Exam Review

Recession = _________ months.

A recession is 6 months - 17 months

A registered person has left the securities industry and now holds a manufacturing job. Under what circumstances may this formerly registered person continue to receive commissions from work done at the person's old firm? A) A contract must have been signed by the registered person and the firm specifying what commissions are still to be paid. B) The person may only receive commissions from current trades done by those who were the person's customers during employment at the firm. C) Any contract regarding continuing commissions must include the provision that the person's spouse must receive them in the event of the person's death. D) Once the registered person has left the industry, the person must be treated like any member of the public and may not receive any further commissions.

A) A contract must have been signed by the registered person and the firm specifying what commissions are still to be paid.

Rihanna resigns from her position as a Series 7 registered representative with Princeton Securities, a FINRA member firm, where she has worked for five years. After completing an accelerated graduate studies program, and receiving a Ph.D. in 30 months, she wishes to return to her prior position as a registered representative. In order to do so she ___________. A) must retake the Series 7 exam but not the SIE exam. B) must retake the Series 7 exam and the SIE exam. C) does not need to take the exams because she is returning to the industry within 36 months. D) does not need to take the exams due to the education exemption.

A) must retake the Series 7 exam but not the SIE exam. The time limit to return for a representative exam (Series 6 or 7) is within two years. The time limit for the SIE exam is four years. There is no education exemption. LO 12.a

A municipal finance professional (MFP) is ______________. A) an employee of a Financial Industry Regulatory Authority (FINRA) member engaged in municipal security representative activities such as underwriting and trading. B) employed by a municipality (not elected) to oversee the issuance of municipal bonds. C) an elected official of a municipality having some decision-making authority regarding who will underwrite the municipality's bonds. D) an employee of the Municipal Securities Rule Board (MSRB) specializing in seeing that broker-dealers adhere to the MSRB rules and regulations regarding the sales of municipal bonds.

A) an employee of a Financial Industry Regulatory Authority (FINRA) member engaged in municipal security representative activities such as underwriting and trading. As per the Municipal Securities Rulemaking Board (MSRB), a municipal finance professional (MFP) is an associated person of a member firm who is primarily engaged in municipal securities representative activities, including underwriting, sales and trading, or any other activity that involves communications with the public regarding municipals. LO 12.f

** A new customer opens a margin account and, upon account approval, does an initial transaction purchasing 100 shares of MJS common stock at $25. How much will the customer need to deposit? A) $2,000 B) $2,500 C) $1,000 D) $5,000

A) $2,000 For the first trade in a newly opened margin account, there must be at least $2,000 in equity. The rule is as follows: transaction greater than $4,000, deposit 50%; between $2,000 and $4,000, deposit $2,000; and if the transaction is less than $2,000, deposit 100% of the purchase price. In this case, the transaction was between $2,000 and $4,000, and so a deposit of $2,000 is required. LO 6.g

BOB Income Fund has total assets of $120 million and liabilities of $5 million. The fund has 5 million outstanding shares. What is the fund's current net asset value (NAV) per share? A) $23 B) $24 C) $25 D) $22

A) $23 To find the net assets, you subtract the fund's liabilities from the fund's total assets. In this question 120 million - 5 million = 115 million. NAV is calculated by dividing the net assets of the fund by the number of outstanding shares. In this question, 115 million / 5 million = $23 per share. LO 4.c

Two years ago Lisa Smith sold short 100 shares at $50 per share and two years later bought them back for $55 per share. The stock paid a $2.50 dividend each year. How much did Smith gain or lose per share for tax purposes? A) A $5 loss B) No gain or loss C) A $5 gain D) A $10 gain

A) A $5 loss The formula to calculate a gain or loss for tax purposes is the proceeds minus the cost basis. Smith bought the shares at $55 and sold at $50. The dividends are not included in the calculation of gain or loss for tax purposes. LO 8.b

All of the following are true of Roth IRAs except ________. A) Contributions may be deductible depending on income limits B) Withdrawals are not required at age 72 C) Contributions are made after tax D) Contributions may be able to be made after 59½

A) Contributions may be deductible depending on income limits ROTH contributions are NOT deductible. They are made with after-tax dollars and may continue past age 59½ if still working. Roths are not subject to RMDs. LO 6.e

Which of the following records must be kept for six years? I. Customer statements II. Customer new account forms III. Customer confirmations IV. Customer order tickets A) I and II B) I and IV C) II and III D) III and IV

A) I and II Customer statements AND Customer new account forms must be kept for 6 years The buy and sell and quantity information on the order tickets and confirmations statements will show up on the customer's monthly or quarterly statements. Monthly and quarterly statements must be kept six years. LO 10.g

Advantages to the investor offered by investment companies include: I. ability to invest small amounts in many different securities. II. special securities prices available only to investment companies. III. elimination of market risk through pooling of investments. IV. increased purchasing power in the marketplace. A) I and IV B) II and III C) I and III D) II and IV

A) I and IV Investors who can only invest relatively small amounts of money can nevertheless purchase interest in many different securities through investment companies. By the same token, they also gain access to increased purchasing power by pooling their investments with others. MARKET RISK CAN'T BE ELIMINATED. LO 4.a

Which of the following statements regarding real estate investment trusts (REITs) are true? I. Hybrid REITs typically invest in both commercial property and residential property. II. Some REITs hold no real property but hold mortgages on commercial property instead. III. Hybrid REITs can hold only residential property and mortgages on residential property. IV. REITs can pay dividends to shareholders and make capital gains distributions. A) II and IV B) I and IV C) I and III D) II and III

A) II and IV Some REITs hold no real property but hold mortgages on commercial property instead AND REITs can pay dividends to shareholders and make capital gains distributions. Equity REITs typically hold commercial property rather than residential property. Mortgage REITs hold mortgages on commercial property, and hybrid REITs do both. Dividend disbursements, as well as capital gains distributions, can be made to shareholders. LO 5.i

What is the maximum number of nonaccredited investors allowed in a Regulation D exempt transaction under Rule 506(c)? A) None B) 25 C) 50 D) 35

A) None In order to sell under Rule 506(c) (which allows advertising), all purchasers of the advertised securities must be accredited investors, or the business must reasonably believe that the investors are accredited investors at the time of the sale. LO 1.c

Your customer wants to be in a position to buy CDS stock while taking in premium. Which of the following options positions might accomplish this? A) Short puts B) Short calls C) Long puts D) Long calls

A) Short puts Long calls or short puts would meet the criteria of being in a position to buy stock, but only sellers of options take in premium (income). Therefore, to meet both criteria, shorting puts would be the only basic option position that might accomplish this. LO 5.a

By the Securities and Exchange Commission (SEC) definition, when is the latest that payment in full for purchased securities may take place in a cash account? A) T + 4 business days B) Promptly C) T + 3 business days D) On the trade date

A) T + 4 business days Regulation T, which applies to everyone who opens a brokerage account, specifies that payment in full for securities must take place no later than two business days after regular way settlement. Because regular way settlement is T + 2, it follows that T + 4 is the latest. LO 6.g

U.S. Treasury notes are U.S. government-issued _________. A) intermediate-term debt securities with maturities of 2-10 years. B) short-term debt securities with maturities of 2-12 months. C) long-term debt securities with maturities of 10-20 years. D) short-term debt securities with maturities of 2-10 years.

A) T-notes are intermediate-term debt securities with maturities of 2-10 years.

* Which of the following acts created the SEC? A) The Securities Exchange Act of 1934 B) The Securities Act of 1933 C) The Securities Market Improvement Act of 1975 D) The Securities Investor Protection Act of 1970

A) The Securities Exchange Act of 1934 The Securities Act of 1933 requires the registration of most new issues; the Securities Exchange Act of 1934 created the SEC; the Securities Investor Protection Act of 1970 created the SIPC; the Securities Market Improvement Act of 1975 created the MSRB. LO 10.a

** Who is responsible for meeting the desired returns on a defined benefit plan? A) The sponsor B) The employee C) The Pension Benefit Guaranty Corporation D) The custodian

A) The sponsor The sponsor is the employer who has promised the defined benefit plan to the employee. LO 6.f

Your customer opens a position at 45 and then closes it later at 47. This represents ___________. A) a 2-point gain or loss. B) a 2-point gain. C) a 2-point loss. D) a 47-point gain.

A) a 2-point gain or loss. Because we do not know if the opening transaction was a buy or a sell from what we are told, this could be either a 2-point gain or loss. If the opening transaction was a buy, this represents a gain (bought at 45, sold at 47). But if the opening transaction was a sell, this represents a 2-point loss (sold at 45, bought back at 47). LO 1.g

Two months ago your customer sold short 200 shares of Seabird Airlines at $15 a share. Today, the stock is trading at $10 a share. In order to close out the position your customer would _______. A) buy 200 shares of Seabird. B) borrow 200 shares of Seabird. C) buy Seabird calls. D) realize a $5 a share loss.

A) buy 200 shares of Seabird. A customer would need to buy the shares in order to close this short position. Borrowing the shares does not close the short, nor does buying the call. They could buy the call and then exercise, but the buy, alone, does not close the position. If they closed the position at $10 they would have a gain. LO 1.g

Preferred shares have ________. A) characteristics of both equity and debt securities. B) characteristics of neither equity nor debt securities. C) only the characteristics matching those of equity securities. D) only the characteristics matching those of debt securities.

A) characteristics of both equity and debt securities. Preferred shares are equity securities, but not only do they have the characteristics of equity securities, they share some of the characteristics of debt securities as well. The most notable characteristic is that a preferred stock's annual dividend represents its fixed rate of return, like the fixed rate of return for a bond (debt security). LO 2.d

An investor holds a 5% bond callable in six years and maturing in eight years. The bond's current yield (CY) measures its annual coupon payment relative to ________. A) its market price. B) its value at maturity. C) par value. D) its value when callable.

A) its market price. The Current Yield (CY) measures a bond's annual coupon payment (interest) relative to its market price, as shown in the following equation: annual coupon payment ÷ market price = current yield. LO 3.a

Mutual funds that market directly to the public, using no underwriter and charging no sales charge, are called _________. A) no-load funds. B) charge-free funds. C) free-sale funds. D) loaded funds.

A) no-load funds. Some funds distribute their own shares without using an underwriter and, hence, have no need to levy a sales charge. Because sales charges are also called sales loads, such funds are known as no-load funds. LO 4.b

For tax purposes, investment income is _________. A) normally taxed as ordinary income. B) never taxable at ordinary income tax rates. C) always taxed at the capital gains tax rate. D) always taxed at the highest ordinary income tax rate.

A) normally taxed as ordinary income. Investment income is that which is earned from one's investments. Sometimes called portfolio income, it would include dividends, interest, and short term capital gains derived from the sale of securities. Investment income is included in ordinary income for income tax purposes. Long-term capital gains are taxed at the capital gains tax rate. LO 8.d

Inflation risk is most closely associated with _____________. A) purchasing power risk. B) call risk. C) nonsystematic risk. D) interest-rate risk.

A) purchasing power risk. When prices are rising (inflation), purchasing power is reduced. During inflationary periods, a dollar today often doesn't purchase the quantity of goods and services it purchased yesterday. LO 7.a

** Underwriters in a firm commitment offer _________. A) will act as principals. B) will act as an agent for the issuer. C) do not provide the issuer with any guarantee that they will raise all of the capital needed. D) will not be at risk for any securities left unsold.

A) will act as principals. In a firm commitment, the underwriters contract with the issuer to buy the securities from them, and thus, they are acting as principals rather than agents. In this type of underwriting, it is the underwriters who are at risk for any shares they cannot sell to the public, not the issuer. The issuer knows that ultimately, all of the securities will be sold and all of the capital needed will be raised. LO 1.a

ABC Growth Fund has net assets of $120 million and liabilities of $5 million. The fund has 5 million outstanding shares. What is the fund's current net asset value (NAV) per share? A) $25 B) $24 C) $22 D) $23

B) $24 NAV is calculated by dividing the net assets of the fund by the number of outstanding shares. In this question the net assets are given; the liabilities are already in the figure. The math is 120 million / 5 million = $24 per share. LO 4.c

DEF Growth Fund has reported average net assets of $330 million and expenses of $4.95 million. What is the fund's expense ratio? A) 1.20% B) 1.50% C) 5.00% D) 1.25%

B) 1.50% Expense ratios are calculated by dividing the expenses for the reporting period by the average assets over that period. In this example, 4.95 million / 330 million = 1.5 (1.50%). LO 4.c

A letter of intent (LOI) must be completed within ________. A) indefinitely. B) 13 months. C) 6 months. D) 90 days.

B) 13 months. The obligation under the LOI must be met within 13 months from the date of the letter. LOIs may be backdated up to 90 days. LO 4.b

XYZ Corp pays a quarterly dividend of $1. The common stock is currently valued at $160 per share. What is XYZ common stock's dividend yield? A) 1.0% B) 2.5% C) 5.0% D) 7.5%

B) 2.5% The formula for dividend yield (or current yield) is annual income ÷ current market value. In this example you need to multiply the quarterly dividend by four to find the annual number: 4 ÷ 160 = 0.025 (2.5%). LO 8.a

Your client is about to retire and wants to rearrange his portfolio in order to have predictable income. Which of the following would not be a good investment vehicle? A) AA-rated debentures B) Adjustment (income) bonds C) AA-rated mortgage bonds D) U.S. Treasury notes

B) Adjustment bonds Income bonds, aka adjustment bonds, are issued when a company is reorganizing and coming out of bankruptcy. Income bonds pay interest only if the company has enough income to meet the interest payment. Therefore, the interest payments are not predictable, and they are not suitable for customers seeking income. LO 3.c

Which of the following is not a feature shared by mutual funds and closed-end funds? A) An investor may liquidate a portion of his holdings without disturbing the portfolio's balance or diversification. B) The fund may offer various withdrawal plans that allow different payment methods at redemption. C) A professional investment adviser manages the portfolio for investors. D) The fund provides diversification by investing in different companies or securities.

B) The fund may offer various withdrawal plans that allow different payment methods at redemption. A closed-end fund does not offer redemptions. Shares must be liquidated in the secondary markets. All the other points here are true of both types of managed investment companies. LO 4.b

Borrowing money to buy securities is prohibited in all of the following accounts except _____________. A) a Roth IRA. B) a margin account. C) a custodial account. D) an individual IRA.

B) a margin account.

** A company is looking to raise additional capital to fund an expansion plan. The company's senior management chooses to issue additional bonds to the general public. The best expression to explain this type of offering would be ___________. A) an initial public offering (IPO). B) a primary offering. C) a private securities offering. D) a secondary offering.

B) a primary offering / additional public offering (APO) A primary offering is one in which the proceeds raised go to the issuing corporation, municipality, or government. The corporation in this case looks to increase its liquid capital by offering bonds. Primary offerings of bonds may be made by an issuer publicly, as is the case, or privately. This question points to an additional public offering (APO) of securities, not an initial public offering. LO 1.a

An officer of a public company buys 1,000 shares of the company's registered stock in the open market. Regarding the sale of these shares, the officer may sell __________. A) only after leaving (becoming unaffiliated with) the company. B) immediately, subject to Rule 144 volume limitations. C) immediately, with no volume restrictions. D) under Rule 144 only after a six-month holding period.

B) immediately, subject to Rule 144 volume limitations. Because the shares were purchased in the open market (already registered), the transaction is not a private placement and there is no required holding period. The officer, however, is an affiliate and is therefore subject to the reporting and volume limitations imposed when selling under Rule 144. LO 2.f

Amendments to articles of incorporation are kept _____. A) for 10 years. B) indefinitely. C) for six years. D) for three years.

B) indefinitely.

The SEC has regulatory authority over all of these except ______. A) reporting requirements for issuers. B) municipalities. C) insider transactions. D) net capital requirements.

B) municipalities. Although the SEC does oversee the process of issuing municipal government debt, neither the SEC nor the MSRB regulates municipalities in the United States. The SEC does regulate insider transactions, broker-dealer capital requirements, and reporting requirements for public companies. LO 10.a

Associated persons who wish to enter into a private securities transaction for which they will receive no compensation must ________. A) await the employer's approval before proceeding. B) provide prior written notice to their employer. C) open a new account to accommodate the transaction immediately. D) take steps to have the transaction supervised at the firm where it will occu

B) provide prior written notice to their employer. Associated persons who wish to enter into a private securities transaction must provide prior written notice to their employer. Approval is only required when compensation will be paid. All supervision for the transaction is the responsibility of the employing member and not the firm accommodating the transaction. LO 12.e

Opening a margin account for a client requires the client to do all of the following except _________. A) signing the hypothecation agreement. B) signing the loan consent. C) recieve a risk disclosure document. D) signing the credit agreement.

B) signing the loan consent. The signing of the loan consent agreement allowing one's securities to be loaned to others for the purpose of short sales is optional; all the other items are required to be signed to open a margin account. LO 6.g

Several months of slow economic growth and rising unemployment have characterized the economy. Market analysts would describe this as a period of ________. A) inflation. B) stagnation. C) stagflation. D) deflation.

B) stagnation.

A registered representative enters a discretionary order for her clients account. All of the following are required except ___________. A) the order must be identified as or marked discretionary. B) the order must be approved by a principal prior to entry. C) the order should be included in those required to be reviewed frequently. D) a record of the order must be maintained.

B) the order must be approved by a principal prior to entry. Each discretionary order must be identified as such at the time it is entered for execution, a principal, officer or a partner of the BROKER-DEALER must approve each order promptly and in writing, but not necessarily before order entry, a record must be kept of all transactions including discretionary ones, and as with all trading activity, it is subject to frequent and systematic review by a designated supervisor or manager. LO 6.h

An investor holds a Treasury note with a stated interest of 6%. The investor will receive _______________. A) two $60 interest payments per year. B) two $30 interest payments per year. C) one $6 interest payment per year. D) one $60 interest payment per year.

B) two $30 interest payments per year. Treasury note (T-note) annual interest is stated as a percentage of par value ($1,000) and is paid in semiannual payments. Therefore, a 6% T-note pays $60 per year in two payments of $30 each. LO 3.e

The primary use for a revocable living trust is to _______________. A) prevent the grantor from liquidating his estate prior to death. B) use as a substitute for a will. C) limit the grantor access to items in the estate. D) avoid tax consequences for the grantor.

B) use as a substitute for a will. LO 6.c

Three brothers open a joint account instructing you that if they die, they want the cash and securities in the account to go to the remaining parties to the account. The account should be opened _________. A) as a custodial account. B) with rights of survivorship. C) as a transfer on death (TOD) account. D) as a tenants in common (TIC) account.

B) with rights of survivorship. Under joint tenants with right of survivorship (JTWROS), each brother's interest in the account would go to the surviving brother. Although JTWROS accounts may be opened with a TOD designation, that is not the best answer to this question - that is a feature that would be added to the account. From time to time, you will see questions on the exam where it will be a challenge to choose between two good-looking answers. The key is to pick the one that is the most appropriate to the specific question. LO 6.a

If a customer had a large cash position and was interested in purchasing stock at prices below where they are today, an option strategy would be to _______. A) place a buy stop order below the market. B) write covered puts that are currently out of the money. C) buy out-of-the-money calls. D) write uncovered calls that are currently out of the money.

B) write covered puts that are currently out of the money. If the stock declines in value and the short put options are exercised, the customer will buy the stock at a price lower than where the market is at this moment. The short calls would force him to sell the shares if exercised. Buying out-of-the-money calls costs money, and the strike price would be higher than the market. Buy stop orders are entered above the current market value of a stock. LO 5.c

hich of the following investments would not require heightened suitability requirements before recommending them to your clients? A) An exchange-traded note (ETN) B) An oil and gas limited partnership C) A utilities mutual fund D) A hedge fund

C) A utilities mutual fund Mutual funds are generally suitable for a broad class of investors. ETNs, limited partnerships, and hedge funds all have specific suitability requirements. LO 7.d

Which of the following statements is true regarding Exchange-traded notes? A) Exchange-traded notes (ETNs) track performance to U.S. Treasury notes B) Exchange-traded notes (ETNs) are backed by the good faith and credit of the United States government C) Exchange-traded notes (ETNs) are senior, unsecured debt securities issued by a bank or financial institution. D) Exchange-traded notes (ETNs) are junior, unsecured debt securities issued by a municipality

C) Exchange-traded notes (ETNs) are senior, unsecured debt securities issued by a bank or financial institution. They are backed only by the good faith and credit of the issuer. The notes track the performance of a particular market index but do not represent ownership in a pool of securities the way share ownership of a fund does. ETNs are bond like with a stated maturity date but do not pay interest and offer no principal protection. ETN investors receive cash payments linked to the performance of its underlying index less management fees when the note matures. LO 5.j

A company is engaging in a securities offering that is a combination of a primary and secondary offering. Which of the following is true? A) This combination is known as a split offering where the issuer receives all of the proceeds from the sale. B) This combination is known as an APO where existing shareholders receive all of the proceeds of the sale. C) This combination is known as a split offering where the issuer receives some of the proceeds and existing shareholders receive some of the proceeds from the sale. D) This combination is known as an IPO where the issuer receives all of the proceeds from the sale.

C) This combination is known as a split offering where the issuer receives some of the proceeds and existing shareholders receive some of the proceeds from the sale. When an offering is a combination of a primary and secondary offering, it is known as a split offering. In a split offering the corporation issues a portion of the shares offered to the public and receives the sales proceeds from those shares, while existing shareholders offer the balance of the shares to the public and receive the proceeds from those shares. LO 1.b

Financial risk is most attributed to which of the following investments? A) Municipal general obligation bonds B) Value stock C) Corporate bonds D) U.S. government bonds

C) Corporate bonds Financial risk is the risk that an issuer would not be able to make principal and interest payments. This rules out government bonds and municipal general obligation bonds because they are backed by taxing power, and stocks don't pay principal and interest. LO 7.a

ABC Growth Fund has net assets of $120 million and liabilities of $5 million. The fund has 5 million outstanding shares. What is the fund's current net asset value (NAV) per share? A) $23 B) $25 C) $24 D) $22

C) $24 NAV is calculated by dividing the net assets of the fund by the number of outstanding shares. In this question the net assets are given; the liabilities are already in the figure. The math is 120 million / 5 million = $24 per share.

** An investor short a January 30 call at 4 has a maximum gain potential of _______. A) 26 points or $2,600. B) 30 points or $3,000. C) 4 points or $400. D) 34 points or $3,400.

C) 4 points or $400. Maximum gain for any short option position (call or put) is the premium initially received when the contract was written. In this case, it is 4 points or $400. This would occur if, at expiration, the contract was at or out of the money and, therefore, left unexercised. LO 5.a

An investor owns 200 shares of MNO common stock. The company's management has proposed a 2:1 stock split. If the price of the stock at the time of the split is $50, what would the investor's adjusted position be? A) 100 shares at $200 B) 400 shares at $100 C) 400 shares at $25 D) 100 shares at $25

C) 400 shares at $25 The number of shares doubles to 400 (2 × 200) and the price per share would be $25 ($50 ÷ 2). LO 2.h

What is the penalty, if any, for overcontribution to an IRA? A) 10% B) 50% C) 6% D) No penalty

C) 6% There is a 10% penalty is for early withdrawal. There is a 50% penalty is for failure to make the minimum required distribution for the year. Contribution of more than the maximum amount in a year carries a 6% penalty. LO 6.e

LMN Corporation's board of directors declared a $0.50 per share dividend on Wednesday December 2. The dividend will be paid to shareholders of record on Monday, December 28. The dividend will be sent to shareholders on Tuesday, January 19. What is the most likely ex-dividend date? A) December 25 B) December 27 C) December 24 D) December 26

C) December 24 Trick question! The ex-date for a corporation will be one business day prior to the record date. The record date is December 28. The days before that are Sunday and Saturday. The next day before that is Friday, December 25 (a holiday). The first business day before the record date is Thursday, December 24. The only holidays we have heard of appearing on the exam are July 4 and December 25. LO 2.b

** Which regulator sets maintenance requirements for margin accounts? A) the SEC. B) the FRB. C) FINRA. D) the OCC.

C) FINRA. Maintenance requirements are set by the governing SRO. FINRA is the best answer of this set. FRB sets the initial margin requirement along with the SRO minimum. The FRB does not set maintenance requirements. LO 6.g

Which of the following is a coincident indicator? A) Housing starts B) Increase in the duration of unemployment C) Household income D) S&P 500 Index

C) Household income Personal or household incomes are coincident indicators, moving up and down along with the overall economy. Equity prices and housing starts are both leading indicators. Changes in the duration of unemployment is a lagging indicator. LO 9.b

Which of the following are true of qualified plans but not true of nonqualified plans? I. Contributions are not tax deductible II. Contributions are tax deductible III. Plan needs IRS approval IV. Plan does not need IRS approval A) II and IV B) I and IV C) II and III D) I and III

C) II and III Contributions are tax deductible AND Plan needs IRS approval Qualified plans require IRS approval, and the contributions are tax deductible. Because nonqualified plans' contributions are not deductible, they do not require IRS approval. LO 6.f

An investment company that features a managed portfolio of securities is known as which of the following? A) Unit investment trust B) Face-amount certificate C) Managed investment company D) REIT

C) Managed investment company The managed investment company actively manages a securities portfolio to achieve a stated investment objective. UITs and FACs do not have actively managed portfolios. REITs are a portfolio of real estate or mortgages, not securities. LO 4.a

Which of the following is a benchmark for small cap stocks? A) Standard and Poor's 500 Index B) Dow Jones Industrial Average C) Russell 2000® Index D) Wilshire 5000

C) Russell 2000® Index The Russell tracks 2,000 small company stocks. LO 7.e

What is the time period required for a customer to qualify for a breakpoint discount under rights of accumulation? A) 13 months B) 180 days C) There is no time limit D) 90 days

C) There is no time limit Rights of accumulation, like breakpoints, allow an investor to qualify for reduced sales charges. The major differences are that rights of accumulation are available for subsequent investments (the reduced sales charges will not apply to initial transactions), allow the investor to use prior share appreciation to qualify for breakpoints, and do not impose time limits. Rights of accumulation allow an investor to combine previous investments in the fund with today's investment to determine today's sales charge. LO 4.b

** Before an option trade may be entered for a customer, that customer's account must be approved for option trading by _________. A) an executive officer. B) a branch manager. C) a Registered Options Principal. D) a firm principal.

C) a Registered Options Principal. Only an ROP may approve option trading for an account. LO 5.c

An investor has entered into a contract to pay an investment company a specific sum of money in exchange for the company's agreement to pay the investor a specific (larger) sum of money on a specific date in the future. The investment company must be ________. A) a unit investment trust. B) a mutual fund. C) a face-amount certificate company. D) a closed-end investment company.

C) a face-amount certificate company. A face-amount certificate company offers the investor a certificate with a face amount on it. The investor buys it for a discount from the face amount, with the agreement being that the company will pay the investor the face amount on a specific date in the future. LO 4.a

An investor notices that a bond purchased several years ago at 95 is now priced at 90. The investor sells the bond for 90, then immediately repurchases it for 90. This action is known as ______. A) pegging. B) matched orders. C) a wash sale. D) marking the close.

C) a wash sale. The investor's intent with this wash sale is to declare a $50 capital loss without changing positions on the bond. Immediate repurchase is not illegal, but it precludes declaring the loss for tax purposes. The investor must wait at least 30 days before buying the bond back, or the loss will be disallowed. LO 8.d

Investors in exchange-traded notes (ETNs) should understand that the primary risk associated with ETNs is ______. A) market risk. B) purchasing power risk. C) default risk. D) call risk.

C) default risk. ETNs are debt instruments (that is what note means) and subject to default. Although a debt instrument, they have a return that may be tied to a number of different variables. Purchasing power risk is not normally considered a significant risk with ETNs. They are not callable nor do they trade in the secondary markets (so no market risk). LO 5.i

All of the following are features of the exchanges except ____________. A) a physical floor where traders call out bids and offers. B) designated market makers maintaining liquidity. C) employees of the exchange buying and selling securities on the floor. D) two-dollar brokers assisting in maintaining an orderly market.

C) employees of the exchange buying and selling securities on the floor. Trades on the floor of the exchange are conducted by floor brokers, two-dollar brokers, and floor traders, and are members, not employees, of the exchange. Market makers are tasked with maintaining an orderly market and are also members of the exchange. LO 1.d

Your customer has a portfolio consisting entirely of municipal-issued securities. Therefore, the entire portfolio would have to consist of __________. A) Treasury receipts and government agency bonds. B) Treasury STRIPS and bills. C) general obligation and revenue bonds. D) Treasury notes and general obligation bonds.

C) general obligation and revenue bonds. Two categories of municipal securities are general obligation (GO) bonds and revenue bonds. LO 3.d

T-bonds are the U.S. government's __________. A) short-term debt of 1 year or less. B) only tax-free debt. C) long-term debt of over 10 years. D) intermediate-term debt of 2-10 years.

C) long-term debt of over 10 years.

* When making unsolicited cold calls to prospects, a registered representative must disclose all of the following to the individual called except _______. A) the caller's name. B) the name of the member broker-dealer firm. C) the address of any securities issuer mentioned during the call. D) the address at which the caller may be contacted.

C) the address of any securities issuer mentioned during the call. When making cold calls, the caller must disclose his name and the name of the member broker-dealer, the telephone number or address at which the caller may be contacted, and that the purpose of the call is to solicit the purchase of securities. When securities of any issuer are mentioned in such a call, there is no requirement to disclose the address of the issuer. LO 11.j

An individual owning shares of a corporation's common stock would have all of the following rights except ___________. A) to vote for those who will serve on the board of directors (BOD). B) to vote when unable to be present at a shareholder meeting. C) to declare dividends. D) to review a list of stockholders.

C) to declare dividends. Common shareholders have a number of rights. While they may receive dividends, declaring dividends is a function of the BOD. LO 2.a

The maximum gain on a long call is ________. A) the premium. B) strike price + premium. C) unlimited. D) strike price - premium.

C) unlimited. A long call goes up in value as the price of the underlying security goes up above the strike price. As there is no limit to how much it can go up, the maximum gain is also unlimited. LO 5.a

An investor has purchased Class A mutual fund shares. The net asset value (NAV) per share of the fund is the price the investor _________. A) has paid for the shares when purchased. B) knows will be the cost per share when the order is entered. C) will receive upon redemption of the shares. D) will use as the cost basis in tax return filings once redeemed.

C) will receive upon redemption of the shares When redeeming the shares, the investor simply receives NAV. Remember that for purchases and redemptions of mutual fund shares, the next calculated NAV per share is used, a practice known as forward pricing. Therefore, when purchasing or redeeming shares, because mutual funds use forward pricing, the investor can never be certain of the exact price that will be paid or received when entering the order. LO 4.b

Which of the following statements is most accurate about feature benefits? A) The call feature benefits both the issuer and investor. B) The put feature benefits both the issuer and investor. C) The put feature benefits the issuer; the call feature benefits the investor. D) The call feature benefits the issuer; the put feature benefits the investor.

D) The call feature benefits the issuer; the put feature benefits the investor. The call feature allows the issuer to call in old bonds at a high rate of interest and then issue new bonds at a lower rate, similar to refinancing a high interest rate loan. The put feature allows the investor to sell the bond back to the issuer at par when the bond market value has declined, thus avoiding a loss. LO 3.a

Regarding open-end and closed-end investment companies, all of the following are true except ________. A) both may be either diversified or nondiversified portfolios. B) both may avoid taxation by distributing all of their net investment income to shareholders. C) both may offer numerous investment objectives to select from. D) both offer an unlimited number of shares in a continuous public offering.

D) both offer an unlimited number of shares in a continuous public offering. This is false for closed-end. The key difference between open-end investment companies and closed-ends is the fact that new shares are continuously being offered and are unlimited in number for open-end companies. In the case of the closed-end, the number of shares is fixed and once the initial public offering (IPO) is over, the only way to acquire shares is in the secondary market. Both types of funds may operate as regulated investment companies and avoid taxation, both may choose to be diversified or not, and both offer a wide variety of investment objectives. LO 4.a

All of the following are false descriptions of different securities offering types except _________. A) in an additional primary offer (APO) issue, underwriting proceeds go to existing stockholders. B) in an initial public offering (IPO), underwriting proceeds go the majority shareholders. C) in a secondary offering new issue, underwriting proceeds go to the issuer. D) in a primary additional issue, underwriting proceeds go to the issuer.

D) in a primary additional issue, underwriting proceeds go to the issuer. As with all primary offerings, new issue (IPO), or additional issue, underwriting proceeds go to the issuing company. LO 1.a

What is the intrinsic value of an XYZ 30 call purchased at a premium of 3 when the current market value of XYZ is at 40? A) $7 B) -$10 C) -$7 D) $10

D) $10 Intrinsic value is the amount that a contract is in the money. The premium of the contract is not a factor. All calls (buys) are in the money when the market value of the stock is above the strike price. LO 5.a

Your customer, Leo, recently purchased one put contract on Napa Valley Spirits, Inc., stock. The strike price is $50.00 and the premium was $4.50. He later executed the contract. How much did he pay for the contract? A) $5000 B) $4,550 C) $500 D) $450

D) $450 The question asks what he paid for the contract, not what he received when he executed it, or the breakeven price. One contract of 100 shares at $4.50 per share is $450. LO 5.a

Automatic exercise will occur at expiration for any equity option contract that is in the money by at least _________. A) 1/4 of a point. B) 0.05. C) 1/8 of a point. D) 0.01.

D) 0.01. Unless specific instructions are given by the customer not to do so, options contracts will be automatically exercised at expiration if they are in the money by at least 0.01. LO 5.c

* According to the U.S. Commerce Department, the economy is in a depression when a decline in real output of goods and services lasts ___________. A) 9 months or more (3 quarters). B) beyond 12 months (4 quarters). C) 6 months or more (2 quarters). D) 18 months or more (6 quarters).

D) 18 months or more (6 quarters).

Minimum maintenance requirements in a long margin account is ________. A) 30%. B) 5%. C) 50%. D) 25%.

D) 25%. Minimum maintenance for long margin is 25%. In a short account the minimum maintenance requirement is 30%. Initial requirement under Regulation T is 50%. LO 6.g

All of the following issuers are exempt issuers except _______. A) Smalltown Savings and Loan. B) ABC Railroad Trust. C) SmallTown Charitable Trust. D) ABC Railroad Power Systems, Inc.

D) ABC Railroad Power Systems, Inc. The hint that leads to the correct response is "Inc." A for-profit corporation is not likely to be an exempt issuer. Common carriers (railroad), charities, and S&Ls are exempt issuers. LO 1.c

Which of the following sets of FINRA rules focuses on fair dealing with the public? A) Code of Arbitration B) Code of Procedures C) Uniform Practice Code D) Conduct Rules

D) Conduct Rules The Conduct Rules deal with a broker-dealer's (and representative's) relationship with the customer and the public. The Uniform Practice Code deals with interactions with other broker-dealers. LO 10.e

Which of the following constitute a private securities transaction, or selling away? I. A registered representative executes a trade for a customer in securities of a type normally handled by the representative's broker-dealer. II. A registered representative's sibling has some old bonds that the representative sells as a favor through a municipal securities broker. III. A registered representative helps an old school friend issue securities for a small business under formation. IV. A registered representative helps an acquaintance sell some inherited stock certificates without the acquaintance becoming a customer of the firm. A) I and II B) II and IV C) I and III D) III and IV

D) III and IV SELLING AWAY = A registered representative helps an old school friend issue securities for a small business under formation. OR A registered representative helps an acquaintance sell some inherited stock certificates without the acquaintance becoming a customer of the firm. a transaction done for an immediate family member, however, does not fall under the definition. LO 12.e

ABC Corporation's board of directors declares a $0.25 per share dividend on Wednesday, June 1. The dividend will be paid to shareholders of record on Tuesday, July 5. The dividend will be sent to shareholders on Tuesday, July 26. What is the most likely ex-dividend date? A) July 2 B) July 3 C) July 4 D) July 1

D) July 1 DERP This is a potent example of a difficult question that requires you to slow down and think it through. The ex-date for a corporation will be one business day prior to the record date. The record date is July 5. The day before is July 4 which is a holiday and not a business day. The days before that are Sunday and Saturday. The first business day before the record is Friday, July 1. The only holidays we have heard of appearing on the exam are July 4 and December 25. LO 2.b

For those who follow monetary theory, which is the most complete measure of the money supply? A) M2 B) M1 C) M1 + M2 D) M3

D) M3 M3 is the most complete of the money supply measures because it includes all of M1 and M2 and adds large time deposits (only those over $100,000) plus repurchase agreements (repos) with a term of more than one day. LO 9.h

Which of these are part of the expense ratio of a mutual fund? A) Sales charges applied at purchase B) CDSC C) Broker-dealer transaction fees D) Management fees

D) Management fees The investment adviser's (manager's) fee is a component of the expense ratio of a fund. The contingent deferred sales charge (CDSC) is charged against the proceeds of a sale of the fund's shares, not against the fund's assets. Front-end loads and broker-dealer charges are applied before the investment dollars flow into the fund. LO 4.c

An official statement is a disclosure document that would be used in connection with an offering of which of the following securities? A) Limited partnership interests B) U.S. Treasury notes C) Common of preferred stock offered privately D) Municipal bonds

D) Municipal bonds An official statement serves as a disclosure document and contains any material information an investor might need about a municipal bond issue. Municipal bonds are exempt from registration under the Securities Act of 1933. LO 1.c

Which of the following would have no effect on the NAV per share of a mutual fund share? A) The portfolio's market value undergoes a large increase. B) The fund pays its monthly operating expenses like utility bills. C) The fund receives a dividend from one of the portfolio stocks. D) Portfolio securities had to be sold for a big capital loss.

D) Portfolio securities had to be sold for a big capital loss. Selling securities out of the portfolio, whether for a gain or a loss, simply replaces the securities with an equivalent amount of cash, leaving the NAV per share unchanged. The other choices involve changes in net assets with no accompanying change in the number of shares outstanding, which would change the NAV per share. LO 4.b

Which of the following entities considers appeals of decisions made in department of enforcement (DOE) actions? A) Federal Bureau of Investigation (FBI) B) Federal Reserve Board (FRB) C) Municipal Securities Regulatory Board (MSRB) D) The National Adjudicatory Council (NAC)

D) The National Adjudicatory Council (NAC) The National Adjudicatory Council (NAC) hears appeals from DOE decisions. An NAC ruling may be appealed to the SEC, then to the appellate courts. LO 10.e

Which of the following are securities representing other securities held on deposit with a trustee where the principal and interest payments have been separated? A) Treasury bills and notes B) Treasury receipts, bills, and notes C) Treasury notes and bonds D) Treasury receipts and STRIPS

D) Treasury receipts and STRIPS Treasury receipts or STRIPS can represent U.S. T-bonds and notes held on deposit at a bank where essentially the coupon interest payments have been separated from the principal. When the Treasury Department does this, the resulting new issues are known as Treasury STRIPS, and when broker-dealers do this, the resulting new issues are known as Treasury receipts. LO 3.e

A customer purchases 100 American depositary receipts (ADRs) of a London-based company. When does the trade settle? A) Seven business days following the trade date (due to the international currency transaction) B) One business day following the trade date C) On the trade date D) Two business days following the trade date

D) Two business days following the trade date ADRs trade in U.S. markets in U.S. dollars and settle T+2. LO 2.e

An investor has just received stock rights in the mail allowing the purchase of 250 shares of a stock offering at a discount. With these rights, the investor may take any of the following actions except ___________. A) sell some rights and let the rest expire unexercised. B) sell the rights for a portion of their value. C) exercise some rights and sell the rest. D) purchase 125 shares at double the discount.

D) purchase 125 shares at double the discount. Once an investor has received stock rights, the rights may be exercised in whole or in part, sold on the open market in whole or in part, allowed to expire in whole or in part, or some combination of these. The discount, however, stands as offered and may not be manipulated. LO 2.g

For the risk disclosures found in the margin agreement, all of the following would be accurate disclosures except _____________. A) firms can increase their in-house margin requirements without advance notice. B) customers can lose more money than initially deposited. C) customers are not entitled to an extension of time to meet a margin call. D) if a maintenance call is not met, the customer must direct which securities to sell.

D) if a maintenance call is not met, the customer must direct which securities to sell. If a maintenance call is not met it is the broker-dealer who determines which securities to sell, not the customer. The others are all accurate disclosures found in the margin agreement. LO 6.g

A March 30 call purchased at 3 has expired without being exercised. The owner of the call ________. A) keeps the $300 paid. B) losses the $30 paid. C) keeps the $30 paid. D) loses the $300 premium paid.

D) loses the $300 premium paid. The owner (buyer) of the call would have paid 3 ($300) for the contract. If the contract expires unexercised, the owner loses the $300 premium paid. LO 5.a

Regarding the purchase of a new equity issue, an account where a restricted person has a beneficial interest would be allowed to purchase the new shares at the public offering price ______. A) never B) without restriction C) only if the interest exceeds 15% D) only if the interest does not exceed 10%.

D) only if the interest does not exceed 10%. Restricted persons will be able to have an interest in an account (one that is not wholly their own) that purchases new equity issues as long as no more than 10% of the account's beneficial owners are restricted persons.LO 1.a

NAV =

NAV = net assets of the fund / the number of outstanding shares.

Roth IRAs

Roth IRAs have no minimum required distributions at any age. All earnings grow and may be withdrawn tax free as long as there has been an open Roth IRA for at least five years and the participant is at least age 59½. One may contribute to both a Roth and a traditional IRA in the same year, but the combined contribution may not exceed the annual maximum for any plan. LO 6.e

Securities and Exchange Commission Rule 144 regulates ___________.

Rule 144 regulates the sale of control and restricted securities in the secondary market. The rule stipulates the holding period, quantity limitations, manner of sale, and filing procedures when divesting of control or restricted shares.

NAV will fall if _______.

The fund pays a dividend to shareholders. or The market value of the portfolio declines.

Financial risk =

associated with corporations

Mutual fund sales charges are ____________.

not an expense to the fund, but to the investor. AND They are used to compensate the fund's underwriter and sales representatives.

exception report = for __________ activity

suspicious account