EXAM FX TEST QUESTIONS # 2

A customer purchases on XYZ July 50 put for $2.50 with the price of XYZ stock at 55. The following week, XYZ reports disappointing earnings and the stock drops to 43.50. If the customer simultaneously exercises the long put and purchases 100 shares of XYZ stock at 43.50, the resulting profit or loss would be:

$400 profit

An investor has a net worth of $500,000. If the investor takes $2,500 out of savings to invest in an IRA and $3,000 to pay off a credit card, and buy a $5,000 stereo on store credit, the investors net worth will then be:

$500,000

When selling a new issue of securities within a given state, which of the following would potentially be governed under the state Blue Sky Laws? 1. Registered representative 2. Broker/dealer 3. Security

1 , 2 , and 3

Which of the following is considered a self-regulating organization for the regulation of securities offerings and trading? 1. MSRB, DC 2. FINRA 3. CBOE 4. SEC

1 , 2, and 3 Only

FINRA may impose which of the following sanctions on a member or an associated person for a violation of securities laws and regulations? 1. Fine, censure, suspension of membership of barring from association with a member firm 2. Up to 10 years in prison 3. Expulsion from membership or revocation of registration 4. Up to 3 years in prison and/or fine up to $10,000

1 and 3 Only

Which of the statements are true regarding a prime brokerage account? 1. It has a higher net equity requirement than standard margin accounts 2. It has a lower equity requirement than standard margin accounts 3. It can have trades executed by multiple broker/dealers 4. It has trades executed by one broker/dealer, but safekeeping performed by another

1 and 3 Only

A step coupon bond 1. Has a nominal rate which increases at a specified point during its life 2. Has a nominal rate which fluctuates based on an underlying index 3. Pay periodic interest 4. Accretes interest and pays at maturity

1 and 3 Only - A step coupon, or step-up bond, has a fixed coupon rate which increases to another fixed rate at a specified year during its life. Step-ups pay periodic interest; they are not OIDs.

Regarding a broker/dealer retail sale to a customer, how can an order be filled? 1. From inventory 2. Sell short to customer 3. Simultaneously or riskless transaction 4. As an agent

1, 2, 3, and 4

What should an investor consider when evaluating a DPP investment opportunity? 1. Tenure of ownership 2. Liquidity risk 3. Marketability risk 4. Management risk

1, 2, 3, and 4

The contract size for equity mini-options is:

10 shares of the underlying stock

Which of the following represents the inside market? 1. Lowest bid 2. Highest bud 3. Lowest offered 4. Highest offered

2 and 3 Only

Prior to writing an option in a newly-opened account, which of the following must be completed and delivered? 1. Options agreement 2. Margin agreement 3. Options disclosure 4. Margin disclosure

2 and 3 only - The hypothecation (margin) agreement must be completed prior to the first margin trade, and writing an option is a short sale on margin. The options disclosure document must also be sent. The options agreement needs to be signed only after 15 days of account opening, and margin disclosure is with the opening of the margin account, not the first trade.

With a variable annuity, which of the following factors are NIT involved in determining the amount of an annuitants first annuity payment? A. The number of annuity units B. The settlement option selected C. The value of the annuitants interest in the separate account D. An actuarial factor base on the annuitants life expectancy

A. The number of annuity units

Which of the following options is trading at parity? A. 40 call with a $3 premium when the current market value of the underlying stock is trading at $40 B. 40 call with a $3 premium and the current market value of the underlying stock is trading at $43. C. 50 put with a $3 premium when the current market value of the underlying stock is at $53. D. 50 put with a $3 premium when the current market value of the underlying stock is at $50.

B. 40 call with a $3 premium and the current market value of the underlying stock is trading at $43.

Which of the following is true of GNMA? A. Interest payments are semi-annual B. It issues $25,000 bonds C. It lends funds to savings institutions D. It is a direct obligation of the government

B. It issues $25,000 bonds - GNMA is a serial, pass-through certificate making monthly payments of principal and interest. It is also a government agency which buys only government-guranteed mortgages.

In order to make sure that the trader received the best execution, the trader should seek the: A. Highest ask B. NBBO C. Last trade in the security D. Lowest bid

B. NBBO - The NBBO, which stands for the National Best Bid and Offer, will be determined bu looking at the different markets where the security trades to determine the highest bid and the lowest ask price.

The Securities Exchange Act of 1934 deal with all of the following issues EXCEPT: A. The regulation of broker/dealers B. The sale of new issues C. The trading of securities after they have been issued D. The regulation of exchanges

B. The sale of new issues - The sale of new issues of securities is covered by the Securities Act of 1933.

Which of the following entities does NOT issue Eurodollar bonds? A. Foreign corporations B. U.S. government C. U.S. corporations D. A local government

B. U.S. government

An investor with a short position is:

Bearish

The legislation that regulates the sale of securities at the state level is known as the:

Blue Sky laws

Your client has a portfolio of Treasury bonds. You are concerned about a rise in interest rates. Which of the following would you recommend?

Buy T-Bond puts

Sell a 15 put for 2. What is the maximum loss? A. $200 B. $500 C. $1,300 D. $1,500

C. $1,300

ABC stock is trading at $29. Jan thinks that ABC stock is going lower so she buys 10 ABC Feb 30 puts @ $2.25. The following week ABC rallied to $35 and Jan sold her puts for $0.75. What is gain or loss? A. A gain of $1,500 B. A loss of $600 C. A loss of $1,500 D. A loss of $150

C. A loss of $1,500 - Jan paid $2.25 (a debit) and sold for $0.75 (a credit) = ($1.50) X 100 X 10 contracts = $1,500 loss

Which of the following is related to the additional bonds test in the bond indenture? A. Subordinated debenture B. Dilution of tax revenue C. Limitation on future bond issues D. Junior lien

C. Limitation on future bond issues

Which of the following would require the delivery of a prospectus at the time of sale? 1. Variable universal life 2. UIT 3. Mutual Fund 4. Closed-end fund

CORRECT ANSWER: B. 1,2,3, AND 4. - All of the examples are registered securities and require a prospectus

What is the description of the industry's Five Percent Policy?

Charges must be fair and reasonable

What type of annuity contract could act as a hedge against either inflation or deflation?

Combination annuity

Which of the following is an appropriate investment for a LGIP?

Commercial paper

Which of the following issues equipment trust certificates? A. A company that builds boats B. A company that leases planes C. An airline manufacturer that manufactures jet engines D. A regional airline

D. A regional airline

Which is the best rating? A. A-3 10 years to maturity B. A-2 15 years to maturity C. A-1 20 years to maturity D. Aaa 5 years to maturity

D. Aaa 5 years to maturity

Alfred is long $276,000 in his portfolio, and his portfolio had a beta of 1.25. He wants to hedge his position. The OEX (S & P 100) is at 230. To hedge his position, Alfred should: A. Sell 15 puts B. Buy 12 calls C. Buy 12 puts D. Buy 15 puts

D. Buy 15 puts

The manager of a bond fund has used the strategy of writing covered T-Bond calls as a means of increasing the fund's yield. Distributions to shareholders from this source of income will be treated, for tax purposes as: A. Interest B. Interest and capital gains C. Ordinary income D. Capital gains

D. Capital gains - Any income derived from writing options is considered to be capital gain.

Which of the following accounts is NOT insured by the SIPC? A. Custodian account B. Single owner account C. Joint account D. Commodities account

D. Commodities account

Which of the following is an example of an unsecured corporate bond? A. Equipment trust certificate B. Collateral trust bond C. Mortgage bond D. Debenture

D. Debenture

Which of the following would not be in an equity REIT portfolio? A. Vacant land B. Shopping center C. Office building D. Mortgage

D. Mortgage

Which of the following statements regarding commercial paper is false? A. Any discount is taxable as ordinary income B. It is issued by corporations C. It can be issued either at a discount or with a coupon rate D. Registration is required by the SEC

D. Registration is required by the SEC

Long-term unsecured corporate debt offerings are defined as:

Debentures

EPS measures:

Earnings available to common stockholders - EPIS is net income available to common stock after the preferred dividend is paid.

Under defined benefit retirement plan, who determines what benefits a retired employee will receive?

Employer

Which of the following is FALSE regarding all preferred stock?

Preferred stock is cumulative for past dividends and allows for a dividend catch up at some point in the future - THIS IS A FALSE STATEMENT

The Act that requires financial institutions to develop. Implement and monitor procedures that prevent its registered representatives and associated person from misusing nonpublic information is:

Securities and Exchange Act of 1934

An asset-backed security is backed by:

Short-term loans on credit cards or automobiles

A technical analyst states that the market is "consolidating". This means that the market rend line is moving:

Sideways

A guaranteed bond is one that is guaranteed by another company or entity. We would typically see a guaranteed bond used in which of the following situations?

Spinoff

Another term for "market risk" is:

Systematic risk

Upon dissolution of a partnership, the total amount of money received by the limited partner is considered by the IRS to be:

Taxable as ordinary income, only to the extent that it exceeds the basis

In pricing a new issue, a municipal bond underwriter would be most likely to check:

The 30-day visible supply - The 30-day visible supply indicates how much competition a bond issue will have in the next 30 days. This influences an underwriter's pricing decision on a new bond offering. The other three are information sources for the secondary market

What is designed to prevent fraud in the issue of securities?

The Securities Act of 1933

When a customer effects a proceeds transaction, the Five Percent Policy states:

The combined proceeds to the broker/dealer on the sale and purchase should not exceed the 5% guideline based on the inside ask on the buy side.

When comparing a convertible bond to a similar callable debenture, which of the following statements is true?

The convertible bond will have a lower stated interest rate

Your client owns a utility income fund and reinvests the monthly dividend and income distributions back into the fund, if he redeems some of the shares at a loss, which statement is CORRECT?

The redemption will fall under IRS wash sale rules.

You have been watching two OTC stocks for a period of time and have noted that the spreads between the bid and ask prices are quite different. What could you likely assume from this finding?

The stock with the more narrow spread is more active

Which of the following is contracted by a mutual fund to issue new shares and cancel redeem shares for the fund?

Transfer agent

An investment with a stated interest rate that matures in 2 to 10 tears is a:

Treasury note

Which of the following are issued with a specified, fixed rate of interest?

U.S. government bonds and notes

A customer has a portfolio of Treasury securities. In order to increase investment income:

Write calls

Which of the following is NOT true of Section 1035 Policy Exchange?

Any exchange made under Section 1035 of the Internal Revenue Code must be completed within 30 days - Section 1035 of the Internal Revenue Code does not give a specific time limit to complete such an exchange.

Which bond has the greatest markert risk? A. 6 ½% 15 year noncallable, rated A B. 6% 30 year callable, rated Baa C. 7% 15 year noncallable, rated BBB D. 7% 30 year callable, rated A-1

B. 6% 30 year callable, rated Baa

Which of the following is measured by the yield to maturity? A. The return on a bond up to the call date B. The return of an investment in relation to the degree of risk C. The total performance of a bond from the time of purchase until maturity D. The return on a bond based on its current market value

C. The total performance of a bond from the time of purchase until maturity - The yield to maturity measures the total performance of a bond from the time of purchase until maturity.

If a customer purchases securities and does not settle the account in 4 business days, the brokerage firm's first order of business is to:

Cancel the trade and sell of the purchased securities

When a member offers an investment analysis tool to retail customers, it must make the investment analysis tool available to:

FINRA within 10 business days of its first use by the public

An investor who wants to purchase mortgage-backed securities fully guaranteed by the U.S. government should purchase:

GNMA ( Ginnie Mae )

The yield curves for high-grade and low grade bond are both positive and are moving further apart. An investment in which of the following would be most consistent with the economic expectations reflected in this relationship?

Government bonds

A rising put/call ratio:

Is bearish

Advance refunding is:

Issuing new debt to extinguish old debt at the first opportunity

Disintermediation is:

Large-scale movement from the short to the long end of the yield curve. - Disintermediation occurs when investors leave the uncertainty of short-term rates and lock in long-term rates when the yield curve is inverted

What is the primary difference between IRA's and SEPs?

More money can be contributed to a SEP

A customer has not paid for a stock transaction in 4 business days and has been refused an extension. The member firm:

Must cancel or liquidate the order by immediately selling the securities.

Regulation S addresses:

Off-shore sales of restricted stock

If a client is leaving the United States for an extended period of time, confirmations may be held by the broker:

Only upon the clients written request

Under NYSE rules, the final approval to open a new account is given by the:

Partner or principal

Which of the following statements regarding Eurodollar bonds is false?

Payment of interest and principal may be made in U.S. dollars or designated foreign currencies, at the option of the issuer. - THIS IS A FALSE STATEMENT

If a member firm suspects that a senior customer ( age 65 or older) is being financially exploited, it may:

Place a temporary hold on disbursements from the customer's account

Under Regulation T, the 90- restriction applies to a customer who purchases and subsequently sells:

Same stock in a cash account without having first fully paid for the purchase.

A registered representative of a NYSE firm has written a research report and wishes to mail it to a customer. The rep can not do so without:

The approval of the supervisory analyst.

UITs have fixed portfolios, which means that:

The content of the portfolio is fixed for the life of the trust

Which statement describes the typical candidate for a SIMPLE plan?

The employer with 100 or fewer eligible employees who desires an alternative to the 401 (k) that includes employee deferrals, flexible employer matching features and low administrative costs

An investor has some bonds that are callable. She is wondering what the yield on her bonds will be if they are in fact called by the issuer. Which of the following is true regarding this investors bonds?

The investor would have a yield on the bond based on the call premium at the time that the bond is called.

Which statement is true regarding sales charges in a variable life insurance policy?

The maximum charge is 9% calculated over a 20-year period

A couple established a Coverdell Education Savings Account for their son, who never attended college. The son will be turning 30 in a few months. What options do the parents have for the Coverdell they established for their son?

The parents can roll the money over to another qualified family member for his or her education without penalty

What is the primary purpose of a 401 (k) plan?

To accumulate retirement savings

Under Reg D rule 504, how much money may be raised within 12 months?

$ 5 million

The writer of a call option opens with a premium of 8 and closes his option position at ¼. What is the loss or gain?

$ 775 gain

Revenues: $1,980,000; Operating expenses: $500,000; Interest expenses: $300,000; Management fees: $100,0000; Depreciation: $2,700,000; Taxable income or loss for the year from this limited partnership is:

$1,620,000 loss - Total expenses = $3,600,000 ($2,700,000 PLUS $500,000 PLUS $300,000 PLUS $100,000)$3,600,000 MINUS $1,980,000 = $1,620,000 Loss

With the underlying stock at $120, an investor writes a naked 120 put for a premium of $200. The maximum the writer can lose is: A. $200 B. $11,800 C. $200 to $12,000 D. $200 to infinity

$11,800 - The maximum loss for a short put occurs if the stock goes to zero. The writer is exercised, and is forced to buy worthless stock for $120 per share. Keeping the $200 premium, the maximum loss is $11,800

XYZ stock is trading at $1.25 per share. With Reg T at 50%, what is the required deposit to sell short 10,000 XYZ @ $1.25 per share?

$25,000 - For stocks trading under $2.50 per share, the Rule is $2.50 per share. 10,000 x 2.50 = $25,000

An issuer that currently has $150 million in outstanding capitalization and has an average daily trading volume of $1 million would have a restriction period for their add-on offering of:

0 Days

According to MSRB rules, if a control relationship exists between an issuer and a municipal securities dealer, the nature of the relationship must be disclosed under which of the following circumstances? 1. When the transaction involves the sale of a new issue 2. When the transaction occurs in the secondary market 3. When the broker/dealer is acting as agent 4. When the broker/dealer is acting as principal

1, 2, 3, and 4. - Control relationships must be disclosed in the official statement and on the confirm.

A SIMPLE ( Savings Incentive Match Plan for Employees) plan is available to small business that employ a maximum of how many employees?

100

If you anticipate interest rate to decline you would recommend: 1. T-Bond yield call 2. T-Bond yield put 3. T-Bond call 4. T-Bond put

2 and 3

An investor is long 1 July 50 put. After writing 1 July 45 put, this position is a: 1. Credit spread 2. Debit spread 3. Horizontal spread 4. Vertical spread

2 and 4 only - The spread is debit (buy the higher put) and vertical (difference in strike price)

Prior to completing a trade, a broker/dealer must have which of the following, according to MSRB rules? 1. Customer signature 2. Registered representative signature 3. Principal signature 4. Customer financial status

2, 3, and 4 ONLY

Face amount certificates issue debt certificates that offer predetermined interest rates. The certificates may be purchased by either periodic installments or with a lump-sum payment. These certificates have a maturity of at least:

24 months - Face amount certificates have maturities of at least 24 months.

An Internal Revenue Code provision that specifically provides for an individual retirement plan for public school teachers is a:

403(b) Plan (TSA)

The capital asset pricing model is used to determine:

A security's value, considering its beta and a risk-free rate of return

Which of the following is traded on the NYSE AMEX? A. HOLDRs B. ELKS C. TANs D. STRIPs

A. HOLDRs

According to the Trust Indenture Act of 1939, a trust indenture is required A. On corporate bonds B. On government bonds C. On municipal bonds D. On municipal and corporate bonds

A. On corporate bonds

Interest income from U.S. government bonds is: A. Subject to federal income tax but exempt from state income tax B. Subject to federal and state income tax C. Exempt from federal and state income tax D. Subject to state income tax but exempt from federal income tax

A. Subject to federal income tax but exempt from state income tax

All of the following are different between qualified and nonqualified retirement plans EXCEPT: A. Taxation on accumulation B. Taxation on withdrawals C. Taxation on contributions D. RS approval requirements

A. Taxation on accumulation - Taxation on accumulation is deferred in both types of plans. The rest of the characteristics differ.

A fundamental analyst would use technical analysis in determining which of the following? A. Timing B. Earning trends C. Capitalization D. Liquidity

A. Timing