LEM BOOK QUESTIONS ALL UNITS

Mr. Perez began contributing $3,000 a year to a Roth IRA account 10 years ago when he was 50 years old. The account value today has grown to $60,000. He withdraws $5,000 from the account. Mr. Perez will owe taxes on A. the entire amount. B. none of the withdrawal. C. the principal portion of the withdrawal. D. the gains plus a 10% penalty for premature distribution.

B Perez meets the requirements of a qualified distribution from his Roth IRA. He is over 59½ (he started 10 years ago at the age of 50, so he is now 60), He has had the account for more than 5 years (about 10 years). There are no taxes for this distribution. LO 23.a

A newly issued treasury security that matures in five years is A. A T-bill. B. a T-note. C. a T-bond. D. a treasury receipt.

B T-notes are issued with maturities between 2 and 10 years. T-bills longest maturity is 1 year and T-bonds have maturities over 10 years. Treasury receipts are not issued by the Treasury.

A customer owns a diversified portfolio of domestic large-cap stocks. This customer would like to compare her portfolio's performance to the overall market. The best index to use as a benchmark is which of the following? A. EAFE Index B. S&P 500 Index C. Barclay's Aggregate Bond Index D. Russell 2000 index

B The S&P 500 is an index of large U.S. companies and is the closest of these to the portfolio's makeup. The Russell 2000 is an index of small companies. The Barclay's is a bond index and the EAFE is non-US companies. LO 20.g

A BB-rated 6% corporate callable bond that matures in 12 years that is trading at 100.25 is priced at A. a discount. B. a premium. C. with a current yield above 7%. D. with a coupon rate below 6%.

B There are a lot of words, but the only thing you need to understand in order to answer this question is that the bond is trading at a price above par (100), so it's at a premium. LO 2.b

Which of the following is a taxable event for an investor when it occurs? A. Stock dividend distribution B. Cash dividend distribution C. Forward split D. Reverse split

B There is no economic benefit for investors when a stock splits or when a stock dividend occurs. In each of these cases, the investor's cost basis in the investment is adjusted based on the resulting stock the investor owns after the split or additional stock received from a stock dividend. Only cash dividends are taxable (in the year they are distributed). LO 21.b

Your customer purchases 200 shares ABC stock at $9 a share in a cash account. The customer is expected to deposit how much to pay for the trade? A. $900 B. $1,800 C. $2,000 D. $450

B This is a cash account—100% of the trade must be paid for by the customer. LO 24.a

A BD may give other firms' employees gratuities without violating the rules, provided the compensation's total value does not exceed A. $50. B. $100. C. $250. D. $500

B Under the current rules, the cash gift that may be made without raising concern is $100 per person per year. LO 32.f

The receptionist at a BD opens all incoming mail and forwards it to various departments and people of the firm. Which of the following statements is true? I. The receptionist must be fingerprinted. II. The receptionist need not be fingerprinted. III. The receptionist must be registered with FINRA. IV. The receptionist need not be registered with FINRA. A. I and III B. I and IV C. II and III D. II and IV

B When opening mail for the BD, it is inevitable that the receptionist will handle monies and securities from customers and, as such, will need to be fingerprinted. Registration is not required. LO 30.e

Which of the reasons for termination from Form U-5 do not require a detailed explanation? I. Discharged II. Permitted to resign III. Deceased IV. Voluntary V. Other A. I and II B. II and III C. III and IV D. I, II, and V

C

Interest from a zero-coupon bond A. pays monthly and is taxed annually. B. pays annually and is taxed at maturity. C. pays at maturity and is taxed annually. D. pays and is taxed at maturity.

C A zero is purchased at a deep discount and pays no interest until it matures; however, the interest is taxed on an annual basis, called "Phantom Income" LO 2.e

In 2011, RST Corporation had both common stock and $100 par value 4% noncumulative preferred stock outstanding. The preferred, like the common stock, pay dividends on a quarterly basis. Because of financial difficulties, the company stopped paying dividends after 2011. After resolving its problems in 2015, the company resumed dividend payments in 2016. Before paying the first quarterly common stock dividend that year, the company would have to pay a quarterly dividend to the preferred stockholders of A. $1.00. B. $4.00. C. $17.00. D. $20.00.

A In the case of a noncumulative preferred stock, skipped dividends are forever lost. So, when the company is able to pay a dividend, as is always the case, it must pay the current preferred dividend before paying to the common shares. The question states that dividends are paid quarterly. Therefore, the quarterly dividend on a stock paying $4.00 annually would be $1.00—an amount that must be paid before the quarterly common dividend can be paid. LO 1.i

Mr. Perez dislikes Seabird Airlines because of a bad experience on a flight to Portland. He thinks the company's stock is overvalued. He is currently short 1,000 shares of the company. He is concerned with the potentially unlimited risk he is exposed to and would like to use options to hedge that risk. His best option position would be A. buy 10 Seabird Airline calls. B. buy 10 OEX (S&P 100 index) calls. C. sell 10 Seabird Coffee calls. D. buy 10 Seabird Coffee puts.

A Long Calls provide the best protection against a short stock position. The calls give the owner the right to exercise and buy the stock at the exercise price, thereby locking in the cost to replace the shares.

An investor is long 1 August XYZ 30 put and XYZ is has a current market value of 25. Which of the following is true? A. The August 30 put is in the money by 5 points. B. The August 30 put is at the money. C. The August 30 put is out of the money by 30 points. D. The August 30 put has no intrinsic value.

A Options are in the money by the amount of their intrinsic value. This August 30 put has intrinsic value of 5 points and is therefore in the money by 5 points. Puts have intrinsic value when the current market value of the stock is below the strike price.

CMOs are backed by A. mortgages. B. real estate. C. municipal taxes. D. the full faith and credit of the U.S. government.

A The "M" in CMO stands for mortgage. LO 2.n

American Liquidators Corporation (Ticker LQDT) has 100 million outstanding common shares. The company would like to raise capital by selling 100 million new shares. In order to accomplish, this they would A. offer warrants to existing shareholders. B. suggest that existing shareholders go to the market and double their existing position. C. offer stock rights to existing shareholders. D. perform a stock split.

C LQDT would give the right to purchase a portion of the newly issued shares to existing shareholders sufficient to maintain their current percentage of ownership via a stock rights offering. Warrants are long term and normally attached to a fixedincome offer. Neither the stock split nor investors buying in the market generates capital for the company. LO 1.f

Your customer, Mr. Garcia, lives in Scottsdale, Arizona. He owns general obligation bonds issued by the city of San Juan, Puerto Rico. The interest from the bonds will be taxed at A. the federal, but not the state, level. B. the state, but not federal, level. C. neither the state nor the federal Level. D. both the state and federal levels.

C U.S. taxpayers pay no income tax on interest paid by U.S. territories and municipalities of those territories. LO 2.l

A security that is a contractual obligation between two parties and whose value is based on the specifics of the contract in relation to a different security is A. a contractual plan. B. an investment company. C. a derivative. D. a hedge fund.

C A contract that derives its value from its relationship to another security is a derivative. A contractual plan is a type of investment company that is no longer issued. LO 3.a

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

A Writing the puts would generate premium income. If the stock declines in value and the option is exercised, he will by the stock at a price that's 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 cost money, and the strike price would be higher than the market. The buy stop does not generate income.

All of the following are types of prohibited activities except A. wash sales. B. pump and dump. C. churning. D. front running.

A A wash sale is not prohibited. Using the losses from a wash sale to lower your taxes is. Pump and dump, churning, and front running are all prohibited practices. LO 29.c

Which of the following statements regarding options are true? I. Investors who are bullish on a stock should buy calls. II. Investors who are bullish on a stock should buy puts. III. Investors who are bearish on a stock should sell puts. IV. Investors who are bearish on a stock should buy puts. A. I and IV B. I and III C. II and III D. II and IV

A Buying calls is bullish and buying puts is bearish. Buying puts is bearish and selling puts is bullish. LO 3.b

Which of the following transactions done in a single day would not cause a firm to file a Currency Transaction Report (CTR)? A. Deposits of a series of four checks of $3,000 each B. Twenty-two deposits of $500 cash C. Four deposits of $3,000 cash and an outbound wired funds transaction for $10,000 D. A withdrawal of $12,000 from an account followed by a deposit of $11,000 cash into a third-party account

A Checks are not currency. All the others include cash deposits in excess of $10,000.

Which of the following is a nonfinancial consideration or circumstance? A. Has the customer ever been divorced? B. What is the customer's current income? C. How much is the customer's mortgage balance? D. What is the balance of the customer's 401(k)?

A Debt and asset account balances, as well as income, are all financial considerations. A person's current or former marital status may be useful but is not, in itself, a financial consideration. LO 26.a

Another term for stocks and bonds is A. equity and debt. B. shares and units. C. voting and nonvoting. D. taxable and tax free.

A Equity is a common term for securities that represent ownership interest, such as stocks. Bonds are the most common type of debt security. LO 1.b

FINRA retains regulatory jurisdiction for how long after a registered person terminates association with a member firm? A. 2 years B. 120 days C. 1 year D. 90 days

A FINRA and other regulators retain jurisdiction to investigate possible violations for two years after a representative leaves the industry. LO 31.c

The Alta Loma High School District is asking voters to approve a bond to fund the purchase of new computers and software. The bond will mature in 40 years, and the interest and principal payments will be funded from real estate taxes. This is an example of A. a GO bond. B. a revenue bond. C. a debenture. D. an equipment trust bond.

A If a municipal bond requires a vote, it is most likely a GO bond. Generally revenue bonds do not require a vote (note that there is no revenue-generating source

If three individuals have a tenants in common (TIC) account with your firm and one individual dies, then A. the two survivors continue as cotenants, along with the decedent's estate. B. the account must be liquidated and the proceeds split evenly between the two survivors and the decedent's estate. C. trading is discontinued until the executor names a replacement for the deceased. D. the account is converted to joint tenants with rights of survivorship.

A In a TIC, the estate replaces the decedent tenant. Eventually the decedent's portion of the account will be distributed to the estate's beneficiaries. LO 22.a

A retirement plan that requires a formula-based payment for the retiree's life is A. a pension plan. B. a defined contribution plan. C. a money purchase plan. D. 401(k) plan.

A Pension plan is another name for a defined benefit plan. A defined benefit plan pays a benefit to the retiree for life. The payment is based on a formula that defines the amount of the benefit. LO 23.b

As a means of protecting the integrity of the industry and protecting the investing public, associated persons of FINRA member firms must submit fingerprint records to A. the U.S. attorney general. B. the attorney general for the state in which they reside. C. the Securities and Exchange Commission (SEC). D. the FBI.

A Registered BDs must have fingerprint records made for most of their employees, and all directors, officers, and partners must submit those fingerprint cards to the U.S. attorney general for identification and processing. LO 30.c

Which of the following customers are of special concern for potential exploitation? A. Mr. Johansen, age 70 B. Mrs. Roberts, age 60 C. Mr. Gating, age 30, and known to be irresponsible D. Mr. Henning, age 55, going through a mid-life crises

A Special concern is for customers 65 and older, or other adults that are unable to protect their own interest due to illness, injury, or disability. Just being irresponsible or stupid is not enough. LO 29.f

Which of the following statements concerning the delivery of statements is not correct. A. Statements must be sent monthly. B. Statements must be sent at least quarterly. C. Statements must be sent for any month in which there is activity. D. Statements must be sent monthly if the account holds penny stocks.

A Statements are only required to be sent monthly if there is activity in the account or the account holds penny stocks. LO 29.g

All of the following are considered securities except A. U.S. minted gold coins. B. common stock of XYZ Corporation. C. 15 British pound put contracts. D. Treasury bonds.

A Stocks, bonds, and options are all examples of securities. Gold and gold coins are a commodity, not a security. LO 1.a

Your customer had $120,000 in ordinary income in the prior tax year. This customer also sold two stock positions—the first for a gain of $47,000, and the second for a loss of $50,000. For that tax year, the customer will pay tax on A. $117,000 in ordinary income and zero net gains. B. $117,000 in ordinary income and $3,000 in gains. C. $120,000 in ordinary income and zero net gains. D. $120,000 in ordinary income and $3,000 in net gains.

A The $47,000 in gains is completely offset by the $50,000 in losses. The remaining losses may be used to reduce ordinary income (up to $3,000 a year). LO 20.f

Your customer is in the 30% federal tax bracket. He is considering purchasing a 7% corporate bond. The after-tax yield would be A. 4.9%. B. 2.1%. C. 10%. D. 7%.

A The formula for the calculation is 7% (corporate rate) × (100% ‒ 30% (tax bracket)). 7 × (1 - 0.3) = 7 × 0.7 = 4.9%. LO 2.i

A 6% corporate bond trading on a 7% basis is trading A. at a discount. B. at a premium. C. with a current yield above 7%. D. with a coupon rate below 6%.

A The term "a 7% basis" means that the YTM is 7%. YTM is higher than the coupon rate (6%), so the bond trades at a discount. Current yield must be between the coupon rate and the YTM. LO 2.b

All of the following are true of a 529 college savings plan except A. distribution must be complete by the beneficiary's 30th birthday. B. there are no taxes due for distributions used for qualified education expenses. C. there is no income limit for the person making a contribution. D. there is no annual contribution limit.

A There is no beneficiary age limit for 529 plans, either for contributions or distributions. LO 22.f

All of the following securities are issued the U.S. Treasury except A. treasury receipts. B. STRIPS. C. T-bills. D. TIPS.

A Treasury receipts are created and issued by broker-dealers acting as investment bankers. T-bills, STRIPS, and TIPS are issued by the U.S. Treasury.

A written customer complaint is retained A. for four years. B. for six years. C. for three years. D. until resolved.

A Written customer complaints are retained for four years. LO 28.c

Mr. Darcy owns 5,000 shares of English Manor Properties. It is his belief that the company is unlikely to grow much over the next year. He is curious how he might generate some additional income from the position because English Manor pays a paltry dividend and asks about covered calls. You tell him that A. writing calls against his stock position is a conservative strategy for generating income. B. writing calls against his stock position is a conservative strategy but is ineffective for generating income. C. selling covered calls is very aggressive but has a solid chance of generating substantial income. D. buy puts is the best hedge against this position.

A Only selling an option will generate income. Selling covered calls is an effective and very conservative way to do so.

Squidco, Inc., is issuing 100 million dollars in 4 ½% bonds maturing in 20 years. When purchased at issue, the buyers will receive an additional security that allows them to purchase 20 shares of Squidco common stock at $50 per share anytime in the next 10 years. Squidco common is currently trading at $29.95 a share. This is an example of A. a warrant. B. a stock right. C. a follow-on offering. D. a call.

A A warrant is normally issued attached to a fixed-income security to attract more interest in the debt issue. Warrants are generally longer term (five or more years) and have an exercise price that is higher than the current stock price. LO 1.f

An investor is long 1 January 15 put at 4. Calculate the breakeven, maximum gain, and maximum loss. A. BE 11, MG 1100, ML 400 B. BE 19, MG unlimited, ML 400 C. BE 11 MG 400, ML unlimited D. BE 19, MG 1100. ML 400

A Breakeven = 11 (for a put, BE = strike price [15] - premium [4]); maximum gain = $1,100 (market attitude for a long put is bearish; the stock can fall to zero leaving the investor with a gain from the BE point [11] down to 0); maximum loss = $400 (the most an investor can lose when purchasing options is the premium paid; 4 points = $400).

An investor who is seeking income might choose a corporate bond because A. a corporate bond pays a steady income and are generally reliable. B. bonds pay a higher dividend than stocks. C. bonds can grow faster than the rate of inflation. D. corporate bond interest is tax free.

A Corporate bonds are, depending on rating, generally reliable producers of income through interest payments. Bonds do not pay dividends, nor do they grow in value with inflation. Corporate interest is fully taxable. LO 2.g

If the owner of an option may only issue exercise instructions on the last day of trading, this is an example of A. a European-style option. B. an American-style option. C. an expiration-style option. D. a Eurasian-style option.

A European-style option may only be exercised on the last trading day. An Americanstyle option may be exercised at any time. We just made up the other two styles. LO 3.f

Which of the following money market instruments are routinely used in import/ export activities? A. GNMA B. BAs C. T-bills D. Repurchase agreements

B Banker's acceptances (BAs) are used for this purpose. LO 2.m

Under Rule 144, which of the following sales are subject to volume limitations on the number of shares sold? I. Control person selling registered stock held for 1 year II. Control person selling restricted stock held for 2 years III. Nonaffiliate selling registered stock held for 1 month IV. Nonaffiliate selling restricted stock held for more than 6 months A. III and IV B. I and II C. I and III D. I and IV

B Control persons (insiders) are always subject to volume limitations. Nonaffiliates have no volume (or any other restrictions) in the sale of registered stock. If the shares are restricted, the volume limits for nonaffiliates end after six months. Registered shares sold by nonaffiliates have no Form 144 filing requirement. LO 1.g

Which of the following securities is not backed by the full faith and credit of the U.S. Treasury? A. GNMA B. FNMA C. STRIPS D. Treasury bills

B Federal National Mortgage Association is a government-sponsored entity. Its debt is not directly backed by the federal government. LO 2.k

An investor is long 1 XYZ May 40 call and XYZ stock has a current market value of 44. Which of the following is true? A. The May 40 call is at the money. B. The May 40 call is in the money. C. The May 40 call is out of the money. D. The May 40 call has no intrinsic value.

B Options are in the money by the amount of their intrinsic value. This May 40 call has intrinsic value of 4 points and is therefore in the money by 4 points. Calls have intrinsic value when the current market value of the stock is above the strike price.

An investor writes a September 65 ABC put for $3 when the stock is trading at $63. Which of the following is true? A. The Intrinsic value is $3. B. The intrinsic value is $2 and the time value is $1. C. The intrinsic value is $1 and the time value is $2. D. The investor has the right to purchase ABC stock at 65.

B Puts are in the money when the price of the stock is lower than the strike price. In this example, the stock is at $63 and the strike price is $65; the put is $2 in the money (or has intrinsic value of $2). The premium is $3. Using the formula IV + TV = Pr, we know that the time value is $1: the difference between intrinsic value and premium. As the writer of a put, the investor has an obligation to buy the stock if the option is exercised.

Which of the following positions/actions would cover a client who has 1,000 shares of the Seabird Coffee Company (Ticker BCC)? A. A long stock position B. Buying 10 BCC puts C. Buying 10 BCC calls D. A short stock position

B The best hedge for a long stock position is to own long puts. This gives a bottom price the customer can sell the stock for during the life of the put.

For this election cycle, Big Trucks, Inc., has three open board seats. Big Trucks operates under a cumulative voting system. Your customer owns 300 participating preferred shares of Big Trucks. He has A. 900 votes he can divide anyway he wants among the three seats. B. no voting rights. C. 300 votes each for the open seats. D. 300 votes total to spread among the three open seats.

B Your customer owns preferred stock. Preferred stock carries no voting rights. LO 1.i

A corporation opening a brokerage account must present all of the following documents except A. a new account form. B. an authorization from the state department of corporations. C. a copy of the corporate charter. D. a resolution of the board of directors.

B A corporation does not (normally) need authorization from the state to open an account. LO 22.c

If a bond has a feature that allows the issuer to pay off bondholders prior to maturity, the bond has A. a put feature. B. a call feature. C. a conversion feature. D. a presale feature.

B A feature that allows an issuer to pay a bond off earlier than the maturity date is a call feature. A put feature allows the holder of the debt to force the issuer to pay off the bond. A conversion feature allows the owner to convert the bond to the issuer's common stock. A presale feature has nothing to do with bonds. LO 2.d

All Big Company, Inc., an NYSE-listed manufacturer of large objects, has declared a 50-cents-a-share dividend payable next month. All Big also has options available for trade. The actual ex-dividend date will be declared by A. the OTC. B. the NYSE. C. FINRA. D. the CBOE.

B Ex-dates are set by the market center where trades will likely take place. In the case of an NYSE-listed stock, the New York Stock Exchange will determine the ex-date. The fact that All Big has listed options is not relevant to the question. LO 1.d

Jim is a restricted person under Rule 5130. Which of the following members of Jim's family may buy a new issue at the IPO? A. Jim's brother Robert B. Jim's grandfather Farris C. Jim's sister DeAnn D. Jim's daughter April

B Grandfathers, aunts, and uncles are not immediate family under Rule 5130. LO 29.d

A trust formed during the grantors lifetime that may be modified only by the original grantor(s) is normally called A. an irrevocable living trust. B. a revocable living trust. C. an A-B trust. D. a life insurance trust.

B If a grantor forms and funds a trust in his lifetime, it is a living trust. If anyone has the power to modify the trust, it is a revocable trust. An A-B trust is a type of revocable living trust used for estate planning purposes and not expected to appear on the test except, as you see here, a distraction. LO 22.d

Your customer purchases 200 shares of ABC stock at $9 a share in a margin cash account. The customer is expected to deposit how much to pay for the trade? A. $900 B. $1,800 C. $2,000 D. $450

B In a margin account, the minimum deposit is the higher of 50% of the purchase price (Regulation T) or the FINRA requirement of $2,000 or 100% of the purchase if less than $2,000. In this case, the 200 shares at $9 is $1,800, below $2,000, so no borrowing is allowed. LO 24.c

Which of the following is an investment recommendation? A. A recommendation to read the business press to develop an understanding of the economy B. A suggestion that the Windmill Family of Funds would be a good basis for a portfolio C. A discussion about the inverse relationship between bond values and interest rates D. Sharing an opinion about the amusement parks run by a particular company

B Only the reference to the Windmill Funds directs a customer to a security. The others are only educational resources or a suggestion that the representative likes amusement parks. LO 26.b

Which of the following is correct regarding the continuing education regulatory element requirements? A. Training must be completed within 120 days of the person's second registration anniversary and every 5 years thereafter. B. Training must be completed within 120 days of the person's first registration anniversary and then annually thereafter. C. Training must be completed within 120 days of the person's second registration anniversary and every 3 years thereafter. D. Training must be completed annually.

C The regulatory element requires that all registered persons complete a computerbased training session within 120 days of the person's second registration anniversary and every 3 years thereafter. LO 32.b

An individual opens an account with your firm. She tells you that upon her death, she wants any assets in the account to be divided equally among her three children. She also wants the ability to change the allocation in the event that conditions change and one of the children is in greater need than the others, but she does not want to incur any significant legal expense. You would suggest that the account be opened A. as a joint account with right of survivorship. B. as a joint account with tenants in common. C. as an individual transfer on death (TOD) account. D. under a discretionary power.

C An individual account with a TOD designation would be best for this customer. A joint account would make the children owners of the account, and a discretionary power does not accomplish the owner's desire to transfer the account on her death. LO 22.b

Which of the following is not a security that an investor would purchase? A. Common shares of ABC Petroleum, Inc. B. Debt issue by ABC Petroleum C. Bitcoins D. Windmill Growth Fund

C Bitcoin is considered a commodity, not a security. LO 1.a

Which of the following is not a rule under the TCPA of 1991? A. Calls must be made between 8:00 am and 9:00 pm in the prospect's time. B. Solicitors must identify themselves and their company. C. Calls must be made between 9:00 am and 8:00 am in the prospect's time. D. All telemarketing firms must maintain a do-not-call list.

C Calls must be between 8:00 am and 9:00 pm. LO 27.c

Which of the following securities would likely provide the greatest potential for capital appreciation? A. A preferred stock B. A U.S. Treasury STRIP C. A common stock D. A convertible bond

C Common stocks would be the most suitable for investors seeking capital appreciation (growth). Bonds and preferred stocks are better suited for conservative investors because each is primarily an income investment and has limited growth prospects. LO 1.e

All of the following records must be retained indefinitely except A. stock certificate books. B. articles of incorporation. C. customer ledgers. D. board meeting minutes.

C Customers' ledgers (statements) must be retained for six years. Stock books, articles of incorporation, and meeting minutes are related to the life of the firm and are retained indefinitely. LO 28.a

How soon after termination must Form U-5 be filed with CRD? A. 60 days B. 90 days C. 30 days D. 120 days

C Form U-5 must be filed within 30 days of termination to avoid possible penalties. LO 31.b

All of the following are true except A. breakeven (BE) is always the same number for both buyer and seller of an option contract. B. the maximum loss for options buyers is the premium paid. C. the maximum gain for options buyers is always unlimited. D. BE is calculated using the same formula for both buyer and seller.

C BE is calculated using the same formula for both buyer and seller of an option contract. Therefore, BE is always the same number for both buyer and seller. The formula for calls is strike price plus premium, and the formula for puts is strike price minus premium. The most any options buyer can lose (maximum loss, or ML) for a call or a put is the premium paid. However, maximum gain (MG), while unlimited for a call buyer (bullish market attitude), is limited for a put buyer. Remember that the market attitude of a put buyer is bearish, and the farthest the stock could fall is to zero. Therefore, the put buyer's MG is limited to amount from BE point to zero.

An investor is long 1 January 30 call at 2. Calculate the breakeven, maximum gain, and maximum loss. A. BE 30, MG unlimited, ML 200 B. BE 32, MG 200, ML unlimited C. BE 32, MG unlimited, ML 200 D. BE 2. MG 500, ML 32

C Breakeven = 32 (for a call, BE = strike price [30] + premium [2]); maximum gain = unlimited (market attitude for a long call is bullish; the stock could go to infinity); maximum loss = $200 (the most an investor can lose when purchasing options is the premium paid; 2 points = $200

Your customer would like current monthly income from a very safe investment. Which of the following would you recommend? A. T-bonds B. FNMA C. GNMA D. T-notes

C GNMA certificates pay monthly income and principal payments and are directly backed by the federal government. LO 2.k

An investor might make money in a strong bull market by A. selling shares short. B. buying equity index puts. C. buying equity index calls. D. selling equity index calls.

C If the market is going up, you should own the bullish position, a long call. LO 3.e

Your client holds ADRs of Daikon Motors, Inc., an automobile manufacturer based in Asia. All of the following are true about the position except A. they will receive dividends in U.S. dollars. B. the security may be traded in U.S. markets. C. they have the same voting rights as an owner of the common stock. D. they have the right to request the underlying common shares be issued to them directly.

C It is important to remember that ADRs are issued by a depository bank and the bank is the registered owners of the shares. Depository banks are not required to pass voting proxies through to the ADR holders. LO 1.h

Your customer is a large exporter of electronic devices. They are delivering a large shipment to Japan and are concerned that the value of the Japanese yen may drop before they receive payment. In order to hedge this currency risk, your customer should A. buy yen calls. B. sell yen calls. C. buy yen puts. D. sell yen puts.

C U.S. exporters are concerned about the currency they will be paid dropping in value against the U.S. dollar. The best hedge against an asset dropping in price is to own puts. LO 3.e

Seacoast Securities is a new FINRA member firm. It is preparing a new marketing campaign, including a mass mail advertisement. The advertisement must A. be filed with FINRA within 10 days of first use. B. be filed with the SEC within 10 days of first use. C. be Filed with FINRA at least 10 days before use. D. be approved by a FINRA before use.

C A new member firm is required to file a copy of all retail communication with FINRA at least 10 days before use. The filing with FINRA is just a record; no approval from FINRA is required. LO 27.b

In order to contribute to both a traditional IRA and a Roth IRA in the same year, a customer must have sufficient A. ordinary income. B. passive income. C. earned income. D. portfolio income.

C An IRA contribution must come from earned income. LO 23.a

Seabird Securities does not have any firm policies regarding borrowing or lending arrangements between associated persons and customers. Under which of the following circumstances would a registered representative be allowed to borrow from a customer? A. Borrowing from his Uncle Joe B. Borrowing from Dustin, his college buddy C. Under no circumstance D. Borrowing from Dr. DuVall, his optometrist

C If a firm has no policy regarding loans to and from customers, then the activity is not allowed. LO 29.e

In a stock buyback, the shares are purchased by which of the following? A. Owner B. Board of directors C. Issuer of the shares D. Investment trust

C In a stock buyback, the issuer of the stock buys the shares from the secondary markets. LO 21.d

The Office of Foreign Asset Control is a division of A. the State Department. B. the Justice Department. C. the Treasury Department. D. the Federal Reserve Bank.

C OFAC is part of the Treasury Department. LO 25.f

All of the following are components of ordinary income except A. A bonus from their employer B. Interest payments from a bond portfolio C. Profit made from the sale of a long-held security D. Consultation fees received from a client

C Profits made from the sale of a long-held (more than one year) investment are long-term capital gains and are not part of ordinary income. Bonuses and consulting fees are earned income, and interest payments are portfolio income. Both are components of ordinary income. LO 20.d

Seabird Airlines, Inc., pays a $0.40 a share quarterly dividend, and shares are currently trading at $32 a share. The current yield for Seabird is A. 1¼%. B. 2½%. C. 5%. D. 10%.

C Remember that it is a quarterly dividend, while current yield is an annualized figure. This problem required you to multiply the quarterly dividend times four to get to the annual income figure. 0.40 × 4 = 1.60. Then divide 1.60 by 32 (current market value), which gives you a result of 0.05 (or 5%). LO 20.b

Treasury bills may be issued with all of the following maturities except A. 4 weeks. B. 13 weeks. C. 39 weeks. D. 52 weeks.

C T-bills may be issued with 4-, 13-, 26-, and 52-week maturities. They are not issued with a 39-week maturity.

You overhear a discussion about a registered representative (RR) being disciplined because of selling away. Which of FINRA's Conduct Rules was violated? A. Outside business activity B. Accepting excessive noncash compensation C. Private securities transactions D. Failure to direct the client's trade to the best available market

C The Conduct Rules define a private securities transaction as any sale of securities outside an associated person's regular business and his employing member. Private securities transactions are also known as selling away. LO 32.e

Mr. Johnson is a 77-year-old retiree. He would like to invest cash to generate some additional income. He also says that he is very nervous about losing money in the markets. Which of the following is the most suitable recommendation for Mr. Johnson? A. The Windmill Growth Fund B. The EAFE Emerging Markets Fund C. The Washington Treasury Bond Fund D. Jim's Really Great Technology Fund

C The Washington Treasury Bond Fund is a portfolio of very safe bonds meeting the customer's desire for safe income. The others are all equity funds likely oriented toward long-term growth. LO 26.c

When opening a new brokerage account that will allow for margin trading, all of the following forms are required except A. account application. B. credit agreement. C. consent to loan agreement. D. hypothecation agreement

C The consent to loan agreement is not a regulatory requirement. LO 24.b

Which of the following bonds would have the most price volatility? A. 3% 10-year T-note B. 2% 5-year T-note C. 5% 20-year T-bond D. 5% 15-year corporate bond

C The more time left to maturity, the more volatile the bond tends to be. Even though the 20-year T-bond is safer than the corporate, its price will be more volatile. LO 2.c

Ms. Johansen purchased 100 shares of Natasha Publishing two years ago for $40 a share. The stock has risen to $62 a share. She is concerned that the recent death of the founder and CEO may negatively impact the stock. As a hedge she buys a 60 put on the stock for $2. Her breakeven price on this position is A. $64/share. B. $62/share. C. $58/share. D. $42/share.

D The formula for breakeven on a long stock plus long call position is the cost of the stock plus the cost of the option on a per share basis. The original cost of the stock is $40, and the put cost $2, for a breakeven of $42/share.

Below which of the following S&P ratings would a bond be considered speculative? A. A B. B C. BB D. BBB

D The investment-grade ratings, from highest to lowest, are AAA, AA, A, and BBB. All ratings below BBB are speculative bonds. LO 2.c

Your customer, Mr. Newsome, recently purchased one put contract on Napa Valley Spirits, Inc., stock. The strike price is $50 and the premium was $4.50. He later executed the contract. How much did he pay for the contract? A. $5,000 B. $500 C. $4,550 D. $450

D 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 a shares is $450. LO 3.c

An investor writes (sells) a July 25 ABC call. Which of the following is true? A. The investor has the right to purchase ABC stock at 25. B. The investor has the right to sell ABC stock at 25. C. The investor will be obligated to purchase ABC stock at 25 if the call is exercised by the owner (buyer). D. The investor will be obligated to sell the ABC stock at 25 if the call is exercised by the owner (buyer).

D Writers of options incur an obligation if the option is exercised by the other party to the contract (owner or buyer). If the owner of a call exercises her right to purchase the stock, the writer will be obligated to sell the stock. Therefore, this investor will be obligated to sell the ABC stock at the strike price (25) if the call is exercised by the owner (buyer).

Your client, Mrs. Watt, sold her investment in Ohm Electric Company on June 10 for $22 a share. She purchased the stock on July 10 of the previous year for $18 a share. She has realized A. a long-term capital loss. B. a long-term capital gain. C. a short-term capital loss. D. a short-term capital gain.

D A holding period starting on July 10 and ending on June 10 of the following year is a period of 11 months, less than a year. The stock was purchased for $18 and sold for $22, so she has a gain with a holding period of less than a year—a short-term capital gain. LO 20.d

Which of the following are considered sources of debt service for GO bonds? I. Personal property taxes II. Real estate taxes III. Fees from delinquent property taxes IV. Liquor license fees A. I and IV B. II and III C. II, III, and IV D. I, II, III, and IV

D All of these are taxes or fees that pay into the general fund of a municipality and may be used to service GO debt. LO 2.h

Which of the following records has a three-year retention requirement? A. Amendments to the partnership agreement B. Trade blotters C. Customer statements D. Order tickets

D An order ticket must be retained for three years. An amendment to a founding document is retained indefinitely. Customer ledgers (statements) and trade blotters are held for at least six years. LO 28.d

Which of the following would most likely require shareholder approval? A. Declaring a dividend B. Firing the CEO C. Hiring a new CFO D. Changing the corporation's name

D Changing the corporation's name is a significant matter that will likely need shareholder approval. Declaring a dividend and the hiring and firing of senior executives is well within the board's power. LO 1.c

Which of the following is not a step in the money laundering process? A. Placement B. Layering C. Insertion D. Integration

C. The three steps of money laundering are placement, layering, and integration. Insertion is not one of the steps. LO 25.b

A customer has returned a signed proxy statement for stock held in street name by a member firm. He did not indicate how he wanted to vote for any issues listed on his ballot. What action, if any, is required of the member firm? A. No action is required and no votes are cast. B. The firm must contact the beneficial owner of the stock and ask for direction on how to vote on the proposals listed. C. The firm may vote on the ballot as it sees fit for the benefit of the customer. D. The firm must vote in accordance with the recommendations made by the issuer of the stock.

D If a customer signs and returns a proxy statement for shares held in street name and fails to indicate how the shares are to be voted, the member must vote the shares as recommended by the issuer's management. LO 21.g

Your customer calls you with a question. The customer tells you that they received a phone call from the bond desk telling the customer that a trade to purchase 20 bonds at 100 has been executed for the customer's account. The customer would like to know how much they paid for the bonds before any commission or other charges. The answer to the customer's question is A. $2,000. B. $200,000. C. $1,000. D. $20,000.

D Paying "100" means they paid 100% of par ($1,000) per bond. They purchased 20 bonds, so a total of $20,000. Note that the question concerned "how much they paid for the bonds," not the price per bond. LO 2.a

According to Standard and Poor's rating system, the four highest grades of bonds (from best to lowest grade) are A. Aaa; Aa; A; Baa. B. A; Aa; Aaa; B. C. B; A; AA; AAA. D. AAA; AA; A; BBB.

Choice A would be correct if the question referred to Moody's

Lando Entertainment, Inc., issues a bond collateralized by a trust holding the company's Las Vegas headquarters. This type of bond is called A. a collateral trust bond. B. a guaranteed bond. C. a headquarters debenture. D. a mortgage bond.

D A secured bond backed by real estate is called a mortgage bond. Collateral trust bonds hold other securities in trust as collateral. A guaranteed bond is an unsecured bond backed by a third party. A headquarters debenture is not a thing. LO 2.f

All of the following would most likely be found in a money market fund's portfolio except A. T-bills. B. T-bonds with less than one year to maturity. C. negotiable CDs. D. common stock.

D Common stock does not meet the criteria for a money market. Though highly liquid, it has no maturity date nor is it relatively safe compared to debt instruments. LO 2.m

An individual applying for registration as an associated person will be rejected if he A. submitted an application for registration that omitted mention of a minor traffic violation that occurred two years ago. B. failed to include the ZIP code on his home address. C. is under a court injunction regarding a domestic issue. D. is under an order of a foreign financial regulator denying, suspending, or revoking his registration or barring him from association with a BD.

D There are a number of reasons why application for registration as an associated person might be rejected. Among them are if the applicant is under an SEC order or an order of a foreign financial regulator denying, suspending, or revoking his registration or barring him from association with a BD. Non-securities-related misdemeanors, such as traffic violations, do not have to be reported. The ZIP code being left out is not a cause for rejection, and only a court injunction enjoining him from entering the securities business would be cause for rejection, not a domestic issue. LO 30.d

Which of the following is not one of the three general classes of communication with the public? A. Institutional B. Retail C. Correspondence D. Educational

D Though communication may be educational, the three classes of communication are institutional, retail, and correspondence. LO 27.b

Which of the following investments would not be allowed in a custodial account? A. Covered call options B. Small-company stocks from an emerging market C. Blue-chip stocks D. Uncovered call options

D Uncovered call options with their inherent (unlimited) risk are not appropriate for a custodial account. Covered calls are allowed, as are most common stocks. LO 22.e

The Windmill Growth Fund declares a 15-cent dividend that will be shareholders on the record date of Wednesday, November 12. The most likely ex-dividend date is A. Monday, November 10. B. Tuesday, November 11. C. Wednesday, November 12. D. Thursday, November 13.

D With a mutual fund dividend, the ex-date is normally the day after the record date. This is due to the nature of a mutual fund purchase (or redemption) settling on the same day as the trade. LO 20.a

Penalties for insider trading may include all of the following except A. up to $5,000,000 for a person. B. up to 20 years in prison for a person. C. up to $25,000,000 for a firm. D. up to 20 years in prison for a firm.

D You can't put a firm in prison. Entities don't go to jail, natural persons do. LO 29.b