Midterm S7TO

A registered representative who learns of a customer's death should A) cancel all open (unexecuted) orders currently working in the market B) liquidate all positions in the account immediately upon notification C) notify FINRA and the IRS that the account holder is deceased D) accept no orders to buy or sell securities unless coming from a third-party power of attorney

A

An individual likes the concept of a variable life insurance policy and using separate accounts to drive the policy's cash value. She is concerned about maintaining a minimum death benefit for estate liquidity needs and the erosion of the death benefit over time due to inflation. You explain to her that A) the variable life policy is issued with a minimum guaranteed face amount that can increase over time based on the separate account performance and the policy's assumed interest rate B) the variable life policy cash value is added to the death benefit, and her concerns about estate liquidity and inflation are nothing to worry about C) the death benefit can go up but can't go down D) if money is tight, she can skip paying premiums as long as there is cash value in the policy

A

An investor is somewhat risk averse and wants to invest in industries that are steady, no matter what phase of the business cycle the economy is in. Which of the following industries would be best suited for your recommendation? A) Tobacco B) Gold C) Steel D) Capital goods

A

Fee-based accounts would tend to be most suitable for investors who follow: A) a tactical approach to investing B) an indexed approach to investing (index funds) C) a buy and hold philosophy D) a strategic approach to the market.

A

Moody's bond ratings are based primarily on an issuer's A) financial strength B) expected marketability of a bond issue C) expected trading volume of a bond issue D) capitalization

A

Which of the following is NOT subject to preapproval by a principal prior to use? A) A form letter to 20 prospective customers B) Independently prepared reprints C) Research reports D) A website

A

Which of the following statements regarding Roth IRAs are TRUE? Contributions are made with pretax dollars. Earnings accumulate tax free. Distributions are not taxable if a holding period is satisfied. Only cost basis is taxable at the time of distribution. A) II and III B) II and IV C) I and II D) I and III

A

Which of the following securities would most likely have the lowest expense ratio? A) Exchange-traded fund B) Hedge fund C) Variable annuity D) Balanced mutual fund

A Generally, most exchange-traded funds (ETFs) have a lower expense ratio than do comparable mutual funds. ETFs have other advantages over mutual funds in that they can be bought or sold at any time during the trading day (as opposed to end-of-day pricing), they can be bought on margin, and they can be sold short. Variable annuity expense ratios tend to be higher than mutual funds, and those for hedge funds are the highest of all.

If a client who holds a convertible preferred stock believes the company may go bankrupt within the next 3 years, what would you advise the client to do with the stock? A) Sell the security. B) Buy puts on the common stock as a hedge. C) Immediately convert it to common stock because the preferred dividends may no longer be paid. D) Sell calls on the preferred stock.

A In the event of bankruptcy, all debt holders have priority over equity holders in claims on the assets of the corporation in liquidation. The safest alternative is to sell the stock. Buying puts on the underlying common stock would be an effective hedge, but with a 3-year wait, the position would have to be renewed several times, as the usual option only has a life of 9 months. This would lead to increased transaction costs.

Which of the following income investments would be most suitable if interest rates were expected to increase sharply within the next 2 years? A) Treasury bills B) GNMAs C) AAA corporate bonds D) Treasury bonds

A The recommendation of a short-term debt instrument is most suitable during a period of substantial interest rate risk, since they have the smallest price response. Of the securities listed, Treasury bills would be the most suitable because of their maturity of less than one year.

If a customer writes 2 ABC Feb 90 puts at 8 and buys 2 ABC Feb 80 puts at 2, which of the following statements are TRUE? The spread is bullish. The spread is bearish. The breakeven point is 84. The breakeven point is 86. A) I and III B) II and III C) II and IV D) I and IV

A This is a credit put spread (the net credit being 6 points per share) in which the breakeven point is calculated by subtracting the net premium (debit or credit) from the higher strike price (90 - 6 = 84). A credit put spread is like the net sale of a put, and buying the lower strike price in any spread (put or call) is bullish.

An intrastate offering is exempt from: A) all registrations B) federal registration C) blue-sky registration D) state registration

B

An investor owns Blue Streak common stock. Blue Streak's latest earnings report beat estimates but the stock price dropped 12% when the S&P 500 dropped 10%. When discussing the markets drop and what it means to the investor, which of the following would be incorrect? A) If we coupled Blue Streak stock with another stock that has a negative correlation, it is likely the loss would have been reduced. B) A diversified portfolio would all but eliminate the risk of negative returns should the market drop like this in the future. C) Blue Streak has a beta that is greater than 1.0, therefore the loss as a percentage was greater than the markets loss percentage. D) Diversification can significantly reduce business risk, but not systematic risk.

B

Each of the following is a defined contribution plan EXCEPT A) a money-purchase pension plan B) a stock option plan C) a 401(k) plan D) a profit-sharing plan (qualified)

B

For U.S. investors holding American Depositary Receipts (ADRs), dividends received are A) tax-free in the country of origin B) subject to a foreign withholding tax C) taxed as a capital gain in the U.S. D) tax-free in both the country of origin and in the U.S.

B

If a registered representative opens a joint account for three people, the registered representative should obtain information on A) the tenant with trading authority B) all of the tenants C) the senior tenant in the account D) a single tenant of the account holders choosing

B

Investors who purchase callable bonds face what types of investment risk? A) Timing Risk B) Reinvestment Risk C) Currency Risk D) Liquidity Risk

B

Ratio call writing exposes an options investor to limited loss unlimited loss limited gain unlimited gain A) I and IV B) II and III C) I and III D) II and IV

B

The stock market has been in a bullish trend for several months. However, a NYSE stock your customer owns recently reported an accounting scandal, and it has lost 20% of its value in the last week. The customer calls and wants to sell the security. What kind of risk was the customer exposed to? A) Currency risk B) Business risk C) Liquidity risk D) Systematic risk

B

Under the Securities Act of 1933, an accredited investor is defined as one having I. an annual income of at least $1 million for the last two years II. an annual income of at least $200,000 for the last two years and anticipating an income of $200,000 in the current year III. a net worth of $1 million not including net equity in a primary residence IV. a net worth of $200,000 A) I or IV B) II or III C) I or III D) II or IV

B

When an investment banker is successful on a competitive bid corporate underwriting in which they agree to purchase the shares from the issuer, the underwriters will be handling the offering as A) a standby underwriter B) a firm commitment C) an all or none D) a best efforts

B

Which of the following are included in the rules on retail communications? A) A market research report that will only be sent to insurance companies B) A website C) A public appearance D) A letter sent out to 10 customers

B

Your established firm wishes to promote a mutual fund it markets to the public. What approval and filing requirements apply to this communication? It must be filed with FINRA within 10 days of first use. It must be filed with FINRA at least 10 days before first use. It must be reviewed by a principal either before or after first use. It must be approved by a registered principal. A) II and IV B) I and IV C) II and III D) I and III

B

An investor would like to make a long-term investment in a debt security whose duration is equal to its maturity. Which of the following AAA-rated bonds should his registered representative recommend? A) DEF 10-year 8% bond maturing in eight months B) XYZ zero-coupon bond maturing in five years C) MNO zero-coupon bond maturing in eight months D) ABC 8% 10-year bond maturing in five years

B Because they make no interim payments, zero-coupon bonds have a duration equal to maturity. Of the choices offered, only XYZ is both long-term (over one year to maturity) and zero-coupon.

A registered representative is hired by a broker-dealer on May 1. On June 2, the representative calls former customers at her previous firm in an attempt to move the assets in their accounts to her new firm. Which of the following statements regarding FINRA Rule 2273 are TRUE? A) FINRA Rule 2273 applies to both retail and institutional accounts. B) When the contact is oral and made within three months of the hire, a disclosure of costs to transfer assets, financial incentives received by the representative, and differences in products and services must be sent to the customer within 3 business days of contact. C) If the former customer reaches out to the representative or firm within 3 months after the hire to transfer assets, no educational material is required to be sent to the former customer. D) No disclosure is required if the contact by the representative is more than 30 days after hire by the new firm.

B FINRA Rule 2273 is applicable for 3 months after the hire. Educational material that discloses costs and incentives must be sent within 3 business days when the contact is oral in nature. If the former customer contacts the new firm to transfer assets within the 3 months of hire, the firm must deliver the educational material with account approval documentation.

The market attitude of a customer who establishes a credit call spread is A) neutral B) bearish C) bullish D) speculative

B In a call spread, a customer is buying one call and selling another with different strike prices and/or expirations. In any spread, one of the options is dominant. In a short call spread, the short call position is dominant because it has the higher premium; writing calls is bearish.

A 65-year-old man called the branch manager to complain about a recent exchange of a deferred variable annuity proposed and performed by a new representative. The customer said he was unaware that there would be charges associated with the transaction and was shocked that the account value diminished substantially during a recent downturn in the market. The manager should do which of the following? A) Retrain the new representative to make exchanges in variable products only by prospectus and require future sales calls to be recorded B) Document the facts of the complaint and submit a report to FINRA C) Interview the representative to ascertain whether firm procedures were adhered to with regard to suitability and disclosure of charges and risks associated with exchanges D) Promptly refund the customer's losses and unwind the transaction

C

A brother and sister would like to open an account together. Contributions to the account will be disproportionate. Both the brother and sister have children and they each want their children to get their proportionate shares when either the brother or sister dies. What type of account would you recommend? A) Joint tenants with rights of survivorship B) community property C) tenants in common D) partnership

C

A fundamental analyst is reviewing the financials of a company. The company is highly leveraged. What does that mean? A) The company is generating excellent cash flow from operating activities. B) The company is better positioned than others in its industry to survive an economic downturn. C) The company has capitalized itself by issuing mostly debt. D) The company has a solid financial foundation from which to operate.

C

A technical analyst is charting a stock and notices a trading pattern of head and shoulders—top. What does this indicate to the analyst? A) The stock is heading into a bullish trend. B) The market is heading into a bullish trend. C) The stock is heading into a bearish trend. D) The market is heading into a bearish trend.

C

ABC Corp. has outstanding a 10% noncumulative preferred stock. Two years ago, ABC omitted its preferred dividend. Last year, it paid a dividend of $5 per share. In order to pay a dividend to common shareholders, each preferred share must be paid a dividend of A) $15 B) $25 C) $10 D) $5

C

Each of the following securities are issued with a fixed rate of return EXCEPT A) bonds B) preferred stock C) common stock D) convertible preferred stock

C

In April, a customer buys 1 MCS Oct 50 call for 9 and sells 1 MCS Jul 50 call for 4. What will the customer's profit or loss be if he buys back the July call for $1 and sells the October call for $12? A) $100 loss B) $100 profit C) $600 profit D) $600 loss

C

LMN Securities is the managing underwriter for a new issue of one million MIC common shares. LMN has agreed to sell as much stock as possible in the market, and MIC has agreed to take back any unsold shares. If MIC has not specified a minimum amount of capital for LMN to raise, this is what type of offering? A) Contingency B) Standby C) Best efforts D) All-or-none

C

The Securities Act of 1933 exempts all of the following securities EXCEPT A) municipal securities issues B) U.S. government debt issues C) real estate investment trusts D) savings and loan issues

C

Which investor has the greatest potential risk if the price of QRS goes up? A) Long 10 puts on QRS B) Short 10 puts on QRS C) Short 10 calls on QRS D) Long 10 calls on QRS

C

Which of the following attributes best describes a tactical asset allocation portfolio style? A) Has an aggressive growth objective B) Employs a passive management style C) Employs an active management style D) Employs a strategic management style

C

Which of the following occurs in a partnership account if one partner dies? A) The surviving partners receive the deceased partner's share B) The surviving partners are considered joint tenants and receive the deceased partner's share. C) The account is frozen until an amended partnership agreement is received. D) The surviving partners are considered joint tenants.

C

Which of the following securities would match up well with an equity growth fund that a customer already owns when using modern portfolio theory to reduce risk and increase overall return of the newly created portfolio? A) S&P 500 index fund B) Preferred stock fund C) Corporate bond fund D) Equity value fund

C

Which of the following statements about warrants is NOT true? A) Warrants have an exercise price above the current market price of the common stock when issued. B) Warrants may be attached to another of the issuer's securities. C) Warrants may not be traded in the secondary market. D) Warrants have longer lifetimes than rights.

C

A company without business operations that raises money through an IPO in order to have its shares publicly traded for the sole purpose of seeking out a business or combination of businesses is known as A) a Regulation D, Private Placement company B) a growth company C) a special purpose acquisition company (SPAC) D) a special situation company

C Generally, with IPOs the business purpose and products or services offered by a company are clearly defined. However, both the NYSE and Nasdaq allow companies without a defined business purpose to raise capital through an IPO in order to have its shares traded for the sole purpose of seeking out a business or combination of businesses that when located would be submitted to shareholders for their approval. These types of companies are known as special purpose acquisition companies (SPACs).

A customer has invested a total of $10,000 in a nonqualified deferred annuity through a payroll deduction plan offered by the school system where she works. The annuity contract is currently valued at $16,000, and she plans to retire. On what amount will the customer be taxed if she chooses a lump-sum withdrawal? A) No taxes owed because annuity was nonqualified B) $16,000 C) $6,000 D) $10,000

C Payments into a nonqualified deferred annuity are made with after-tax money; taxes must only be paid on the earnings of $6,000.

All of the following option strategies could be effectively used in a bear market EXCEPT a A) debit put spread B) credit call spread C) short straddle D) short call

C Short straddles are appropriate only in flat or neutral markets. The writer will lose in a rising market (the call will be exercised) or a falling market (the put will be exercised). Short calls and short call spreads are bearish, as are debit (long) put spreads.

A customer has just opened a new account at your firm and given her lawyer limited power of attorney. Which of the following statements are TRUE? Confirmations of trades will be sent to the account owner. Confirmations will be sent to the party given the power of attorney only. The POA ceases upon the death of either party. The POA must be renewed annually. A) I and IV B) II and IV C) II and III D) I and III

D

A customer long 100 shares of XYZ stock who wishes to reduce risk and generate income should A) sell an XYZ put B) buy an XYZ call C) buy an XYZ put D) sell an XYZ call

D

A customer wishes to open a cash account and give trading authorization to a sibling. The required documentation would include which of the following? New account form Joint account agreement Customer agreement Limited power of attorney A) II and IV B) I and III C) II and III D) I and IV

D

A holder of an ADR assumes all of the following risks EXCEPT A) foreign currency risk B) market risk C) political risk D) liquidity risk

D

A member of the board of directors of ABC Co. has received ABC stock. The stock was issued last July through a private placement and not a public offering. It is now March of the following year. If the board member wants to sell the ABC stock, what would be the most important disclosure prior to the sale? A) The stock can be sold but it will need to be registered with the exchange where the security sells prior to the sale. B) The stock may be sold at this point in time without restriction. C) The stock must be held for six months prior to the sale. D) The stock can be sold, but paperwork must be filed, and the sale is subject to volume restrictions during a 90 day window that will be opened.

D

A stock has a beta of 1.5. If the market goes up 10%, how much would we expect this stock to increase in value? A) 5% B)10% C) 20% D) 15%

D

An affiliate holding restricted stock wishes to sell under Rule 144. The shares have been held fully paid for one year. The issuer has 2.4 million shares outstanding. Form 144 is filed on Monday, April 10, and the following is the weekly trading volume for the stock. Week Ending Trading Volume April 7: 23,000 March 31: 25,000 March 24: 26,000 March 17: 24,000 March 10: 22,000 The maximum number of shares the customer can sell with this filing is A) 23,000 B) 24,250 C) 24,000 D) 24,500

D

An individual younger than age 70½ may contribute to an IRA A) provided she does not own a self-employed retirement plan such as a SEP B) provided she is not covered by a pension plan through an employer C) provided her income is between $40,000 and $50,000 if married and $25,000 and $35,000 if single D) if she has earned income

D

An investor owns a 6% bond issued by ABC Corporation that is callable at 102 ($1,020) next May 1. All of the following statements are true regarding the call EXCEPT A) up until May 1, the investor has call protection B) it is likely that once the bond is called, the investor will also be exposed to reinvestment risk C) when bonds are called, they are usually called at a premium to par D) the bond is probably being called by the issuer because interest rates went up

D

An investor unaffiliated with the issuer is permitted to sell restricted stock without being subject to volume restrictions after having held the shares, fully paid, for a period of at least A) 2 years B) 3 years C) 9 months D) 6 months

D

Given the following choices, the most suitable investment recommendation for a customer who wants monthly income is A) T-bills B) utility stocks C) income bonds D) GNMAs

D

Mr. Brown has several stock rights. Which of the following is NOT an alternative regarding these stock rights? A) Gifting the rights to his son to exercise B) Selling in the open market at the prevailing market price C) Exercising the stock rights before expiration to purchase shares of stock D) Redeeming them from the issuer for cash

D

Which of the following concerning Section 529 plans are TRUE? I. Qualified withdrawals are exempt from federal income tax. II. Contributions are tax qualified. III. Up to $10,000 per year can be used for k=K-12 education expenses. IV. Withdrawals may be used for any expenses incurred by a student. A) II and IV B) II and III C) I and IV D) I and III

D

Which of the following statements about a red herring is NOT true? A) The final offering price does not appear in a red herring. B) Additional information may be added to a red herring at a later date. C) A red herring is used to obtain indications of interest from investors. D) A registered representative may send a copy of a company's research report with it.

D

If your client wished to purchase a preferred stock that would offer him the highest likelihood of assured income, plus the opportunity to take part in the growth of the company's common stock, which of these features might he consider? Callable Convertible Cumulative Straight A) II and IV B) I and II C) I and III D) II and III

D Dividends on common stock are variable and are never paid ahead of preferred stockholders. The board decides how much of the earnings to pay out as a dividend and may, in fact, decide to keep all of the earnings (or a very high percentage of the earnings) if the money is needed for future expansion, new equipment, and so on.

An agent has recommended investments in the XYZ fund family to his customers for 10 years. He is referred by one of his customers to a prospect who has inherited $500,000 as beneficiary of a life insurance policy. The prospect tells the agent she has never invested in the market before, is risk averse, and wants safety of principal to be the first priority, with liquidity second. The agent recommends the following investments: XYZ government bond fund, B shares $200,000 XYZ large-cap growth and Income B shares $150,000 Liquid reserve money market $150,000 The recommendation is A) suitable because it addresses the customer's liquidity objective B) suitable because it addresses the customer's safety objective C) suitable because he recommended conservative investments D) unsuitable because it does not address the customer's two primary objectives

D The customer's objectives of safety and liquidity are not satisfied by these recommendations. The government bond fund and large-cap growth and income fund are both subject to market risk and, as Class B shares, are subject to a contingent-deferred sales charge in the event the customer wishes to access the funds before the back-end load expires. The back-end load is not consistent with the customer's liquidity objective.

Several investors open an account in joint tenancy. Which of the following statements regarding the account is TRUE? A) Only one designated account holder need sign a margin agreement or other forms pertinent to the account. B) Checks need not be endorsed by all parties to the account in order to be deposited. C) Checks may be made payable to one tenant of the account. D) Mail need only be sent to one of the parties to the account.

D While mail only need to be sent to one of the parties to the account, checks for disbursements from the account must be made payable to all parties and endorsed by all parties in order to be deposited. Any required forms pertinent to the account such as a margin agreement or options agreement must be signed by all parties.