Chap 10, 13

A company's changing from straight line to accelerated depreciation will increase income in the early years. decrease income in the early years. increase income in the later years. decrease income in the later years. A) II and IV B) II and III C) I and IV D) I and III

B Explanation Accelerated depreciation increases charged expenses during the early years of equipment life but decreases charged expenses during the later years.

In the partnership agreement of a limited partnership, all of the following would be disclosed except A) how the operating profits will be distributed. B) the procedures for the annual election of general partners. C) how the general partners will be compensated. D) what matters the limited partners can vote on under the democracy provisions.

B Explanation Limited partners have limited liability. General partners have unlimited liability. Only in specific situations can the limited partners elect a new general partner. Such situations would include the resignation, death, incapacity, or removal of the general partner.

A summary statement of all interest and dividends credited to a customer's account must be sent to the primary accountholder each year in A) April. B) January. C) December. D) July.

B Explanation Member firms must provide an IRS Form 1099 to the primary account holder of all the interest and dividends credited to the account in January. This form is used in the customer's tax return preparation.

Acme Pharmaceuticals previously had issued $200 million of common stock in an IPO. A year later, it issued $50 million of debentures at par value. Acme's leverage is what percentage of its total capital? A) 50% B) 20% C) 400% D) 25%

B Explanation The leverage is the extent to which borrowed funds make up the company's total capital. Total capital is the value of the equity and debt financing combined. Acme has issued $50 million of debentures (debt capital) and $200 million of equity capital (the common stock). That makes the total capitalization of Acme equal to $250 million. The leverage is $50 million divided by $250 million, or 20%. An analyst would consider this conservative leverage.

The visible supply has been increasing steadily over the past 30 days. This is an indication that A) fewer new issues will be offered in the next 30 days. B) yields are likely to rise. C) yields are likely to fall. D) prices are likely to rise.

B Explanation When the visible supply increases, it tells us that the number of bond issues coming to market is increasing. Greater supply puts downward pressure on prices. As bond prices fall, yields increase.

Which of the following may be affected when a company buys machinery for cash? Shareholders' equity Current assets Total liabilities Working capital A) I and IV B) II and IV C) I and III D) II and III

B Explanation The purchase of machinery for cash will reduce current assets and working capital.

A confirmation of each customer trade must be given or sent A) on the trade date. B) before the trade date. C) before the settlement date. D) on or before the settlement date.

D Explanation A confirmation must be sent to a customer on or before the completion of the transaction (the settlement date).

If a father makes a gift of securities to his 10-year-old daughter, gift taxes would be based on A) the cost of the securities. B) the market value of the securities as of December 31 of the year in which the gift is made. C) the market value of the securities as of April 15 of the year in which the gift is made. D) the market value of the securities on the date of gift.

D Explanation If a gift tax is due, it is paid by the donor and based on the gift's value on the date it is given.

Under Municipal Securities Rulemaking Board (MSRB) rules, which of the following yields for a callable bond would be shown on a confirmation? A) Yield based on catastrophe call B) Yield based on farthest in-whole call C) Yield based on in-part call D) Yield based on nearest in-whole call

D Explanation MSRB rules require that yield to call based on the nearest (near-term) entire issue (in-whole call) be disclosed on a customer's confirmation. With a partial call, the bond being purchased may or may not be included in the call, and with a catastrophe call provision, a call would only occur if an unpredictable event requires the issuer to call the bonds.

Information gathered to verify a customer's identity must be maintained by a member firm for at least A) the lifetime of the firm. B) 6 years. C) 3 years. D) 5 years.

D Explanation The USA PATRIOT Act requires that information gathered to verify a customer's identity must be maintained for at least five years.

Capital gains distributed by a mutual fund to shareholders are reported and taxable for the year A) earned (accrued). B) the shareholder chooses but not later than two years after all shares are redeemed. C) paid by the fund. D) the shares are redeemed by the fund.

A Explanation Capital gains can be distributed to shareholders by a mutual fund no more than once per year and are reported and taxable for the year earned (accrued).

Which of the following are required to be given to retail customers at settlement in municipal new issue transactions? Confirmation showing the purchase price Official statement Names of syndicate members with their participation amounts Copy of the agreement among underwriters A) I and II B) III and IV C) II and IV D) I and III

A Explanation Municipal Securities Rulemaking Board rules state that a confirmation and an official statement must be sent to the investor no later than at settlement.

An investor wanting to know about the tax consequences of a direct participation program should know which asset types can be depleted or depreciated. All of the following asset types can be depleted or depreciated except A) crops. B) oil. C) buildings. D) gas.

A Explanation Oil and gas are examples of asset types that can be depleted, whereas buildings are a depreciable asset. Farm crops are considered renewable assets.

Records relating to terminated representatives must be retained for how many years? A) 3 years B) 5 years C) 1 year D) 6 years

A Explanation Records generated by and about terminated representatives are among those records retained for 3 years.

Which of the following regarding the Bond Buyer Revenue Bond Index (Revdex) are true? It includes 30-year bonds. It includes 20 bonds. It is compiled weekly. It is compiled monthly. A) I and III B) II and IV C) I and IV D) II and III

A Explanation The Bond Buyer Revdex is computed weekly just like The Bond Buyer's general obligation (GO) index. Revdex consists of 25 revenue bonds with 30-year maturities. The GO index includes 20 bonds, each with approximately 20 years to maturity.

All of the following Municipal Securities Rulemaking Board (MSRB) Rules of Uniform Practice requirements may be altered by mutual agreement between dealers except A) the content of confirmations. B) the terms of delivery. C) the payment of shipping expenses. D) the price and time of delivery.

A Explanation The MSRB regulates the contents of confirmations to standardize information. There must be an original record of the agreement, even though dealers may mutually agree to change the terms.

Balance sheets contain A) the net worth of the firm as of the date of the balance sheet. B) no reference to the accounting methods used to construct the balance sheet. C) the amount of cash and cash equivalents expended during the first half of the fiscal year as opposed to the second half. D) gross revenues for the year.

A Explanation The balance sheet provides a snapshot of the financial condition of the firm on that date. It does not provide information on the flow of expenses, revenues, and cash during the reporting period, as they would appear on the income statement. Among other references will be if inventory was calculated using first-in-first-out (FIFO) or last-in-first out (LIFO).

When a customer of a broker-dealer dies, all of the following documents may be required to release the decedent's assets except A) a power of attorney. B) an affidavit of domicile. C) a certified copy of the death certificate. D) an inheritance tax waiver.

A Explanation The power of attorney is the only document not required. If the decedent had executed a power of attorney, it would have become invalid upon death. An affidavit of domicile and an inheritance tax waiver may be required. A certified copy of the death certificate is always required.

A customer buys a real estate limited partnership interest by contributing $20,000 and signing a nonrecourse note for $50,000. The customer's beginning basis is A) $30,000. B) $70,000. C) $20,000. D) $50,000.

B Explanation Generally, nonrecourse debt does not add to basis because the limited partner is not responsible (at risk) for the repayment of the debt. However, in real estate partnerships, the at-risk rules do not apply, and therefore, add to basis in this type of partnership.

All of the following are covered by FDIC insurance except A) money market deposit accounts. B) money market mutual funds. C) bank savings accounts. D) negotiable CDs.

B Explanation One of the most important disclosures registered representatives must make to their clients is that a money market mutual fund is not the same as a money market account at a bank. The bank account is insured by the FDIC (up to the stated limits), while the mutual fund has no insurance. Negotiable CDs (the money market instrument) are bank issues insured by the FDIC up to the stated limit, as are bank savings accounts.

At the birth of a grandchild, your customers, the child's grandparents, purchased 1,000 shares of XYZ stock at $10 per share in their JTWROS account. The child is now an adult and the grandparents gift all the shares to their grandchild when the stock price is $50 per share. If the donee sold all the shares at $55 per share, the tax consequences would be a capital gain of A) $5,000. B) $45,000. C) $55,000. D) $50,000.

B Explanation The capital gain would be $45,000 ($55,000 - $10,000). If a gift is made of securities, the donee must use the original cost basis of the donor to calculate the gain or loss on a sale.

Which of the following statements regarding yield shown on a bond confirmation for a bond that has been called is true? A) A bond confirmation will show the higher of YTC or YTM if a bond has been called under an in-part call provision. B) A bond confirmation will show YTM if the bond has been called under an in-whole call provision. C) A bond confirmation will show YTC if the bond has been called under an in-whole call provision. D) A bond confirmation will show the lower of YTC or YTM if the bond has been called under an in-whole call provision.

C Explanation A bond confirmation for a bond called under an in-whole call provision will show yield to call (YTC), as the bond being called away is certain. However, in the event of an in-part call, there is uncertainty as to whether that particular bond will be called. Therefore, the lower of the YTC or yield to maturity would be shown on the confirmation.

An investor has purchased 100 shares of common stock of the UOM Corporation. UOM Corporation is a Japanese company. Rather than receiving a UOM stock certificate, the investor receives an American depositary receipt (ADR). The investor calls his registered representative and wants to know why he did not receive the stock certificate. The registered representative tells the client that A) receiving the stock certificates would cost the investor more money. B) records of ownership in UOM stock is book-entry only. C) the ADR is a substitute for the stock certificate and represents the investor's ownership in the foreign corporation's stock. D) UOM stock certificates were not available.

C Explanation An ADR is a negotiable certificate that evidences an ownership interest the shares of a non-U.S. company that are on deposit with a foreign branch of a U.S. bank. It is similar to a stock certificate representing shares of stock. ADRs trade in U.S. dollars and clear through U.S. settlement systems, allowing ADR holders to avoid having to transact in a foreign currency.

A fundamental analysis is reviewing a corporation's income statement. For the period, the company reported net sales of $10 million, cost of goods sold of $6 million, depreciation expense of $1 million, interest on long-term debt of $1 million, and income taxes of $500,000. With this information, the analyst knows that the company's cash flow from operations was A) $2 million. B) $3.5 million. C) $2.5 million. D) $1.5 million.

C Explanation Cash flow from operations is the net income plus the depreciation. The net income is found after deducting all the expenses plus the income taxes from the net sales. Those expenses are $8 million ($6 million + $1 million + $1 million) resulting in pretax income of $2 million. After-tax income is $1.5 million. Add the $1 million depreciation to that to arrive at the answer of $2.5 million. Note that some accountants include the depreciation in COGS (cost of goods sold), but if that is not mentioned in the question, it is a separate expense.

All of the following are money market instruments except A) commercial paper. B) reverse repurchase agreements. C) options. D) bankers' acceptances.

C Explanation Money market instruments are short-term (one year or less to maturity) liquid debt instruments. Reverse repurchase agreements, repurchase agreements, commercial paper, CDs, and bankers' acceptances are examples. Options are not money market instruments.

Most business development companies (BDCs) are classified as A) an exchange-traded fund. B) an open-end investment company. C) a closed-end investment company. D) a unit investment trust.

C Explanation Most BDCs register as closed-end investment companies (CEF) and trade in similar fashion in the secondary markets. Federal law places some restrictions on the investment flexibility of a BDC that are not required of regular CEFs. A major difference between BDCs and the other investment companies is the active role played in the management of the businesses in the portfolio. That is what business development is abouthelping smaller businesses develop into larger ones.

Funds for Life (FFL) is an SEC registered broker-dealer. The only securities business done by the firm is the sale of redeemable investment company securities. If FFL should go into bankruptcy proceedings, SIPC would A) offer protection up to $500,000 per customer. B) offer protection up to $250,000 per customer. C) not offer protection to any of the customers. D) protect any losses up to $250,000 in cash.

C Explanation SIPC, the Securities Investor Protection Corporation, is a nonprofit membership organization. SIPC members pay assessments into a general insurance fund that is used to meet customer claims in the event of a broker-dealer's bankruptcy. All registered brokers or dealers, by law, automatically become SIPC members, except for those persons whose business as a broker or dealer consists exclusively of the distribution of shares of registered open-end investment companies or unit investment trusts (redeemable securities). Therefore, FFL would not be a member of SIPC, and its customers would not have SIPC protection.

Your client owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own? A) 100 shares at $25 B) 100 shares at $31.25 C) 125 shares at $20 D) 125 shares at $18.75

C Explanation Stock dividends make the number of shares owned increase and the cost per share decrease. The overall value should remain unchanged before and after the adjustment: 125 shares × $20 = $2,500, and 100 shares × $25 = $2,500.

Riskless or simultaneous transactions by a broker-dealer are A) not permissible under any circumstances. B) permissible only in new issue underwritings. C) permissible if performed in compliance with the 5% policy. D) permissible only if there is a profit for a customer.

C Explanation The 5% policy applies to all types of nonexempt secondary market transactions, including riskless and simultaneous transactions. An example of a riskless or simultaneous transaction is one where a member buys a security to fill an order for the same security previously received from a customer.

Information found in The Bond Buyer would include all of the following except A) the placement ratio. B) secondary market volume. C) Revdex. D) the 30-day visible supply.

C Explanation The Bond Buyer is a source of information for new (primary market) municipal bond issues. It contains Revdex, an index for revenue bonds, as well as general obligation bond indexes. Additionally, it includes the 30-day visible supply and the placement ratio.

When customers receive their account statements, they will generally not include A) interest charged on debit balances in margin accounts during the statement period. B) total cost of purchases and net proceeds of sales made during the statement period. C) trade dates of all transactions during the statement period. D) security positions at the end of the statement period.

C Explanation Trade dates appear on the trade confirmations.

A customer of a member transfers his account to another member firm. Under SEC rules, the transferring member must maintain copies of the customer's account records for how many years following the transfer? A) Three years B) Six years C) Five years D) Two years

C Explanation Under SEC Rule 17a-r, customer account records must be maintained for six years following the closing of an account.

A registered representative left ABC Securities in order to work for MNO Securities. Six months later, the representative contacted a former client in an attempt to gain the client's business at MNO Securities. MNO A) must provide educational materials regardless of contact method. B) may not continue further contact with ABC's customer. C) must provide educational materials to the customer if the contact was made in writing. D) does not need to provide educational materials about the transfer.

D Explanation Educational material only needs to be provided if contact is made with the customer within three months of the representative's employment with the new firm.

You received a signed broker-to-broker transfer initiation form (TIF) from an established customer desiring to transfer a specifically designated part of his account to your firm, which is eligible to use the Automated Customer Account Transfer Service (ACATS). Your firm is obligated to submit the transfer instruction to the carrying member by establishing the instruction in the ACATS A) within 2 business days. B) within 1 business day. C) within 3 business days. D) Immediately.

D Explanation FINRA's Uniform Practice Code requires that the receiving member firms immediately forward the TIF to the firm currently carrying the account. A customer may transfer all or part of the securities held in the account.

Your client is interested in a direct participation program (DPP) limited partnership. Which of the following are most likely to factor into a discussion on suitability of such an investment? Beta Liquidity Alpha Investor's age A) I and III B) II and III C) I and IV D) II and IV

D Explanation The key here is to recognize that with DPPs, the customer's age is a relevant consideration in determining suitability. DPPs are long-term and illiquid. For example, it is unlikely that DPPs would be suitable for a customer near retirement age, regardless of the customer's financial situation. Beta, having to do with measuring an investment's volatility as related to the overall market, and alpha, being a measure of performance adjusted for risk, are not factors generally associated with DPPs.

The first step in transferring a customer's asset from one member firm to another is the submission of A) the Form 112. B) the Form 144. C) the Form D. D) the Form TIF.

D Explanation The receiving member sends the transfer initiation form (TIF) to ACATS, and that starts the account transfer process. Form 112 is the currency transaction reporting form used when more than $10,000 in currency is deposited. The Form 144 is used by control persons and also used by those with restricted stock. Form D is used to report sales of a private placement under Regulation D of the Securities Act of 1933.

Due to a distribution of stock, the contract size in the JGH Oct 50 call options is 108. A customer purchasing one of these contracts for a premium of 2½ would expect to pay A) $330. B) $270. C) $258. D) $250.

B Explanation With a contract size of 108 shares (likely from an 8% stock dividend) and a premium of $2.50 per share, the total cost is $270. Regardless of the reason for the contract size being other than 100 shares, the price paid for an option is always the premium multiplied by the number of shares in the contract. In this question, that would be a premium of $2.50 per share (2½) times 108 = $270.00.

A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer gifts the securities to his son. Which of the following statements are true? For gift-tax purposes, the value of the gift is $3,000. For gift-tax purposes, the value of the gift is $7,000. The son's cost basis on the stock is $3,000. The son's cost basis on the stock is $7,000. A) I and III B) I and IV C) II and III D) II and IV

C Explanation When making a noncharitable gift of securities, the donor's cost basis is passed to the recipient.

To create a credit calendar spread, an investor should buy the near expiration. buy the distant expiration. sell the near expiration. sell the distant expiration. A) I and IV B) I and III C) II and IV D) II and III

A Explanation A credit calendar spread occurs when premium received exceeds the amount paid out. An investor creates a credit spread by selling the distant expiration and buying the near expiration. The distant expiration has more time value, and therefore, a higher premium.

If a customer wishes to buy 1 XYZ option and sell another XYZ option, but he is not willing to spend more than $300, which of the following orders should be entered? A) Two stop orders B) A spread order C) A straddle order D) Two limit orders

A Explanation A spread involves the simultaneous purchase and sale of different option contracts of the same type. A spread incurs a gain or loss depending on what happens to the difference in the premiums between the two contracts. Because this investor wants to limit his risk to $300, he would buy the spread at a net debit of $300 or less. (This is one order, not two.)

When an insured person becomes disabled or unable to work, that person may not be required to continue paying premiums on the contract if the contract included A) a waiver of premium option. B) a disability rider. C) a freeriding provision. D) a low-income provision.

A Explanation A waiver of premium option allows the premiums on an insurance contract to be waived for a person who has become disabled or otherwise unable to work.

A company's changing from straight line to accelerated depreciation will increase income in the early years. decrease income in the early years. increase income in the later years. decrease income in the later years. A) II and III B) I and IV C) I and III D) II and IV

A Explanation Accelerated depreciation increases charged expenses during the early years of equipment life but decreases charged expenses during the later years.

American-style options traded on the Chicago Board Options Exchange are priced higher than European-style options on the same underlying stock, having the same expiration, because A) American-style options can be exercised at any time until expiration, while European-style options can be exercised only at expiration. B) European-style option positions cannot be traded out of. C) European-style options are not adjusted for stock splits and stock dividends. D) U.S. investors cannot use European-style options; thus, the demand is much less, leading to lower premiums.

A Explanation American-style options can be exercised at any time until expiration, while European options can be exercised only at expiration. With all other specifications the same, the American-style option will have the higher premium because it allows the holder broader exercise rights.

You have a client who plans to liquidate some CDL stock to help pay for an upcoming family vacation. When checking the account record, you find the following transactions: Jan 4, 100 shares @ $48 Feb 8 100 shares @ $39 May 11, 200 shares @$43 The client needs about $4,000 and the CDL is currently selling for $44 per share. From a tax standpoint, you should probably recommend that the client A) sell all of the shares purchased on January 4. B) sell all of the shares purchased on February 8. C) sell half of the shares purchased on January 4 and half of the shares purchased on February 8. D) sell 100 of the shares purchased on May 11.

A Explanation By using FIFO, the default method of the IRS, and selling the shares purchased in January at $48 per share, the client realizes a loss of $400. Selling either of the others results in a short-term capital gain, taxed at ordinary income rates. Don't get hung up on the fact that the investor will receive $300 more than needed— the question is looking for tax considerations.

If a customer believes the Swiss franc will depreciate against the U.S. dollar, which of the following option strategies may best take advantage of the expected depreciation? A) Uncovered call writing B) Debit call spread C) Uncovered put writing D) Credit put spread

A Explanation Call writing is bearish, while credit put spreads, debit call spreads, and uncovered put writing are bullish.

When must a new options customer—who has not yet traded options—receive the Options Clearing Corporation's (OCC's) current disclosure document? A) At or before the time the account receives approval for options trading B) Within 15 days of the ROP's approval of the customer's account for options trading C) At or before the time the registered representative signs the customer approval form D) No later than 15 days after the ROP signs the options customer approval form.

A Explanation Customers must receive the OCC Disclosure Booklet at or before the time their account is approved for options trading.

Two years ago, your client purchased 100 shares of ULA common stock at $40 per share. Today, the client buys one ULA Apr 60 put at $2, when the stock's price is $65. At expiration, the ULA stock is selling for $56, and the client exercises his put, delivering the long stock to cover the sale. The client has a gain of A) $1,800. B) $2,300. C) $200. D) $700.

A Explanation Exercise of the put enables the client to sell the stock at the strike price of $60. The stock was originally purchased at $40, so the result is a $2,000 gain in the stock minus the $200 premium paid for the put, for a net gain of $1,800.

KPT, Inc., is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income? Tax rate Cash dividend Allowance for bad debts Retained earnings A) I and III B) I and II C) II and IV D) II and III

A Explanation Higher taxes mean less net income. The allowance for bad debts is an expense item, and increasing it lowers operating income. Dividends are paid out of retained earnings, which have no effect on the net income the company reports.

If a father makes a gift of securities to his 10-year-old daughter, gift taxes would be based on A) the market value of the securities on the date of gift. B) the market value of the securities as of December 31 of the year in which the gift is made. C) the market value of the securities as of April 15 of the year in which the gift is made. D) the cost of the securities.

A Explanation If a gift tax is due, it is paid by the donor and based on the gift's value on the date it is given.

The writer of an equity call option who is assigned A) must deliver stock within two business days. B) must deliver stock within one business day. C) can enter a closing transaction on the day the exercise notice is received. D) can enter a closing transaction any time before exercise settlement.

A Explanation If exercised, the assigned call writer must deliver the underlying stock within two business days (regular way settlement for equity transactions).

An analyst comparing revenues with expenses is most likely analyzing A) cash flow. B) liquidity. C) capitalization. D) working capital.

A Explanation The analyst is most likely measuring the income statement for cash flow (money coming in against money going out). Working capital analysis—not the income statement—would involve examining the balance sheet's current assets and current liability entries. Capitalization analysis involves examination of long-term debt and stock issues. Liquidity analysis involves examining current assets and liabilities from the balance sheet.

The common stock of Porcine Meat Products, Inc., is currently selling at $60 per share. It has a P/E ratio of 12:1 and pays an annual dividend of $3 per share. That would make Porcine's dividend payout ratio equal to A) 60%. B) 12%. C) 36%. D) 5%.

A Explanation The dividend payout ratio is computed by dividing the dividend by the earnings per share. We know the dividend is $3, but how much are the earnings? With a P/E ratio of 12 to 1, the price of $60 is 12 times the earnings per share. Divide $60 by 12 and the EPS = $5 per share. If Porcine earned $5 and paid out $3 of it as dividends, it paid out 3/5th or 60%.

A corporation's income statement reports net income of $10 million for the year. The company has one million shares of 4% $50 par value preferred stock and two million shares of common stock. If the corporation paid a quarterly dividend of $0.60 per share of common stock, A) the dividend payout ratio was 60%. B) the current return on the preferred stock was 4%. C) the earnings per share was $5 per share. D) the retained earnings increased by $6.8 million.

A Explanation The dividend payout ratio is the percentage of the net income (after preferred stock dividends) paid out to the common shareholders. The net income is $10 million. The preferred dividend is $2 per share ($50 par times 4% = $2). With one million shares, the total preferred dividend is $2 million (1 million shares at $2 per share). Because the preferred dividend must be paid before any earnings are available to common stockholders, we subtract that $2 million from the net income. That leaves $8 million in earnings available to common. There are 2 million shares receiving an annual dividend of $2.40 ($0.60 quarterly). That means $4.8 million of the $8 million available is paid, or a ratio of 60% ($4.8 million ÷ $8 million = 60%).

If stock market indexes, such as the S&P 500 and the Dow Jones Industrial Average, are declining daily, and the number of declining stocks relative to advancing stocks is falling, a technical analyst will conclude that the market is A) oversold. B) becoming volatile. C) unstable. D) overbought.

A Explanation The momentum of the market decline seems to be easing as the number of decliners to advancers is leveling out. It looks like the advance/decline line is moving in a direction away from decliners. A technical analyst would conclude that the market is oversold and approaching a bottom.

A client writes 1 Jan 60 put and buys 1 Jan 50 put. This is A) a credit bull spread; the investor wants the price to stay above 60. B) a debit bear spread; the investor wants the price fall below 50. C) a debit bear spread; the investor breaks even at a price greater than 60. D) a credit bull spread; the investor breaks even at a price less than 50.

A Explanation This is a put credit spread, and bulls sell puts. The 60 put is worth more because it has a higher strike price. Long the lower put is bullish; short the lower put is bearish.

All of the following are characteristics of 529 plans except A) donor income limits apply. B) the assets can be transferred to a family member if not used by the original beneficiary. C) an official statement (OS) must be provided to any prospective purchaser. D) there is no age limit on the beneficiary.

A Explanation Unlike the Coverdell ESA, there are no donor income limits with a 529 plan. All of the other statements are true as to 529 plans.

Which of the following may be affected when a company declares a cash dividend? Shareholders' equity Total assets Total liabilities Current assets A) I and III B) III and IV C) II and IV D) I and II

A Explanation When a company declares a cash dividend, it will reduce retained earnings (part of shareholders' equity) and increase current liabilities (dividends payable), which will increase total liabilities. Assets are not affected until the cash is paid out several weeks later.

Government agency securities settle A) in three business days following the trade date. B) the second business day following the trade date. C) the seventh calendar day following the trade date. D) the next business day following the trade date.

B Explanation Most government agencies are treated as a corporate issue. Trades of corporate securities settle regular way (in two business days).

Which of the following regarding the Bond Buyer Revenue Bond Index (Revdex) are true? It includes 30-year bonds. It includes 20 bonds. It is compiled weekly. It is compiled monthly. A) II and III B) I and III C) I and IV D) II and IV

B Explanation The Bond Buyer Revdex is computed weekly just like The Bond Buyer's general obligation (GO) index. Revdex consists of 25 revenue bonds with 30-year maturities. The GO index includes 20 bonds, each with approximately 20 years to maturity.

One of your customers has made periodic purchases of shares of the Castel Growth Fund over the past several years. The customer has decided to take a profit and sell some of those shares. When the investor's tax return is prepared for the year in which the sale of those shares occurs, it is necessary to establish a cost basis of the shares sold. Which of the following methods is available for mutual funds, that is not available for determining the cost basis of stock? A) FIFO B) Average cost basis C) Share identification D) Dollar cost averaging

B Explanation The Internal Revenue Service allows using the average cost basis to determine the cost basis of redeemed mutual fund shares. Investors cannot use this method when selling shares of any security other than a mutual fund. The other methods of determining cost basis are FIFO and share identification. FIFO is the default method used by the IRS if an investor fails to choose. Share identification can frequently result in a lower tax bill, especially if the security was purchased at different intervals at varying prices.

If LEAPS options positions are maintained for more than 12 months, which of the following statements are true? The LEAPS writer's gains are taxed as short-term gains. The LEAPS writer's gains are taxed as long-term gains. The LEAPS buyer's gains are taxed as short-term gains. The LEAPS buyer's gains are taxed as long-term gains. A) II and IV B) I and IV C) II and III D) I and III

B Explanation The LEAPS writer's premium is taxed as a short-term gain. The LEAPS buyer took a position for longer than 12 months, so any profits are considered long-term capital gains. The writer's gain is short term because by opening with a sale, a holding period is never established.

Fundamental analysts rely heavily on information found in a corporation's financial statements. One of the most often used calculations is that of the current ratio. The analyst calculates the current ratio by A) multiplying the current assets times the current liabilities. B) dividing the current assets by the current liabilities. C) subtracting the current liabilities from the current assets. D) dividing the current liabilities by the current assets.

B Explanation The current ratio is the currents assets of a company divided by its current liabilities. It is one measurement of the liquidity of a business. A related liquidity measurement is the working capital. The working capital is the current assets minus the current liabilities.

Covered put writing is a strategy where an investor A) sells a put and sells a call on the same stock. B) sells a put on a stock he has sold short. C) sells a put on a stock that he owns. D) sells a put and buys a call on the same stock.

B Explanation The customer sells the put to generate income. The short stock position provides the necessary cash should his short put be exercised, forcing him to buy the stock.

The common stock of Momentum Growth Industries (MGI) is currently selling at 55 times earnings. Which of the following actions could MGI take that would likely increase the company's earnings per share? Reduce the salaries of C-level officers by 10%. Exercise the call feature on MGI's outstanding preferred stock. Announce a 1:4 stock split. Purchase shares of MGI common stock in the open market. A) I and IV B) II and III C) I, II, III, and IV D) I, III, and IV

C Explanation As is often the case, the question contains irrelevant information. Knowing the price-to-earnings ratio (P/E ratio) has nothing to do with the question. There are two primary ways to increase EPS. The most obvious is to increase the company's earnings. That is accomplished either by increasing revenue or reducing costs. Reducing officer salaries reduces the expenses. Calling in preferred stock removes the obligation for the dividend on that stock. Therefore, income available to common shareholders increases. The second is to reduce the number of outstanding shares. The math behind the EPS formula is net income divided by the total number of common shares outstanding. If the denominator (the number of shares) is reduced, the EPS increases. Sometimes a company wishing to buy back its shares will do so through a tender offer. It does that by inviting shareholders to tender (present) their shares to the company at a specified price (usually at a premium over the current market price). A reverse split, such as 1 for 4, reduces the number of outstanding shares to one quarter of what they were before the split. One of the simplest ways to reduce the number of outstanding shares is to simply buy them back in the open market. They now become treasury stock and are not included in the EPS calculation.

A customer purchases 200 shares of Pyrrhic Trophy Manufacturing Corporation (PTMC) at $105 per share. With the stock at $122 per share, the customer sells one PTMC Jan $120 call option for 3.50. One week prior to expiration, PTMC is selling for $132 per share, and the customer is assigned an exercise notice. The tax consequence of this is A) a capital gain of $3,700. B) a capital gain of $1,500. C) a capital gain of $1,850. D) a capital gain of $2,050.

C Explanation Even though the investor purchased 200 shares, only one call option was written. When exercised, it is only 100 shares that are sold. The numbers are: Bought 100 shares for $10,500. Sold them at the strike price of 120 (100 times $120) bringing in $12,000. That is a capital gain of $1,500. In addition there is the $350 premium received when the option was sold. That makes the total $1,850.

The effect of using the first in, first out (FIFO) method for a sale of some of the securities that were purchased separately during a period of rising prices will be A) an increase in the cost basis of the securities. B) a decrease in the profits of the investor. C) an increase in the taxable profits of the investor. D) a decrease in the tax liabilities of the investor.

C Explanation FIFO is an inventory accounting term used to standardize the determination of which items are sold first. In this case, if different purchases are made of the same stock, and the per-share price is higher each time, then if a portion (but not the entire inventory) is sold at one price, the taxable gain will be maximized. If last in, first out were used, the taxable gain would be minimized, and the lower cost basis securities would remain in the portfolio.

If a fund has a fixed portfolio of municipal bonds with long maturities, how will substantial changes in general interest rates affect the fund's portfolio? A) Both the income and the current value will fluctuate significantly. B) Both the income and the current value will remain unchanged. C) The current value will fluctuate significantly, but the investment income will remain relatively unchanged. D) The current value will not change, but the investment income will fluctuate significantly.

C Explanation For a fund with a fixed portfolio of long-term municipal bonds, the market value of the portfolio will fluctuate with changing interest rates, but the income will remain unchanged.

Your customer has purchased 100 shares of Synovial Lubrication Products (SLP) at $95 per share. The date of the purchase was April 22, 2021. Simultaneously, the customer purchased one SLP Dec 90 put for 3. At the expiration date of the option, SLP's market price is $101 and the option expires unexercised. What is the customer's cost basis in SLP? A) $92 per share B) $101 per share C) $98 per share D) $95 per share

C Explanation If, on the same day, a customer buys stock and buys a put option on that stock as a hedge, the put is said to be married to the stock. For tax purposes, irrespective of what happens to the put, the cost basis of the stock is adjusted upward by the premium paid. Even if the put expires worthless, there is no capital loss on the put. Rather, the premium paid is reflected in the cost basis of the stock. Therefore the initial cost of $95 per share is now increased by the $3 premium paid resulting in a new cost basis of $98 per share.

One of your customers exercises a put option. The stock is in the customer's account and your firm makes timely delivery. The proceeds from the sale of the stock will be paid to your firm by A) the exchange where the option exercise took place. B) the writer to whom the exercise notice was assigned. C) the broker-dealer to whom the exercise notice was assigned. D) the OCC.

C Explanation Look at this as a regular buy and sell. When the customer exercises the put, it is a sale of stock. When customers of member firms sell stock, those firms collect the sales proceeds from the contra party (the other member firm representing the buyer). The OCC assigns the exercise to a member firm that is then responsible for paying the broker-dealer representing the seller of the stock.

Your customer has purchased 100 shares of Synovial Lubrication Products (SLP) at $95 per share. The date of the purchase was April 22, 2021. Three months later, the customer purchased one SLP Dec 90 put for 3. At the expiration date of the option, SLP's market price is $101 and the option expires unexercised. The customer sells the 100 shares of SLP stock on June 1, 2022 at $104 per share. This sale results in A) a short-term capital gain of $600. B) a short-term capital gain of $900. C) a long-term capital gain of $600. D) a long-term capital gain of $900.

C Explanation Purchasing a put option on an existing long position is a protective put. It does not offer the same tax benefits as a married put (the option and long security position are purchased on the same day). That is, if the long position is not more than 12 months old when the put is purchased, the holding period is erased and does not begin again until disposition of the put. In addition, if the option expires or is sold, the transaction is a loss or a gain and does not affect the cost basis of the long position. This is why the cost basis of the SLP stock is the original $95 per share. Furthermore, the option expired in December 2021. That means the loss is taken that year. Selling the stock at $104 creates a capital gain of $900. As described above, the purchase of the put option severed the holding period and restarted it at the put's expiration date. From December to June is not longer than 12 months, so the gain is short term.

Which of the following would likely occur when a corporation engaged in a rights offering? A) After successful completion of the offering, the market price would rise slightly. B) The number of outstanding shares would increase. C) After successful completion of the offering, the market price would decline slightly. D) The corporation would use a standby underwriter.

C Explanation Successful completion of a rights offering generally results in a slight decline in the market price of the stock. This is because the subscribers were able to purchase at a price below the current market. This would have a small dilutive effect, causing a slight reduction in the market price. The rights offering is of additional shares, so the number outstanding would increase. Most corporations use a standby underwriter who will buy any shares that were not exercised.

An investor purchased 100 shares of a stock three years ago at $38 per share. Disappointed with the stock's performance, the investor sells it for $35 per share. Two weeks later, after the company announced higher-than-expected earnings, the investor purchased 100 shares at $44 per share. When this investor decides to sell the newly purchased shares, the cost basis will be A) $44 per share. B) $41 per share. C) $47 per share. D) $38 per share.

C Explanation This is a wash sale situation. Selling a stock at a loss and repurchasing it within 30 days "washes" out the loss for current tax purposes. The loss, in this case $3 per share, is added to the cost of the repurchased stock. Thus, $44 plus $3 equals a new cost basis of $47 per share.

Use the following information to answer the question that follows: Number of shares outstanding: 10,000,000 Trading volume: Week 1 90,000 Week 2 80,000 Week 3 125,000 Week 4 135,000 Week 5 100,000 Based on this information, a control person holding unrestricted stock is complying with Rule 144 when selling a maximum of A) 106,000 shares. B) 100,000 shares. C) 110,000 shares. D) 107,500 shares.

C Explanation Unrestricted stock does not have a holding period. Compliance with Rule 144 relies on a volume limit. A control person may sell the greater of 1% of the outstanding shares or the average of the last four weeks of trading volume. In this example, the last four weeks are week 2 through 5, not 1 through 4. The average of those four weeks is 110,000 and that is greater than 1% of the outstanding shares (100,000).

A customer sells 1 ABC Corporation put for 2 on February 22, 2019, with a strike price of 50 and an expiration date of March 16, 2019. On March 15, 2019, ABC is put to the customer. Which of the following statements about this transaction is correct? A) He has an acquisition cost of $5,000 and a date of acquisition of March 16, 2019. B) He has a $200 short-term gain on the sale of his put. His cost of acquisition is $5,000, and the date of acquisition is February 22, 2019. C) He has an acquisition cost of $4,800 and a date of acquisition of March 15, 2019. D) He has an acquisition cost of $4,800 and a date of acquisition of February 22, 2019.

C Explanation When a put is exercised, the cost of acquisition is the cost that the writer has to pay (strike price) less the amount of premium the writer originally received. The date of acquisition is the trade date in exercising the option. Let's do the math. The sale of the put brings in a credit of $200. Almost one month later, the seller of the put receives an exercise notice. This means the seller is obligated to purchase 100 shares at the strike price of $50. That is a cost of $5,000. For tax purposes, the cost of $5,000 is reduced by the $200 premium received making the acquisition cost, $4,800. The date of acquisition (the date the holding period begins) is the date the option is exercised (March 15, 2019).

An aggressive investor buys ABC stock with a beta of 1.7. The S&P 500 has a 10% rate of return for the year, and ABC's return is 12%. What is the alpha for ABC? A) +5% B) -3% C) -5% D) +3%

C Explanation With a beta of 1.7, an investor would expect ABC stock to be 70% more volatile than the general market as measured by the S&P 500. Remember, the beta of the market is 1.0. Therefore, we would expect to see the stock return 17% based on the S&P 500's 10% return. However, the actual return on ABC was only 12%. Alpha measures the difference in the actual return vs. the expected return. The difference between the expected return (sometimes referred to as the required return) of 17% and the actual return of 12% is a negative 5%. That represents an alpha of -5% for ABC stock.

If an investor writes 2 DWQ Jan 60 puts at 3 in September, and the investor buys back the 2 puts at 4.50 two months later, the result for tax purposes is A) a $150 short-term capital loss. B) a $150 short-term capital gain. C) a $300 short-term capital gain. D) a $300 short-term capital loss.

D Explanation A $900 closing cost minus $600 opening proceeds equals a $300 short-term loss. Here's the math. Writing (selling) 2 puts at a premium of 3 each brings in $600 (2 times $300). Buying back those 2 puts at 4.50 costs $900 (2 times $450). The difference is the loss of $300.

An investor purchased 100 shares of Paradigm Publishing Corporation (PPC) on October 17, 2020. The price was $83 per share. On April 11, 2021, the investor wrote one PPC Nov 85 call for 3. At expiration date, the PPC stock is selling for $90 per share, and the investor liquidates the stock at the market price and closes the option at its intrinsic value. The net tax consequences are A) $200 long-term capital gain. B) $500 short-term capital gain. C) $900 long-term capital gain. D) $500 long-term capital gain.

D Explanation Let's take the positions one at a time. The stock is purchased for $83 and sold for $90. That is a $700 long-term gain (Oct 2020 to Nov 2021). The option is sold for $300 and closed (bought back) at the $5 intrinsic value (the difference between the 85 strike and the 90 market) for a short-term capital loss of $200. The net of the two (+700 and -200) is a $500 long-term capital gain. If you thought that writing the call when the stock's holding period was still short-term had an impact, you were thinking of the effect of buying a put on stock held short-term. Buying or selling a call does not affect the holding period of the underlying stock.

Your customer has purchased 100 shares of Synovial Lubrication Products (SLP) at $95 per share. The date of the purchase was April 22, 2021. Three months later, the customer purchased one SLP Dec 90 put for 3. At the expiration date of the option, SLP's market price is $101 and the option expires unexercised. What is the customer's cost basis in SLP? A) $101 per share B) $98 per share C) $92 per share D) $95 per share

D Explanation Purchasing a put option on an existing long position is a protective put. It does not offer the same tax benefits as a married put (the option and long security position are purchased on the same day). That is, if the long position is not more than 12 months old when the put is purchased, the holding period is erased and does not begin again until disposition of the put. In addition, if the option expires or is sold, the transaction is a loss or a gain and does not affect the cost basis of the long position. That is why the cost basis of the SLP stock is the original $95 per share.

A C corporation's income statement renders the following information: pretax income: $2,000,000; dividends from preferred stock issued by other corporations: $100,000; interest paid on outstanding debentures: $200,000. This corporation has taxable income of A) $1,900,000. B) $2,100,000. C) $1,850,000. D) $2,050,000.

D Explanation Remember the 50% dividend exclusion available to C corporations. All of the $2 million of pretax income is taxable along with half of the $100,000 in dividends. The interest is included (as the exam often does) as an extra number to confuse. Pretax income is always after all expenses including interest.

Your client writes 2 ABC Nov 220 calls at 5 and buys 200 shares of ABC common stock at $220 in his margin account. What is the breakeven point for the client's position? A) $230 B) $210 C) $225 D) $215

D Explanation The breakeven point for covered call writing is the cost of stock purchased less the premium (220 − 5). Breakeven is the same if it is one covered call, or 1,000.

At the birth of a grandchild, your customers, the child's grandparents, purchased 1,000 shares of XYZ stock at $10 per share in their JTWROS account. The child is now an adult and the grandparents gift all the shares to their grandchild when the stock price is $50 per share. If the donee sold all the shares at $55 per share, the tax consequences would be a capital gain of A) $50,000. B) $55,000. C) $5,000. D) $45,000.

D Explanation The capital gain would be $45,000 ($55,000 - $10,000). If a gift is made of securities, the donee must use the original cost basis of the donor to calculate the gain or loss on a sale. In this case, the original cost basis for the grandparents was $10,000. The difference between that and the proceeds of $55,000 is a capital gain of $45,000. If the shares were inherited from the grandparents, the grandchild would have received the stock at a stepped-up cost basis, the price of the stock on the decedent's death. Using our numbers, that would be a capital gain of $5,000, the difference between the stepped-up basis of $50,000 and the proceeds of $55,000.

An investor buys 2 RST 40 calls and pays a premium of 4 each. He also buys 2 RST 40 puts and pays a premium of 2.50 each. When purchased, RST is trading at $40.75. On the expiration date, RST is trading at $32.50, and the investor closes his positions for intrinsic value. Excluding commission, the investor realizes A) a $100 loss. B) a $100 profit. C) a $200 loss. D) a $200 profit.

D Explanation The cost of opening these two straddles is $1,300. On the expiration date, the puts are worth $750 each, for a total of $1,500, giving the investor a $200 profit. The calls will expire worthless. Alternatively, the breakeven points for this long straddle are 33.50 and 46.50 (add the combined premiums of 6.50 to the call strike and subtract combined premiums from the put strike). The investor profits in a long straddle when the stock moves outside the breakeven points. As the stock is at 32.50, the customer makes 1 point (33.50 − 32.50) on each straddle, resulting in a $200 profit.

If an investor sells 1 AMF Apr 50 put for 2.50 and buys 1 AMF May 60 put for 7.75, the investor has profit when the spread narrows. the spread widens. both puts are exercised. both puts expire. A) I and III B) II and IV C) I and IV D) II and III

D Explanation The investor created a debit spread, which is profitable when both sides are exercised or the spread widens. Conversely, credit spreads are profitable when both sides expire or the spread narrows.

An investor purchased 100 shares of Wilmont Auto Supply Holdings (WASH) on June 1, 2018, at $55 per share. On July 5, 2019, WASH is trading at $40 per share and the investor sells at the market price. On August 1, 2019, the investor purchases a WASH Jan 40 call @4. If there are no other transactions during 2019, the investor's tax consequences are A) $1,500 short-term loss because the option was purchased less than 30 days after the sale erasing the holding period. B) $1,500 long-term loss with no wash sale violation because the stock was long term before the purchase of the option. C) not able to be determined until we know the disposition of the option. D) no taxable loss for 2019 because of the wash sale rule.

D Explanation The investor in WASH has violated the wash sale rule. Anytime a security is sold at a loss and then repurchased within 30 days of the sale (before or after), the loss cannot be taken at that time. The rule includes the purchase of substantially identical securities, such as call options, warrants, and convertibles, when determining if a violation has taken place. Because the question asks for the 2019 tax consequences, the disposition of the option expiring in Jan 2020 is irrelevant.

Interest rate risk is intrinsic to all types of fixed-income investments, including debt securities and preferred stock. When interest rates go up, market prices decline. Although not commonly associated with common stock, some common stock investments are subject to interest rate risk. The common stock of which of the following companies would be most affected by interest rate risk? A) Common stock shares of investment company growth funds B) Common stock shares of public utility companies C) Common stock shares of a company that has recently filed for bankruptcy D) Common stock shares of ABC High Tech Company

Explanation Interest rate risk affects the shares of public utility common stock in two ways. First, for most investors, public utility stocks are attractive because of their dividend yield. Therefore, if market interest rates rise, unless the utility can increases the dividend, the price of the stock will decline. That is where the second part comes into play. Public utilities are known for their highly leveraged capital structures. Put simply, they borrow a lot of money. An increase to market interest rates will likely cause their borrowing expenses to rise. With increased expenses, earnings fall and that can lead to a reduction to the dividend payout. The primary factor affecting the market price of shares of growth companies is the future expectations of earnings growth for these companies. Therefore, their market prices are not correlated with current interest rate changes. In addition, these companies rarely pay much, if any, dividend. As stated in the question, interest rate risk applies to companies paying income. Bankrupt companies do not pay dividends. High tech companies typically have very little debt in their capital structure and rarely pay dividends, so their common stock prices are not interest rate sensitive.

The higher the P/E ratio, the ___________ the earnings ABC and MNO both have the same market price and shares outstanding for their common stock. If ABC's P/E ratio is higher, that would indicate that A) ABC's net income is higher than MNO's. B) ABC's sales are higher than MNO's. C) ABC sales are lower than MNO's. D) ABC's net income is less than MNO's.

The higher the P/E ratio, the LOWER the earnings D Explanation If ABC's P/E ratio is higher than MNO's, then its earnings (defined as net income ÷ shares outstanding) is lower than MNO's. Let's use some hypothetical numbers to prove this. The stock price of both companies is $60 per share. Both companies have 1 million shares outstanding. The P/E ratio compares the market price ($60) to the earnings per share. If ABC earned $5 per share and MNO earned $6 per share, their respective P/E ratios would be 12:1 ($60 ÷ $5) and 10:1 ($60 ÷ $6). From that we see, that given the same market price and the same number of shares outstanding, the higher the P/E ratio, the lower the earnings. Taking this one step further, if there was a third company with the same price and number shares and it had earnings per share of $1, the P/E ratio would be much higher at 60:1 ($60 ÷ $1). The information provided does not provide enough detail to know whether ABC or MNO had higher sales.

A customer who has, as part of her account holdings, unlisted REITS, as well as a limited partnership interest in an oil and gas program, may expect her servicing member firm to show A) a per share estimated value of the securities. B) the amount shown on Tape B the business day before the account statement closing date. C) an exact per share value as calculated on the last business day of the month. D) no valuation for the unlisted REITS and the original investment made in the DPP interest.

A Explanation A general securities member must include in a customer account statement a per share estimated value of a DPP or unlisted REIT security, in a manner reasonably designed to ensure that the per share estimated value is reliable.

Which of the following describe a securities exchange? Prices are set by negotiation between interested parties. The highest bid and the lowest offer prevail. Only listed securities can be traded. Minimum prices are established at the beginning of the day. A) II and III B) I and III C) I and IV D) II and IV

A Explanation An exchange is not a negotiated market but an auction market in which securities listed on that exchange are traded. No minimum price is set for securities. Rather, the highest bid and the lowest offer prevail.

Which of the following option strategies, besides going long a call, can be used to purchase stock below its current market value? A) Short put B) Long put C) Short straddle D) Short call

A Explanation If the put is exercised by the owner, the writer of the put will be obligated to purchase the stock. The cost of the stock is reduced by the amount of premium taken in when the put was written, allowing the investor to purchase the stock at a net cost lower than the stock's current market value.

A margin account may not be used A) for retirement accounts. B) to purchase corporate bonds. C) to purchase listed stocks. D) when opening a fee-based account.

A Explanation Investors cannot open a margin account for retirement plans. There are other restrictions on margin accounts, including accounts for minors. Listed and many OTC stocks and corporate bonds can be purchased on margin.

Listed options expire at A) 11:59 pm ET on the third Friday of the expiration month. B) 4:30 pm ET on the Saturday immediately following the third Friday of the expiration month. C) 3:00 pm ET on the third Saturday of the expiration month. D) 4:00 pm ET on the third Friday of the expiration month.

A Explanation Options expire on the third Friday of the expiration month at 11:59 pm ET.

For the purpose of reporting sales to the IRS, the method available to investors by the IRS that offers the most flexibility in anticipation of the investor's year-end tax needs is A) share identification. B) average cost basis. C) first in, first out. D) none of these.

A Explanation Share identification is the most flexible of the three methods. The investor keeps track of the cost of each share purchased and specifies which shares to sell based on his anticipated year-end tax needs. For investors, the idea is to minimize tax liability, if possible, by limiting gains or maximizing loses in anticipation of what one's year-end tax liability might be.

Which of the following balance sheet items is not a current liability? A) Mortgages B) Long-term debt amount that is due within one year C) Accounts payable D) Accrued taxes

A Explanation Short-term or current liabilities are those entries on a balance sheet that are due in one year or less. Accounts payable, accrued taxes, and that portion of long-term debt due within the year are all current liabilities. Mortgages are generally long-term liabilities, although that portion of a mortgage that is due within the year would be classified on the balance sheet as a current liability.

One of the most popular index options is the VIX. The VIX trades on A) the Chicago Board Options Exchange (CBOE). B) the Nasdaq Options Market (NSDQ). C) the New York Stock Exchange-American (AMEX). D) the Boston Options Exchange (BOX).

A Explanation The VIX, usually referred to as the fear index, trades solely on the CBOE. Just as is the case with stock, it is not unusual to have an option listed on more than one exchange. However, the VIX is a single-market product.

The FINRA 5% policy deals with markups, markdowns, and commissions. When acting as a dealer, what prices are used to compute the member firm's markup or markdown? A) The highest bid and lowest ask for all market makers B) The lowest bid and highest ask for all market makers C) The lowest bid and lowest ask for all market makers D) The highest bid and highest ask for all market makers

A Explanation The basis of the fairness of markups and markdowns under the 5% markup policy is the highest bid and the lowest ask shown for all market makers making a market for that security. This is the inside quote or inside market price because it shows the narrowest spread. Comparing the inside market to the price charged (or paid) to the retail customer determines the actual percentage. Depending on the circumstances, it may be 5%, more than 5%, or less than 5%.

An investor purchases a GFC Jan 40 call @ 4 and sells a GFC April 30 call @ 9. This is an example of A) a diagonal spread. B) a variable hedge. C) a vertical spread. D) a horizontal spread.

A Explanation The investor has created a diagonal spread. An investor that buys and sells the same type of option has created a spread. If the strike prices and/or the expiration months of the options are different, it is a diagonal spread.

A document that allows an investor in Class A shares of a mutual fund to receive a breakpoint on an initial purchase without investing the required breakpoint amount is A) a letter of intent. B) the rights of accumulation form. C) the breakpoint sale memorandum. D) the new account form.

A Explanation The letter of intent (LOI) is a document available to mutual fund investors that allows them to receive breakpoints (discounted sales charges) on the initial and subsequent deposits over a 13-month period. Investors can backdate an LOI up to 90 days to pick up previously invested monies. If backdated, the 13 months begins from that date. There is no rights of accumulation form. Rights of accumulation allow future deposits to receive sales charge discounts when the investment total grows into higher breakpoint levels. A difference between the LOI and rights of accumulation is that the LOI allows for the reduced sales charge starting with the initial payment and rights of accumulation do not apply until the account reaches the breakpoint. The new account form is the opening document of an account and does not provide these benefits. A breakpoint sale is the unethical procedure of selling Class A shares in an amount just below a breakpoint. This usually results in a higher commission to the registered representative and greater cost to the investor.

One of your more conservative clients is a buy and hold investor. As her registered representative, what would be the most suitable asset allocation strategy you should employ? A) Strategic asset allocation B) Portfolio rebalancing C) Tactical asset allocation D) Maximizing alpha

A Explanation The most appropriate asset allocation strategy for a buy and hold investor (long-term passive investor) would be strategic asset allocation. Using this strategy, the portfolio would be subject to periodic rebalancing, but rebalancing is not an asset allocation strategy. Tactical asset allocation is a suitable allocation strategy for active investors who are trying to time the market, buying when prices are down and selling when prices are up. Alpha measures an investment's actual return to the expected return; it is not an allocation strategy.

One of your customers calls for an explanation of the net amount due showing on a confirmation of a recent purchase transaction. The customer has multiplied the number of shares times the price per share, and that is lower than the amount the confirmation says is due. You would explain that the net amount is determined by A) adding the commission and any firm-added fees to the principal amount. B) adding the spread to the principal amount. C) subtracting the markdown from the principal amount. D) adding the interest to the principal amount.

A Explanation The net amount due on purchases is determined by adding expenses (commissions and fees added by the firm) to the principal amount (or subtracting them from the principal amount if a sale). FINRA has levied fines for mischaracterizing or disguising increased commissions by improperly describing them as handling or postage fees. Interest is added to the principal amount when bonds are traded with accrued interest.

An investor purchases 1,000 shares of PLEX common stock at a price of $153 per share. Shortly afterward, with PLEX selling for 149 per share, a purchase of 10 PLEX 150 puts at 4 takes place. What is the investor's breakeven point? A) $157 per share B) $113 per share C) $149 per share D) $153 per share

A Explanation This investor is looking for the price to go up. The purchase price was $153 and the cost of the "insurance" (the put option) was 4. That means that the investor will not start making money until the stock rises above the cost of the stock plus the cost of the put ($153 plus $4 = $157). In a question like this, the current market price of the stock and the exercise price of the option are irrelevant. Breakeven on long stock and long put is the cost of the stock plus the cost of the put. As is always the case when computing breakeven, the number of shares and number of option contracts is meaningless−breakeven is the same price for one or one thousand.

All of the following are risks associated with most mutual funds except A) liquidity risk. B) tenure risk. C) market risk. D) expense risk.

A Explanation Under federal law, mutual funds must redeem shares within seven days of receipt of the investor's request. There is never a need to find a buyer for the shares. Therefore, mutual funds have little to no liquidity risk. As with any investment, there is market risk for most mutual funds (little to none with money market funds, but they would have to be specified in the question). Expense risk is the uncertainty as to future expenses incurred by the fund. The higher the expense ratio, the lower the performance. Management fees, transaction costs, and regulatory filing fees can change. Another risk is that the management team that has brought the fund great success in the past might leave or be terminated. That is what tenure risk is all about.

A new customer has given you written authorization to transfer the holdings in her account at another broker-dealer to her new account at your broker-dealer. Under the Uniform Practice Code, using the automated customer account transfer system form, the carrying broker-dealer would have how many days to validate the positions and how many days to complete the transfer after validation? One business day to validate Two business days to validate Two business days to transfer after validation Three business days to transfer after validation A) I and IV B) I and III C) II and III D) II and IV

A Explanation Under the Uniform Practice Code, the carrying broker-dealer has one business day to validate positions and three business days to transfer to the receiving broker-dealer after validation.

The visible supply has been increasing steadily over the past 30 days. This is an indication that A) yields are likely to rise. B) yields are likely to fall. C) fewer new issues will be offered in the next 30 days. D) prices are likely to rise.

A Explanation When the visible supply increases, it tells us that the number of bond issues coming to market is increasing. Greater supply puts downward pressure on prices. As bond prices fall, yields increase.

An investor purchased an XYZ Oct 50 call for a premium of 4. On the expiration date, XYZ is selling for 46 and the investor closes the position at the option's intrinsic value. For tax purposes, the investor has A) realized a short-term capital loss of $400. B) realized a short-term capital gain of $800. C) realized a short-term capital gain of $40. D) broken even.

A Explanation With the stock selling a $46, the call is out of the money and has no intrinsic value. Therefore, the position is closed out for zero dollars. With a cost of $400 and proceeds of $0, the investor has a $400 short-term capital loss. How do we know it is short term? Unless the question specifies LEAPS, all options have a maximum term of nine months.

An investor purchases a U.S. Treasury bond put option. The option is in the money on the last trading day and the investor exercises the put. Which of the following statements is correct? A) On the settlement date, the investor will receive cash in the amount of the intrinsic value. B) The investor will sell the option for its intrinsic value. C) On the settlement date, the investor will deliver the bonds and receive cash in the amount of the intrinsic value. D) On the settlement date, the investor will pay cash in the amount of the intrinsic value.

A Explanation Yield-based options settle in cash. The settlement amount is the intrinsic value. When an investor holding a put option exercises, the debt security is, in essence, being sold to (put to) the writer of the option. Instead of physical delivery of the bonds, settlement is made in cash. It is quite possible the investor will simply sell the option for its intrinsic value. That isn't the correct answer to this question because you are told the investor exercises the put.

A confirmation sent to a customer must include all of the following except A) the name of the registered representative handling the account. B) whether the member acted as an agent or principal. C) the amount of any commission. D) markup or markdown if the member acted as a principal in a Nasdaq security. Explanation There is no requirement to provide identifying information for the registered representative. A customer confirmation must disclose the amount of markup for a principal transaction in a Nasdaq security, whether the member acted in an agency or principal capacity, and the amount of commission if the member acted as an agent. Under SEC rules, all of the following information must be on a customer confirmation except A) whether the trade was solicited or unsolicited. B) whether the member has a control relationship with the issuer. C) whether the member is a market maker in the security bought or sold. D) whether the member acted as agent or principal.

A There is no requirement to provide identifying information for the registered representative. A customer confirmation must disclose the amount of markup for a principal transaction in a Nasdaq security, whether the member acted in an agency or principal capacity, and the amount of commission if the member acted as an agent. A Explanation Under SEC Rule 10b-10, a customer trade confirmation must include whether the member acted as agent or principal, if the member is a market maker in the security, if a control relationship exists between the member and the issuer. Whether the trade was solicited or unsolicited is not a required disclosure (although many firms do disclose this information). Confusing fact: The solicitation must be on the order ticket, but not on the confirmation.

If an investor buys a LEAPS contract on issuance and allows it to expire unexercised, what is the investor's tax consequence at expiration? A) Short-term capital gain B) Long-term capital loss C) Long-term capital gain D) Short-term capital loss

B Explanation A LEAPS contract has an expiration of more than one year. Upon expiration, the buyer incurs a long-term capital loss equal to the amount of the premium paid.

Peyton has been a client of Turing Technical Analytics (TTA), a FINRA member broker-dealer, for 10 years. Peyton has decided that it is time to move the account to a new firm, Enigma Mathematical Portfolio Modeling, (EMPM). Which of the following statements accurately reflects the requirements when using the ACATS system? A) TTA has three business days to validate or take exception to the positions listed on the Transfer Initiation Form (TIF). B) TTA has one business day to validate or take exception to the positions listed on the Transfer Initiation Form (TIF). C) EMPM has three business days to validate or take exception to the positions listed on the Transfer Initiation Form (TIF). D) EMPM has one business day to validate or take exception to the positions listed on the Transfer Initiation Form (TIF).

B Explanation ACATS requires the carrying firm (TTA) to validate or take exception to the securities listed on the TIF within one business day. If all is in order, the transfer must be completed within three business days. The receiving firm, EMPM, is responsible for sending the signed TIF to ACATS.

A retiree contacts an agent to discuss investing his retirement savings of approximately $2.1 million; his investment objective is long-term growth. The representative and customer discuss the advantages and disadvantages of diversifying among five different mutual funds within two fund families, as opposed to purchasing just one fund. Consequently, the agent made the following purchase recommendations: XYZ Emerging Growth Class B: $495,000 XYZ Research Class B: $310,000 XYZ Investors Growth Stock Class B: $495,000 ABC Capital Enterprise Class B: $495,000 ABC Capital Opportunity Class B: $310,000 Total: $2,105,000 These recommendations are A) unsuitable because the investments are not equal in amount. B) unsuitable because Class A shares in either (or both) fund family could be purchased for a sales charge breakpoint discount at or near 0%. C) suitable because they achieve the diversification the customer seeks. D) suitable because the customer fully understands all of the ramifications and is satisfied.

B Explanation All mutual funds with Class B shares also have Class A shares. All Class A shares provide sales charge discounts at stated breakpoints. At a purchase of this quantity, the sales charge is likely 0%. That means that, just like with the Class B shares, all of the money is invested into the funds. The advantages of the Class A shares is that their operating expenses are lower than Class B shares and there is no back-end load to this investor if the funds were needed unexpectedly within a few years. As a practical—but probably not specifically tested—point, Class B shares are not sold in quantities higher than $100,000; Class A shares are invariably the better option.

In the United Kingdom, they are called gilts. In Germany, they are called Bunds. In France, they are called OATS. To investors, they are known as A) eurobonds. B) sovereign debt. C) stock exchanges. D) commodities.

B Explanation Although it is highly unlikely that you would ever see any of these terms on the exam, you might need to know what sovereign debt is. For the United States, the sovereign debt (the debt issued by the sovereign nation) is Treasury securities. The safety of sovereign debt depends on the economy of the specific nation. You would probably not recommend the debt of a third-world country to a customer wishing to avoid risk.

The Union Fidelity Bank of Highville has issued jumbo CDs with a term of three years and a fixed interest rate of 3.5%. The minimum denomination of the CDs is $100,000, and the CDs are callable at 101% of face value beginning on the first anniversary of the issue date. Under which of the following circumstances is it most likely that the bank would exercise the call feature on that anniversary date? A) Three-year jumbo CDs are currently being issued with a fixed interest rate of 3.5%. B) Five-year jumbo CDs are currently being issued with a fixed interest rate of 2.7%. C) One-year jumbo CDs are currently being issued with a fixed interest rate of 4%. D) Three-year jumbo CDs are currently being issued with a fixed interest rate of 4%.

B Explanation As is the case with other fixed payment callable issues, whenever interest rates decline, it is generally beneficial to call in the older issue. In this case, the bank would pay an extra 1% to redeem but could refinance at a rate that is at least .8% lower and extend the maturity. We say at least .8% lower because with the new five-year CDs paying 2.7%, if the bank wanted to keep to the same final maturity date (two more years), it is expected that the rate on two-year CDs would be lower than that of CDs with a five-year maturity.

Customer account records (such as the new account form) must be maintained for not less than A) 3 years commencing from the date the account is opened. B) 6 years commencing from the date the account is closed. C) 6 years commencing from the date the account is opened. D) 3 years commencing from the date the account is closed.

B Explanation Customer account records (such as the new account form) are 6-year records. The six years toll from when the account is closed. Think about this logically. A firm has a customer for 20 years. Were the account records discarded 14 years ago? As long as the account is open, the records must be on file. Similarly, do you throw away your income tax returns after you've filed?

In analyzing the ability of a company to meet its debt obligations, but not wanting to chance that certain accounting decisions or practices will cloud the picture, one measure that you might look at is the firm's A) price-to-earnings (P/E) ratio. B) earnings before interest and taxes (EBIT) as calculated from the firm's income statement. C) cash flow from financing activities. D) net worth found on the firm's balance sheet.

B Explanation EBIT, calculated from the firm's income statement, is a metric that measures the ability of a company to meet scheduled interest payments. Cash flow from financing activities reflects money raised by the company by issuing debt and equity securities. Net worth is useful for determining payback of principal but not semiannual interest.

The effect of using the first in, first out (FIFO) method for a sale of some of the securities that were purchased separately during a period of rising prices will be A) a decrease in the profits of the investor. B) an increase in the taxable profits of the investor. C) a decrease in the tax liabilities of the investor. D) an increase in the cost basis of the securities.

B Explanation FIFO is an inventory accounting term used to standardize the determination of which items are sold first. In this case, if different purchases are made of the same stock, and the per-share price is higher each time, then if a portion (but not the entire inventory) is sold at one price, the taxable gain will be maximized. If last in, first out were used, the taxable gain would be minimized, and the lower cost basis securities would remain in the portfolio

Income from which of the following is not partially exempt to a corporate investor? A) Common stock B) Convertible bonds C) Preferred stock mutual funds D) Preferred stock

B Explanation Fifty percent of dividend income received from investments in common stock and preferred stock is excluded from taxation for a corporate investor. This exclusion applies to dividends from mutual funds where all of the portfolio securities are preferred or common stock.

A corporation's dividend payout ratio is 30%. If the current market value of the stock is $132 per share and the P/E multiple is 22:1, the annual dividend rate is A) $6.00 per share. B) $1.80 per share. C) $3.96 per share. D) $6.60 per share.

B Explanation Here is how this to compute this. The current market price of $132 per share is 22 times the earnings. Dividing $132 by 22 results in earnings per share of $6.00. If the company is paying out 30% of its earnings as a dividend, multiplying $6.00 times 30% results in dividend at a rate of $1.80 per share.

If XYZ Corporation sells an additional 1 million common stock with a par value of $1 for $10 per share, which of the following is true? A) Its earnings per share will increase. B) Its paid-in surplus will increase. C) Its liquidity ratio will decrease. D) The current ratio will decrease.

B Explanation Paid-in surplus is a balance sheet entry that accounts for money raised from the issuance of stock in excess of par value. When more shares are sold, paid-in surplus will increase.

When part of an issue of speculative bonds with a 25-year maturity are called, the effect on the remaining bonds will be to A) decrease their coupon rate. B) improve their quality. C) increase their coupon rate. D) decrease their quality.

B Explanation Speculative bonds are those with lower ratings. They are considered to be of lower quality because the risk of timely payment and principal are higher than investment-grade bonds. When a company shows its determination to honor its debt by paying off some of it in advance, the rating associations take note of that and invariably increase the rating. Compare this to your personal credit score. Your score might be relatively low because you have a lot of outstanding debt. As you pay down that debt, your credit score is likely to increase. It is the same logic here.

A direct participation program shows the following operations results: Revenues: $3 million Operating expense: $1 million Interest expense: $200,000 Management fees: $200,000 Depreciation: $3 million The profit or loss for the year is A) a profit of $2.7 million. B) a loss of $1.4 million. C) a loss of $3 million. D) a profit of $1.6 million.

B Explanation Taxable income for a partnership is determined as follows: Gross revenue: $3 million less operating expense: $1.2 million equals net revenue: $1.8 million less interest: $200,000 less depreciation: $3 million equals taxable loss: $1.4 million

An investor purchased 100 shares of ABC common stock at $50 per share on June 17, 2019. On May 11, 2020, with the ABC selling at $60, the investor hedges by purchasing one ABC Oct 55 put at 2. Immediately prior to the expiration date, ABC is selling for $45 per share and the put option is exercised using the long stock for delivery. This would result in A) a long-term capital gain of $500. B) a short-term capital gain of $300. C) a long-term capital gain of $300. D) a short-term capital gain of $500 and a short-term capital loss of $200.

B Explanation The investor purchased a protective put against a long position that had a short-term holding period. That means the holding period of the stock is erased and does not restart until the earliest of the date the investor disposes of the stock, exercises the put, sells the put, or the put expires. That means this investor's gain will be short term. The gain is the difference between the cost and the proceeds. When exercising a put, the cost of the stock is the investor's cost basis. The exercise price minus the option premium paid is the sale price. In our question, the cost is the $50 initial purchase price ($5,000 total). The sale price is the 55 strike minus the $2 premium, or $5,300. That results in a short-term capital gain of $300.

Buying stocks with high price-to-earnings (P/E) ratios normally reflects which of the following investment styles? A) Special situations B) Growth C) Turnaround D) Value

B Explanation The purchase of stocks with high P/E ratios represents a growth investment style. Growth-oriented investors will pay for high P/E ratios. Value investment style is associated with the purchase of low P/E stocks or stocks trading below their intrinsic value.

Which of the following bonds is most affected by interest rate risk? A) 7.5s of '39 B) 7.6s of '45 C) 7.8s of '42 D) 7.3s of '37

B Explanation To begin with, let's be sure you understand the nomenclature used here. Each of the choices has two numbers. The first is the coupon rate of the bond and the second is the year the bond matures. For example, the 7.3s of '37 pay interest at a rate of 7.3% of the $1,000 par value per year and mature in 2037. The s is just to separate the two numbers. Interest rate risk is the loss in value due to a rise in interest rates. Because there is little difference in coupon rates, the bond with the longest maturity (highest duration) will experience the greatest fall in a rising interest rate market.

An ABC 40 call is quoted at 4.25 - 4.50, and an ABC 45 call is quoted at 1.50 - 2.00. What is the cost of establishing a debit spread? A) $275 B) $300 C) $225 D) $250

B Explanation To establish a debit spread, an investor buys a 40 call at the ask price of 4.50 and sells a 45 call at the bid price of 1.50. The net premium paid is (4.50 minus 1.50) times 100 shares, which equals $300.

Upon notification of the death of a client, which of the following actions would not need to be taken by the registered representative assigned to the account? A) Canceling all good-til-canceled (GTC) orders currently entered for the account B) Obtaining the names of the beneficiaries of the estate for the purpose of notifying all parties C) Canceling all day orders currently entered for the account D) Marking the account Deceased until all proper documentation has been received

B Explanation Upon being notified of the death of a client, the registered representative assigned to the account should cancel all open orders (GTC and day) and mark the account Deceased. The firm should not permit any trades until proper documents are received from the estate representative. There is no requirement, nor is it the responsibility of the firm to contact the decedent's attorney or beneficiaries.

A new customer asks her registered representative to recommend undervalued or out-of-favor securities with relatively low prices. This portfolio management strategy is known as A) tactical. B) value. C) growth. D) passive.

B Explanation Value investing is the strategy of selecting stocks that trade for less than their book value. Value investors actively seek stocks of companies with sound financial statements that they believe the market has undervalued.

A customer purchases $50,000 of bonds at a discount in the secondary market. The bonds mature in 10 years and are callable in five years at par. Under industry rules, the customer's confirmation will show A) YTC. B) YTM C) both the YTM and YTC. D) either the YTM or YTC.

B Explanation With callable bonds, the confirmation must show the lower of the yield to maturity (YTM) or yield to call (YTC). For a bond bought at a discount, the YTM is lower than YTC. On the exam, you will never encounter a call on a bond selling at a discount—it is less expensive to purchase the bond in the open market than pay the call price (which is always at least par).

Without any position in the stock, an investor wrote an ABC Jul 60 put for 6. On the expiration date, ABC is selling for 66, and the investor closes the position at the intrinsic value. For tax purposes, the investor has A) broken even. B) realized a short-term capital gain of $600. C) realized a short-term capital loss of $600. D) realized ordinary income of $600.

B Explanation With the stock at 66, the put is 6 points out of the money (put-down rule). That means the option will expire unexercised, and the writer gets to keep the premium. That 6 point premium is a short-term capital gain. Aren't short-term capital gains taxed at ordinary income tax rates? Yes they are, but for IRS and test purposes, they are legally characterized as short-term capital gain. All short positions will result in short-term treatment, even when the options are LEAPS.

A direct participation program shows the following operating results for the year: Revenues: $3 million Operating expense: $1 million Interest expense: $200,000 Management fees: $200,000 Depreciation: $3 million The cash flow from program operations is A) $1.4 million. B) a loss of $1.4 million. C) $1.6 million. D) $3 million.

C 3mil revenue - 1.4 liabilities = 1.6 Explanation The cash flow for a direct participation program is the net income (or loss) plus the depreciation. In this question, there is a loss of $1.4 million. When the depreciation of $3 million is added to the negative $1.4 million, the cash flow is a positive $1.6 million. How did we get the loss of $1.4 million? The money that came in was the revenue of $3 million. From that, we subtract all of the expenses. Total operating expense of $1.2 million ($1 million plus $200,000 management fees) Interest expense of $200,000 Depreciation of $3 million Total expenses: $4.4 million Net loss of $1.4 million

Which of the following statements regarding index options are true? Exercise is settled in cash. Exercise settlement value is based on the value of the index at the time exercise instructions are received. Exercise settlement value is based on the closing index value on the day exercise instructions are tendered. Exercise settlement is T+2. A) II and IV B) II and III C) I and III D) I and II

C Explanation All index option exercises are settled in cash. The amount a writer owes the holder is known as the intrinsic value of the option, and the settlement value is based on the closing index value on the day exercise instructions are tendered. Exercise settlement is the next business day.

An investor in fixed-income debt securities wishing to eliminate interest rate risk could do so by A) increasing the duration. B) purchasing a bond fund rather than individual bonds. C) holding the securities until they mature. D) limiting purchases to investment-grade debt.

C Explanation As we know, when interest rates go up, bond prices go down. Therefore, bondholders are at risk to their principal when interest rates change. However, there is no interest rate risk to the principal if the bond is held to maturity. Regardless of the current market interest rates, the bond pays off at par value. The risk is highest as the duration lengthens. Because bond funds do not have a maturity date, they cannot avoid this risk. The rating (quality) is irrelevant; even Treasury bonds are affected by changes in interest rates.

A fundamental analyst is reviewing GEMCO's financial statements. The company has a current ratio of 4:1, a price-to-earnings (P/E) ratio of 12:1, $10 million in 5% debentures, and net income after preferred dividends of $4 million. If the current market price of GEMCO stock is $60 and the company pays dividends at a rate of $0.75 quarterly, the dividend payout ratio is A) 5%. B) 40%. C) 60%. D) 20%.

C Explanation As with many computational problems, there is some unnecessary information given. The current ratio is irrelevant, and so is the information on the debentures. What is needed is the amount available to pay the common so that we can compare that to the amount actually paid. We see that $0.75 in quarterly dividends are paid. That is equal to $3 per year. The next key is determining the earnings. With a market price of $60 per share and a price-to-earnings ratio of 12:1, the earnings per share must be $5. The dividend payout ratio should be thought of as "dividends paid out of earnings made." The dividends paid are $3; the earnings made are $5. That is a 3 to 5 ratio, or, as usually expressed in percentage form, 60%.

Covered call writing normally occurs in A) a rising market. B) a falling market. C) a stable market. D) a volatile market.

C Explanation Covered call writing normally occurs in a stable market. In a rising market, writing calls against a long stock position limits upside potential. In a falling market, the calls only provide downside protection to the extent of the premium received.

An investor places $100,000 into an oil and gas limited partnership program. To comply with FINRA rules, what is the minimum amount of the investment that must be received by the business? A) $98,000 B) $90,000 C) $85,000 D) $95,000

C Explanation Each of these choices uses a percentage that has some logic. Under FINRA Rule 2310, the maximum in total offering expenses is 15%. Therefore, at least 85%, or $85,000, must actually be put to work in the program. There is a maximum compensation of 10% to the member firm selling the program, and that is the largest part of the 15% total. The 5% policy does not apply to DPPs, and if this question were about a DPP roll-up, then there is 2% maximum to the member if recommending the client vote in favor of the roll-up.

Your clients' option position has been adjusted due to a 2-for-1 stock split. Which of the following regarding this 2-for-1 adjustment is true? A) The strike price will remain unchanged. B) The number of shares per contract will increase. C) The number of contracts owned will increase. D) The strike price will increase.

C Explanation For even splits (i.e., 2 for 1 or 3 for 1), the number of contracts owned will increase proportionately. The number of shares per contract will remain unchanged, and the strike price will decrease proportionately.

Growth companies tend to have all of the following characteristics except A) potential investment return from capital gains rather than income. B) a high earnings retention ratio. C) low price-to-earnings (P/E) ratios. D) low dividend payout ratios.

C Explanation Growth companies have high P/E ratios and a low dividend payout ratio because they retain most, if not all, of their earnings. Investors anticipating fast growth bid up prices, so P/E ratios tend to be high. Growth companies retain most of their earnings to fund future growth. Investors select growth companies for capital gain potential, not for investment income.

FINRA Rule 2310 defines a direct participation program as "a program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution including, but not limited to, oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, Subchapter S corporate offerings and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof." The rule places limits on the overall expenses and amount of broker-dealer compensation considered fair and reasonable. That limit is A) 2% of the gross proceeds. B) 10% of the gross proceeds. C) 15% of the gross proceeds. D) 5% of the gross proceeds.

C Explanation If the organization and offering expenses exceed 15% of the gross proceeds, FINRA considers that too high. The 10% limitation is on the amount of compensation received by a member firm for selling interests in the DPP. The 2% is the maximum charge in a DPP rollup if the firm wishes to solicit votes from the limited partners. The 5% is the FINRA markup policy and that does not apply to DPPs.

A client purchases 1,000 shares of the XYZ Value Fund when the NAV is $18.75 and the POP is $19.74. Five years later, the client makes a gift to her daughter when NAV is $24.50 and POP is $25.79. The daughter elects to receive all distributions in cash. Two years after the gift, she sells all shares when the NAV is $34.25 and POP is $36.05. What are the tax consequences of this sale? A) Long-term capital gain of $17,300 B) Long-term capital gain of $15,500 C) Long-term capital gain of $14,510 D) Long-term capital gain of $16,310

C Explanation In the case of a gift of securities, the donee acquires the donor's cost basis—$19.74 per share. Sale (redemption) takes place at the NAV ($34.25) for a profit of $14.51 per share (times 1,000 shares = $14,510.00).

If a company issues $10 million in par value convertible debentures, all of the following balance sheet items will be affected except A) assets. B) liabilities. C) net worth. D) working capital.

C Explanation Net worth is not affected by the issuance of long-term debt because it does not represent ownership. Assets will be affected (increased) by the issuance of long-term bonds. Liabilities will be affected (increased) by the amount of the issuance. Working capital will also increase. How does the working capital increase if the net worth does not? Because this company now has $10 million more in cash, and the liability is the debenture that is included in long-term debt, not current liabilities.

If a company issues $10 million in par value convertible debentures, all of the following balance sheet items will be affected except A) liabilities. B) working capital. C) net worth. D) assets.

C Explanation Net worth is not affected by the issuance of long-term debt because it does not represent ownership. Assets will be affected (increased) by the issuance of long-term bonds. Liabilities will be affected (increased) by the amount of the issuance. Working capital will also increase. How does the working capital increase if the net worth does not? Because this company now has $10 million more in cash, and the liability is the debenture that is included in long-term debt, not current liabilities.

Which of the following is the most stringent test of liquidity taken from a corporation's balance sheet? A) Current ratio B) Assets / current liabilities C) (Current assets - inventory) / current liabilities D) Current assets / current liabilities

C Explanation Of the answers given, the quick ratio (or the acid test) is the most stringent because it excludes inventory in the calculation. The current ratio is defined as current assets divided by current liabilities.

All of the following might be used to measure the marketability of a new municipal general obligation issue except A) visible supply. B) S&P's ratings. C) Revdex. D) placement ratio.

C Explanation Revdex is an index of yields on 25 revenue bonds with 30-year maturities that are traded in the secondary market.

Which of the following statements regarding the Bond Buyer 20 bond index are true? It includes only GO bonds. It includes both GO bonds and revenue bonds. It is computed weekly. It is computed monthly. A) I and IV B) II and III C) I and III D) II and IV

C Explanation The Bond Buyer 20 bond index measures secondary market yields of GO bonds. It consists of 20 GO bonds, A-rated or better, and each with approximately 20 years to maturity. The index is updated each week.

An options trader establishes the following positions: Long 10 ALF Apr 40 calls at 6 Short 10 ALF Apr 50 calls at 2 What is the client's maximum gain and loss per share? A) Gain 2, loss 6 B) Gain 4, loss 2 C) Gain 6, loss 4 D) Gain unlimited, loss 6

C Explanation The gain is 6 (between 44 and 50). If the stock declines, both options will expire for a loss of 4 (6 − 2).

The financial statements of the Acme Manufacturing Corporation contain the following information: Current assets: $20 million Fixed assets: $52 million (of which $8 million represents the book value of a mechanical lathe) Current liabilities: $6 million Long-term debt: $19 million of 5% debentures due 2049, callable at 102 Common stock: $18 million (1.8 million shares of $10 par) Paid-in capital: $7 million Retained earnings: $22 million Acme decides to call in $5 million of the debentures. This will result in all of the following except A) a decrease to long-term debt. B) a decrease to net worth. C) a decrease to current liabilities. D) a decrease to working capital.

C Explanation The key fact is that the call price is 102, a premium over the par value. That means for each $1,000 of long-term debt taken off the books, Acme has to spend $1,020. This has no effect on the current liabilities. However, the current assets (cash) decrease leading to a decrease in working capital, as well as net worth. When $5 million of debt is called in, the remaining long-term debt is reduced to $14 million.

A municipal bond dealer purchased $100,000 of municipal revenue bonds at a 3% yield less 3/8ths. The dealer marks the bond up by ½ point and reoffers them to his customers. The compensation to the firm on each bond is A) $3.75. B) $8.75. C) $5.00. D) $10.00.

C Explanation The price paid for the bonds is irrelevant. The important fact is that the dealer put on a markup of ½ point. That is $5 per bond.

When a registered representative opens an options account for a new client, in which order must the following actions take place? Obtain approval from the branch manager Obtain essential facts from the customer Obtain a signed options agreement Enter the initial order A) I, II, IV, III B) II, I, III, IV C) II, I, IV, III D) I, II, III, IV

C Explanation The steps in opening a new options account occur in the following order: obtain essential facts about the customer, have the manager approve the account, enter the initial order, and have the customer sign the options agreement within 15 days. What about delivery of the options disclosure document (ODD)? That isn't included in the choices here. It must be delivered at or prior to the time the account is approved for options trading. That would mean before or simultaneously with choice I.

Which of the following statements regarding the visible supply in The Bond Buyer is true? A) It is the total of the bonds offered in the Blue List. B) It is a weekly listing of bonds sold in the past 30 days. C) It is a daily listing of bonds to be offered in the next 30 days. D) It is a daily listing of available bonds.

C Explanation The visible supply implies that the supply of bonds will be available for the visible future.

The working capital of a corporation includes all of the following except A) marketable securities of other companies. B) cash. C) convertible bonds. D) accounts receivable.

C Explanation The working capital of a corporation is equal to its current assets minus its current liabilities. A current liability is payable within 12 months. Because convertible bonds are long-term (not short-term) liabilities, they are not included as working capital.

SSS Corporation's total assets amount to $780,000, of which $260,000 represents current assets. Total liabilities equal $370,000, of which $200,000 is considered long-term or other liabilities. What is the equity of SSS Corporation's shareholders? A) $1,150,000 B) $980,000 C) $410,000 D) $170,000

C Explanation Total assets minus total liabilities equals shareholders' equity ($780,000 - $370,000 = $410,000).

New offering: 800,000 units at $6 per unit. Each unit has two shares of common stock and one warrant. Each warrant is to purchase half a share of common stock. Based on this information, how many shares of stock will be sold, and how many warrants will be sold? A) 800,000 shares and 400,000 warrants B) 800,000 shares and 200,000 warrants C) 1.6 million shares and 800,000 warrants D) 1.6 million shares and 400,000 warrants

C Explanation Warrants may be distributed to stockholders in an underwriting as part of a unit. The warrant is a form of bonus to entice investors to purchase the unit. As each unit contains two shares, 1.6 million shares are being distributed. As each unit also includes one warrant, 800,000 warrants are being distributed.

A mother makes a gift of appreciated securities to her 10-year-old son. The son's cost basis in the stock is A) the market value of the securities on December 31 of the year the gift is made. B) the market value of the securities on the date of the gift. C) the original cost of the securities to the mother. D) the market value of the securities on April 15 of the year the gift is made.

C Explanation When a gift of securities is made while the donor is alive, the original cost of the securities is the cost basis, not the value of the security on the date of the gift. Market value on the date of the gift is used to determine if gift taxes are applicable.

The writer of an IRX yield-based option, if exercised, must A) deliver T-bills. B) receive cash. C) deliver cash. D) receive T-notes.

C Explanation Yield-based options settle in cash if the option is exercised. The writer must deliver the in-the-money amount in cash.

A new client asks for your advice in investing an inheritance of $50,000. The client is 35 years old, has an annual salary of $40,000, and is married with two children. Which of the following would be the least likely suitable recommendation? A) Investing $35,000 into a market index fund and $15,000 into an intermediate bond fund B) Investing $30,000 into a large-cap growth fund, $10,000 into an international bond fund, and $10,000 into a money market fund C) Splitting $25,000 into two different AAA-rated GO municipal bonds D) Investing all $50,000 into a balanced fund

C (LEAST SUITABLE) Explanation We do not know a lot about this client, but, with an annual income of $40,000 and two children, the tax bracket is in the lower end. Certainly for exam purposes, municipal bonds are never the suitable recommendation unless something in the question indicates that the client is in a high tax bracket. As far as all $50,000 into one mutual fund, the nature of a balanced fund is that its assets are broadly allocated between equity and debt securities so that it accomplishes the diversification shown in the other choices.

If an investor practices value investing, which of the following stock types is he least likely to purchase? A) A stock that has exhibited a high dividend yield in the past B) A stock that is presently selling for two-thirds of net current assets C) A stock with a low (P/E) ratio D) A stock with an above-average price-to-earnings (P/E) ratio

D Explanation A growth investor looks for stocks with above-average (P/E) ratios. Conversely, a value investor focuses on stocks with low P/E ratios, a low price-to-book value, and historically high dividend yields.

The legal contract stating the issuer's obligation to pay back a specific amount of money on a specific date to its bondholders is best described as A) the official statement. B) the prospectus. C) the official notice of sale. D) the trust indenture.

D Explanation A trust indenture delineates the covenants or promises made by an issuer to its bondholders. Those would include the amount of the debt, the maturity date, and the rate of interest. A trustee would also be identified in the indenture who would act on behalf of the bondholders in the event of default on any of the indenture's provisions.

Which of the following describes additional paid-in capital? A) Total of all residual claims that stockholders have against the corporation's assets B) Total of all earnings since a corporation was formed, less dividends C) May also be called earned surplus D) The difference between the total dollar amount received from the issuance of common stock and the stock's aggregate par value

D Explanation Additional paid-in capital is the difference between the dollar amount received from the sale of stock and the stock's aggregate par value. Earned surplus is another name for retained earnings.

Your client has purchased shares of VACL at several different times. A view of the client's account ledger indicates the following: 100 shares @$50 on February 12 100 shares @$52 on April 23 200 shares @$49 on May 12 100 shares @$55 on June 28 The client decides to sell 200 shares of the VACL on November 14 of the same year when the price of the stock is $53 per share. Tax consequences would be minimized if the investor A) used the LIFO method. B) used the average cost basis. C) used the FIFO method. D) sold the shares purchased in June at $55 and the shares purchased in April at $52.

D Explanation By using the identified cost method, the investor would sell the highest cost purchases. This would result in the lowest taxable gain (or perhaps even a loss). Average cost is only available for mutual funds.

While watching the financial news on TV, you hear an internationally recognized economist say that she expects a significant devaluation of the U.S. dollar. If she is correct, what would be the likely effect on foreign trade? The price of foreign goods would decrease, leading to an increase in imports. The price of foreign goods would increase, leading to a decrease in imports. The price of U.S.-made goods would decrease, leading to an increase in exports. The price of U.S.-made goods would increase, leading to a decrease in exports. A) I and III only B) II and IV only C) I and IV only D) II and III only

D Explanation If the dollar is devalued, it becomes less valuable in foreign countries. That means that more dollars are required to purchase the same amount of foreign goods. The increased cost of those foreign goods will reduce imports of them. On the other side, because the foreign currency now goes further in the United States, goods made here become cheaper to buy, so exports will increase.

When determining whether a tax swap of municipal bonds will result in a wash sale, which of the following is not considered? A) Coupon B) Issuer C) Maturity D) Principal amount

D Explanation In judging whether bonds purchased are substantially identical to bonds sold for a loss, the tax code considers maturity, issuer, and coupon rate. If at least two of the three are different, a wash sale will generally not result.

The ABC Corporation has a long-standing policy of maintaining a dividend payout ratio of 45%. ABC's net income for the year is $12 million, and there are 8 million shares of common stock outstanding. After a 3:2 stock split, the annual dividend per share is A) $0.675. B) $1.0125. C) $1.50. D) $0.45.

D Explanation Take this systematically. A dividend payout ratio of 45% means ABC will distribute 45% of its net income to its common shareholders. Forty-five percent of $12 million is $5,400,000 in dividends. If there were 8 million shares before the split, there are now 12 million (8 times 3/2 = 24 divided by 2 = 12). Divide the amount available for common ($5.4 million) by the number of shares (12 million) to arrive at a dividend per share of $0.45.

The 5% markup policy applies to all of the following secondary market transactions except A) agency transactions in nonexempt unlisted securities. B) principal transactions in the over-the-counter (OTC) market. C) agency transactions on an exchange. D) municipal bond transactions.

D Explanation The 5% policy applies to secondary market transactions. The secondary market is where trades are made in outstanding securities between buyers and sellers rather than a new issue. Excluded from the 5% policy are transactions in exempt securities such as municipal and government bonds. The policy applies to nonexempt securities and transactions on an exchange and in the OTC market, and it applies to both agency and principal trades. In the case of a primary offering (new issue) sold by prospectus, the 5% policy does not apply because the underwriting spread and commissions are already stated in the prospectus or other offering document.

Your customer notices that the exchange rate for the British pound in the spot market is listed at 148.47. What do you tell her when she asks you what this means? A) One pound equals 14.847 cents. B) $1 equals 14.847 pounds. C) $1 equals 1.4847 pounds. D) One pound equals $1.4847.

D Explanation The exchange rate refers to cents per British pound; 148.47 equals $1.4847.

A bond with 25 years to maturity, 7% coupon, quoted on a 6.25% basis is callable in 10 years at 103, 15 years at 102, and 20 years at par. On the customer's confirmation, the dollar price quoted must be based on A) 20 years to call. B) 25 years to maturity. C) 15 years to call. D) 10 years to call.

D Explanation This is a premium bond. With premiums, the years to call will be lower than the years to maturity. The question becomes which call date should be used. As a rule of thumb, always use the near-term (first) in-whole call date.

Which of the following is an automated system of delivering information relating to the market for municipal securities? A) The Blue List B) INSTINET C) The Bond Buyer D) Thomson's Muni News or Muni Market Monitor (Munifacts)

D Explanation Thomson's Muni News or Muni Market Monitor (formerly Munifacts) supplies up-to-the-minute information to its subscribers.

If the strike price of a yield-based option is 62.50, this represents a yield of A) 0.0625%. B) 0.625%. C) 0.00625%. D) 6.25%.

D Explanation To calculate the percentage yield of the underlying Treasury security, divide the strike price by 10 (62.50 / 10 = 6.25%).

A mother makes a gift of appreciated securities to her 10-year-old son. The son's cost basis in the stock is A) the market value of the securities on April 15 of the year the gift is made. B) the market value of the securities on the date of the gift. C) the market value of the securities on December 31 of the year the gift is made. D) the original cost of the securities to the mother.

D Explanation When a gift of securities is made while the donor is alive, the original cost of the securities is the cost basis, not the value of the security on the date of the gift. Market value on the date of the gift is used to determine if gift taxes are applicable.

What are the tax consequences an investor incurs when exercising the conversion privilege within a family of funds? A) There are no tax consequences if completed within 60 days. B) There are no tax consequences because the funds are all part of one family. C) There are no tax consequences, as long as this is done through a Section 1035 exchange. D) The investor treats the exchange as a sale and new purchase.

D Explanation When exchanging one fund for another in the same fund family, the exchange is done at NAV. This avoids any sales charges. The IRS considers this as the sale of the old fund (capital gain or loss applies) and the purchase of the new fund. That begins a new cost basis and holding period. The Section 1035 exchange allowing investors to move from one investment to another without current tax consequences is applicable only to insurance products.

An investor purchased an XYZ Oct 50 put for a premium of 4. On the expiration date, XYZ is selling for 57, and the investor closes the position at the option's intrinsic value. For tax purposes, the investor has realized A) a $700 short-term capital gain. B) a $300 short-term capital gain. C) a $700 short-term capital loss. D) a $400 short-term capital loss.

D Explanation With the stock selling at 57, a 50 put is out of the money (put-down rule) and has no intrinsic value. Closing the position (selling the worthless put) generates zero proceeds. The cost is $400; the sale proceeds are zero resulting in a loss of the $400 premium. How do we know it is short term? Unless the question specifies LEAPS, all options have a maximum term of nine months.

An investor takes a short position in one XYZ Nov 140 call @7. Disregarding any commissions, if the option is exercised, on settlement date, the investor A) must pay $14,000. B) must pay $700. C) receives $700. D) receives $14,000.

D Short call (obli to sell) Explanation When an investor takes a short position in an option, it means the investor has sold, or written the option. When a call option is exercised, the seller is obligated to deliver the stock at the exercise (strike) price. A strike price of $140 for 100 shares results in the seller receiving $14,000 on settlement date.

collars (cashless or not) are used to protect an existing profit. What makes it a collar?

It is cashless is because the calls are sold for 2 and the puts bought for 2. That means no out-of-pocket cash. The investor has "put a collar" on the long position in the stock by selling an out-of-the-money call and buying an out-of-the-money put. If the option purchase was more expensive than the one sold, it is still a collar, but not cashless because the investor would have to come up with the difference. For example, if the cost of the put was 3 while the proceeds from the call was 2, the client's cost would be one point to establish the collar.