investment. Given this objective, which of the following is the MOST appropriate? A. A stock with a low dividend yield and a beta of 1.5 B. A stock with no dividend and a beta between 1.5 and 2.0 C. A stock with a high dividend yield and a beta of less than 1.0 D. A stock with no dividend and a beta of greater than 2.0

D. A stock with no dividend and a beta of greater than 2.0 Beta is a measure of a stock's (or portfolio's) volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If a portfolio's beta is 1.5, this means that the portfolio's price will change 1 1/2 times as much as the market. The term high beta is usually associated with a beta of greater than 2.0 and offers a customer a high risk, high reward investment.

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

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

A conservative investor has a long-term time horizon. He wants an investment that will provide him with long-term capital appreciation, and will not be too volatile. Which of the following funds would be the MOST suitable for him? A. A fund of funds B. A growth fund C. An emerging markets fund D. A value fund

D. A value fund Of the choices given, a value fund would be the best option for the investor. As with a growth fund, the main objective of a value fund is long-term capital appreciation. Value funds are usually considered less volatile than growth funds, since they invest in companies that are priced low in relation to their earnings. They also tend to invest in more mature companies that are more likely to pay regular dividends than pure growth funds. Both a fund of funds and an emerging markets fund would be too risky for him

An accumulation unit in a variable annuity contract is: A. The same as the insurance company's profit from the separate account B. An accounting measure that's used to determine payments to the owner of the variable annuity C. The same as a shareholder's ownership interest in a mutual fund D. An accounting measure that's used to determine the contract owner's interest in the separate account

D. An accounting measure that's used to determine the contract owner's interest in the separate account An accumulation unit in a variable annuity contract is an accounting measure that's 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 that each have different objectives and portfolios.

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

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

Compared to selling short, buying a put option: A. Requires a margin account B. Has a larger loss potential C. Requires a larger capital commitment D. Does not require the client to arrange to borrow the stock

D. Does not require the client to arrange to borrow the stock 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.

Which inventory evaluation method shows the greater profit in a period of rising costs? A. Depletion B. Depreciation C. LIFO D. FIFO

D. FIFO The first-in, first-out (FIFO) method of valuing inventories uses the cost of the first item purchased. The last-in, first-out (LIFO) method uses the cost of the last item purchased. In a period of rising prices, the FIFO method, because of the lower cost basis, results in an increase in inventory profits.

Which of the following is included on an income statement? A. Current liabilities B. Stockholders' equity C. Current assets D. Gross revenues

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

Listed equity options cease trading at 4:00 p.m. Eastern Time on the expiration date. The expiration date for listed equity options is the third Friday of the expiration month, at 11:59 p.m. Eastern Time. A. Informing a customer that he may receive as many shares as he desires B. Accepting orders for the shares to be offered C. Attempting to obtain indications of interest for the shares to be offered D. Having the registered representative contact an investment banker at the firm

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

Which TWO of the following are suitable for an aggressive investor who wants a non-traditional investment as well as access to his capital? I. A business development company II. A hedge fund III. A liquid alternative investment IV. A private equity fund A. II and IV B. I and IV C. II and III D. I and III

D. I and III Both a business development company and a liquid alternative investment are non-traditional investments that are suitable for an aggressive investor. A business development company (BDC) raises capital by selling securities to investors, has a structure that is similar to a closed-end investment company, and provides an investor with access to his capital (liquidity). A BDC will use the money it raises to invest in private companies, small and developing businesses, as well as financially troubled companies that have difficulty raising capital in public markets. Since some of the funds are invested in the equity of non-public companies, purchasing shares of a BDC is similar to buying a publicly traded investment in a private equity firm. The term alternative investments refers to non-traditional strategies, such as short selling, using derivatives, long/short trading or neutral strategies, trading in distressed securities or currencies, and arbitrage. These strategies differ from simply buying, holding, and selling securities and are often referred to as a way to diversify a portfolio through the use of securities other than equities and bonds. These are the types of strategies are used by hedge funds and private equity funds. One of the disadvantages of both hedge funds and private equity funds is their lack of liquidly. A liquid alternative investment combines the structure of an SEC-registered mutual fund (which is liquid) with a non-traditional or alternative investment.

A fundamental analyst is NOT interested in which TWO of the following metrics? I. Short interest II. The P/E ratio III. Trading volume IV. EPS A. II and IV B. II and III C. I and IV D. I and III

D. I and III Short interest and trading volume are technical indicators. EPS and the P/E ratio are fundamental indicators.

Dennis, Al, and Dan have opened a securities account with your firm as tenants in common. All of the following are TRUE, EXCEPT: A. You may accept an order from either Dennis, Al, or Dan B. Checks issued by your firm from the account will be in the name of all three co-owners C. When opening the account, you should obtain Social Security numbers from all three co- owners D. If Dennis dies, his interest in the account will pass to Al and Dan

D. If Dennis dies, his interest in the account will pass to Al and Dan In a tenants-in-common account, the interest of a deceased owner passes to the estate of the deceased. The surviving owners of the account (Al and Dan) would receive the securities if the account was a joint tenants with rights of survivorship account.

When a carrying firm receives a transfer request from the Automated Customer Account Transfer Service (ACATS) system, it must validate or protest the transfer within: A. Three business days B. Two business days C. A reasonable period D. One business day

D. One business day A broker-dealer must cooperate in the transfer of a customer's account. If notified of a customer's intent to transfer an account through ACATS, the carrying firm must either validate or reject the request for a valid reason within one business day.

The term that's used when a company sells stock to the public above par value is: A. Capital excess B. Extraordinary earnings C. Earned surplus D. Paid-in capital

D. Paid-in capital Shares are often priced well above their par value in an offering. This excess is recorded on the balance sheet as Capital Surplus. For example, a company prices its IPO at $18 per share, but the par value is $10 per share. In this case, $8 is added to the Capital Surplus in the Stockholders' Equity section of the balance sheet. A more common term for this excess is Paid-in Capital. Retained earnings can also be referred to as earned surplus.

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. Lyle and Molly must change the arrangement to a Joint Tenants with Right of Survivorship B. The account would be liquidated as soon as the brokerage firm learns of Seena's death C. Seena's share of the assets in the account are automatically transferred to Lyle and Molly D. Seena's estate has a claim on her portion of the account's assets

D. Seena's estate has a claim on her portion of the account's assets 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 arrangement.

Logan has the following position in his account. Long 1 DEF May 35 call. Logan anticipates a slight bullish move in DEF from which he wants to benefit, but he also wants some income generated to reduce the cost of the position without adding additional risk. He could accomplish this by adding which of the following positions to his account? A. Short 1 DEF May 25 call B. Short 1 DEF May 25 put C. Short 1 DEF May 45 put D. Short 1 DEF May 45 call

D. Short 1 DEF May 45 call By ****selling (short) 1 DEF May 45 call, Logan will generate income through the premium received and reduce the overall cost of the position. While the short call ****allows the owner to purchase DEF from him at $45 per share until it expires in May, Logan is long a DEF call that allows him to purchase the same stock at $35 per share until May. Logan has established a debit call spread.***** Had Logan added 1 short DEF May 25 call, he may have been required to sell DEF at $25 per share with the risk it would have cost him $35 per share to purchase DEF. If he added either of the short puts, he may have been required to purchase DEF at $25 or $45 per share without a right to dispose of it.

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

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

Which of the following actions should be taken if a registered representative (RR) receives a written complaint from a customer? A. FINRA should receive a copy of the complaint within 10 business days. B. The RR should respond to the complaint within 10 business days. C. The firm should immediately respond to the customer. D. The RR should forward the complaint to her principal.

D. The RR should forward the complaint to her principal. When an RR receives a written complaint, it should immediately be forwarded to a principal who must place a copy in a complaint file.

Which of the following transactions would NOT take place on an exchange? A. The short selling of an equity security B. The sale of an options contract C. The purchase of an exchange-traded fund D. The purchase of a municipal bond

D. The purchase of a municipal bond The SEC definition of an exchange is a marketplace that ***brings buyers and sellers together***. An exchange may be a physical location such as the NYSE or a purely electronic system such as Nasdaq. Most exchanges trade equities (common and preferred stock, closed-end or exchange-traded funds), equity derivatives (options, rights, and warrants). Some exchanges will also trade corporate debt. **Most corporate **debt** and other types of fixed-income or debt securities (i.e., municipal bonds) are **not traded on an exchange, but ARE traded ***directly between broker-dealers.

Which of the following statements is TRUE concerning electronic communication networks (ECNs)? A. They can be used by clients who don't want to use a broker-dealer. B. They can be used only by retail investors. C. They can be used only by institutional investors. D. They can be used by investors who want to trade anonymously.

D. They can be used by investors who want to trade anonymously. Electronic communication networks (ECNs) are securities trading systems that are designed to anonymously match buyers with sellers. These systems 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; however, they do allow subscribers (e.g., broker-dealers) to use these systems to execute orders that they receive from their clients.

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

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

An investor's goal is to buy a security that establishes a fixed return, for a long period, with no reinvestment risk. Which of the following securities BEST suits the investor's needs? A. Common stock B. Treasury bonds C. Highly rated corporate bonds D. Treasury STRIPS

D. Treasury STRIPS The typical yield-to-maturity calculation assumes that each interest payment is reinvested at the same yield. There is no guarantee that the investor could reinvest at the same yield (reinvestment risk). Treasury STRIPS are zero-coupon bonds (long-term). Interest is automatically reinvested and compounded at the same yield and reinvestment risk is avoided.****

An employee of a broker-dealer owns shares of XYZ in his personal account. His spouse is a director of XYZ Corporation. If XYZ is engaged in a secondary offering of stock, can shares be purchased in a joint account that's owned by the employee and his spouse? A. No, unless there are unsold portions of the secondary offering. B. Yes, but only in the personal account of the spouse who's not a director of the issuer. C. No, because both are considered associated persons of the firm. D. Yes, because secondary offerings are permitted to be sold to restricted persons.

D. Yes, because secondary offerings are permitted to be sold to restricted persons. Only the sale of initial public offerings (IPOs) of equity securities are prohibited to restricted persons. Since secondary offerings are not considered new issues, they can be sold to associated persons of broker-dealers. Since the spouse is a director of the issuer, the sale would be permitted even if it was an IPO.

An investor that wants to hedge a portfolio of preferred stocks can buy: A. S&P 500 call options B. Yield-based put options C. S&P 500 put options D. Yield-based call options

D. Yield-based call options Yield-based options are based on the yield-to-maturity of Treasury bonds, rather than the price of Treasury bonds. Essentially, yield-based calls will increase in value as bond prices fall because of the inverse relationship between yield and price. As is true for bond prices, preferred stock prices are inversely related to the movement of interest rates. An investor who wants to hedge its preferred stocks is worried that the prices will decline and that interest rates and yield-to-maturity on bonds will rise. An investor who fears that yields will rise should buy the option that gains value due to an increase in yields. The best hedge for the investor is to buy yield-based call options.