7-Final 6

Value of ex rights

(adjusted market price - subscription price) / N

A broker-dealer holds a limit order to buy 100 shares of ABC stock at $20.00 for a customer. Which of the following trades are acceptable? I The purchase of 100 shares of ABC for the firm's trading account at $19.50 prior to executing the customer's orderII The purchase of 100 shares of ABC for the firm's trading account at $20.50 prior to executing the customer's orderIII The long sale of 100 shares of ABC out of the firm's trading account to the customer at $20.00IV The short sale of 100 shares of ABC out of the firm's trading account to the customer at $20.00 A. I only B. I and II onlyC. III and IV onlyD. II, III, IV

All of the following securities are generally traded "over-the-counter" EXCEPT: A. Options B. Corporate debt issues C. Municipal debt issues D. Treasury debt issues

ptions with over 9 months to expiration: I can be purchased on 75% marginII must be paid in fullIII have a loan value of 25%IV have no loan value A. I and III B. I and IVC. II and III D. II and IV

The best answer is A.LEAPs with over 9 months to expiration require a 75% margin deposit, so the loan value is 25% for these.

On Thursday, May 5th, 2019, a customer buys 5 XYZ 10% subordinated debentures M' 8-01-42 at 95 5/8 plus accrued interest in a regular way trade. On January 13th, 2020, the customer sells the bonds at 90 3/8 plus accrued interest in a regular way trade. For tax year 2019, the customer's reported interest income is: A. $113.89B. $136.11 C. $250.00 D. $386.11

The best answer is A. For tax purposes, interest is reported as it is received on a cash basis. Thus, only interest payments actually made by the issuer in tax year 2019 are included. The customer bought the bonds on Thursday, May 5th, 2019. The customer receives the August 1st interest payment in 2019. The next payment will be made on February 1st, 2020, so only one interest payment is reported for 2019. One interest payment (August 1st) 10% bonds x $5,000 face amount = $500 annual interest income/2 = $250 interest payment reported on that year's tax return. In addition, the accrued interest that the buyer paid to the seller is deducted from the reported interest income. The bonds were purchased on Thursday, May 5th, 2019, so regular way settlement takes place on Monday, May 9th. Interest accrues up to, but not including the 9th. Thus, the buyer had to pay the seller accrued interest for: Feb:Mar:Apr:May:30 days30 days30 days8 daysTotal: 98 days 98 days/360 days per year x $100 annual interest per bond x 5 bonds = $136.11 accrued interest paid. The reported taxable interest income is $250 interest received less $136.11 accrued interest paid = $113.89 taxable interest income. Note: This is a very difficult question and a minor item for the exam.

Rank the following investments from lowest to highest, for overall historical returns experienced by investors over long periods of time: I Treasury BillsII AAA Rated Corporate BondsIII Common Stocks A. I, II, III B. III, II, I C. II, III, I D. III, I, II

The best answer is A. Historically, common stocks have provided a superior return over time compared to that provided by Corporate Bonds and Treasury Bills. This has occurred because common stock investments have provided both capital gains over time, in addition to the dividend yield. Long term investments in Corporate Bonds and Treasury Bills do not provide capital gains; these securities mature at par value. The investment return consists solely of interest paid. Of the two, Corporate Bonds provide a higher return, since the interest rate reflects a premium for greater default risk, purchasing power risk and market risk, as compared to Treasury Bills. Please note that the risk/reward relationship holds true for these securities. Common stocks have given the highest return, but have the highest risk. Investment grade Corporate Bonds give a lower return, with lower risk. Treasury Bills give the lowest return with the lowest risk.

Which option strategy has the greatest loss potential? A. short call B. short call spread C. short put D. short put spread

The best answer is A.A short call has unlimited loss potential in a rising market. As the market goes up, the customer must purchase the stock in the market for delivery. A short call spread has limited upside loss. Short puts and short put spreads are profitable in a rising market as the contracts will expire "out the money" with the gain being the premium collected.

American Depositary Receipts pay dividends in: I U.S. DollarsII EurodollarsIII European Currency UnitsIV Foreign Currency A. I only B. I and II C. III and IVD. I, II, III, IV

The best answer is A.American Depositary Receipts pay dividends in U.S. Dollars only. The dividends are declared and paid in the foreign currency by the issuer. The bank that issues the ADR exchanges the dividend that was received in the foreign currency into U.S. Dollars and pays this to the U.S. ADR holders.

An unmanaged limited partnership offering is one which is sold to investors through wholesalers on a(n): A. best efforts basis B. not held basisC. firm commitment basis D. all or none basis

The best answer is A.An unmanaged direct participation program is one which is sold to investors through wholesalers, acting as agents for the issuer. These offerings are sold on a best efforts basis. The wholesalers take no financial responsibility for the issue. Managed direct participation program offerings are firm commitments by underwriters who buy the issue and then sell it to the public through a syndicate - the underwriter is said to be "managing" the sale of the offering.

Maximum income limits that reduce permitted contributions do NOT apply to: I IRAsII Spousal IRAsIII Roth IRAsIV Coverdell Education Savings Accounts A. I and II B. III and IV C. I and III D. II and IV

The best answer is A.As one's income increases, permitted contributions to Roth IRAs and Coverdell Education Savings Accounts are phased out (so high earning persons cannot contribute to these accounts). However, there is no income limit for making a contribution to a Traditional IRA or spousal IRA (however, if the contributor is covered by another qualified retirement plan and earns too much, the permitted contribution may not be tax deductible).

A short term corporate debt which is backed solely by the full faith and credit of the issuer is: A. commercial paper B. an income bond C. a mortgage bond D. a general obligation bond

The best answer is A.Commercial paper is simply backed by the issuer's full faith and credit (the promise to pay). The maturities are short, most typically 30 days or less, though legally the maturity can extend to 270 days maximum (9 months). All of the other debts listed are long term (over 1 year) obligations. Income bonds are long term corporate obligations that require the issuer to pay interest only if it has sufficient income. Mortgage bonds are backed by real property owned by the issuing corporation. General obligation bonds are issued by municipalities; they are not issued by corporations.

A customer has a large portfolio of diversified blue chip stocks and would like to increase the income from the investments. Which of the following strategies are suitable? A. Covered call writing B. Naked call writing C. Covered put writing D. Naked put writing

The best answer is A.Covered call writing is suitable for securities that are expected to remain relatively constant in price. If the price remains constant, the calls expire and the premium is earned, with no gain or loss on the stock position. Blue chip stocks are less volatile than lesser quality stocks and are good candidates for covered call writing strategies. If covered calls are sold against these stocks, there is no margin required on the sale of the call. Downside risk is limited to the loss of the investment net of premiums received. Naked call writing exposes the writer to unlimited risk and is not suitable. Put writing strategies are used to increase income against short stock positions.

What is the penalty imposed for excess contributions to an IRA? A. 6% of the excess contribution B. 8 1/2% of the excess contributionC. 10% of the excess contribution D. no penalties are imposedq

The best answer is A.Excess contributions to an Individual Retirement Account are subject to a 6% penalty tax. Do not confuse this penalty with that imposed on a premature distributions from an IRA. Premature distributions (prior to age 59 1/2) are subject to a 10% penalty tax.

The self-supporting spouse of a registered representative has an account with your firm. Your firm is underwriting the initial public offering (IPO) of ACME Co. common stock, and the spouse inquires about whether it is possible to receive an allocation. The registered representative should inform the spouse that the issue: A. cannot be purchased through the IPO B. can only be purchased through the IPO if the amount purchased is insubstantial C. can only be purchased through the IPO with the approval of FINRA D. can be purchased through the IPO without restriction

The best answer is A.FINRA prohibits the purchase of equity IPOs (Initial Public Offerings) by industry "insiders." The list of prohibited purchasers includes FINRA member firms for their own accounts, officers and employees of member firms (and their immediate family members), fiduciaries to member firms (such as accountants and lawyers that are retained by FINRA member firms); and investment managers for investment companies, insurance companies, pension plans, who want to buy personally, etc.

Wide swings in market interest rates would affect which of the following for holders of collateralized mortgage obligations? I Prepayment RateII Interest RateIII Market ValueIV Credit Rating A. I and III B. II and IVC. I, II, III D. I, II, III, IV

The best answer is A.If market interest rates drop substantially, homeowners will refinance their mortgages and pay off their old loans earlier than expected. Thus, the prepayment rate for CMO holders will increase. Furthermore, as interest rates drop, the value of the fixed income stream received from those mortgages increases, so the market value of the security will increase. Market interest rate movements have no effect on the stated interest rate paid by the security; and would not affect the credit rating of the issue.

All of the following are affected when securities are sold in a restricted margin account EXCEPT: A. Equity B. Long Market ValueC. SMA D. Debit Balance

The best answer is A.If securities are sold in a restricted margin account (one that is below 50% margin), the long market value must decline. The proceeds of the sale are used to reduce the debit balance, therefore the debit balance will decrease. When securities are sold from a restricted account, 50% of the proceeds may be withdrawn. This is accomplished by crediting 50% of the proceeds to SMA. Thus, this amount can be borrowed. The only choice that does not change is Equity - this stays the same. Equity will be affected only if the market value rises or falls - or if cash is paid into, or borrowed from, the account.

Straight line accretion for municipal bonds is the annual: A. increase in the cost basis of a discount bond performed according to IRS rules B. decrease of the cost basis of a discount bond performed according to IRS rules C. increase of the cost basis of a premium bond performed according to IRS rulesD. decrease of the cost basis of a premium bond performed according to IRS rules

The best answer is A.Straight line amortization for municipal bonds is the annual reduction of the cost basis of a premium bond performed according to IRS rules. Straight line accretion for municipal bonds is the annual increase in the cost basis of a discount bond performed according to IRS rules.

Which of the following are investment grade bonds? I A-ratedII BBB-ratedIII BB-ratedIV CCC-rated A. I and II only B. II and III only C. III and IV only D. I, II, III, IV

The best answer is A.The lowest investment grade is BBB. Any securities below this rating (BB or lower) are considered to be speculative - and are commonly known as "junk" issues.

All of the following are included in a competitive bid EXCEPT: A. reoffering yields B. stated rates of interest C. premiums or discounts D. dollar amount of bid

The best answer is A.The reoffering yields are not in the syndicate bid - the interest rates to be printed on the bonds are in the bid. Also included are any premiums or discounts from par specified in the bid; the total dollar amount being bid; and the Net Interest Cost (if it is an NIC - Net Interest Cost bid) or the True Interest Cost (if it is a TIC - True Interest Cost bid).

When a sales charge is imposed on a fund purchase, this is known as a: A. front-end load fund B. no-load fund C. contingent deferred sales charge fund D. negotiated sales charge fund

The best answer is A.The sales charge that is imposed when a customer initially purchases fund shares is known as a "front-end load sales charge."

All of the following securities are generally traded "over-the-counter" EXCEPT: A. Options B. Corporate debt issues C. Municipal debt issues D. Treasury debt issues

The best answer is A.The vast majority of corporate debt trades "OTC," with the exception of a small amount of bond trading performed on the NYSE. All trades in Treasury issues and municipal bonds are effected "over-the-counter." However, all options trades are effected on exchanges, the CBOE being the largest options exchange. The other exchanges that trade options are the AMEX (American Stock Exchange), PHLX (Philadelphia Stock Exchange), and PSE (Pacific Stock Exchange - now renamed the ARCA exchange).

Referring to the order to buy 100 shares for DW at $50.02, if a trade is not effected on this day, which statement is TRUE? A. The order will be canceled by the Specialist/DMM B. The order will be canceled by DW Securities C. The order remains open on the Specialist's/DMM's book for one more dayD. The order remains open on the Specialist/DMM's book until canceled

The best answer is A.This order was entered as a day order. If it is not executed this day, it will be canceled by the Specialist/DMM. Note that the Specialist is now called the DMM - Designated Market Maker.

Treasury Bills: I mature in 1 year or lessII mature in over 1 yearIII are issued by the United States GovernmentIV are issued by United States Government Agencies A. I and III B. I and IV C. II and III D. II and IV

The best answer is A.Treasury bills mature in 52 weeks or less and are issued by the U.S. Government.

Under NYSE rules, a company moving its listing from another market must meet which requirements? I 2,200 shareholdersII 4,400 shareholdersIII Average monthly trading volume of 100,000 sharesIV Average monthly trading volume of 1,000,000 shares A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is A.Under NYSE rules, the numerical standards for a company wishing to move its listing from another market include 2,200 or more shareholders, with an average monthly trading volume of 100,000 shares for the past 6 months. Also, there must be a national interest in trading the stock and the company must agree to distribute proxies to be listed.

Which of the following features affect the pricing of a municipal bond quoted on a yield basis? I In Whole CallII Calamity CallIII Put option A. I onlyB. II only C. III only D. I, II, III

The best answer is A.When a municipal dealer gives a basis quote, he or she is promising the purchaser a certain yield on the bond. MSRB rules require that when the actual dollar price is determined, that the dollar price be computed to the lowest dollar amount of yield to call or yield to maturity. The only calls that are considered are optional calls, meaning the issuer has the option of calling in the entire issue at preset dates and prices, as set forth in the bond contract. Mandatory calls are not considered - an example of a mandatory call is a "sinking fund" call. In such a call, the issuer is obligated to deposit monies annually to a sinking fund, and then use the funds to call in bonds on a random pick method at specified dates. It is the luck of the draw as to whether a given bond is called or not. Since there is no reasonable certainty of a specific bond being called, this type of call is not considered when pricing municipal bonds. Extraordinary calls (such as catastrophe calls, or calls of bonds backed by mortgages due to mortgage prepayments) are not considered, again because of the lack of any certainty as to their actually happening. Put options have no effect on bond pricing, because exercise is at the option of the bondholder; not the issuer.

A 13D notice would be filed when a(n): A. corporation has a change in its Board of DirectorsB. investor accumulates a 5% or greater position in the common stock of an issuer C. corporation reports its annual results to the Securities and Exchange Commission D. investor wishes to sell shares of restricted stock in the public market

The best answer is B. Investors who accumulate a 5% or greater position in the common stock of one registered issuer are required to file a 13D notice with the SEC within 10 business days of date that the 5% threshold was passed. This information is made public (and is of great interest to the management of the company, since the new large stockholder will probably want a say in how the company is being run!). Choice A would require the filing of an 8K by the corporation. Choice C would require the filing of a 10K by the corporation. Choice D would require the filing of a Form 144 by the seller.

A customer wants to buy enough PHLX Canadian Dollar Feb 85 Put contracts to hedge a long 100,000 Canadian Dollar position. The customer must buy: A. 1 contractB. 10 contractsC. 100 contracts D. 1,000 contracts

The best answer is B.PHLX World Currency options cover 10,000 units of currency, with the exception of the Japanese Yen contract, which covers 1,000,000 units of currency. Since this customer is long 100,000 Canadian Dollars, and each put contract covers 10,000 Canadian Dollars, 10 contracts are needed to hedge the long foreign currency position from a market decline.

Which statement is TRUE regarding Regulation A? A. Offerings are limited to a maximum of 35 non-accredited investorsB. Offerings are limited to a maximum size of $50,000,000C. A Prospectus must be delivered to purchasers D. The Offering is exempt from registration with the Securities and Exchange Commission

The best answer is B. Regulation A is intended to make it easier for smaller issuers to raise capital. There are 2 "tiers" to the rule. Tier 1 gives an "E-Z" registration process to offerings of no more than $20 million in a 12 month period. Tier 2 requires more detailed information, including audited financial statements, and can be used for offerings of up to $50 million. While no prospectus is required, each buyer must be given disclosure in an Offering Circular. Anyone can purchase a Regulation A offering. Unlike the private placement exemption (Regulation D) that permits offerings to be made to a maximum of 35 non-accredited investors and an unlimited number of accredited investors, Regulation A does not set a limit on the number of non-accredited purchasers.

Regulation AC requires all of the following EXCEPT: A. member firm research analysts certify each written research reportB. 3rd party research analysts certify each written research report C. research analysts must certify that their opinion is unbiased and honest D. research analysts must certify that they received no special compensation for giving a favorable opinion

The best answer is B. Regulation AC (Analyst Certification) requires research analysts at member firms to certify each published research report; and to make a quarterly certification covering all public appearances made during that quarter. The certification basically states that the analyst gave his or her honest view at that time; and that the analyst's compensation was not tied to the recommendation or views expressed. If an analyst fails to make the required certification, FINRA must be notified; and for the next 120 days, any research reports authored by that analyst must include the disclosure that the analyst did not provide the required certification. Note that the rule does not apply to "independent research" prepared by 3rd parties, since the potential for conflicts of interest does not exist.

The listing of current municipal bond offerings shows the following: Cook County School District BondP/R @ 102 4.20 6/15/19 M'29 2.50 Which of the following statements are TRUE? I The bonds will be redeemed in 2019II The bonds will be redeemed in 2029III The redemption price is parIV The redemption price is 102 A. I and IIIB. I and IVC. II and III D. II and IV

The best answer is B. The School District bonds have a coupon of 4.20% and were scheduled to mature in 2029. However, the issuer has pre-refunded (P/R) the bonds by escrowing U.S. government securities to retire the bonds prior to maturity (at the call date of 6/15/19). At that time, the bondholder will receive 102 (call premium of 2 points). The bonds are currently being offered at a price to yield 2.50%, so they are trading at a premium (coupon is 4.20%). Remember, municipal issuers prerefund their debts when interest rates have fallen, similar to a homeowner refinancing a mortgage when interest rates have dropped. By prerefunding the debt, the issuer "retires" the debt prior to its maturity date because its debt service comes from escrowed government securities (and not tax collections in this case), freeing up the issuer to sell new bonds at lower current market rates.

A divided syndicate is known as a(n): A. Eastern SyndicateB. Western Syndicate C. Northern Syndicate D. Southern Syndicate

The best answer is B.A divided syndicate is known as a Western syndicate. Here, each member takes a preset dollar amount of the issue and is only responsible for selling that initial amount. This contrasts to an undivided syndicate agreement, which is an Eastern account. There is no such thing as a Northern or Southern account.

Which of the following securities can be sold by an individual holding an investment companies/variable annuities (Series 6) registered representative's license? I Municipal Investment TrustsII Real Estate Investment TrustsIII Municipal Bond FundsIV Revenue Bonds A. I and II onlyB. I and III only C. III and IV only D. I, II, III, IV

The best answer is B.A person holding an investment companies/variable annuities (Series 6) license is only allowed to sell mutual funds, unit investment trusts, and variable annuities. To sell other securities such as Real Estate Investment Trusts, municipal bonds, corporate bonds, options etc., the broader Series 7 general securities license is required.

Contributions to a Coverdell Education Savings Account must cease when the beneficiary reaches the age of: A. 16B. 18 C. 21 D. 30

The best answer is B.Contributions to a Coverdell Education Savings Account must stop once the beneficiary reaches age 18.

The interest rate paid on Eurodollar deposits is: A. Prime rateB. LIBOR C. Fed Funds Rate D. Discount rate

The best answer is B.Eurodollar deposits are U.S. currency held in banks in foreign countries, mainly in Europe. The Eurodollar market is centered in London - and the interest rate paid on these deposits is "LIBOR" = London Interbank Offered Rate.

A customer buys 1 ABC Jul 50 Put @ $3. The customer lets the contract expire. Which statement is TRUE? A. The holder has a $300 capital loss as of the date the contract was purchasedB. The holder has a $300 capital loss as of the date the contract expires C. The holder has a $4,700 capital gain as of the date the contract was purchased D. The holder has a $4,700 capital loss as of the date the contract expired

The best answer is B.If the holder of an option contract allows the option to expire, he or she has a capital loss equal to the premium paid as of the expiration date.

Which of the following must be disclosed, or be disclosed upon customer request, in competitive bid municipal underwritings? I SpreadII Initial offering price of each maturityIII Participation amount of each underwriterIV Order priority provisions A. I and IIIB. II and IVC. I, II and IV D. I, II, III, IV

The best answer is B.In competitive bid municipal underwritings, the offering price of each maturity must be disclosed, but there is not requirement to disclose the spread, which is typically very thin. There is no requirement to disclose the participation amounts of the underwriters (since this in no way affects the customer). However, the order priority provisions must be disclosed (the usual priority is Pre-Sale; Group Net; Designated; Member Takedown).

All of the following terms apply to mutual fund shares EXCEPT: A. continuously issuedB. tradeable C. redeemableD. non-negotiable

The best answer is B.Mutual fund shares do not trade; they are non-negotiable. The shares are redeemed by the fund at Net Asset Value. The fund continuously issues and redeems its shares.

Regular way trades of U.S. Government securities settle: I next business dayII in 2 business daysIII in Clearing House fundsIV in Federal Funds A. I and IIIB. I and IV C. II and III D. II and IV

The best answer is B.Regular way trades of U.S. Government securities settle next business day in Federal Funds. question

The physical securities which are the underlying collateral for Treasury Receipts are: A. Treasury BillsB. Treasury Notes C. Series EE Bonds D. Treasury Stock

The best answer is B.The physical securities which are held in trust against the issuance of Treasury Receipts are either Treasury Notes or Treasury Bonds. Treasury Bills cannot be used because their maturities are too short; Series EE bonds (savings bonds) cannot be used because they are non-marketable.

The flow of funds for a municipal revenue bond offering is set forth in the: A. Official Notice of SaleB. Trust IndentureC. Official Statement D. Legal Opinion

The best answer is B.The trust indenture for a revenue bond issue will include the flow of funds. The flow of funds details the order in which collected revenues will be applie

A Municipal Finance Professional (MFP) who lives in San Francisco makes a political contribution to the election campaign of an individual running for mayor of Los Angeles. Which statement is TRUE about this? A. There is no violation of Rule G-37 if the amount of the contribution is less than $250B. There is a violation of Rule G-37 because the contribution was made to a campaign where the MFP is not entitled to vote C. There is no violation of Rule G-37 because the rule would only apply to contributions made to candidates running for office in San Francisco D. There is a violation of Rule G-37 because MFPs are not permitted to make contributions to the campaigns of any candidates running for election

The best answer is B.Under MSRB Rule G-37, a Municipal Finance Professional can give up to $250 to an elected official's campaign in which the MFP is entitled to vote without any problems. If the amount given is more than $250, or if ANY dollar amount is given to an elected official's campaign in which the MFP is not entitled to vote (as in this case), then the municipal broker-dealer is banned from doing negotiated underwritings and municipal financial advisory work for that municipality for 2 years. question # 9-6-45-1Regulations: MSRB Rules: Political Contribution Rule: MFP Contribution To Campaign Where Not Entitled To VoteCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved

If a registered representative solicits an order from a new customer to purchase a "penny stock" that is trading over-the-counter, which procedure is required? A. Send a prospectus to the customerB. Have the customer sign a statement that he or she understands the risks involved prior to executing the order C. Have the branch manager approve the order and then fill the customer's order in the same manner as with any other security D. Send the customer a Subscription Agreement to be signed before filling the order

The best answer is B.Under the SEC's "penny stock rule" (Rules 15g-1 through 15g-6), if a registered representative solicits a new customer to buy a non-NASDAQ over-the-counter stock priced under $5 (translated, this is an OTCBB or Pink Sheet issue under $5), the registered representative must complete a detailed suitability statement for the customer, and the customer must sign this statement before the order can be confirmed. This rule was enacted to curb unethical sales practices of so-called "penny stocks."

During a period when the yield curve is flat: A. short term bond prices are more volatile than long term bond pricesB. long term bond prices are more volatile than short term bond pricesC. short term and long term bond prices are equally volatile D. no relationship exists between short term and long term bond price changes

The best answer is B.Whether the yield curve is ascending (normal), flat or descending, long term bond prices always move faster than short term bond prices, as interest rates change. This is due to the compounding effect on the bond's price that occurs, which increases with longer maturities.

Yield quotes for collateralized mortgage obligations are based upon: A. average life of the trancheB. expected life of the tranche C. 15 year standard life D. actual maturity of the underlying mortgages

The best answer is B.Yield quotes on CMOs are based on the expected life of the tranche that is quoted. Do not confuse this with the "average life" of the mortgages in the pool that backs the CMO. This pool, with say an average life of 12 years, is "chopped-up" into many different tranches, each with a given "expected life." For example, there may be 10 tranches in the pool, with the first tranche having an expected life of 1-2 years, the second tranche having an expected life of 3-5 years, the third tranche having an expected life of 5-7 years, etc.

Which of the following agencies issuing mortgage backed pass through certificates is (are) restricted to purchasing conventional mortgages that are not VA or FHA insured? I Fannie MaeII Ginnie MaeIII Freddie Mac A. I only B. II onlyC. III only D. I, II, III

The best answer is C. Freddie Mac - Federal Home Loan Mortgage Corporation - buys conventional mortgages from financial institutions and packages them into pass through certificates. This agency was partially sold off to the public as a corporation that was listed on the NYSE. Fannie Mae (Federal National Mortgage Association) buys FHA and VA insured mortgages from financial institutions and packages them into pass through certificates. This agency was sold off to the public as a corporation that was listed on the NYSE. Both Fannie and Freddie are now bankrupt due to excessive purchases of bad "sub prime" mortgages and have been placed in government conservatorship. Their shares have been delisted from the NYSE and now trade OTC in the Pink OTC Markets. Ginnie Mae (Government National Mortgage Association) performs the same function as Fannie Mae except that its pass through certificates are guaranteed by the U.S. Government. It remains an agency of the government and cannot be "sold off" as a public company as long as the government continues to guarantee its securities.

All of the following are standardized for listed option contracts EXCEPT: A. strike price B. contract sizeC. premium D. expiration

The best answer is C.Exchange traded option contracts have standardized contract sizes (e.g., 100 shares of stock), expiration dates, and strike prices. The premium or "price" of the option is determined minute by minute in the trading market.

A short seller is prohibited from covering short sales with offered securities purchased from an underwriter participating in the offering if the short sale occurred how many days prior to the pricing of the offered securities? A. 1 B. 2C. 5 D. 10

The best answer is C. SEC Regulation M (Rules 101-105) covers secondary market activities related to registered public offerings, and addresses such items as prohibitions or limits on syndicate members buying the stock in the secondary market during the 20-day cooling off period (this is for add-on offerings); stabilization rules (because stabilizing bids are placed in the secondary market); and also, under Rule 105, addresses a rather nasty market manipulation that occurred in secondary offerings. Prior to the adoption of this rule, a common trading practice was for overly aggressive independent traders to short that stock in the market - pushing the price down during the 20-day cooling off period. The fall in the market price would force the underwriters to lower the Public Offering Price of the issue. Thus, when registration became effective, the independent trading firms could buy the issue from the underwriters at the lower P.O.P., cover their short positions, and have a nice profit. The problem was, however, that this activity was clearly manipulative. The SEC took a dim view of this activity, and under Rule 105, prohibits broker-dealers from purchasing shares of stock from the underwriters at the offering price to cover short positions established within 5 business days of the effective date. question # 9-2-42-1Regulations: Securities Exchange Act of 1934: Regulation M - Add On Offerings - Trading Prohibitions: Short Sale of IssueCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved

A customer contributed $50,000 to a variable annuity contract. The account value has grown over the years and the NAV is now $70,000. The customer is now age 60, and takes a lump-sum distribution of $25,000 to pay for expenses. Which statement is TRUE? A. The entire $25,000 distribution is not taxable B. $5,000 of the distribution is taxable and $20,000 is not taxableC. $20,000 of the distribution is taxable and $5,000 is not taxableD. The entire $25,000 distribution is taxable

The best answer is C. Variable annuity contributions are not tax-deductible. Earnings in the account build tax-deferred. When distributions are taken, tax is due on the portion that represents the tax-deferred build-up. The portion that represents the original contribution (already taxed dollars) is returned without any further tax due. If a lump-sum distribution is taken, the IRS uses LIFO (Last-In; First-Out) accounting. The Last-In Dollars are the tax-deferred build-up, so these are the First-Out dollars and they are 100% taxable! Any distribution above and beyond the build-up amount is a tax-free return of original capital. In this example, the customer contributed $50,000 and this has grown, tax-deferred, to $70,000. If a lump sum distribution of $25,000 is taken, the first dollars out are the $20,000 of never taxed build-up and this amount is taxable. The remaining $5,000 is a partial tax-free return of the original $50,000 investment (which was not tax deductible).

Which statements are TRUE regarding the conduct of Treasury Bill auctions? I 4 week, 13 week and 26 week T-Bills are auctioned weeklyII 1 year T-Bills are auctioned monthlyIII Non-competitive bids take priority over competitive bidsIV Bids are awarded based on the lowest discount yield except for 26 week bills which are sold at par A. I and III only B. I, II, IVC. I, II, III D. II, III, IV

The best answer is C.4 week, 13 week and 26 week Treasury Bills are auctioned weekly; 1 year T-Bills are auctioned monthly. Because the amount of securities represented by non-competitive bids are withheld from auction and are always filled at the average winning yield, these bids have priority. Competitive bids will not be filled if the yield specified is too high. The bids are always awarded on the basis of lowest discount yield

A primary U.S. Government securities dealer purchasing T-Bills for its inventory account would most likely buy the bills: A. in the trading market B. from other U.S. Government dealersC. directly from the U.S. Treasury at the weekly yield auction D. directly from the Federal Reserve open market trading desk

The best answer is C.A primary U.S., Government dealer buys T-Bills directly at the weekly Treasury auction and then reoffers the bills to both the public and secondary dealers.

Types of funds used to back revenue bond issues include all of the following EXCEPT: A. excise taxes B. lease rentalsC. ad valorem taxes D. enterprise activity income

The best answer is C.Ad valorem taxes back general obligation bonds. Revenue bonds can be backed by any source of revenue other than ad valorem taxes. These sources include revenue from facility operations, grants, excise taxes, or other non-ad valorem taxes, like sales and income taxes.

Which of the following terms are synonymous? I Open end fund / Mutual fundII Closed end fund / Mutual fundIII Open end fund / Publicly traded fundIV Closed end fund / Publicly traded fund A. I and II B. III and IVC. I and IV D. II and III

The best answer is C.An open-end fund portfolio is managed and the fund continuously issues and redeems its common shares - so it is an "open end" management company. A closed-end fund has a 1 time stock issuance and then "closes" its books to new investment and then lists its stock on an exchange or NASDAQ. The stock then trades like any other common stock, except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is a "publicly traded" fund.

Business Development Companies (BDCs) must distribute what percentage of their taxable net income to shareholders annually? A. 75%B. 80%C. 90% D. 100%

The best answer is C.BDCs are a type of investment company that invests in privately held start-up businesses and financially troubled companies. To qualify as a BDC, at least 70% of the assets must be invested in small or financially troubled companies. To receive "conduit tax treatment" under the Internal Revenue Code, the BDC must distribute at least 90% of its taxable net income to shareholders and must derive 90% of its net income from dividends, interest and capital gains on investments. Note that the 90% distribution rule is the same as for mutual funds and REITs.

All of the following statements are true for both mutual funds and variable annuities that are in the accumulation phase EXCEPT: A. both are regulated by the Investment Company Act of 1940 B. both have portfolios that are managedC. dividend and capital gains distributions are taxable each year for bothD. asset appreciation is untaxed for both

The best answer is C.Dividend and capital gain distributions made by variable annuity separate accounts must be reinvested and are tax deferred. Dividend and capital gain distributions from other investment companies do not have to be reinvested and are always taxable, whether reinvested or not. Both variable annuities and mutual funds are regulated under the Investment Company Act of 1940; have managed portfolios; and asset appreciation is untaxed. Mutual fund asset appreciation is taxable only when a capital gains distribution is made.

Which of the following is NOT defined as an Outside Business Activity by FINRA? A. A registered representative who helps out in his or her family's restaurant at night, only earning tips B. A registered representative who is elected to the Board of Directors of her cooperative apartment houseC. A registered representative who volunteers to make solicitations of contributions to her churchD. A registered representative who teaches a course on financial literacy at a local community college

The best answer is C.FINRA requires that associated persons give written notice to their employer and receive written approval from their employer, to serve as an officer, director, partner or employee of another business organization. In addition, such an OBA (Outside Business Activity) must be reported on that individual's U-4 Form. This information then flows into that registered representative's BrokerCheck report and shows as an OBA on the report. The intent of the OBA disclosure in BrokerCheck is that a potential customer can assess how much time a representative is devoting to his or her business as a representative, as opposed to how much time the representative is devoting to Outside Business Activities. Being compensated is not the sole determinant of whether an activity is an OBA. If the activity can reasonably be expected to lead to additional business for that representative, it is an OBA. Teaching a course in night school at a college could be a way to get new client leads, and hence is an OBA. Being on the Board of Directors of a cooperative apartment house, while not compensated, puts the representative in a position to "steer" the Board when it makes a decision as to investing the coop's reserve and operating funds, so it is an OBA. Working in the family restaurant for tips is clearly an OBA. Note that volunteer charitable work, where there is no "quid pro quo" arrangement, is not an OBA. Rather, it is simply doing a good thing!

Trading of Swiss francs takes place on the: A. New York Stock Exchange B. Over-the-Counter MarketC. Interbank Market D. Instinet Market

The best answer is C.Foreign currencies trade in the "Interbank Market." Trading of foreign currency option contracts that are "securities" takes place on the Philadelphia Stock Exchange.

A municipal "broker's broker" does which of the following? I Executes trades as agent for institutional clientsII Executes trades as agent for other dealersIII Trades for the firm's own accountIV Obtains quotes from other dealers A. I and II only B. III and IV onlyC. I, II, IV D. I, II, III, IV

The best answer is C.Municipal broker's brokers act as agents handling large municipal orders, usually for institutions. These firms do not act as market makers and do not take inventory positions.

Which of the following statements are TRUE regarding REITs? I REITs are similar to closed end investment companiesII REITs issue shares of beneficial interest representing an undivided interest in a pool of real estate investmentsIII REITs are similar to open end investment companiesIV REITs are registered under the Securities Act of 1933 A. I and II only B. III and IV onlyC. I, II and IV D. I, II, III, IV

The best answer is C.REITs, though not defined as a type of investment company under the 1940 Act, are similar to closed end investment companies; not open end management companies. REITs issue shares of beneficial interest with each certificate representing an undivided interest in the pool of real estate investments. REITs are registered securities under the Securities Act of 1933 and trade on an exchange or OTC.

All of the following statements are true regarding defined benefit plans EXCEPT: A. contributions made to the plan can vary from year to year B. employees with the highest salaries and the fewest years to retirement benefit the mostC. benefits paid to employees consists of a tax free return of capital and a taxable return of earnings D. actuarial tables are used to determine contribution rates for each employee

The best answer is C.Since a defined benefit plan is a "tax qualified" retirement plan, contributions are tax deductible and earnings "build up" tax deferred. When distributions commence, since none of the funds were ever taxed, the distribution amounts are 100% taxable. The other statements about defined benefit plans are true.

Which of the following are considered to be "technical indicators"? I Advance / Decline RatioII Consumer Confidence IndexIII Dow Theory A. I only B. II onlyC. I and IIID. I, II, III

The best answer is C.The Advance / Decline Theory measures the relative strength of the market by comparing the number of issues advanced to the number of issues declined. The Dow Theory states that market turns can be predicted if a downturn in the Dow Jones Industrial Average is confirmed by a downturn in the Dow Jones Transportation averages. Both of these are technical measures that attempt to predict future market movements by looking at current and prior market price movements and trading volumes.The Confidence Index is not a technical indicator - rather it is a fundamental indicator of consumer sentiment. If the confidence index is strong, consumers can be expected to spend money freely and the economy is likely to expand. If the confidence index is weak, consumers will be "belt tightening" and the economy may fall into recession.

Which of the following communications fall under the Federal Telephone Consumer Protection Act of 1991? I Telephonic via live human voiceII Telephonic via pre-recorded messageIII Facsimile transmissionIV U.S. Mail A. I only B. II and IIIC. I, II, III D. I, II, III, IV

The best answer is C.The Federal Telephone Consumer Protection Act of 1991 applies to any unsolicited offers made through the phone - whether these are made by personal contact, pre-recorded messages, or facsimile. It does not apply to offers made through the U.S. mail.

Which of the following is an indicator of "market sentiment"? A. Daily trading volume B. Daily trading price rangeC. Number of bullish investors versus number of bearish investors D. Number of new listings on the New York Stock Exchange versus number of delistings

The best answer is C.The principal "Market Sentiment" (that is, market direction) indicators are the advance / decline ratio and the put / call ratio. Both of these indicators measure the relative number of bullish investors (as indicated by advancing prices or call purchases) relative to the number of bearish investors (as indicated by declining prices or put purchases). Trading volumes and price ranges do not indicate market direction; nor do the number of new listings versus the number of delistings. question # 12-5-9-3

If 26-week T-bills are yielding 5%, all common stocks are yielding 10%, and growth stocks are yielding 15%, the risk premium for investing in growth stocks is: A. 0% B. 5%C. 10% D. 15%

The best answer is C.The risk premium is the excess return achieved for investing in a specific class of assets as compared to the risk free return. The risk-free return is 5%, while growth stocks are yielding 15%. The excess return for investing in growth stocks is 10%.

If an unsolicited facsimile is sent to a potential client, which of the following information must be sent? I Date and number of sheetsII Identity of senderIII Time, place and address from which sentIV Phone number from which sent A. I and II only B. III and IV onlyC. II, III, IV D. I, II, III, IV

The best answer is C.Unsolicited phone calls, even by fax, come under the Federal Telephone Consumer Protection Act of 1991. This Act requires that the caller identify his name, the firm name, and phone number or address from which the communication is being sent. There is no legal requirement to give the date and number of sheets on a fax transmission (though this is commonly done).

A customer buys 100 shares of XYZ stock at $51 and buys 1 XYZ Jan 50 Put @ $4 on the same day. The put expires and the stock is sold in the market for 59. For tax purposes, the put premium is: A. a capital loss at expiration date B. a capital loss at the date the stock is soldC. added to the cost basis of the stock, reducing any capital gain when the stock is sold D. subtracted from the strike price of the put, reducing any capital gain when the stock is sold

The best answer is C.When a put is purchased on a stock on the same day that the stock is bought, the put is said to be "married" to the stock position. The only reason the option was purchased was to protect the customer against loss if the market for the stock fell. It was not purchased to speculate in the market. The IRS treats a "married" put as part of the cost basis of the stock. Notice that, therefore, the put premium cannot be deducted as a capital loss if the put expires worthless; instead, it has increased the stock's cost basis and will reduce any potential capital gain, when, and if, the stock is sold. As one would expect, this is the tax treatment that is most beneficial to the IRS and least beneficial to the investor. The cost of the stock is $51 + $4 premium = $55 per share. When the stock is sold at $59, the customer reports a 4 point capital gain.

Which of the following options communications must be approved by the designated Registered Options Principal prior to use? I AdvertisingII Sales literatureIII Independently prepared reprints A. I onlyB. I and II C. II and IIID. I, II, III

The best answer is D. Options communications that are distributed to more than 25 existing or prospective clients must be approved in writing prior to use by the designated Registered Options Principal (main office compliance ROP). Retail communications include advertising, sales literature and independently prepared reprints distributed to more than 25 existing or prospective clients. Options institutional sales literature and public appearances are the 2 public communications that do not require designated ROP approval. However, they are subject to the firm's policies and procedures. Options correspondence is a communication to up to 25 existing or prospective clients. It is subject to "post use review and approval" by a branch manager or ROP. question # 9-7-4-4Regulations: CBOE Rules: Communications: Approval by Designated ROPCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved

Which of the following indexes is the narrowest measure of the market? A. Value Line Index B. Dow Jones Averages C. Wilshire IndexD. Dow Jones Industrial Average

The best answer is D. The Dow Jones Industrial Average has 30 stocks, while the Dow Jones Averages contain 65 stocks - 30 industrials; 20 transportations; and 15 utilities. The Wilshire Index is the broadest measure since it includes about 3,500 issues of companies headquartered in the United States that are listed on the NYSE, NYSE American (AMEX), or NASDAQ. The Wilshire started at 5,000 stocks in 1974 but the number of listed companies in the U.S. has been declining over the years, mainly because of the high regulatory cost of a company "going public." The Value Line Index includes 1,700 issues.

The Specialist (DMM) performs all the following functions EXCEPT: A. trades for his own account B. executes orders for other brokersC. executes odd lot ordersD. participates in new issue syndicates

The best answer is D. The Specialist (now called the DMM - Designated Market Maker) is a dealer on the exchange floor trading for his own account. He trades both round lots and "odd" lots (units of less than 100 shares for all stocks except "cabinet" stocks - very high priced stocks that trade is round lots of 10 instead of 100). The Specialist/DMM also acts as agent for other brokers, running a book of open orders to be filled if the market moves up or down. The Specialist/DMM does not participate in new issue syndicates; this is handled by retail firms who deal with the public. All new issues are initially sold over-the-counter, so the Specialist/DMM on an exchange could not participate in these offerings. Once an initial public offering is completed over-the-counter, the stock trades either on an exchange or over-the-counter.

A wealthy, sophisticated investor with a high risk tolerance has just turned extremely bullish on the market. To profit from this, the BEST recommendation to the client would be to: A. buy index calls B. buy index puts C. buy inverse ETFsD. buy leveraged ETFs

The best answer is D. This customer has just turned "extremely bullish" on the market, meaning he thinks that equities are going to rise rapidly in price. The customer is wealthy, sophisticated, and has a high risk tolerance. The most aggressive choice offered is the leveraged ETF. Assume it is a 300% leveraged ETF based on the S&P 500 Index. If the index rises by 15%, this ETF should rise by 3 x 15% = 45%. (Of course, if the customer is wrong and the index falls, then the customer loses big time!) The purchase of an inverse ETF is not appropriate because it moves opposite to the general market, so if the market rises, it falls. Of course, if the customer were to short an inverse ETF, then if the market moved up, the inverse ETF would fall in value, for a profit on the short position - but this is not offered as a choice. question # 11-1-29-2Suitability: Portfolio Construction / Asset Allocation: Portfolio Management: Suitable Recommendations - Aggressive ClientsCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved

A double barreled revenue bond is one which offers investors: A. double the normal interest rate due to the high risk factor B. both a high rate of interest and a high level of creditworthiness C. the choice of both term and serial maturitiesD. general obligation backing in addition to a revenue pledge

The best answer is D.A "double barreled" bond is one backed by a specified source of revenue as well as the full faith and credit of an issuer with ad valorem taxing power. Revenue bonds are "double barreled" to increase the credit rating of the issue and hence reduce interest cost and increase marketability.

A fund of hedge funds: A. must invest at least 75% of its assets in hedge funds B. must invest at least 90% of its assets in hedge funds C. must invest in at least 10 different hedge fundsD. can invest in any number of hedge funds

The best answer is D.A "fund of hedge funds" is a registered investment company that invests in hedge funds. There is no limit on how the manager allocates invested monies into hedge fund investments in a "fund of hedge funds."

Which of the following requires filing with the SEC? I Purchase of a 5% position in one company's stockII An officer selling 1% of that company's stockIII Corporation declaring bankruptcyIV Corporate proxy materials A. I only B. II only C. I, II, IIID. I, II, III, IV

The best answer is D.All of the items listed are filed with the SEC. Anyone who accumulates a 5% position in one company must make a 13D filing with the SEC; officers must report their sales of that company's stock under the insider rules by filing a Form 4 within 2 business days of the trade; a corporate 8K filing is required for any unusual corporate announcements such as a merger or divestiture, or bankruptcy declaration; and corporate proxy materials must be filed with the SEC 10 business days before use.

Which money market instruments are marginable? A. Bankers' acceptances B. Treasury bills C. Commercial paperD. All of the above

The best answer is D.Because money market instruments are "safe," they can be margined - meaning that the brokerage firm can lend money against these securities held as collateral for the loan. Government securities, agency securities, investment grade money market instruments, investment grade corporate bonds, and listed stocks are the marginable securities.

Which of the following statements are TRUE regarding a registered individual who recently left the employment of a FINRA member firm? I The individual is allowed to maintain his license at another member firm without being employed by that firmII The individual cannot maintain his license at another member firm without being employed by that firmIII The license remains active for an indefinite time period if the individual does not affiliate with another member firmIV The license lapses if the individual remains unaffiliated for 2 years A. I and IIIB. I and IV C. II and IIID. II and IV

The best answer is D.FINRA prohibits "parking" of licenses when an individual is not affiliated with a member firm. If that person remains unaffiliated for 2 years, all licenses lapse.

Which of the following mutual fund terms are synonymous? A. Bid; Asking Price B. Bid; Public Offering PriceC. Ask; Net Asset ValueD. Ask; Public Offering Price

The best answer is D.For mutual funds the Ask is the same thing as Public Offering Price. Bid, Redemption Price, and Net Asset Value are all the same terms.

A customer buys Kingdom of Sweden bonds in the secondary market at a discount. Which statements are TRUE? I If the bonds are held to maturity, the discount is taxed as a capital gainII If the bonds are held to maturity, the discount is taxed as ordinary incomeIII The interest received is exempt from Federal, State, and Local taxIV If the bonds are sold prior to maturity, the investor may have a capital gain or loss A. I and III B. I and IV C. II and IIID. II and IV

The best answer is D.Foreign government bonds are treated like corporate bonds for tax purposes. The interest income is subject to Federal, State, and Local Tax. If the bond is bought in the market at a discount, the so-called "market discount" is taxable interest income, taxed when the bond matures (or the holder can opt to accrete the market discount each year, and pay the tax annually on the earning of the discount - not the best choice to do). If the bonds are sold prior to maturity, the pro-rated "accretion" amount on the bond is taxed as interest income earned; any capital gain or loss on the bond will result from the sale price being different than the bond's accreted value.

Which statement is TRUE about transfers of Individual Retirement Accounts? A. A maximum of 1 transfer is permitted each year B. A maximum of 2 transfers are permitted each year C. A maximum of 3 transfers are permitted each yearD. There is no limit on transfers

The best answer is D.IRA transfers between trustees must be made directly from trustee to trustee. There is no limit on the number of transfers that can be made each year. If the transfer is effected by having the check made out to the account holder, this is considered to be an IRA rollover, which must be completed within 60 days and only 1 rollover per year is permitted.

Keynesian Economic Theory postulates that production and economic growth are stimulated by: I Decreased government borrowingII Increased government borrowingIII Lower government spendingIV Higher government spending A. I and III B. I and IV C. II and IIID. II and IV

The best answer is D.Keynesian Economic Theory states that economic growth is controlled by government spending and transfer payments (e.g., Social Security). This theory gained adherents in the 1930s during the Great Depression. With the private economy shattered at that time, the only way out was to have the government employ workers in large projects. This increased Government spending; and helped to stimulate economic activity as earnings were placed in individual pockets. To pay for this the government had to borrow more money.

Passive asset management is: A. buying securities positions and holding them to the liquidation date of the portfolio B. buying securities positions and holding them until pre-established prices are reachedC. selecting securities to be purchased for each asset class based upon fundamental analysisD. using index funds as the investments for each asset class

The best answer is D.Passive asset management does not mean that there is no management. Passive asset management is the use of index funds (which are managed to mirror a chosen index benchmark) as the security selections within an asset class. Thus, the actual specific security selection and management is embedded within the index fund chosen for investment. question # 11-1-4-2

Below is a listing of municipal bonds with the same credit ratings and maturities. Which bond has the lowest yield? A. General Obligation Bond B. Public Purpose Revenue Bond C. Non-Essential Use Private Purpose Revenue BondD. Puerto Rico Bond

The best answer is D.Ranking the yields on these bonds from highest to lowest:Private purpose revenue bond would have the highest yield because its income is Federally taxable via the AMT - Alternative Minimum Tax. Public purpose revenue bond would have a lower yield because its interest income is exempt from Federal tax. A general obligation bond would have a lower yield than a public purpose revenue bond because it has greater safety; as well as being exempt from Federal tax. A Puerto Rico bond would have the lowest yield because its income is exempt from both Federal, State, and Local taxes for all investors, no matter where they live.

If an individual, aged 65, wishes to withdraw money from her variable annuity, which of the following statements are TRUE regarding the taxation of her withdrawal? I All of the withdrawal is subject to income taxII Part of the withdrawal is subject to income taxIII The amount is subject to a 10% penalty tax for early withdrawalIV The amount is not subject to a 10% penalty tax for early withdrawal A. I and III B. I and IV C. II and IIID. II and IV

The best answer is D.Since this person is above age 59 1/2, any withdrawals from the retirement plan are not subject to the 10% penalty tax for a premature distribution. Since the contribution amount in the non-tax qualified plan was not tax deductible (meaning the amount contributed was already taxed), this portion of the investment is returned without any tax consequence. Thus, only part of the monthly payment is taxable (the portion that represents the tax deferred build up). The portion that represents the original after-tax contribution of capital is not taxed.

The Specialist/DMM receives an order via Super Display Book to buy 6,000 shares of ABC at the market. The Specialist/DMM will: A. place the order on his book for execution B. fill 3,000 shares at $50.05 and place the unfilled portion of the order on his book C. fill 6,000 shares at $50.05D. fill 6,000 shares at $50.06

The best answer is D.The Specialist (now called the DMM - Designated Market Maker) is quoting the stock at $50.05 Bid with a size of 30 (good for 30 x 100 = 3,000 shares); and $50.06 Ask with a size of 60 (good for 60 x 100 = 6,000 shares). These are the next orders to be filled on the Specialist's/DMM's book. If the Specialist/DMM receives a market order to buy for 6,000 shares, the Specialist/DMM will fill that order at the current ask price of $50.06.

A customer buys a Direct Participation Program by investing $100,000; and signing a $400,000 recourse note. The partnership immediately liquidates, and the investor is returned $100,000 by the general partner. The investor has: A. no capital gain or loss B. a $100,000 capital gain C. a $300,000 capital lossD. a $400,000 capital loss

The best answer is D.The customer's beginning tax basis is $500,000 in the partnership (the recourse financing is included in the basis since the partner is personally "at risk" for this). If the partnership immediately liquidates and the partner is returned $100,000, this represents his "sale proceeds" for tax purposes. The capital gain or loss is: $500,000 basis - $100,000 sale proceeds = $400,000 loss.

A customer has purchased 1,000 shares of ABC stock at $44 per share, paying a commission of $1.00 per share for the transaction. ABC stock declares a 20% stock dividend. When the dividend is paid, the tax status of the investment is: A. 1,000 shares held at a cost basis of $44 per share B. 1,000 shares held at a cost basis of $45 per shareC. 1,200 shares held at a cost basis of $36.66 per shareD. 1,200 shares held at a cost basis of $37.50 per share

The best answer is D.The payment of a stock dividend increases the number of shares held by the investor and the cost basis must be reduced accordingly, since each share is theoretically worth less after the stock dividend is paid. The customer will have 1,000 shares x 1.20 = 1,200 shares after the dividend. Each share originally had a cost basis of $45 ($44 price plus $1 commission). After the dividend is paid, the cost basis is adjusted to $45/1.20 = $37.50.

All of the following participate in the Eurodollar bond market EXCEPT: A. Domestic commercial banks B. Foreign commercial banks C. Domestic investment banksD. Domestic thrift institutions

The best answer is D.Thrift institutions do not operate in the foreign markets. They only conduct business in the State in which they are organized, with their primary purpose being to give mortgages on local real estate, funded by deposits raised locally.Participants in the Eurodollar bond market include both domestic and foreign commercial banks (most domestic commercial banks have large overseas offices); as well as domestic and foreign broker-dealers.

A middle-aged widowed customer has an investment objective of stable income and wants minimal market and liquidity risk. What type of preferred stock would be the best recommendation? A. Participating preferredB. Convertible preferred C. Straight preferredD. Variable rate preferred

The best answer is D.Variable rate preferred has a dividend rate that is tied to a market rate of interest, and the dividend rate varies as that rate varies. When market interest rates rise, the dividend rate rises; when market interest rates fall, the dividend rate falls. Because the dividend rate varies, the price of the security stays right at par value and has minimal market risk. In contrast, any fixed income security, which includes the other types of preferred stock, is subject to market risk. When market interest rates rise, the value of any fixed rate security must fall, making its yield competitive with current market rates. Finally, all preferred stock has minimal liquidity risk. Preferred shares are listed and trade, so the shares can be sold readily at low cost.