STC Series 7 Final #2

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. The individual's maximum loss is: A. $2,000 B. $3,000 C. $4,000 D. $6,000

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

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

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

A variable annuity would be MOST suitable for which of the following customers? A. A client in a high tax bracket who is purchasing the annuity for his spouse's retirement needs B. A client in a high tax bracket who is purchasing the annuity for short-term liquidity needs C. A client who is purchasing the annuity in a 401(k) for his retirement needs D. A client who is purchasing the annuity in order to have the funds available by the age of 50

A. A client in a high tax bracket who is purchasing the annuity for his spouse's retirement needs A variable annuity is most suitable for an investor seeking long-term, tax-deferred income for retirement. A tax-deferred investment, as with a variable annuity, becomes more advantageous for an investor with a higher tax bracket. A variable annuity is unsuitable for customers that have short-term needs since the insurance company may impose surrender charges if the annuity proceeds are withdrawn early. It would also be unsuitable for a client purchasing the annuity in a tax-qualified account such as a 401(k) or IRA, since these accounts already have the benefits of tax-deferred growth. If a client withdraws the proceeds of a variable annuity prior to age 59 1/2, a 10% tax penalty applies.

Which of the following statements is TRUE regarding spreads? A. A put spread created for a net debit is bearish B. A put spread created for a net credit is bearish C. A call spread created for a net credit is bullish D. A call spread created for a net debit is bearish

A. A put spread created for a net debit is bearish A put spread created for a net debit is bearish. A bearish put (or call) spread involves selling the lower exercise price and buying the higher exercise price. For a put spread, the lower exercise price will have the lower premium and, therefore, the spread will be done at a debit.

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

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

Of the following factors, which would be the most important to consider when analyzing a client's investment portfolio who has retirement as her primary investment objective? A. Age B. Net worth C. Education level D. Previous investment history

A. Age When analyzing a client's existing portfolio to determine how it affects recommendations you might make, it is important to consider a client's investment objectives and the length of time available to try to meet those objectives. When retirement is the primary objective, it is very important to know the client's age. The other items mentioned are also valuable for an RR to know, but they are not as critical as knowing the client's age.

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

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

Your client owns a convertible bond that has been called at 104. The bond is convertible at 40 and is selling in the market at 107. The common stock is selling in the market at 41. Which of the following choices is the LEAST attractive alternative to the client? A. Allow the bond to be called B. Sell the bond C. Convert the bond to common stock and sell the common stock D. All of the the alternatives are equally attractive

A. Allow the bond to be called To find the conversion ratio, divide the par value of the bond by the conversion price ($1,000 divided by 40 = 25). The common stock is selling at $41. Converting the bond to common stock and selling the stock gives the client $1,025 (25 shares x $41 = $1,025). Since this is less than the client will receive by selling the bond ($1,070) or allowing the bond to be called ($1,040), it represents the least attractive alternative.

Which of the following risks affects bonds primarily when interest rates decline? A. Call risk B. Credit risk C. Political risk D. Currency risk

A. Call risk When interest rates decline, bond issuers are more likely to call in existing, higher interest rate bonds and replace them by issuing bonds paying lower rates. Investors whose bonds are called are then faced with reinvesting their principal at lower rates.

Two types of stock that may contain a stock legend are: A. Control stock and restricted stock B. Book-entry and registered stock C. Exempt and nonvoting stock D. Cumulative and noncumulative preferred stock

A. Control stock and restricted stock Control and restricted stock are both subject to transfer restrictions. The restriction stipulates when and how the securities may be lawfully sold. Clean stock, i.e., stock without a legend, may be obtained by getting an opinion letter from the issuer's legal counsel.

ABC Corporation has issued a call notice on its 5% convertible preferred stock. The preferred stock, which is convertible at $20, is being called at $110 and is currently trading at $111. If ABC's common stock is currently trading at $23, what should an RR recommend to an investor who holds the preferred stock? A. Convert the preferred stock into common stock and sell the common stock B. Sell the preferred stock at the current market price C. Allow the preferred stock to be called D. Continue to hold the preferred stock

A. Convert the preferred stock into common stock and sell the common stock To determine the best choice for the investor, let's evaluate each possibility separately. The preferred stock may be converted into five shares of common stock ($100 par value ÷ $20 conversion price). The five common shares may then be sold at the market price of $23, which provides the investor with a total of $115. If the stock is sold, the investor will receive the current market price of $111. If the stock is called, the investor will receive the call price of $110. The investor is not able to continue holding the preferred stock since it is being called. By converting and selling the common stock, the investor will be provided with the greatest amount of proceeds.

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

A. Current assets decrease As it relates to the payment of a dividend, the funds being paid out come from the corporation's cash (a current asset). It is important to distinguish the difference in the treatment of a dividend being declared compared to a dividend being paid. When a company declares a cash dividend, dividends payable (a current liability) will be increased by the amount of the announced dividend and the retained earnings (part of shareholders' equity) will be reduced. Regardless of the specific corporate transaction, the balance sheet must remain balanced.

Paul and Mary Smith have discussed various portfolio allocations with their adviser Chuck. He has considered the Smiths' risk tolerance and expected return in order to recommend an efficient portfolio, that is, one in which the portfolio offers the: A. Highest expected return for the lowest level of risk B. Average of expected returns for the lowest level of risk C. Lowest of expected returns based on its Beta for the least amount of investment D. Greatest return based on the average Beta of each stock in relation to the total return

A. Highest expected return for the lowest level of risk A portfolio that has a maximum expected return for any level of risk, or a minimum level of risk for any expected return is known as an efficient portfolio

A customer wishes to make a purchase based on his belief that interest rates will decline over the next 15 years. The recommendation of which TWO of the following securities is NOT consistent with the customer's belief? I. A 5-year noncallable bond II. A tax anticipation note (TAN) III. Floating rate notes IV. A 15-year bond with a 5-year put feature A. II and III B. I and IV C. II and IV D. I and III

A. II and III Since the customer believes interest rates will decline, he wants to lock in a high yield for the next 15 years. A TAN is a short-term security and a floating rate note's interest rate would be adjusted downward with prevailing interest rates. Neither would lock in the high return. The 5-year noncallable bond would lock in a high return without the possibility of being called prior to maturity. The 15-year bond locks in the high return and the 5-year put feature permits the investor to redeem the bond after 5 years or keep it to maturity. This decision would depend on the prevailing rates in 5 years.

Municipal notes are used for: A. Interim financing B. Long-term financing C. Taxable financing D. Permanent financing

A. Interim financing Municipal notes are used mostly for interim (temporary) financing.

A bond is selling at a discount and yields have remained constant. As the bond gets closer to its maturity, what happens to its price? A. It increases B. It decreases C. It remains the same D. It will experience significant price changes

A. It increases Although fixed income securities are subject to some degree of interest rate risk, that risk is of less concern if the bond is being held to maturity. Assuming there is no default by the issuer, the price of a bond that is selling at a discount will increase (move towards par value) as it gets closer to maturity.

Which of the following statements is NOT TRUE concerning the Student Loan Marketing Association (Sallie Mae)? A. It issues securities that can be redeemed to pay for college education B. It issues securities that are not backed by the U.S. government C. It purchases federally sponsored student loans D. It provides loans to educational institutions

A. It issues securities that can be redeemed to pay for college education The Student Loan Marketing Association (known as SLMA or Sallie Mae) provides liquidity to student loan makers by purchasing federally sponsored student loans. It also lends funds directly to educational institutions. Sallie Mae securities are not backed by the full faith and credit of the U.S. government, but the SLMA maintains a direct line of credit with the U.S. government. It does not issue securities that can be redeemed to pay for college education.

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

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

An investor is interested in selling 500 shares of her listed REIT. The sale will be handled in a manner that's similar to the: A. Liquidation of a stock on the NYSE B. Maturity of a DPP C. Liquidation of a hedge fund D. Liquidation of a private placement

A. Liquidation of a stock on the NYSE A secondary market exists for real estate investment trusts (REITs). The vast majority of REITs trade on the NYSE with prices that are determined by the forces of supply and demand.

The spouse of a brokerage firm employee wants to open a brokerage account in order to invest in bonds. If this account is opened at a firm that does not employ her spouse, the employee of the firm is required to: A. Obtain the prior written consent of the employing firm in order to open the account B. Obtain the prior written consent of the employing firm if the account is a joint account C. Obtain the written consent of the employing firm within a reasonable period after the account is opened D. Obtain the prior written consent of the employing firm for each order being entered

A. Obtain the prior written consent of the employing firm in order to open the account Employees of broker-dealers who intend to open outside accounts for the purpose of executing securities transactions are required to obtain the prior written consent of their firm. This rule also applies to accounts being opened for the spouse or dependent children of member firm employees.

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

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

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

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

An individual has been purchasing shares of a mutual fund and has chosen to reinvest all distributions rather than take the payments. If the individual chooses to sell the shares purchased through these reinvestments, the cost basis will be: A. The purchase price of these shares B. Zero since reinvestment is made with pretax dollars C. The same as the purchase price on previous investments D. The purchase price less any sales charge

A. The purchase price of these shares Investors must report all distributions from a mutual fund as taxable income, whether reinvested or not. When an individual chooses to reinvest the distributions, the cost basis is the purchase price of the shares.

A customer purchases a municipal security in the secondary market at a discount. At maturity the customer will: A. Treat the discount as ordinary income B. Treat part of the discount as a capital gain and part as ordinary income C. Treat the discount as a capital gain D. Not have to pay tax on the amount of the discount

A. Treat the discount as ordinary income If a municipal bond is purchased at a discount in the secondary market and held to maturity, there will be reportable taxable income. The discount is taxed as ordinary income, not a capital gain. The investor may pay the tax each year or elect to report the entire amount at maturity. If a municipal bond is purchased at an original issue discount and held to maturity, there will be no federal tax liability.

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

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

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

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

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

B. $7,050 This is a tricky and involved question in which Ms. Green has written three covered calls and three uncovered puts. In both cases, the maximum loss occurs if the underlying stock (RSW) becomes worthless. If the market price of RSW is zero, the three covered calls will result in a $4,200 loss (300 shares x $15 purchase price minus the $300 premium received). The three uncovered puts will be exercised if the stock declines to zero, which is the worst case scenario. The maximum loss on an uncovered put is the total or aggregate value of the option less the premium received. The aggregate strike price of $3,000 ($10 x 100 shares x 3 contracts) minus the premium of $150 ($.50 x 100 shares x 3 contracts) equals $2,850. Therefore, the total loss is $7,050 ($4,200 + $2,850). A popular answer is a loss of $4,050 (the $4,200 loss - $150 premium received); however, this answer disregards the investor being exercised against on the short puts. Also, students often arrive at a loss of $4,950 by adding the cost of the stock ($4,500), plus the premium received from the sale of the calls ($300), plus the premium received from the sale of the puts ($150). Keep in mind, when an investor is long stock, losses will be realized by the stock declining in value. The answer of $7,050 was determined by assuming that the stock becomes worthless.

Premature withdrawals from a traditional IRA are subject to a penalty of: A. 5% B. 10% C. 15% D. 25%

B. 10% A person under the age of 59 1/2 who withdraws funds (premature withdrawals) from an IRA, or most retirement plans, is subject to a penalty of 10%.

A convertible bond is convertible at $25 and is selling in the market at 108. At what price should the common stock be selling for it to be at parity with the bond? A. 25 B. 27 C. 40 D. 43

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

On Monday, June 15, an investor purchases for regular-way settlement, $20,000 face value of 8% municipal bonds that mature on November 1, 2035. How many days of accrued interest is the investor required to pay? A. 16 B. 46 C. 51 D. 226

B. 46 Since the bonds mature on Nov. 1, we know the semiannual interest payments are made on Nov. 1 and May 1. The bonds were purchased in June, so accrued interest must be calculated from the last interest payment date, (May 1, up to but not including settlement.) Since the transaction will settle on June 17, we count 16 days in June. So the total number of days of accrued interest is 30 days for May (remember, in calculating accrued interest for municipal bonds, a 30-day month and 360-day year are used) and 16 days for June. Accrued interest of 46 days is owed to the seller.

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

B. A broker-dealer pays for the cost of a conference concerning the future of the computer software industry

An issuer currently has an S&P A- rating. If the ratings service notifies the firm that it has been upgraded by two notches, its new rating would be: A. A B. A+ C. AA D. BBB

B. A+ Standard & Poor's highest rating is AAA and its lowest rating is D. The company also uses a (+) or (-) to further distinguish between ratings. Each upgrade or downgrade is referred to as a notch. If an issuer currently has an A- rating, one notch above would be A and two notches above would be an A+ rating.

An investor owns a $100 convertible preferred stock that is convertible into 2 shares of common stock. The common is selling at $52 and the preferred is selling at $104. The preferred stock is called at 105. What should the investor do? A. Sell the preferred stock B. Allow the preferred to be called C. Convert to common and sell the common D. Wait for a more favorable call

B. Allow the preferred to be called The value of the preferred ($104) equals the value of converting to common (2 shares at $52 per share). The investor will receive the greatest amount ($105) by allowing the preferred to be called.

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

B. Allowed to accumulate on a tax-deferred basis All growth, dividends, and capital gain distributions paid during the accumulation period in a variable annuity are automatically reinvested and grow tax-deferred. Any tax implications commence when distributions begin.

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

B. An S&P 500 Index mutual fund Although all of these investments are suitable for a client seeking broad exposure to the U.S. equity market, the mutual fund is the most cost-effective method for an investor to accomplish this goal with $250 per month. The closed-end fund and ETFs are purchased on an exchange and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge (no-load). If the investor were to purchase a large dollar amount at one time, any of these funds may be appropriate.

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

B. Approval by the state legislature State legislative approval is required before a municipality can begin making payments on a moral obligation bond.

A margin disclosure document must be provided to customers: A. Only at the time the account is opened B. At the time the account is opened and annually thereafter C. Only on an annual basis D. At the time the account is opened and upon request of the customer

B. At the time the account is opened and annually thereafter A margin disclosure document describes the different types of risks facing margin customers. This document must be provided at the time the account is opened and annually thereafter.

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

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

A mortgage-backed security that is available in several "tranches," each with different cash flow characteristics, is a: A. Government National Mortgage Association pass-through certificate B. Collateralized Mortgage Obligation C. Public Housing Authority bond D. Real Estate Investment Trust

B. Collateralized Mortgage Obligation Collateralized mortgage obligations, or CMOs, are securities backed by pools of mortgages or pools of mortgage-backed securities, such as GNMA pass-throughs. However, unlike GNMA pass-throughs, a single issue of CMOs is divided into several classes, or tranches. When principal repayments are received by the CMO company or trust, the principal is paid to the various tranches according to a predetermined sequence of priority. Some tranches receive principal repayments immediately; others will not receive principal repayments for several years

Two individuals hold $100,000 in assets in a JTWROS account. Each party's ownership in the account may be described as: A. Equal and divided B. Equal and undivided C. Unequal and divided D. Unequal and undivided

B. Equal and undivided In a JTWROS account, each holder's interest is equal and undivided. Each position in the account is owned by both persons.

All of the following government agencies are involved in the housing market, EXCEPT: A. FNMA B. FHLMC C. SBA D. GNMA

B. FHLMC The SBA is the Small Business Administration and is not involved in the housing market. The SBA is a federal agency involved in providing financial assistance to small businesses.

Mike is long a yield-based put option in his account. Mike would like to see interest rates: A. Rise B. Fall C. Stabilize D. Fluctuate

B. Fall The value of yield-based options is determined by the difference between the yield of a Treasury index and the strike price. Yield-based calls have intrinsic value when the Treasury index yield is above the strike price. Yield-based puts have intrinsic value when the Treasury index yield is below the strike price. When interest rates (yields) decrease, a long position in yield-based puts and/or a short position in yield-based calls will be profitable.

Which of the following choices represent logical strategies for a technical analyst? 1. Buy calls when a stock breaks through a resistance level 2. Buy calls when a stock breaks through a support level 3. Buy puts when a stock breaks through a resistance level 4. Buy puts when a stock breaks through a support level A. I and III B. I and IV C. II and III D. II and IV

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

Regulation NMS applies to which TWO of the following choices? I. Listed equity trades II. Listed debt trades III. Quotes available for manual execution IV. Quotes available for electronic execution A. I and III B. I and IV C. II and III D. II and IV

B. I and IV One of the provisions of Regulation NMS (National Market System) requires a broker-dealer to provide its clients with the best price available for listed equity trades available for electronic execution. The best price is defined as the highest bid or lowest offer (inside market) from all available market centers. Reg NMS does not apply to securities subject to manual execution. Nor does it apply to debt securities, whether electronically or manually executed.

Which TWO of the following statements are TRUE about real estate investment trusts (REITs)? 1. They must distribute 90% of their earnings to shareholders 2. They may invest only in short-term construction loans 3. They must invest in mortgages and securities 4. Their profits are derived from the difference between the payments made on outstanding mortgages and the amount received in rental income A. I and II B. I and IV C. II and III D. II and IV

B. I and IV Real estate investment trusts (REITs) raise capital and invest the proceeds in real estate and mortgages. Their profit is derived from the rental income they receive as well as the difference between the interest they pay and the greater amount of interest they receive. In order to qualify for favorable tax treatment, REITs must pay 90% of their income to shareholders.

A customer buys 10 ABC January 50 calls paying a $3 premium and 10 ABC January 50 puts also paying a $3 premium when the market price of the stock is $49 per share. The buyer's TWO breakeven points are: I. $44 II. $47 III. $53 IV. $56 A. I and III B. I and IV C. II and III D. II and IV

B. I and IV The customer has the right to call the stock at $50. The customer paid a $600 premium per straddle. The breakeven point on the call is determined by adding the $50 strike price to the premium of $6. This equals a breakeven of $56. The customer also has the right to sell the stock to the writer at $50, but has paid a $600 premium. The breakeven point on the put would be six points below the strike price of $50, which equals $44. The buyer's breakeven points, therefore, will be $44 and $56.

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

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

Which of the following statements is FALSE regarding a broker-dealer acting as a market maker in a stock? A. It trades for its own account when buying and selling securities B. It makes money by charging commissions for executing transactions C. When making a market, it is acting as a principal D. It must be prepared to honor the prices it quotes unless it clearly qualifies them

B. It makes money by charging commissions for executing transactions A market maker is a broker-dealer that stands ready to buy or sell a specific stock for its own inventory (its own account). The price it is willing to pay for the stock is its bid price, while its ask or offer price represents the price at which it is willing to sell stock (to other dealers). The difference between the bid and offer prices is the spread, a source of market-maker profits. As principals in transactions, market makers do not charge commissions. Commissions are charged when firms act as brokers (agents). However, in transactions with retail customers, market makers might charge a markup when selling (an increase in price above its offer price) and a markdown when buying from customers (a decrease below its bid price).

How would preferred stock most likely be affected by an increase in interest rates? A. Its market value would increase B. Its market value would decrease C. Its dividend would decrease D. There would be no effect

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

Which of the following bonds would increase most in price if interest rates decline? A. Short-term bonds selling at a discount B. Long-term bonds selling at a discount C. Short-term bonds selling at a premium D. Long-term bonds selling at a premium

B. Long-term bonds selling at a discount When interest rates decline, bond prices will rise. The longer maturities will rise more than the shorter maturities due to market risk. Bonds selling at a discount will rise more sharply than those selling at a premium.

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

B. Ordinary income The investor purchased an already outstanding municipal bond at a discount and later redeemed it for par at maturity. The profit on the transaction is taxed as ordinary income. This is different from an example in which the investor purchased an original issue discount municipal bond and held it to maturity. In such an example, the profit is considered interest and is exempt from federal income tax.

An individual has invested in a nonqualified variable annuity. If she withdraws the entire value of the annuity, the tax treatment will be: A. Ordinary income on the entire amount B. Ordinary income on the amount in excess of the original investment C. Ordinary income on the amount in excess of the original investment and a capital gain on the original investment D. A capital gain on the entire amount

B. Ordinary income on the amount in excess of the original investment A total withdrawal from a nonqualified annuity results in two separate tax treatments. The original amount invested is treated as a return of capital and the earnings in the account (amount above the original investment) is treated as ordinary income.

The call premium of a bond refers to the amount: A. An investor must pay above par to buy a callable bond B. Over par value that the issuer must pay to exercise the call privilege C. The issuer must add to the semiannual interest payments to offset the call feature D. Added to the price at issuance to compensate for the call privilege

B. Over par value that the issuer must pay to exercise the call privilege The call premium of a bond refers to the amount the issuer must pay in excess of par value to exercise the call privilege. The call privilege is the issuer's right to buy the bond from the holder prior to maturity. For example, if a bond is callable at 102, it has a two-point ($20) call premium. The issuer must pay $1,020 ($20 more than par) if it wishes to call in the bond.

Which of the following statements is TRUE concerning Modern Portfolio Theory? A. Portfolio management should be based on the risk and return of individual securities B. Portfolio management should focus on diversification among different classes of assets C. Portfolio management should focus only on the best performing securities D. Portfolio management should always avoid securities with greater risk

B. Portfolio management should focus on diversification among different classes of assets Modern Portfolio Theory creates optimal portfolios based on a client's risk tolerance and investment objectives, by allocating the portfolios among various classes of securities. It does not focus on individual securities or avoid risk. Instead, it focuses on diversifying investments across a wide spectrum of securities.

An investor writes an XYZ October 70 call at 3 and an XYZ October 70 put at 1. This strategy is known as a: A. Short combination B. Short straddle C. Bull spread D. Bear spread

B. Short straddle A long straddle consists of purchasing a put and a call, on the same underlying security, with the same strike price and same expiration. A short straddle consists of selling a put and a call, on the same underlying security, with the same strike price and expiration.

All of the following statements are TRUE concerning both auction rate securities (ARSs) and variable-rate demand obligations (VRDOs), EXCEPT: A. Bond funds B. Tax-exempt funds C. Stock funds D. International funds

B. Tax-exempt funds This question focuses on an investor whose tax burden is increasing. An investment that produces a taxable return is taxed at the investor's marginal rate (i.e., the investor's tax bracket). However, dividend income from a tax-exempt fund doesn't incur this burden. (Note that capital gains distributions from a tax-exempt fund are still taxable.)

As a customer's tax bracket increases, an RR is likely to allocate more of a customer's portfolio to: A. Bond funds B. Tax-exempt funds C. Stock funds D. International funds

B. Tax-exempt funds This question focuses on an investor whose tax burden is increasing. An investment that produces a taxable return is taxed at the investor's marginal rate (i.e., the investor's tax bracket). However, dividend income from a tax-exempt fund doesn't incur this burden. (Note that capital gains distributions from a tax-exempt fund are still taxable.)

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

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

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

B. The Treasury Department Firms are prohibited from transacting business with individuals and entities that are identified on the Office of Foreign Assets Control (OFAC) list. If a registered representative discovers that one of the owners or beneficiaries of an account is on the OFAC list (or if someone on the list tries to open an account with his firm), the RR or another person from her firm should contact the U.S. Treasury Department immediately. The Financial Crimes Enforcement Network (FinCEN) and OFAC are both a part of the Treasury Department.

Which of the following statements is NOT TRUE regarding the purchaser of a put option? A. The purchaser has a right to sell stock B. The purchaser limits the amount of money he could lose if the value of the underlying stock increases C. The purchaser benefits if the value of the underlying stock declines D. The only way to realize a profit is to exercise the option

B. The purchaser limits the amount of money he could lose if the value of the underlying stock increases There is more than one way the investor could profit. The investor could profit by either exercising or liquidating the put. The other choices are true statements. The purchaser of a put has a right to sell stock. The maximum loss that a purchaser of an option (put or call) can sustain is the amount of the premium paid. The purchaser of a put can profit if the underlying stock declines in value.

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

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

A breakpoint sale is best defined as: A. The payment of compensation to a registered representative who has ceased to be employed by a member firm B. The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions C. The sale of investment company shares in anticipation of an impending distribution D. The sales amount in an IPO where institutional clients get a price discount

B. The sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity transactions A breakpoint sale is defined as the sale of investment company shares in dollar amounts just below the point at which the sales charge is reduced on quantity purchases. Breakpoint sales are generally affected in order to assess higher sales charges on transactions and they are a violation of FINRA rules.

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

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

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

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

Which of the following statements is TRUE concerning Trade Reporting and Compliance Engine (TRACE) reports? A. The system is used for mutual funds B. The system is used for corporate bonds C. The system is used for money-market instruments D. The system is used for municipal bonds

B. The system is used for corporate bonds TRACE was created to provide greater transparency in the corporate bond market. Every FINRA member firm that is a party to a transaction in TRACE-eligible securities must report its side of the transaction to TRACE. TRACE-eligible securities include U.S. and foreign corporate bonds, U.S. treasuries, and debt of U.S. government agencies and enterprises. Transactions in municipal securities must be reported to the Real-Time Transaction Reporting System (RTRS), which is operated by the MSRB.

Which of the following choices makes a financial commitment in the distribution of a new issue of securities? A. The selling group B. The underwriting syndicate C. A customer who provides an indication of interest D. The exchange on which the security will be listed

B. The underwriting syndicate The underwriting syndicate makes a commitment to the issuer to purchase the entire offering. If the syndicate cannot resell the offering at the public offering price, it may suffer a loss. Although the selling group also participates in the sale of the new issue, it does not run the risk of losses if the securities do not sell. A customer who provides an indication of interest has no obligation of any kind.

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

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

Which of the following securities does NOT trade with accrued interest? A. Treasury bonds B. Treasury STRIPS C. Jumbo certificates of deposit D. Convertible bonds

B. Treasury STRIPS Securities that pay interest periodically or have a stated rate of interest (such as Treasury bonds, municipal bonds, corporate bonds, and certificates of deposit) trade with accrued interest. However, many money-market securities such as Treasury bills and bankers' acceptances trade at a discount and are, therefore, purchased without paying accrued interest. Zero-coupon bonds (e.g., Treasury STRIPS) do not pay periodic interest and are traded without accrued interest.

Real estate investment trusts (REITs) invest in all of the following, EXCEPT: A. Shopping centers B. Undeveloped land C. Golf courses D. Self-storage facilities

B. Undeveloped land Real estate investment trusts (REITs) raise capital and invest the proceeds in real estate and mortgages. They are income-oriented investments and their profit is derived from both the rental income they receive as well as the difference between the interest they pay and the greater amount of interest they receive. Most REITs invest in income-producing real estate such as office buildings, hotels, golf courses, health care facilities, apartment buildings, storage families, theaters, shopping centers and malls. Undeveloped land would not generate income and, therefore, would not be part of a REIT investment.

A RR should update a client's financial condition or status: A. When there is an obvious change in the economy of the client's hometown B. When there is a change in the clients purchases or sales that might indicate a different financial situation C. When informed by a friend or relative D. Only after any meeting with the client

B. When there is a change in the clients purchases or sales that might indicate a different financial situation While some clients may keep the firm well informed of any changes, others may not be so forthcoming. Changes in a client's patterns of purchases and sales may indicate a different financial situation.

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

Bond yields and prices have an inverse (opposite) relationship, meaning that as one increases, the other would decrease. Therefore, if a bond is selling at a premium (above par), its current yield would have to be lower than its nominal yield. For example, an investor owns an 8% bond trading at $850. The nominal yield is 8%. The current yield is found by dividing the annual interest by the market price. An 8% bond pays $80 per year assuming a par value of $1,000. Therefore, the current yield is 9.41% ($80 / $850 = 9.41%).

A customer's margin account has a market value of $15,000, a debit balance of $8,000, and SMA of $1,000. If the customer sold $1,000 of securities, what is the maximum amount the customer is permitted to withdraw after the sale? A. None B. $1,000 C. $1,500 D. $2,000

C. $1,500 This account is restricted since the equity ($7,000) is less than the Reg T requirement of the account's market value ($15,000 x 50% = $7,500). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds multiplied by the Reg T requirement of 50%. In this question, the sale of $1,000 worth of stock will result in a $500 credit to the customer's current SMA ($1,000). The customer is then at liberty to borrow the total SMA of $1,500.

A customer has a long margin account with the following securities in the account. (Assume a 50% FRB initial margin requirement.) Stock. Market Price. Market Value. Debit Balance 100 A Co. $30. $3,000 $8,400 100 B Co. $25 $2,500 200 C Co. $15 $3,000 100 D Co. $35 $3,500 (total market value = $12000) The minimum maintenance requirement for this account is: A. $2,000 B. $2,200 C. $3,000 D. $5,000

C. $3,000 The minimum maintenance requirement states that the equity must equal at least 25% of the market value of the securities in the account. This equals $3,000. (25% of $12,000 = $3,000.)

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

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

A customer buys an ABC July 50 call, paying a $3 premium. Seven months later, the customer exercises the call when the market price of ABC stock is $60 per share. The customer immediately sells the stock for $6,000. When computing the profit, the customer will use a cost basis of: A. $4,700 B. $5,000 C. $5,300 D. $6,000

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

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

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

On December 16, a Mr. Smith purchased 2 listed XYZ May 70 calls and paid a $4 premium for each call when the current market price of XYZ Corporation was $69 per share. If, in May, the market price of XYZ Corporation is $67 and the calls expire, Mr. Smith loses: A. $400 B. $700 C. $800 D. $1,400

C. $800 Mr. Smith will not exercise the call options. At expiration, the market price of XYZ is $67, which is less than the exercise price. Therefore, the options expire worthless. Mr. Smith loses $800 ($400 per contract times 2), the entire amount of the premium paid.

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

C. 7.6% If a bond is priced at a 7.20 basis, this means that it is priced to yield 7.20 or has a YTM of 7.20%. If the bond's basis increased by 40 basis points, the new yield-to-maturity is 7.60%. The fact that the bond has a 6% coupon rate is relevant for determining whether the bond is trading at a premium or discount to par value. Since the YTM is greater than 6%, the bond is trading at a discount.

Which of the following communications does not qualify as a complaint under FINRA rules? A. An e-mail B. A hardcopy letter C. A telephone call D. An instant message

C. A telephone call FINRA defines a complaint as any written statement by a customer, or a person acting on behalf of a customer, presenting a grievance from a person under the control of the member firm. Under FINRA rules, the term "written" includes customer grievances submitted in either a physical or electronic format. A telephone call is not a written statement and does not qualify as a complaint under FINRA rules

ABC Brokerage, a broker-dealer, purchases 600 shares of stock from a market maker to fill a customer's buy order. ABC has acted as a: A. Dealer B. Designated market maker C. Agent D. Underwriter

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

A couple has a portfolio of domestic equity and bond funds. They wish to diversify their portfolio further. Which of the following investments would MOST likely fulfill this goal? A. An asset allocation fund B. A balanced fund C. An international fund D. A global fund

C. An international fund This is a question where you need to understand terminology. The client has a portfolio of domestic securities. What does that mean? Domestic implies within the United States. The funds the couple already own contain securities issued in the United States. Since they wish to diversify, they need to purchase securities from outside the United States. An asset allocation fund and a balanced fund contain domestic securities, so they would not offer any further diversification. A global fund means securities from around the world, including the United States. Remember, the couple has enough of their money invested in U.S. securities. The International Fund is the best answer. It holds only foreign securities in the portfolio.

A municipal bond trader does NOT: A. Request bids B. Accept bids C. Commit to underwritings D. Negotiate settlement dates in the secondary market

C. Commit to underwritings A municipal bond trader is not involved in underwritings of new issues.

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

C. Coupon rate All of the choices given would affect the markup except the coupon rate of the securities.

Which of the following choices is a feature of the Nasdaq Level II System? A. The price of transactions as they occur B. The cumulative volume of stocks traded as they occur C. Firm quotes of all the market makers in a stock D. Allowing a market maker to change his quotes

C. Firm quotes of all the market makers in a stock Nasdaq Level I shows the highest bid and lowest offer. This is known as the inside market. Level II shows firm quotes and the market makers who are making a market in the security. Level III allows the market makers to change their quotations in the system.

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

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

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

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

A call premium is best described as the amount the: A. Investor pays above the par value B. Investor will receive if the bond is sold above the par value C. Issuer pays above 100 to retire bonds prior to maturity D. Bondholder receives at maturity

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

What capacity is reported by a member firm that has conducted a net basis transaction? A. Riskless principal B. Agent C. Principal D. Net basis principal

C. Principal In a net basis transaction, a dealer holding a customer order to buy, acquires the stock on a principal basis, and executes the customer order at a different price than the dealer's acquisition price. Since both legs of a net basis transaction are at different prices, the market maker will report both sides of the transaction as principal.

An investor purchased a fixed annuity twenty years ago from a top-rated insurance company. The investor is now considering whether to annuitize on a straight life basis, or to take a lump-sum settlement and invest it elsewhere. If economists are now forecasting an extended period of significant inflation, which of the following is the greatest risk facing the investor if she chooses to annuitize? A. Credit risk B. Market risk C. Purchasing-power risk D. Exchange-rate risk

C. Purchasing-power risk An investor who annuitizes a fixed annuity on a straight life basis will receive the same fixed payment for life. Since, in this case the insurance company is highly rated, there is little credit risk (risk of default). However, the purchasing power of any fixed payment is subject to erosion over time due to inflation. It is this disadvantage of fixed annuities that led to the creation of variable annuities.

A Regulation A+ exemption is allowed for an issuer that's offering: A. 500,000 shares or less B. Securities with a value not exceeding $10,000,000 C. Securities with a value not exceeding $50,000,000 D. Securities being sold to only residents of one specific state

C. Securities with a value not exceeding $50,000,000 A Regulation A+ offering is exempt from the registration and prospectus requirements under the Securities Act of 1933. The offering is limited to the issuance of $50,000,000 worth of securities during a 12-month period.

An investor has made the following purchases of XAM stock: Shares bought at $39 in May 2013 Shares bought at $56 in September 2013 Shares bought at $36 in January 2014 Shares bought at $36 in June 2014 The investor sells some of his XAM shares in March 2015 at $51. Based on the various purchases, which shares may be sold to result in the greatest gain with the lowest tax liability? A. Sell from the shares that were purchased in May 2013 B. Sell from the shares that were purchased in September 2013 C. Sell from the shares that were purchased in January 2014 D. Sell from the shares that were purchased in June 2014

C. Sell from the shares that were purchased in January 2014 When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. To find which shares should be sold to generate the largest gain with the lowest tax liability, let's consider each possibility separately. Selling from the shares that were purchased in May 2013 results in a 12-point long-term gain. Selling from the shares that were purchased in September 2013 results in a long-term loss, not a gain. Selling from the shares that were purchased in January 2014 results in a 15-point long-term gain. Selling from the shares that were purchased in June 2014 results in a 15-point short-term gain (due to the shares having been held for one year or less). Since the tax rate on long-term gains (20%) is lower than the tax rate on short-term gains (as ordinary income), selling the shares that were held the longest is the best option. Although the sale of shares that were purchased in January 2014 will result in the same gain as the sale of shares that were purchased in June 2014, the tax liability will be lower.

Which of the following positions would be considered a covered option? A. Long the stock, short a put B. Long the stock, long a call C. Short the stock, short a put D. Short the stock, long a put

C. Short the stock, short a put The terms covered or uncovered (naked) refer only to the seller (writer) of an option (also known as being short the option). If the seller of an option can fulfill the obligation of the contract without additional risk, he is considered covered. For example, the seller of a put option is obligated to purchase stock if the put option is exercised against the writer. If the customer is short the stock and the put is exercised, the seller of the put option would buy the stock to cover or close out the short stock position. A call option writer is covered if he is long or owns the stock since, if the call is exercised, the seller of the call would be able to deliver the stock he is long.

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

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

Which of the following issues will most likely have a mandatory sinking fund? A. Serial issues B. Balloon issues C. Term issues D. Convertible issues

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

A customer sells short 1,000 shares of DT at $60 a share on Monday, October 14 and deposits the Regulation T margin requirement. If on October 23 the stock is trading at $75 a share, which of the following statements is TRUE? A. The account will be closed by the broker-dealer B. The account will be adjusted on October 23 and no margin maintenance call will be issued C. The account will be adjusted on October 23 and a margin maintenance call will be issued D. The account will be adjusted on October 24 and a margin maintenance call will be issued

C. The account will be adjusted on October 23 and a margin maintenance call will be issued A short margin account is marked to the market once a day (daily) to make sure the account is above the maintenance requirement. The initial Regulation T margin requirement is 50% of $60,000, or $30,000. If the market value increases to $75 a share, the equity in the account will decline to $15,000. The current equity in the account is 20% of the short market value ($15,000 / $75,000), which is below the required 30% and, therefore, a margin maintenance call will be issued.

A registered representative (RR) wants to open a new account for a client who is a resident of Mexico. Which of the following statements is TRUE? A. Customer verification of the client's personal information is not required if the customer was referred by an existing client. B. Customer verification of the client's personal information is required if the name is on the Office of Foreign Assets Control (OFAC) list. C. The client can have either a taxpayer identification number or a passport number and country of origin. D. The client must have a taxpayer identification number to open the account.

C. The client can have either a taxpayer identification number or a passport number and country of origin. If a non-U.S. citizen wants to open a new account, the member firm is required to obtain certain information as part of its anti-money laundering (AML) procedures under its customer identification program (CIP). For non-U.S. citizens, the firm must obtain the client's name, address, date of birth, and one of the following: passport and country of issuance, taxpayer identification number, or any other government-issued document with a photograph. An RR would always need to verify the client's personal information regardless of whether the customer was referred by an existing client. An account should not be opened if the person's name is on the OFAC list.

A facility is created by the issuance of industrial development revenue bonds. The bonds are backed by: A. The local municipal district in which the facility is domiciled B. The state in which the facility is domiciled C. The corporation that leases the facility D. Both the corporation that leases the facility and the municipality

C. The corporation that leases the facility The corporation using the facility that was built by the industrial development revenue bond becomes the authority that backs the bonds. The credit rating of these bonds is dependent on that corporation, not on the municipality that issued the bonds.

Which of the following choices BEST describes Eurodollars? A. U.S. dollars on deposit in U.S. banks B. U.S. dollars on deposit in European banks C. U.S. dollars on deposit in foreign banks D. European currency on deposit in U.S. banks

C. U.S. dollars on deposit in foreign banks Eurodollars are defined as U.S. dollars on deposit in foreign banks, not just in Europe

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

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

On June 5, 2013, an investor purchased 100 shares of ABC at 20. On November 10, 2013, he purchased an additional 100 shares of ABC at 12. On January 20, 2014, he sold 100 shares of ABC at 15. For tax purposes, he would have reported a: A. $300 capital gain in 2013 B. $300 capital loss in 2014 C. $500 capital gain in 2014 D. $500 capital loss in 2014

D. $500 capital loss in 2014 In this question, the investor has two positions in ABC stock. Each was purchased at different times and at different prices. When selling a portion of his holdings, unless the investor identifies (on the order ticket) the specific shares he is selling, the Internal Revenue Code requires the use of the FIFO method. Since the investor did not identify the shares sold, it is assumed that the first shares purchased (at 20, in June) were the shares sold. Therefore, the investor would have reported a loss of $500 in 2014.

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

D. 50% large-cap equity funds, 20% small-cap equity funds, 20% international equity funds, 5% bond funds, and 5% cash An aggressive risk tolerance is for investors who want high growth and do not need income. These investors are willing to accept high volatility and the possibility of substantial loss of their principal. The best recommendation from the listed choices would be the allocation with the largest amount of equity securities (50% large-cap equity funds, 20% small-cap equity funds, 20% international equity funds, 5% bond funds, and 5% cash). The remaining three choices offer too small of an allocation in equities.

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

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

If interest rates increase, which of the following securities has the LARGEST price change? A. A Treasury note trading at a discount B. A Treasury note trading at a premium C. A Treasury bond trading at a discount D. A Treasury bond trading at a premium

D. A Treasury bond trading at a premium When interest rates increase, outstanding bond prices will decline in value. The prices of bonds with longer-term maturities will fall more than those with shorter-term maturities. Treasury bonds have maturities of up to 30 years, whereas Treasury notes have maturities of up to 10 years. The prices of bonds that are selling at a discount will fall more sharply than those selling at a premium. A bond with a high coupon will tend to trade at a premium, while a bond with a low coupon will tend to trade at a discount. The bond with the high coupon will repay an investor sooner than a bond with a low coupon since the investor will be earning more money from the higher coupon. Therefore, bonds that have longer maturities and/or lower coupon rates will have a higher degree of interest rate risk. Ultimately, if interest rates increase, a long-term bond that's selling at a discount will decrease (in percentage terms) more than a long-term bond that's selling at a premium.

For the following size transactions, ABC mutual fund has a bid price of $8.50 and an asked price of $9.26. Which of the following sales is allowed under the Conduct Rules? A. A member sells 250 shares of ABC fund at $9.10 to a nonmember firm B. A member sells 250 shares of ABC fund at $9.10 to another firm through a nonmember firm C. A member sells 250 shares of ABC fund at $9.10 to one of the firm's customers D. A member sells 250 shares of ABC fund at $9.26 to one of the firm's clients

D. A member sells 250 shares of ABC fund at $9.26 to one of the firm's clients A FINRA member firm may not sell the fund at a discount ($9.10) to a nonmember firm or to one of the firm's customers (the public). According to the Conduct Rules, a member firm can only give a discount from the public offering price to another member firm. The discounts and selling concessions member firms give to each other are inducements for firms to be members of FINRA (the self-regulatory organization of over-the-counter broker-dealers) and to abide by its rules and regulations.

A notice is published stating that RMO 5% convertible preferred stock will be called at $60 per share. The preferred is convertible into 1/2 share of common and is selling in the market at $56 per share. RMO common stock is selling in the market at $110 per share. After the notice appears, the price of the preferred stock will most likely trade in the market at: A. $28 B. $55 C. The same price as before the notice appeared D. A price near $60

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

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

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

Which of the following formulas is used to calculate the current yield on a bond? A. Annual dividend / Investor's cost B. Semiannual interest / Current market value C. Semiannual interest / Investor's cost D. Annual interest Current / market value

D. Annual interest Current / market value The current yield on a bond is determined by dividing the annual interest by the current market value. If an investor owns a bond, his current yield is the annual interest divided by the investor's cost.

A registered person is concerned that his boss is making inappropriate advances. This allegation must be settled by: A. Arbitration B. Litigation C. Mediation D. Any method of the registered person's choosing, including remediation through the court system

D. Any method of the registered person's choosing, including remediation through the court system By signing the application for securities industry registration (Form U4), registered persons agree to a statement that says, in part, "I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer, or any other person, that is required to be arbitrated under the rules, constitutions, or bylaws, of the SROs indicated ... " FINRA rules require that disputes between firms, a firm and its employee, or a firm and a clearing corporation must go to arbitration. An exception exists when the dispute involves statutory discrimination claims, such as sexual harassment. The aggrieved party (the employee) may choose mediation, or may pursue his claim in either arbitration or the court system.

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

D. Ba Of the choices given, Ba is the most speculative. The highest Moody's rating is Aaa.

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

D. Bond anticipation notes A municipality borrowing for a short-term period to finance a capital project would issue bond anticipation notes. Commercial paper is primarily issued by corporations and some municipalities to raise short-term funds for working capital, but not to finance capital projects. Tax anticipation notes are used to meet operational expenditures.

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

D. Hedge fund A prime-brokerage arrangement involves a variety of services offered by a broker-dealer to an active trading firm, such as a hedge fund. Most prime brokers offer both execution and clearing services to these customers. Due to regulatory requirements, a mutual fund would not open a prime brokerage account. Mutual funds generally open an account in which a custodian bank holds securities and a broker-dealer executes the transactions.

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

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

A municipal securities broker-dealer has a control relationship with an issuer. When selling the bonds subject to the control relationship, the broker-dealer must disclose this relationship to customers: I. Prior to the trade II. In writing at or prior to settlement III. For discretionary accounts only IV. For all accounts and for all types of transactions A. I and III only B. II and III only C. I, II, and III only D. I, II, and IV only

D. I, II, and IV only Customers must be informed about the existence of a control relationship regardless of the type of account (i.e., discretionary or nondiscretionary) or type of transaction (i.e., agency or principal). The customer must be told of the relationship prior to the trade. A written disclosure must be made to the customer regarding a control relationship at or prior to the settlement date.

A corporation is NOT considered to be in default if it fails to pay interest on which of the following bonds? A. Mortgage bond B. Debenture C. Convertible bonds D. Income bond

D. Income bond For an income (adjustment) bond, an issuer is only expected to pay interest if it has sufficient income. However, on all of the other debt securities, interest must be paid regardless of the corporation's income. The mortgage bond is secured, but both the debenture and convertible bonds are unsecured. Although the claims of debenture holders come after those of the mortgage bondholders, the corporation is considered to be in default if it fails to make the required interest payments.

Rule 145 applies to a(n): A. Stock split B. Stock dividend C. Adjustment in par value D. Merger or acquisition

D. Merger or acquisition Rule 145 applies to mergers, consolidations, reclassifications of securities, or transfers of corporate assets. Rule 145 requires a company to provide written disclosures to shareholders in connection with the previously listed corporate actions. Stock splits, dividends, and the resulting changes in par value are specifically exempted from filing under Rule 145.

A state agency revenue bond does not have sufficient revenue to meet debt service. A provision of the indenture allows the agency to request funds from the state legislature. The legislature has the option of providing or not providing the additional funds. This is a: A. General obligation bond B. Double-barreled bond C. Special tax bond D. Moral obligation bond

D. Moral obligation bond The legislature does not have a legal obligation to provide funds but is considered to have a moral obligation. Funds would become available after legislative approval.

On Thursday October 7th, a customer purchases 1,000 shares of stock which is listed on the NYSE. The trade would settle on: A. October 8th B. October 9th C. October 10th D. October 11th

D. October 11th Regular-way settlement on transactions in equity securities settle two business days after the trade date. Monday October 11th is two business days after the trade date.

In a large private placement, an investment banking firm has purchased securities directly from an oil and gas company based in Houston, Texas. These securities may be resold immediately to: A. Any type of investor B. Only accredited investors C. Only institutional accredited investors D. Only qualified institutional buyers (QIBs)

D. Only qualified institutional buyers (QIBs) This is an example of a Rule 144 A transaction. These transactions are usually structured as a private placement between an issuer and an investment banking firm(s) and are exempt from SEC registration. Due to the exemption provided under SEC Rule 144A, after acquiring the securities, the firm may then immediately reoffer them exclusively to a purchaser that is a QIB. Securities offered under Regulation D may be sold to accredited investors, but a holding period applies. An institutional accredited investor is defined as a non-individual (e.g., a bank, trust, a pension or mutual fund). However, an institutional accredited investor is only defined as a QIB if its portfolio is worth at least $100 million.

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

D. Pass to the beneficiary free from federal income tax Policy proceeds pass to the beneficiary free from federal income tax upon death of the insured. However, proceeds are included in the policy owner's estate for estate tax purposes.

You are the portfolio manager for Home Fund, Inc., a mortgage-backed securities mutual fund. Which type of risk concerns you in a falling interest rate environment? A. Credit risk B. Political risk C. Homeowner risk D. Prepayment risk

D. Prepayment risk Like most debt instruments, mortgage-backed securities (MBSs) are subject to interest-rate risk, the risk that the security's value will fall as interest rates rise. However, MBSs are also subject to risk when interest rates fall. Falling rates cause an increase in prepayments on the underlying mortgages, and this money must be reinvested in new, lower-coupon securities. This is known as prepayment risk. Mortgage-backed securities, and the funds that invest in them, tend to perform best when interest rates are stable.

A broker-dealer has established a page on a social media site which allows customers to post comments. The firm's responses to these comments are considered: A. Correspondence B. A violation of FINRA rules C. Neither correspondence nor retail communications D. Retail communications

D. Retail communications A principal of the firm must approve the use of the social media site. Customer comments that are posted to a broker-dealer's social media page and the firm's responses are considered to be made on an interactive electronic forum. Although this is defined as retail communication, it's managed in a manner that's similar to correspondence (i.e., it's subject to review and supervision

A customer has sold stock, but he has failed to complete the transaction by delivering the securities. The latest date on which the broker-dealer may buy in the securities is: A. One business day from the trade date B. Three business days from the trade date C. Two business days from the settlement date D. Ten business days from the settlement date

D. Ten business days from the settlement date SEC Rule 15c3-3 (the Customer Protection Rule) sets forth rules for broker-dealer reserve requirements and for maintaining custody of securities. Under the custody of securities section, a brokerage firm must buy in securities within 10 business days from settlement if a customer has failed to deliver the securities that were previously sold

A registered representative receives text messages on a mobile device from one of her customers. Which of the follow is TRUE? A. The broker-dealer is not required to maintain any records of the messages. B. The broker-dealer is required to approve any communication with customers when the RR uses this type of device. C. The broker-dealer must purchase the mobile device that its RRs use to communicate with customers. D. The broker-dealer is required to maintain a record of all communication with customers regardless of the device used.

D. The broker-dealer is required to maintain a record of all communication with customers regardless of the device used. According to FINRA rules, broker-dealers must supervise all written and electronic correspondence that their RRs have with customers (including text, e-mail, and instant messages). Additionally, these records must be maintained by the firm for a minimum of three years. If a firm permits its RRs to communicate with customers through non-firm email addresses and other electronic devices, it's required to supervise and retain those communications. In fact, some firms prohibit or block its RRs from accessing non-firm electronic platforms for business purposes.

An individual purchases 600 shares of BAZ preferred stock. One week later the stock pays a dividend of $1.20 per share and the investor sells the stock the next day. For tax purposes, how will the dividends be taxed? A. 50% of the dividend will be tax-exempt and the remainder will be taxed as ordinary income B. 50% of the dividend will be tax-exempt and the remainder will be taxed as a capital gain C. The dividend will be taxed at long-term capital gains rates D. The dividend will be taxed as ordinary income

D. The dividend will be taxed as ordinary income Currently, dividends paid on stock held by individuals for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date are taxed at a maximum rate of 20%. This is the same maximum tax rate as long-term capital gains. Since the individual held the stock less than the 60-day period, the dividend is taxed as ordinary income. The corporate dividend exclusion allows a corporation to exclude from taxation 50% of the dividends it receives from other corporations.

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

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

Which of the following statements is TRUE concerning reverse convertible securities? A. An investor will receive a coupon rate below prevailing market rates. B. An investor is anticipating a decrease in the value of the underlying asset. C. They are suitable for an investor who wants to own shares of the underlying asset. D. The investor is anticipating that the price of the underlying asset would be above the knock-in value.

D. The investor is anticipating that the price of the underlying asset would be above the knock-in value. Reverse convertible securities are short-term notes that are issued by banks and broker-dealers and usually pay a coupon rate that's 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 that's unrelated to the issuer, a basket of stocks, 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, which is referred to as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of her principal (the most beneficial option). 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. Since the investor is not able to participate in any increase in the value of the underlying asset, the investor is anticipating that its price will remain stable. Reverse convertibles are unsuitable for investors who want to own the underlying asset, since being obligated to buy those securities is an undesirable outcome.

A client buys 100 shares of MTB at $58 per share and writes 2 MTB October 60 calls at 3. Which of the following statements is TRUE? A. The breakeven point is $56 B. The maximum profit is $600 C. The maximum loss is $5,200 D. The maximum loss is unlimited

D. The maximum loss is unlimited This position, which is referred to as ratio writing or a variable hedge, has an objective to increase the income from writing more calls than stock owned. However, this is an extremely risky position and the client's maximum loss is unlimited since two calls were written against a long stock position of only 100 shares. This client is covered on one short call, but uncovered on the second short call, which results in the maximum loss being unlimited. If the market price trades at or below $60 and the options expire, the client will have a $600 profit since two calls were written. The breakeven point is found by taking the purchase price of $58 and subtracting the total premiums of 6, which equals $52. The maximum profit is $800, which is found by taking the difference between the purchase price and the strike price and adding the premiums received from writing the call options (60 - 58 + 3 + 3). A popular answer choice is a maximum loss of $5,200, since students simply subtract the total premiums received ($600) from the total cost of the stock ($5,800). It is important in these questions to examine the entire position and to remember that the maximum loss on an uncovered call is unlimited.

A bond counsel will issue an unqualified legal opinion for a municipal bond issue to state that: A. The issuer has defaulted on previous issues of bonds B. The official statement has not been filed with the SEC C. The bonds are very risky and are not a qualified investment for some investors D. There are no limitations or pending lawsuits that hinder the issuance of the bonds

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

If the purchaser of a non-qualified annuity dies at the age of 56, which of the following BEST describes the tax impact? A. There is a 10% penalty assessed and the difference between the amount invested and the death benefit is considered a non-taxable return of capital B. There is no penalty assessed and the difference between the amount invested and the death benefit is considered a non-taxable return of capital C. There is a 10% penalty assessed and the difference between the amount invested and the death benefit is taxable at ordinary income tax rates D. There is no penalty assessed and the difference between the amount invested and the death benefit is taxable at ordinary income tax rates

D. There is no penalty assessed and the difference between the amount invested and the death benefit is taxable at ordinary income tax rates As a general rule, if an annuitant withdraws the proceeds of his variable annuity prior to age 59 1/2, a 10% tax penalty applies. However, this penalty is waived if the annuitant dies or becomes disabled. Although there is no penalty, the difference between the amount invested and the death benefit is taxable at ordinary income tax rates.

Which of the following positions/strategies is NOT bullish? A. A married put B. A short put C. A long 40 call and a short 50 call D. Writing a straddle

D. Writing a straddle Straddle writers expect a neutral market and obtain the maximum gain if each option expires. Each of the other choices has an opportunity for a profit if the underlying security rises in value.

A U.S. importer needs to purchase British pounds to pay for a shipment of goods. The exchange of U.S. dollars for British pounds would occur: AOn the Philadelphia Stock Exchange In the Interbank market CIn the third market DIn the over-the-counter market

Foreign exchange rates are established in the Interbank market. The Interbank market involves the purchase and sale of foreign currencies between commercial banks. The Philadelphia Stock Exchange is where foreign currency option transactions take place.

A retirement housing program has just been completed in a small town. The income generated by the program will most likely be used to pay the debt service on a(n): AGeneral obligation bond BSpecial tax bond CIndustrial development revenue bond Revenue bond

Housing program bonds are generally a type of revenue bond and the income that's generated by the properties is used to pay the debt service. General obligation bonds are primarily supported by property taxes. Industrial development revenue bonds are supported by lease agreements with the business(es) leasing the property. Special tax bonds are a type of revenue bond and they're backed by the taxes that are assessed on certain products or services.

The PSA Model is used when pricing: a. Put options b. Preferred stock c. Collateralized mortgage obligations d. Treasury notes

The cash flows, future payments that a bondholder will receive, determine the market price of the bond. Collateralized mortgage obligations (CMOs) have uncertain cash flows due to the prepayments (early retirement) of mortgages. Prepayment risk is the risk that homeowners will pay off their mortgages early and the clients who invested in the securities backed by the mortgage will receive their principal prior to maturity. The Public Securities Association (now SIFMA), an association of financial services firms, created a standard model for estimating the prepayment rate for mortgage-backed securities including CMOs. This is called the PSA Model.

The maximum underwriting compensation for selling limited partnerships in public offerings is: A5% 10% 15% D20%

The maximum underwriting compensation for selling partnership units in a public offering is 10%. This is based on the gross dollar amount of the units sold. The 10% limit applies to all compensation, regardless of the source, if it is in connection with the offering.

LRR Corporation has earned $1.10 per share in each of the last four quarters and has paid out 20% of its earnings in the form of a cash dividend. If the stock is selling at $48 a share, what is its price/earnings ratio? QID: 1892193 Mark For Review 10.9 B13.6 C21.8 D43.6

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

A level debt service bond issue is one in which: a. Combined annual interest and principal payments are equal b. Annual interest payments are equal c. Annual principal payments are equal d. All principal is paid at the issue's final maturity

a. Combined annual interest and principal payments are equal A level debt service bond issue is one in which combined annual interest and principal payments are equal.