FINAL SERIES 7 PRACTICE

A client, age 52, wants to know if there are any circumstances that will allow withdrawals from her IRA without having to pay the 10% penalty. One example you could give is A) education expenses for one of her grandchildren. B) premiums for medical insurance in excess of defined adjusted gross income (AGI) limits. C) housing expenses while she is unemployed. D) up to $10,000 annually for the first-time purchase of a principal residence.

a. education expenses for one of her grandchildren. -Distributions before age 59½ are subject to a 10% penalty, as well as regular income tax. The 10% penalty is not applied in the event of the following: death; disability; purchase of a principal residence by a first-time homebuyer (up to $10,000—lifetime); education expenses for the taxpayer, a spouse, a child, or a grandchild; medical premiums for unemployed individuals; medical expenses in excess of defined AGI limits; and Rule 72(t): substantially equal periodic payments.

With respect to elective deferrals, a 403(b) plan must meet the requirements of the universal availability rule. Under this rule, if any employee of the employer maintaining the 403(b) may participate, then all of the employer's employees must be given the opportunity to participate. Certain employees may be excluded, including A) employees who normally work less than 20 hours per week. B) any substitute teacher. C) individuals not contributing to an IRA. D) employees who normally work less than 1,200 hours per year.

a. employees who normally work less than 20 hours per week. -The IRS considers 20 hours per week to be equivalent to 1,000 hours per year (where mandatory eligibility begins). Working less than that allows the employer to exclude the employee from participation. Although most substitute teachers are likely to fall short of the 1,000 hours per year, any who meet that requirement must be given eligibility. Contributing to an IRA has nothing to do with plan eligibility.

If a municipal bond has a call provision, this will tend to A) make the bond less attractive to investors because a call would terminate the interest payments. B) have no effect on the price. C) place a floor on how low the price will decline. D) make the bond more attractive to investors because most bonds are called at a premium.

a. make the bond less attractive to investors because a call would terminate the interest payments. -The possibility of a call is unattractive to the investor. In most cases, bonds are called when their interest rate is above the current market rate. This means the investor must give up that higher yielding security. It is attractive to the issuer because with a call, the bonds are bought back at par or a small premium, and interest payments end.

A 50-year-old investor purchases a single payment deferred variable annuity with a premium of $50,000. Five years later, the value of the account is $45,000, and the investor makes a $10,000 withdrawal. The tax consequences of this action would be A) no tax is due. B) ordinary income on the $5,000 difference between the purchase price and the current value plus a penalty of 10% because the investor is only 55 years old. C) ordinary income on the entire $10,000 withdrawn plus a penalty of 10% because the investor is only 55 years old. D) ordinary income on the $5,000 difference between the purchase price and the current value.

a. no tax is due. -Investors in variable annuities are only taxed on the earnings of the account. This account lost money—there were no earnings to be taxed.

A customer opens a new margin account and immediately purchases 200 shares of XYZ stock, which is trading at $9 per share. The customer must deposit A) $900. B) $2,000. C) $450. D) $1,800.

b. $2,000. -If the first trade in a long margin account is less than $2,000, the customer must deposit 100% of the purchase price.

Your 66-year-old customer invested $35,000 in a nonqualified variable annuity. It now has a value of $55,000, and your customer wishes to make a random withdrawal of $30,000. What is the tax liability that results if the customer is in the 28% tax bracket? A) $8,400 B) $5,600 C) $2,800 D) $7,600

b. $5,600 -Partial or random liquidations of a variable annuity are taxed on a last-in, first-out (LIFO) basis, which means that the last dollars into the account, the earnings, are withdrawn first. Of the $30,000 withdrawn, $20,000 represents deferred earnings or income that is now taxable at the 28% rate (0.28 × $20,000 = $5,600). No penalty applies because the investor is older than age 59½.

XYZ Corporation declares a 4-for-3 stock split. An investor long 600 shares will receive how many additional shares? A) 100 shares B) 200 shares C) 800 shares D) 300 shares

b. 200 shares -With a 4-for-3 split, the investor will receive additional shares equal to one-third of the current holdings. For every three shares held, an investor receives a fourth share. The investor will now have 800 shares, but the question is only asking about the additional shares, not the total.

The following information has been reported for ABC stock: Annual dividend = $2 PE ratio = 20 Closing price = $100 What is the dividend payout ratio? A) 20% B) 40% C) 2% D) 30%

b. 40% -The dividend payout ratio is computed by dividing the dividend by the earnings per share ($2 ÷ $5 = 0.4, or 40%).

The OCC must receive exercise instructions for equity options no later than A) 11:59 pm ET on the Saturday before the third Friday of the expiration month. B) 5:30 pm ET on the third Friday of the expiration month. C) 4:00 pm ET on the third Friday of the expiration month. D) 4:10 pm ET on the third Friday of the expiration month.

b. 5:30 pm ET on the third Friday of the expiration month. -Although trading stops at 4:00 pm ET on the third Friday of the expiration month, the final exercise deadline is 5:30 pm ET (4:30 pm CT) that same day.

An investor is long 300 shares of CTS stock and short 30 CTS May calls. This position can best be described as A) a ratio spread with an unlimited loss potential. B) a long stock, short call hedge with a limited loss potential. C) a debit spread with no gain potential. D) a credit spread with a limited gain potential.

a. a ratio spread with an unlimited loss potential. -This position is a ratio call spread because more calls were sold (30) than the long stock position covers (only 300 shares). To cover 30 calls, 3,000 shares would be needed. This strategy generates additional premium income for the investor, but also it entails unlimited risk because of the short uncovered calls.

A customer is trying to understand any differences between a rollover and a trustee-to-trustee transfer as they relate to his qualified retirement plans. An accurate explanation would be that A) a rollover can occur only once every 12-month period, but a trustee-to-trustee transfer can occur as often as one wishes. B) both rollovers and trustee-to-trustee transfers can occur only once every 12-month period. C) a rollover can occur as often as one wishes, but a trustee-to-trustee transfer can occur only once every 12-month period. D) both rollovers and trustee-to-trustee transfers can occur as often as one wishes.

a. a rollover can occur only once every 12-month period, but a trustee-to-trustee transfer can occur as often as one wishes. -For qualified retirement plans, a rollover is permitted only once in every 12-month period, while a trustee-to-trustee direct transfer can occur as often as one wishes.

Under the Securities Act of 1933, SEC registration is required for A) an offering of $25 million of a corporate bank holding company. B) a municipal revenue note offering of $4 million. C) a commercial paper offering of $30 million maturing in 180 days. D) a private placement offering of $60 million by a brokerage firm.

a. an offering of $25 million of a corporate bank holding company. -While some banks and savings and loans are exempt, issuers' corporate bank holding companies are not. Private placements, municipal securities, and commercial paper (short term) are all exempt from federal registration.

Which of the following is not a characteristic associated with auction rate securities (ARS)? A) Use a Dutch auction method to establish a new clearing rate B) Are backed by the full faith and credit of the U.S. federal government C) Are long-term securities that reset the rate paid at predetermined short-term intervals D) Have the risk of failed auctions

b. Are backed by the full faith and credit of the U.S. federal government -ARS are long-term securities, typically issued by municipalities that are tied to short-term interest rates. A Dutch auction method is used to reset a new rate, known as the clearing rate, at predetermined short-term intervals. Failed auctions—ones where no bids are received to reset the rates—are an inherent risk with ARS.

You are listening to another registered representative (RR) speak about Rule 147 offerings and recognize that one of his statements is incorrect. Which of these is not correct? A) Under one Rule 147 provision that can be met, an issuer must derive 80% or more of its revenue from the state in which its principal office is located. B) Buyers of stock issued under Rule 147 are subject to a one-year holding period before selling to a nonresident. C) Stock sold under Rule 147 is sold in an exempt transaction. D) Rule 147 applies to intrastate stock offerings.

b. Buyers of stock issued under Rule 147 are subject to a one-year holding period before selling to a nonresident. -Holders of shares issued under Rule 147, the intrastate offering exemption, cannot resell their shares to nonresidents of the state for a period of six months from the date of purchase.

Which of the following statements regarding hedge funds is correct? A) Hedge fund managers, like mutual fund managers, are compensated largely based on assets under management. B) Hedge funds are usually structured as a partnership. C) Hedge funds are typically registered with the SEC as open-end investment companies. D) Hedge funds are passively managed in an attempt to provide predictable returns for investors.

b. Hedge funds are usually structured as a partnership. -Hedge funds are usually structured as a partnership with the general partner as investment manager and the investors as limited partners. In general, hedge funds are exempt from registration with the SEC. Hedge funds are actively and aggressively managed, seeking superior returns—and they are best suited for wealthy, sophisticated investors. Under the typical 2% + 20% fee schedule, hedge fund managers are largely compensated for performance, not assets under management.

Your broker-dealer has received from the Automated Customer Account Transfer System (ACATS) a Transfer Initiation Form (TIF) instructing that one of your customers would like to have existing positions in her account transferred to her new broker-dealer. How long does your broker-dealer have to validate the positions listed on the form? A) Seven calendar days from the time the TIF is received B) One business day C) No later than the end of business on the Friday of the week the TIF was received D) Three business days

b. One business day -When transferring a customer's positions to another broker-dealer via the TIF under the Uniform Practice Code, the carrying broker-dealer has one business day to validate positions and three business days to transfer the positions to the receiving broker-dealer after validation.

A customer interested in a collateralized mortgage obligation (CMO) might look to which of the following for historical data or projections regarding mortgage prepayments? A) FINRA B) PSA C) Bond Buyer D) DEA

b. PSA -The Public Securities Association (PSA) is the source of historical data for prepayment projections on CMOs.

Which of the following does the capital asset pricing model (CAPM) assume? A) Investors are comfortable with risk because they do not believe that it can be diversified away. B) Investors are comfortable with risk and believe that diversification can be used to reduce risk. C) Investors are averse to risk and believe that diversification can be used to reduce risk. D) Investors are averse to risk and believe that no type of risk can be diversified away.

c. Investors are averse to risk and believe that diversification can be used to reduce risk. -The CAPM takes into account systematic risk, the type of risk that investors use diversification to lessen. It assumes that investors are averse to risk, and, if taking on risk, expect to be rewarded for it. Therefore, the pricing of an asset must reflect that.

A registered representative (RR) at a broker-dealer mentions continuity of life as it pertains to limited partnerships (LPs). The reference can best be explained by which of the following statements? A) LPs will exist until the last partner is deceased. B) Continuity of life is a characteristic of LPs because they are scheduled to end on a predetermined date. C) LPs do not have continuity of life because unlike corporations, a limited partnership will end on a predetermined date. D) LPs have continuity of life, which means they will exist in perpetuity.

c. LPs do not have continuity of life because unlike corporations, a limited partnership will end on a predetermined date. -Continuity of life is a corporate characteristic that must be avoided for a partnership to qualify as a direct participation program. The phrase refers to the fact that a corporation should exist in perpetuity. LPs, however, are all scheduled to end on a predetermined specific date.

A municipality wants to issue industrial revenue bonds to benefit a local company who employs hundreds of the municipality's residents. Regarding these bonds, which of the following is true? A) Because these bonds are used for a nonpublic purpose, the interest income will not be subject to the alternative minimum tax. B) The issuance of these bonds would require voter approval. C) The credit rating of the bonds is dependent on the credit rating of the company, not the municipality. D) Interest is paid from revenues collected through property assessments and taxes.

c. The credit rating of the bonds is dependent on the credit rating of the company, not the municipality. -The debt service for IDRs is derived from the lease payments made by the leasing corporation to the issuing municipality; it is not derived from local property taxes. Therefore, the credit rating of the bonds is dependent on the creditworthiness of the leasing corporation. Because they are revenue bonds, they do not require voter approval, and because they are for nonpublic purpose, they may be subject to the AMT for some investors.

An investor has purchased American depositary receipts (ADRs) to achieve portfolio diversification. Holding the ADRs in a portfolio entitles the investor to dividends paid in A) the foreign currency and the ability to trade ADRs on U.S. securities markets. B) U.S. dollars and the ability to trade ADRs on foreign markets. C) U.S. dollars and the ability to trade ADRs on U.S. securities markets. D) the foreign currency and the ability to trade ADRs on foreign markets.

c. U.S. dollars and the ability to trade ADRs on U.S. securities markets. -Dividends on ADRs are declared in the foreign currency, and are paid to investors in U.S. dollars. This is why ADR investors bear currency risk. ADRs trade on U.S. markets, either on an exchange or OTC.

An investor wanting to purchase municipal bonds should be aware that in most instances, if she buys the bond and then later sells it for a profit, then A) neither interest received nor capital gains will be exempt from taxation. B) interest received will be taxable, but the capital gains are exempt from taxation. C) interest received will be exempt from taxation, but not the capital gains. D) both interest received and capital gains will be exempt from taxation.

c. interest received will be exempt from taxation, but not the capital gains. -The interest on municipal debt is largely exempt from taxation, but not the capital gains.

An immediate dilution to earnings per share (EPS) would be least likely to occur from A) a 2:1 stock split. B) conversion of debentures. C) refunding a bond at par. D) a 10% stock dividend.

c. refunding a bond at par. -When a bond is refunded at par, the cash used is equal to the reduction in the liability resulting in no immediate corporate EPS (the number of shares remains the same). A stock split, a stock dividend, and conversion of a debenture increase the number of shares outstanding. Because the earnings haven't changed and there are more shares, the EPS is lower (diluted).

All of the following statements regarding municipal advertising are true except A) it must not be misleading. B) it must be approved by a principal. C) copies must be kept for four years. D) copies must be sent to the Municipal Securities Rulemaking Board (MSRB).

d. copies must be sent to the Municipal Securities Rulemaking Board (MSRB). -All municipal advertising must be approved, in writing, by an appropriate principal before the first use and kept on file for four years. It need not be filed with the MSRB because the MSRB has no enforcement authority.

An investor wishes to save for her retirement. She arranges to have $250 per month withdrawn from her account to be invested into a commodity fund. This type of savings plan is called A) a monthly investment plan (MIP). B) a constant dollar plan. C) a constant ratio plan. D) dollar cost averaging (DCA).

d. dollar cost averaging (DCA). -This is the classic DCA. You have to go back to the 1970s to know the old NYSE MIP.

The item that is not true when you read a bond quote of 6.5s of 29 at 99 is A) the bond is trading at a 1-point discount. B) if traded at this price, the yield to maturity rather than the yield to call would be shown on the confirmation. C) the bond matures in 2029. D) if the price quote was changed to a basis quote, the yield would be less than 6.5%.

d. if the price quote was changed to a basis quote, the yield would be less than 6.5%. -This bond is trading at a discount of 1 point ($10); therefore, a basis quote, which is the bond's yield to maturity, will be greater than the 6.5% coupon, not less than 6.5%. YTC is only shown when it produces the lowest yield. That would never be the case with a bond traded at a discount.

A website maintained by a fund company shows that one of the company's mutual funds currently has a NAV of $9.50 and a public offering price (POP) of $10 per share. Your client sees this information and enters an order to make a $10,000 purchase. He asks you to calculate the number of shares he will be able to buy with today's investment. You would respond that A) based on the $9.50 NAV, he will be receiving exactly 1,052.63 shares into his account at the end of the day. B) based on the 5% sales charge, he will be receiving exactly 950 shares into his account immediately. C) based on the $10 POP, he will be receiving exactly 1,000 shares into his account immediately. D) it cannot be determined until after the order is processed by the fund at the next calculated (forward) price.

d. it cannot be determined until after the order is processed by the fund at the next calculated (forward) price. -Mutual funds use forward pricing, so the purchase or redemption price is never known until after the order is processed. This order will be executed at the next calculated POP.

With the underlying stock at $37, an ABC Jan 35 call is trading at $2. All of the following statements regarding the option are true except A) it is at parity. B) it is in the money. C) it is trading at breakeven. D) it has time value.

d. it has time value. -This option is at parity or breakeven, which occurs when the premium equals the in-the-money amount. An option trading at parity has no time value. When an option has no time value remaining, it is very near or at the moment of expiration.

Which of the following is an interest-bearing instrument? A) Treasury bill B) Commercial paper C) Zero-coupon bond D) Jumbo CD

d. jumbo CD -Jumbo (negotiable) CDs are one of the few money market instruments issued at face value. Unlike those issued at a discount, they are interest bearing.

You believe XYZ stock will be rising and want to recommend a spread position to your client that would be profitable if it does. Of the positions listed, you would recommend that the client go A) short 1 XYZ Jan 40 put and long 1 XYZ Jan 50 put. B) short 1 XYZ Jan 30 call and long 1 XYZ Jan 50 call. C) long 1 XYZ Jan 40 call and short 1 XYZ Jan 30 call. D) long 1 XYZ Jan 30 put and short 1 XYZ Jan 40 put.

d. long 1 XYZ Jan 30 put and short 1 XYZ Jan 40 put. -Of the choices given, the correct answer is the credit put spread. Credit put spreads are bullish. Anytime the long option in a spread has a lower strike price than the short position, the spread is known as a bullish spread. We refer to that strategy as buy low, sell high (BLSH).

The Securities Act of 1933 does not regulate A) the delivery of a prospectus when selling a municipal bond mutual fund. B) review of a registration form submitted to the SEC before a public sale of stock. C) the use of a preliminary prospectus during the cooling-off period. D) municipalities registering a revenue bond for building an airport terminal.

d. municipalities registering a revenue bond for building an airport terminal. -Municipal securities are exempt from the registration requirements of the Securities Act of 1933.

An investor's margin account has a short market value of $9,000 and a credit balance of $13,000. Assuming Regulation T is 50%, a maintenance call will be triggered if the short market value increases above A) $10,000. B) $9,000. C) $13,000. D) $11,000.

a. $10,000 -Minimum maintenance rules require a minimum maintenance of 30% for a short margin account. The maintenance level is determined by dividing the credit balance by 1.3 ($13,000 ÷ 1.3 = $10,000).

An investor writes 1 XYZ 180 call at 6.65. If the investor makes a closing purchase at the call's intrinsic value when the stock is at $184.75, he realizes a gain of A) $190.00. B) $147.50. C) $180.00. D) $265.25.

a. $190.00. - 186.65-184.75 = 1.9

An investor contributes $200,000 in cash to an oil and gas partnership. The partnership has entered into a nonrecourse loan for $500,000. The customer's cost basis in the program is A) $200,000. B) $500,000. C) $700,000. D) $300,000.

a. $200,000. -Cost basis in all direct participation programs (DPPs), other than real estate, consists of actual investment plus any recourse financing. Because this note is nonrecourse, it is not included in the customer's cost basis.

To meet the initial Regulation T call in a margin account, a customer could deposit A) 200% of the call in fully paid-for marginable securities. B) 100% of the call in fully paid-for marginable securities. C) 50% of the call in cash. D) 50% of the call in fully paid-for marginable securities.

a. 200% of the call in fully paid-for marginable securities. -With a loan value of 50%, delivering fully paid-for marginable securities in an amount twice the required cash call enables the brokerage firm to lend the client cash sufficient to meet the required call.

Section 28(e) of the Securities Exchange Act provides a safe harbor for certain soft dollar compensation extended from broker-dealers to investment advisers. Which of the following is most likely to be included in that safe harbor? A) Customized software designed to give clients access to asset allocation programs B) Desks remaining after the broker-dealer redesigned its office C) Use of vacant office space in the broker-dealer's facilities D) Meal expenses to attend an investment seminar sponsored by the broker-dealer

a. Customized software designed to give clients access to asset allocation programs -Among the items generally in the safe harbor are those items designed to assist the firm's customers. Customized software that helps clients would be acceptable. Although seminar registration expenses are in the safe harbor, travel and transportation expenses (such as meals and lodging) are not. Rent and office furniture are specifically listed as out of the safe harbor.

our client, age 52, is considering taking distributions from her qualified retirement plan. A portion of her contributions were made with after-tax dollars. Which of these is correct? A) Distributions of earnings are 100% taxable, and a 10% penalty will be applied to the distributions. B) Distributions of earnings are tax free, and there will not be a penalty applied to the distributions. C) Distributions of earnings are tax free, but a 10% penalty will be applied to the distributions. D) Distributions of cost basis is 100% taxable, and a 10% penalty will be applied to the distributions.

a. Distributions of earnings are 100% taxable, and a 10% penalty will be applied to the distributions. -For qualified plans, distributions of earnings are tax deferred until taken. When taken, those earnings are 100% taxable. Unless meeting one of the exceptions (e.g., death, disability), distributions taken before age 59½ will have a 10% penalty applied. When there is a cost basis (after-tax contributions), that portion is always returned tax and penalty free.

Which items would change if a company buys equipment for cash? I. The working capital II. The total assets III. The total liabilities IV. The shareholders' equity A) I only B) II and IV C) I and II D) IV only

a. I only -The general balance sheet formula is assets = liabilities + shareholders' equity. A purchase of equipment for cash would affect working capital by reducing current assets. However, it would not affect total assets because it is an exchange of one asset (cash) for another asset of equal value (equipment). Because no loan was needed, it does not affect total liabilities, nor does it affect equity.

Which of the following statements regarding the sale of restricted stock under Rule 144 is true? A) Nonaffiliates are not subject to volume restrictions on stock held for more than six months. B) Affiliates are not subject to volume restrictions on stock held for more than six months. C) Affiliates are never subject to holding periods or volume restrictions. D) Form 144 must be filed with the SEC within 10 days of the date of sale.

a. Nonaffiliates are not subject to volume restrictions on stock held for more than six months. -Sellers of restricted stock who are not defined as affiliated persons may sell freely after meeting a six-month holding period. Affiliates may also sell after meeting the six-month holding period but are subject to volume restrictions as mandated in Rule 144. Form 144 must be filed no later than concurrent with the sale.

Which of the following collateralized mortgage obligation (CMO) tranches tends to have low extension and reinvestment risk? A) PACs B) TACs C) Companion D) Z-tranche

a. PACs -PACs have targeted maturity dates. They are retired first, and offer protection from prepayment risk and extension risk (the chance that principal payments will be slower than anticipated) because changes in prepayments are transferred to companion tranches, also called support tranches.

ABC stock is going ex-dividend today, and certain orders on the order book must be reduced prior to the opening. For a cash dividend of 0.12, which of the following orders would be reduced? A) Sell 100 ABC at 45 stop. B) Buy 100 ABC at 50 stop. C) Sell 100 ABC at 50. D) Buy 100 ABC at the market.

a. Sell 100 ABC at 45 stop. -Orders that are entered below current market value would be reduced unless do not reduce (DNR) instructions are received. Those orders are buy limits, sell stops (BLiSS) orders. These orders are reduced by the amount of the dividend on the ex-dividend date for a cash dividend distribution.

An investor is long stock at 80. The current market price of the stock is 93, and it is anticipated the stock will continue to rise. If the investor would like to generate income, but limit how much can be made if the stock continues to rise, which of the following contracts would do that? A) Sell a 95 call B) Buy a 90 put C) Buy a 95 call D) Sell a 90 put

a. Sell a 95 call -If the investor sells a 95 call, and collects the premium, income would be generated. However, if the price continues to rise, the call will be exercised, obligating the investor to sell the stock (at a profit).

A registered representative (RR) has prepared a sales piece for one of his retail customers demonstrating a trading strategy. Regarding the piece, which of the following statements is true? A) The piece must be approved by a principal before being sent to the customer. B) The piece will be regulated as correspondence. C) The piece will be regulated as a retail communication with the public. D) All material sent to individual clients must be submitted to FINRA before use.

a. The piece must be approved by a principal before being sent to the customer. -A sales piece that is being sent to one customer will be regulated as correspondence (25 or fewer recipients = correspondence). While it must be reviewed and approved by a principal in accordance with the firms rules and procedures, there is no requirement to be approved in advance by a principal or FINRA.

A customer calls you and excitedly tells you that she just had her first child. She says her mother-in-law gifted $20,000 to them in honor of the birth. She wants to invest it to have funds available for the child's higher education in 18 years. She wants assurance that the principal will grow, regardless of market conditions. Which of the following would be the most appropriate recommendation? A) U.S. Treasury STRIPS maturing in 18 years B) AAA rated municipal bonds maturing in 18 years C) Blue-chip stocks D) U.S. Treasury bonds with 18 years to maturity date

a. U.S. Treasury STRIPS maturing in 18 years -STRIPS are issued at a discount, and are backed by the U.S. Treasury. Purchasing these maturing in 18 years gives the client a guaranteed rate of growth and assurance that the funds will be there when needed. The Treasury bonds will certainly pay off at maturity, but there is no growth potential. The same problem plagues the municipal bonds. Common stock, no matter how respectable the company is today, offer no guarantees for the future.

In what is commonly known as a proceeds transaction, one of your clients is using the proceeds from the liquidation of one stock to purchase another stock. In compliance with the 5% markup policy for these transactions, the markup will be computed based on A) a combination of both the buy side and the sell side compensation to the dealer. B) the markdown or compensation to the dealer on the sale side of the transaction. C) the markup or compensation to the dealer on the buy side of the transaction. D) the compensation to the dealer for each side of the transaction separately.

a. a combination of both the buy side and the sell side compensation to the dealer. -This is known as a proceeds transaction, which is the sale of one position, and the purchase of another with the proceeds of the sale. The 5% markup policy is applicable to proceeds transactions. In compliance with the policy, the markup is computed by adding the compensation made by the dealer on the sell side to that made by the dealer on the buy side, and applying the total to the inside market on the buy side.

A municipal securities advertising piece intended to be distributed to retail customers must be approved by A) a municipal securities principal or a general securities principal. B) a municipal securities principal and the MSRB. C) a branch manager and the MSRB. D) a general securities principal or a branch manager.

a. a municipal securities principal or a general securities principal. -Municipal securities advertising intended to be distributed to retail customers must be approved by a municipal securities principal (Series 53) or a general securities principal (Series 24).

When an analyst adds back the current year's depreciation to the net income, she is computing the company's A) cash flow from operations B) net value of fixed assets C) earnings per share D) cash flow from investments

a. cash flow from operations -Cash flow from operations is computed by adding the year's depreciation deduction to the net income.

The possibility of losing all or part of a person's invested principal in a debt security because of the issuer's failure best describes A) credit risk. B) market risk. C) business risk. D) inflation risk.

a. credit risk. -Credit risk, also called default risk, involves the danger of losing all or part of one's invested principal through an issuer's failure. Although credit risk is most often associated with debt securities, when a company cannot pay its debt, the equity securities can wind up worthless. This is the risk taken by investors buying stock in highly leveraged companies. The higher the rating, the lower the credit risk.

Upon assignment, the writer of an exchange listed equity call option must A) deliver the underlying stock to sell within two business days. B) pay for the underlying stock to buy within one business day. C) deliver the underlying stock to sell within one business day. D) pay for the underlying stock to buy within two business days.

a. deliver the underlying stock to sell within two business days. -Assignment of an equity call option requires the assigned party to deliver the underlying stock. This is treated the same as any other sale of stock. Regular way delivery is two business days after the trade date. In the case of assignment, the trade date is the assignment date.

For an oil and gas limited partnership (LP), allowances in the form of deductions are allowed by the IRS to be taken to compensate for a depleting resource. The allowance can be taken based on A) the amount of the natural resource sold. B) the amount of the natural resource extracted. C) the cost of moving the natural resource to refiners and distributors. D) the condition or grade of the natural resource.

a. the amount of the natural resource sold. -Depletion allowances may be taken only once the oil or gas is sold and is based on the amount sold (depleted).

An hour ago, you entered a sell limit order for your customer in XYZ stock. Looking at a current quote, you could expect the order to have been executed if A) the bid price for XYZ is higher than your customer's sell limit, and the last reported price in the stock is above the sell limit price. B) the bid price for XYZ is higher than your customer's sell limit, and the last reported price in the stock is below the sell limit price. C) the offer or ask price for XYZ is lower than your customer's sell limit, and the last reported price in the stock is below the sell limit price. D) the offer or ask price for XYZ is lower than your customer's sell limit, and the last reported price in the stock is above the sell limit price.

a. the bid price for XYZ is higher than your customer's sell limit, and the last reported price in the stock is above the sell limit price. -A sell limit order sets the minimum price an investor will accept. The order should have been executed if the current bid price is higher than the sell limit or the last reported price in the stock is higher than the sell limit.

A customer's confirmation of a municipal securities transaction must include A) the lowest potential yield the customer may receive and whether the bond is taxable or subject to the alternative minimum tax. B) the lowest potential yield the customer may receive and information regarding the catastrophic call provision. C) the highest potential yield the customer may receive and information regarding the catastrophic call provision. D) the highest potential yield the customer may receive and the amount of markup or markdown in a principal transaction.

a. the lowest potential yield the customer may receive and whether the bond is taxable or subject to the alternative minimum tax. -Customer confirmations always reflect a worst-case scenario (lowest) regarding yield. Any possible tax ramifications, such as the bond being designated as an AMT bond, must also be disclosed. Catastrophe call provisions need not be disclosed on a confirmation. Commissions and markups/markdowns are disclosed, but not the highest yield. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

FINRA's Trade Reporting Facility (TRF) electronically facilitates the reporting of trade data such as price and volume for A) trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor. B) brokers executing orders as agents in an auction market on any exchange trading floors. C) trades in NYSE-listed securities occurring on the NYSE. D) brokers acting as agents in all order execution scenarios.

a. trades in Nasdaq-listed securities and exchange-listed securities when they occur off of the exchange trading floor. -FINRA's TRF is an automated electronic system that facilitates the reporting of data for transactions that occur in Nasdaq-listed stocks or in exchange-listed stocks when they occur off of the exchange trading floor. It is used for transactions that are negotiated between brokers, therefore acting as a dealer, rather than as an agent.

One of your clients is an executive with a corporation that covers him under a qualified defined benefit pension plan. In addition, the client has maxed out his IRA contributions. With retirement coming up in about a decade, he decides to make a $100,000 lump sum deposit to a single premium deferred annuity. Then, he will begin monthly investments of $5,000 into a periodic payment deferred annuity. He does not plan to annuitize. Instead, he will withdraw funds from the annuities as needed. When those withdrawals are made, how will they be taxed? A) The earnings will be taxed as capital gains and will be withdrawn first using LIFO. B) The earnings will be taxed as ordinary income and will be withdrawn first using LIFO. C) A portion of each payment will be taxed as ordinary income with the balance considered a return of principal. D) There is a combination of ordinary income and return of principal based on the exclusion allowance.

b. The earnings will be taxed as ordinary income and will be withdrawn first using LIFO. -Because this is a nonqualified annuity, there are no contribution limits and, once the earnings have been received, the balance is a tax-free return of the original principal. Annuities never receive capital gains treatment.

Which of the following statements regarding real estate investment trusts (REITs) and limited partnerships (LPs) is true? A) They both trade on securities exchanges and OTC and have centralized management. B) They both pass through investment gains to the investor and have centralized management. C) They both pass through investment gains and losses to the investor. D) Only the REIT has centralized management, but both pass through investment gains to the investor.

b. They both pass through investment gains to the investor and have centralized management. -However, REITs are not considered direct participation programs, as are LPs, because there is no pass-through of losses. In addition, although REITs are actively traded in the secondary markets, most LPs are sold in private placements with no active secondary market trading. Both have centralized management.

A 2X leveraged inverse ETF tracks an index that has recently fallen 2%. If the ETF was priced at $25 per share before the drop in the indices price, where should the ETF be priced now, assuming the ETF portfolio performed as intended? A) Down $1 per share B) Up $1 per share C) Down $2 per share D) Up $4 per share

b. Up $1 per share -An inverse fund portfolio attempts to mirror returns that are the opposite of the index it is tracking. Therefore, if the index has fallen, this ETF should be up. A leveraged ETF attempts to produce returns that are a multiple of those produced by the index it is tracking. Therefore, if this index has fallen by 2%, the 2x leveraged fund should move twice as much (4%). With the index dropping by 2%, this inverse fund will rise by 4%; that is, $1 on a $25 index.

A mutual fund portfolio consists primarily of shares of companies considered to be prime candidates for a takeover attempt. Of these choices, this mutual fund is best described as A) a leveraged fund. B) a special situation fund. C) a specialized (sector) fund. D) an aggressive growth fund.

b. a special situation fund. -Special situation funds buy securities of companies that are considered to be in a position to benefit from special, nonrecurring situations. Those could be new management, new products, patents pending, takeover, or turnaround situations.

Your customer, age 46, has been investing money in a variable annuity for several years. He plans to stop the deposits to meet current financial obligations, but he does not intend to withdraw any of the funds already invested until retirement, which is still several years away. Until the withdrawals are made, the client will be holding A) deferred units. B) accumulation units. C) accumulation shares. D) annuity units.

b. accumulation units. -Until the customer withdraws funds or annuitizes, the annuity is still in the deferral stage, and the customer is holding accumulation units.

A U.S. investor owns an American depositary receipt (ADR). The net tax liability to the investor for any dividends received is A) any foreign income tax due, but not U.S. income tax. B) any U.S. income tax due, credited by any amount of foreign income tax withheld. C) zero, because there is no tax liability to U.S. investors who purchase foreign government issues. D) the total of both foreign and U.S. income tax due.

b. any U.S. income tax due, credited by any amount of foreign income tax withheld. -Any income to a U.S. investor is always subject to U.S. income tax. If foreign income tax is withheld in the country of origin, then that tax may be taken as a credit against the U.S. tax due.

A U.S. importer orders computer components from a Japanese manufacturer with payment to be made in yen upon delivery. To hedge against the dollar weakening against the yen before payment is due, the importer should A) buy yen puts. B) buy yen calls. C) sell yen calls. D) sell yen puts.

b. buy yen calls. -If the dollar was to weaken against the yen, then the yen would increase in value. If one wished to gain as the result of an asset's increased value, the appropriate option strategy is the purchase of a call. As a general rule, to hedge, importers buy calls on the foreign currency, whereas exporters buy puts.

A client asks her investment adviser representative what footnotes to the financial statements are for. The best reply would be that footnotes A) serve as a bibliography indicating where additional information may be obtained B) contain information that doesn't have a place in the main body of the financial statements C) contain a detailed history of the enterprise and its products or services D) are used to explain how the various ratios are computed because companies recognize that many shareholders do not have a financial background

b. contain information that doesn't have a place in the main body of the financial statements -There are many important financial details that cannot be properly placed in either the balance sheet or the income statement. Examples of these are: method of accounting used, collateral securing debt, pension liabilities, and many others. Footnotes are an integral part of the financial statements and are usually found with this notation, "The accompanying footnotes to the financial statements are an integral part of these statements."

Having been a customer of a broker-dealer for over 10 years, currently holding equity positions and cash in his account, Daryl Smith wants to purchase 1,000 shares of a penny stock. Smith is A) exempt from the disclosure requirement but must receive a suitability statement. B) exempt from the requirement to receive a suitability statement but subject to the disclosure requirement. C) exempt from both the requirement to receive a suitability statement and the disclosure requirement. D) required to receive both the suitability statement and the disclosure.

b. exempt from the requirement to receive a suitability statement but subject to the disclosure requirement. -Smith meets the criteria for an established customer under the penny stock rules. Established customers are exempt from the suitability statement requirement but not from the disclosure requirements.

A customer wishing to open a numbered account must be informed that A) the account may only be opened with prior permission from the SEC. B) he must supply a written statement attesting to his ownership of the account. C) he must supply proof of U.S. citizenship and reside permanently in the United States. D) numbered accounts are restricted to cash accounts.

b. he must supply a written statement attesting to his ownership of the account. -Numbered—or symbol—accounts require that a written statement, which is signed by the client and acknowledges ownership, be kept on file.

Your customer, who lives in State A, is in the highest federal and state income tax bracket. She is considering purchasing some State B municipal bonds with an Aa rating for her portfolio. You correctly explain that municipal bonds generally pay A) lower interest rates than corporate issuers of the same quality and maturity because of the tax treatment of their capital gains. B) lower interest rates than corporate issuers of the same quality and maturity because of the tax treatment of their interest. C) lower interest rates than corporate issuers of the same quality and maturity because the interest is tax free on a state, local, and federal level. D) higher interest rates than corporate issuers of the same quality and maturity, but this is offset by the more favorable tax treatment of the interest.

b. lower interest rates than corporate issuers of the same quality and maturity because of the tax treatment of their interest. -As a result of the tax-advantaged status of municipal bond interest (tax free on the federal basis; sometimes tax free on the state and local basis), municipalities generally pay lower interest rates than corporate issuers when the bonds are of similar quality and maturity. The interest on State B bonds will not be free of taxation on the state and local level in State A—the exemption only applies to residents of State B. Because the interest is tax free, these bonds are more suitable for those in higher tax brackets.

A bond is quoted as QRS Zr 39. This quote tells an investor that the bond A) pays interest semiannually. B) pays no interest until maturity. C) pays interest annually. D) is backed by the U.S. government.

b. pays no interest until maturity. -The initials Zr in the bond quote indicate that this is a zero-coupon bond. Zero-coupon bonds pay all interest at maturity even though the investor is taxed annually as if he had been receiving the interest over the life of the bond.

A customer who is long 500 shares of XYZ writes 7 calls against the position. This is an example of A) a ratio write. B) portfolio insurance. C) a vertical spread. D) a long straddle.

b. portfolio insurance. -A ratio write is used to describe the position when more call options are written than there are shares of stock available to cover the call. In this case, the customer has 5 covered and 2 uncovered calls. It should also be recognized that the two uncovered calls represent an unlimited maximum loss potential.

A broker-dealer wants to reference its membership with FINRA on its website. Regarding the reference, all of the following are true except A) there is no requirement that any FINRA member broker-dealer shall reference FINRA by name or logo on its website. B) the FINRA reference is intended to demonstrate that the broker-dealer has the approval of FINRA in all of its business dealings. C) if the FINRA reference is made, a hyperlink to FINRA's website must be in close proximity to the reference. D) if the FINRA reference is made, a hyperlink to FINRA's website is mandated by FINRA.

b. the FINRA reference is intended to demonstrate that the broker-dealer has the approval of FINRA in all of its business dealings. -There is no requirement to list or mention FINRA membership or any other self-regulatory organization (SRO) membership on a broker-dealer website. If, however, a broker-dealer chooses to have the FINRA name or logo on its website, it should never be displayed in such a way as to imply—or mean to imply—approval of FINRA. If FINRA or its logo is used, a hyperlink to the FINRA website is required, and it must be placed in close proximity to the reference.

Approval of a new options account by a principal may occur before A) the customer has provided essential suitability information. B) the customer has verified information on the new account form. C) the new account form has been completed. D) the customer has been furnished an options disclosure document.

b. the customer has verified information on the new account form. -For the account to be opened, it would need to be approved by a principal first. To do so, a new account form would have to be completed, suitability information would have to have been supplied by the customer, and an options disclosure document would have to have been provided to the customer. The new options customer must verify information on the new account form within 15 days of opening the account.

Your customer has just signed a limited partnership subscription agreement. Regarding the signing of this agreement, it is important for the customer to know that A) a new agreement is required anytime assets in the partnership are bought or sold. B) the customer will be considered a limited partner only after the subscription agreement has been signed by the general partner. C) a copy of the agreement signed by all partners must be filed with the SEC. D) the registered representative (RR) and general partner are required to sign before the customer can become a limited partner.

b. the customer will be considered a limited partner only after the subscription agreement has been signed by the general partner. -One of the unique characteristics of DPPs (limited partnerships) is that a customer must be accepted by the general partner to become a limited partner in the venture. Therefore, the customer is not a limited partner until the general partner signs the subscription agreement.

XYZ, Inc., has 5 million shares outstanding and will issue 1 million shares of new stock through an upcoming rights offering. Regarding the rights offering, a registered representative (RR) should know that A) XYZ will issue 1 million rights. B) the exercise price is generally lower than the current market price at issuance. C) a shareholder will generally have two to three weeks to exercise the rights. D) the value of the right will generally increase after the ex-date.

b. the exercise price is generally lower than the current market price at issuance. -The exercise price is generally below the current market price at issuance. None of the other choices are true because the value of the right drops on the ex-rights date. Each existing share receives 1 right, so in this case, XYZ will issue 5 million rights. An investor must exercise the rights within 30-45 days of issuance; otherwise, they will expire.

The IRS has determined that the NYNY real estate existing property limited partnership is abusive. The most likely reason would be because A) each partner received enough in losses to shelter all income. B) there was no viable profit motive. C) no net profit was generated after losses were taken. D) all of the assets were found to be rental properties.

b. there was no viable profit motive. -To qualify as a limited partnership direct participation program (DPP), above all else, there must be a viable chance to make a profit. Any DPP established without a profit motive or with the intention of only generating tax losses for investors may be determined abusive by the IRS subjecting the partners to penalties including prosecution for fraud.

With ABC stock trading at 33.10, a customer buys 2 ABC Jun 35 puts at 4.35. What is the time value of each contract? A) $4.90 B) $1.90 C) $2.45 D) $0

c. $2.45 -Time value is the premium minus the intrinsic value ($4.35 − $1.90 = $2.45).

In an existing margin account with no SMA, if a customer buys 300 ABC at 40 and simultaneously buys 3 ABC OCT 40 puts at 2.50, the customer must deposit A) $6,100. B) $6,375. C) $6,750. D) $5,250.

c. $6,750. -Buying 300 shares at 40 ($12,000) requires a deposit of $6,000. In addition, the customer is purchasing 3 puts with a total premium of $750 (3 × 2½). Most options have no loan value and must be paid in full. Adding $6,000 and $750 results in a deposit of $6,750.

XYZ County Sewer Revenue 6.5% municipal bonds mature in 20 years. If they are currently offered at 92, they have a yield to maturity of approximately A) 6.23%. B) 5.96%. C) 7.19%. D) 6.50%.

c. 7.19%. -Because this bond has a nominal yield of 6.5% and is selling at a discount (92), the yield to maturity has to be greater than 6.5%. Remember: price down, yield up.

A customer has substantial passive income from a real estate investment. Which of the following limited partnership (LP) programs is most suitable for this customer if he wishes to offset this income? A) An oil and gas income program B) A government-assisted housing program C) An oil and gas exploratory program D) An equipment leasing program

c. An oil and gas exploratory program -Passive income may be offset by passive losses. Of the programs listed, the one most likely to have significant losses, particularly in the early years, is an exploratory or wildcat drilling program.

A violation of MSRB rules would occur if A) a representative made a recommendation to a customer after gathering information about the customer's financial status, tax status, investment objectives, and other holdings. B) an associated person held a joint account with a spouse. C) a representative gave a gift to an associated person of another broker-dealer that was valued just under $250. D) a registered representative (RR) recommended geographic diversification to limit risk.

c. a representative gave a gift to an associated person of another broker-dealer that was valued just under $250. -MSRB rules limit gift-giving to a maximum of $100 per person per year in cash or value. The $250 is the amount a municipal finance professional can make as a political contribution to a candidate for whom the MFP is eligible to vote.

Because of their unlimited potential loss, short positions A) require a higher initial margin deposit. B) can only be taken by those who are accredited investors. C) are marked to the market at the close of each day. D) must be approved by a designated principal before execution.

c. are marked to the market at the close of each day. -Although most securities positions are marked to the marked on a daily basis, it is more important that this be done with short positions because of how quickly they can reach the maintenance margin level. The initial margin is the same as long purchases, and the term accredited investors applies principally to private placements. Short sales, just as with any transaction, must approved by a principal, but not in advance.

A broker-dealer that is a financial advisor to a municipal issuer A) can act as an underwriter of the issuer's bonds in a negotiated underwriting only if they want to receive compensation for both services. B) can act as an underwriter of the issuer's bonds in a negotiated underwriting or competitive bid underwriting and receive compensation for both services. C) cannot act as an underwriter of the issuer's bonds in a negotiated or competitive bid underwriting and receive compensation for both services. D) can act as an underwriter of the issuer's bonds in a competitive bid underwriting only if they want to receive compensation for both services.

c. cannot act as an underwriter of the issuer's bonds in a negotiated or competitive bid underwriting and receive compensation for both services. -Broker-dealers acting as financial advisors to a municipality regarding a municipal issue are prohibited by MSRB Rule G-23 to also act as underwriters for the same issue regardless of whether the underwriting process has been done by competitive bid or was negotiated. In the event that an exception is allowed, or the broker-dealer performs an advisory function specifically associated with the underwriting, the broker-dealer would be limited to accepting fees for the advisory service only and not be allowed to accept fees for any underwriting services.

To achieve its goals, an inverse ETF uses A) arbitrage. B) short selling. C) derivatives and debt. D) preemptive rights.

c. derivatives and debt. -An inverse ETF will almost always use derivatives, such as options and, in the case of a leveraged ETF, will use debt, primarily in the form of margin. Inverse ETFs do not engage in short selling; they are an alternative to selling short a specific index without the unlimited risk potential of the short sale. Arbitrage is used, typically by institutional investors, to the advantage of temporary imbalances between the ETF's net asset value and market price.

Your client asks you to explain a not-held order. You could correctly explain that a not-held order A) can only be done in a discretionary account. B) must be executed immediately and in its entirety. C) gives time or price discretion to the floor broker. D) can be filled only on the last trade of the day.

c. gives time or price discretion to the floor broker. -With a not-held order, the customer gives the firm's time or price broker the discretion as to time or price. Remember, however, that time and price alone do not require the order to be done in a discretionary account.

All of the following are accurate statements regarding communications filing requirements with FINRA except A) retail communications can be subject to filing with FINRA. B) correspondence pieces are not subject to filing with FINRA. C) there are no requirements to file any sales or advertising piece with FINRA. D) pieces intended for institutional customers need not be filed with FINRA.

c. there are no requirements to file any sales or advertising piece with FINRA. -Any sales or advertising piece distributed by a member broker-dealer will be viewed as either retail, correspondence, or institutional depending on who and how many recipients there will be. While retail communications can be subject to FINRA filing requirements, correspondence and institutional communications are not.

In describing warrants to an investor who has just received them, you could characterize them in all of the following ways except A) they do not represent ownership, so they do not offer voting rights to the holder. B) they are issued by the same corporation that issued the debt instrument they are attached to. C) they are short-term securities with a strike price less than the current market value of the stock. D) they can be sold in the secondary market instead of being exercised.

c. they are short-term securities with a strike price less than the current market value of the stock. -Warrants are corporate issues typically attached to debt offerings as a sweetener. They generally have a life of two to five years and are therefore considered long-term, giving the holder the right to purchase shares in the future at a price that is usually higher than the price of the shares when the warrants were first issued. Warrant holders have no voting rights.

One of your customers is speaking to you about spread strategies for equity options and makes several statements about spreads. Which of her statements is false? A) "No spread can ever have an unlimited maximum loss potential." B) "With spreads, I always know exactly how much I can lose or gain once the position is established." C) "If a position, whether long or short, begins to move against me, I can always close it out in the market." D) "With a time or horizontal spread, both options expire at the same time, which means the position expires completely."

d. "With a time or horizontal spread, both options expire at the same time, which means the position expires completely." -Spreads have a defined maximum gain and loss, and neither can ever be unlimited. Spreads like single option positions can be closed in the market before expiration. Time or horizontal spreads have contracts that expire in different months, not the same time.

An affiliate of the issuer has held 150,000 shares of restricted stock for 18 months. There are 12.5 million shares outstanding, and, on average, 30,000 shares have traded each week over the past four weeks. Under Rule 144, the maximum number of shares the affiliate may sell over the next three months is A) 0. B) 150,000. C) 30,000. D) 125,000.

d. 125,000. -The affiliate who has held the restricted shares beyond the six-month holding period may sell the greater of 1% of the shares outstanding or the average weekly trading volume over the four weeks before the sale in any 90-day period. In this instance, 1% of the outstanding shares (125,000) is greater than the last four weeks' average trading volume (30,000).

A group of underwriters has agreed to engage in a mini-max underwriting for a new issue of equity securities with the issuer of those securities. Which of the following best describes this underwriting agreement? A) A mini-max agreement is a firm underwriting setting a maximum amount the underwriters are willing to purchase from the issuer in the event all shares cannot be sold and a minimum dollar amount of securities the issuer is willing to sell. B) A mini-max agreement is a firm underwriting setting a floor, or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell. C) A mini-max agreement is a best efforts underwriting, setting a maximum amount the underwriters are willing to purchase from the issuer in the event all shares cannot be sold and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell. D) A mini-max agreement is a best efforts underwriting setting a floor, or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell.

d. A mini-max agreement is a best efforts underwriting setting a floor, or minimum, which is the least amount the issuer needs to raise to move forward with the underwriting, and a ceiling, or maximum, on the dollar amount of securities the issuer is willing to sell. -A mini-max agreement is a type of best efforts underwriting agreement. In a best efforts agreement, the underwriters are not purchasing unsold shares from the issuer. There are two components to a mini-max agreement. The first sets a floor, or minimum, amount the issuer needs to raise to move forward with the underwriting, and the other sets a ceiling, or maximum, dollar amount of securities the issuer is willing to sell.

For margin purposes, valuing a short position by marking to market will occur how often? A) Only in months when margin activity in the account will generate a statement to the customer B) At the end of business each week on Friday C) No more than once per month D) At the close of each business day

d. At the close of each business day -All positions, long or short, are marked to market daily for purposes of valuing the position.

An individual is covered under his employer's 401(k) plan. The plan provides for 100% employer matching of the first 3% of the employee's contribution. The employee decides to contribute 7% of his pay to the plan. Under ERISA, which of the following statements is correct? A) Only the 3% employee contribution being matched by the employer is immediately vested. B) Only the 3% employer contribution is immediately vested. C) Only the 4% employee contribution in excess of the employer's match is immediately vested. D) Only the 7% contributed by the employee is immediately vested.

d. Only the 7% contributed by the employee is immediately vested. -Under ERISA rules, any contribution by an employee is immediately vested. It is only employer contributions that may subject to a vesting schedule.

One of your clients has the opportunity to participate in his employer's employee stock purchase plan (ESPP). Before enrolling, he should be aware that funds will come out of his paycheck on A) a pretax basis, and those contributions are deductible on his tax return. B) a pretax basis, and those contributions are not deductible on his tax return. C) an after-tax basis, and those contributions will be deductible on his tax return. D) an after-tax basis, and those contributions are not deductible on his tax return.

d. an after-tax basis, and those contributions are not deductible on his tax return. -Contributions to an ESPP are payroll deductions. Though the contribution percentage is calculated on one's pretax salary, they are taken after tax. Contributions to ESPPs are not deductible on one's tax return.

During the onboarding process of a personal securities account for a 65-year-old investor, the registered representative (RR) attempts to obtain the name of a trusted contact person who will be notified if the firm suspects exploitation. However, the investor looking to open the account declines to provide a contact name and information of a trusted adult. What is the best course of action? A) Open the account, but place a dollar limit on disbursements from the account. B) Open the account, and inform the investor that disbursements from the account must be made on the extended disbursement form providing a detailed explanation of the disbursement. C) The firm cannot open an account of someone age 65 or older without the name of a trusted contact person. D) Open the account, and place a notation in the customer's file indicating the refusal to provide a trusted contact person.

d. Open the account, and place a notation in the customer's file indicating the refusal to provide a trusted contact person. -The firm is required to make a reasonable attempt to obtain the name and contact information of a trusted person. In the event the customer chooses not to provide it, the account may be opened without restriction.

A client interested in Treasury bills (T-bills) asks you to explain their features. Which of these is correct? A) They have a maximum maturity of 365 days. B) They are all auctioned on a monthly basis. C) They are generally callable after the first 6 months. D) They are quoted with a bid higher than the ask.

d. They are quoted with a bid higher than the ask. -T-bills pay no interest; they are issued at a discount and are direct obligations of the U.S. government. They are not callable and have maximum maturities of 52 weeks (not 365 days) or less. Most T-bills are auctioned weekly.

Your customer contacts you proposing to invest a large sum of money in five different mutual fund families using Class A shares. Which of the following is correct and important to disclose to your customer regarding suitability and her proposal? A) She will not be able to achieve diversification this way. B) She will not be able to switch between different funds within each family. C) She should consider Class B shares only if investing a large sum to avoid paying the sales charge up front. D) Your customer may not be able to receive sales breakpoints if she divides the investment among five different fund families.

d. Your customer may not be able to receive sales breakpoints if she divides the investment among five different fund families. -The larger the investment amount, the greater the breakpoint sales charge discount on Class A shares would likely be at a single fund company. While Class A shares are appropriate for larger investments because of breakpoint discounts, Class B (back-end load) shares, which offer no breakpoint discounts, are not. Therefore, the most important disclosure would be to explain that the advantage of breakpoint discounts on Class A shares could be lessened or lost if the investment is divided among so many different fund families. Diversification can occur within one fund family or across many, and moving funds from one fund to another within a single fund family is still possible.

Your customer wrote a September 918 index call at 4.15 five months ago. The option expired, and the customer received no assignment notice. For tax purposes, it should be taxed and reported as A) ordinary income of $415. B) a $41.50 short-term capital loss. C) ordinary income of $9,180. D) a $415 short-term capital gain.

d. a $415 short-term capital gain. -When options contracts expire, writers (sellers) report a capital gain equal to the premium amount received; in this case, the amount is $415. Because options only have a nine-month life cycle, all capital gains and losses are short term.

Your customer wants to buy 1,000 shares of XYZ stock and has entered a not-held order with instructions to you to purchase the stock when you feel the price looks right. Under the rules, this order will be treated as A) a good-til-canceled (GTC) order. B) a limit order. C) an immediate-or-cancel (IOC) order. D) a day order.

d. a day order. -Unless the customer designates that the order is GTC, a not-held order is treated as a day order, and any unexecuted portion of the order remaining at the end of the day will be canceled.

A toll road authority issues a revenue bond backed by the revenue stream from the tolls collected. In addition, the state has agreed to cover any shortfall. This bond is categorized as A) a moral obligation bond. B) an overlapping debt issue. C) an industrial revenue bond. D) a double-barreled bond.

d. a double-barreled bond. -A bond secured by both a defined source of revenue (other than property taxes) and the full faith and credit of an issuer that has taxing powers, such as the state, is known as a double-barreled bond.

Regarding convertible debentures, one characteristic of which your clients should be aware of is that A) they generally pay a higher interest rate than nonconvertible debentures. B) it is generally best to convert when the common stock is selling below its parity price. C) the conversion feature protects against an early call. D) although they trade in line with the issuer's common stock, they are less volatile than the common shares.

d. although they trade in line with the issuer's common stock, they are less volatile than the common shares. -The lower volatility of a convertible debenture stems from the fact that it has fixed interest payments and will be redeemed at maturity as any other bond or debenture would. No such guarantees apply to common stock.

A customer of your broker-dealer wants to grant his registered representative the right to make investment decisions for his account. This would be done by A) providing FINRA with the prescribed discretionary authorization form before the first discretionary trade. B) authorizing the registered representative to determine the price or time of the trade once the client has entered the order. C) providing the registered representative with the prescribed discretionary authorization form not later than settlement date of the first discretionary trade. D) providing the registered representative with the prescribed discretionary authorization form before the first discretionary trade.

d. providing the registered representative with the prescribed discretionary authorization form before the first discretionary trade. -A discretionary account always requires prior written authorization from the customer in the form of a limited power of attorney. The limited power of attorney is the document that grants the registered representative the authorization to trade, and it is sometimes known as the trading authorization.

A registered representative (RR) correctly explains to a new customer who wants to learn about the tax and risk characteristics of collateralized mortgage obligations (CMOs) that the securities are A) tax exempt in the states where the mortgages originated from and they subject holders to prepayment risk. B) tax exempt at the federal level and do not have fixed maturity dates. C) taxable only in the state where the mortgages originated from and are backed by the federal government. D) taxable at all levels and subject the holders to prepayment risk.

d. taxable at all levels and subject the holders to prepayment risk. -CMOs are taxable at all levels. One of the primary risks of CMOs is prepayment of principal because they are backed by mortgage paper. If interest rates fall, mortgage holders will refinance paying off existing mortgages earlier than expected.

A bond is being issued to build a toll road. It has been identified that the state does not own all of the property that the road is going to be built upon. This would most likely be disclosed in A) the trust indenture. B) the bond resolution. C) the prospectus. D) the qualified legal opinion.

d. the qualified legal opinion. -Any legal uncertainty of which bondholders should be informed is first identified by the legal opinion obtained by the municipality issuing the bond. Municipal bonds are exempt from registration with the SEC, and therefore, do not have a prospectus requirement. The full and fair disclosure document for municipal bonds is called the official statement (which would disclose this information as well).

Your customer has purchased a 5.8 % LMN corporate bond in a regular way transaction. Settlement for this bond trade is A) trade date plus one business day. B) trade date plus four business days. C) trade date. D) trade date plus two business days.

d. trade date plus two business days. -Regular way settlement on corporate security and municipal bond security trades is T + 2.

Your customer has established the following spread: Long 1 ABC Jan 60 call at 5 Short 1 ABC Jan 70 call at 2 The customer will realize a gain at expiration if the spread A) narrows to less than 3 points and ABC trades below 63. B) widens to more than 3 points and ABC trades below 63. C) narrows to less than 3 points and ABC trades above 63. D) widens to more than 3 points and ABC trades above 63.

d. widens to more than 3 points and ABC trades above 63. -This is a bull call spread (established at a net debit), so the customer wants the spread to widen and the stock price to rise above the breakeven, which is 63.