Mock Exam 5 S7
When examining the portfolio of a municipal bond client, you notice that every bond is Aaa or Aa rated. In addition, each bond matures at about the same time and the coupon rates do not vary by more than 50 basis points. You also notice that over 10 different states are represented by the issuers with no state being represented more than twice. It would appear that this client has used A) geographical diversification. B) duration diversification. C) quality diversification. D) interest rate diversification.
A) geographical diversification.
A Treasury bond is quoted in The Wall Street Journal as follows: -- Bid 100:15 -- Asked 100:17 -- Bid Chg. -1 -- Yield 7.9 From this information, you know that the nominal yield is A) greater than 7.90%. B) 7.89%. C) 7.90%. D) less than 7.90%.
A) greater than 7.90%. --The Bid and Asked prices show that the Treasury bond is being quoted at a premium (above par), --With a yield to maturity of 7.9%. --When bonds are trading at a premium, the nominal yield (coupon rate) is greater than the yield to maturity.
One of the specific concerns that the regulators have with variable annuities is sales personnel recommending that an investor switch from an existing contract to a new one. It would generally raise a "red flag" if the customer A) has had another deferred variable annuity exchange within the preceding 36 months. B) elects to make the exchange under the provisions of IRS Section 1035. C) has had another deferred variable annuity exchange within the preceding 60 months. D) has had another deferred annuity exchange within the preceding 36 months.
A) has had another deferred variable annuity exchange within the preceding 36 months. --FINRA Rule 2330 frowns on recommending the exchange of one deferred variable annuity for another within a period of 36 months. This only applies to deferred variable annuities. When an exchange takes place, it is generally under the provisions of IRS Section 1035 - no red flag raised there.
A breakpoint sale is defined as the sale of mutual fund shares in an amount A) just below the dollar amount at which the sales charge is reduced. B) just below the public offering price of the fund. C) at or above the dollar amount at which the sales charge is reduced. D) required as the minimum investment in a fund, as specified by the SEC.
A) just below the dollar amount at which the sales charge is reduced. --The term breakpoint sale refers to the violation that occurs when a sale is made just below the point at which the investor would receive the reduced sales charge. The practice earns a higher commission for the salesperson but is not in the interest of the customer.
Stockholders' preemptive rights include the right to A) maintain proportionate ownership interest in the corporation. B) serve as an officer on the board of directors. C) purchase Treasury stock. D) sell stock back to the issuing corporation.
A) maintain proportionate ownership interest in the corporation. --Preemptive rights allow stockholders to maintain their proportionate ownership when the corporation wants to issue more stock. --For example, if a stockholder owns 5% of the outstanding stock and the corporation wants to issue more stock, the stockholder has the right to purchase 5% of the new shares.
Earlier in the day, you entered a customer order to buy 300 XYZ at 26.45 good til canceled (GTC). By late afternoon, you notice that XYZ is trading at your customer's limit price. At the close of trading, you contact the order desk and get a Nothing Done report because A) of stock ahead. B) of the small size of the order. C) the order was canceled at the close of trading. D) of the normal time delay between execution and execution reports.
A) of stock ahead. --All limit orders stand in time priority.
In a direct participation program, a general partner is all of the following except A) one who has limited liability. B) key executive who makes day-to-day business decisions. C) one who appoints the property manager. D) one who buys and sells the program's property.
A) one who has limited liability. --A general partner of a limited partnership is a key executive of the program who purchases and sells the property and/or appoints someone to manage the property. --The general partner does not have limited liability. --By not allowing the general partner to have limited liability, the program is able to rule out limited liability as a corporate characteristic.
Expressed as a percentage of par, one basis point equals A) one-one hundredth of 1%. B) 10%. C) one-one thousandth of 1%. D) one-tenth of 1%.
A) one-one hundredth of 1%. --One basis point equals one-one hundredth of 1% of par. --One percent of par ($1,000) equals $10; therefore, 1 basis point equals one-one hundredth of $10, or $0.10 (10 cents).
A company that has issued cumulative preferred stock A) pays past and current preferred dividends before paying dividends on common stock. B) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common. C) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends. D) pays the preferred dividend before paying the coupons due on its outstanding bonds.
A) pays past and current preferred dividends before paying dividends on common stock. --Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. --Bond interest is always paid before dividends. --Dividends in arrears on cumulative preferred have the highest priority of dividends to be paid.
The date on which the interest on a new municipal issue begins accruing is A) the dated date. B) the closing date. C) the delivery date. D) the settlement date.
A) the dated date.
The bond resolution includes all covenants between A) the issuer and the trustee acting for the bondholders. B) the bond counsel and the bondholders. C) the issuer and the Municipal Securities Rulemaking Board. D) the issuer and the bond counsel.
A) the issuer and the trustee acting for the bondholders.
Automatic exercise will occur for equity options at expiration that are in the money by at least A) one-eighth of a point. B) $0.01. C) one-quarter of a point. D) $0.05.
B) $0.01. --Automatic exercise will occur for equity options at expiration that are in the money by at least 0.01, unless specific instructions are given by the customer not to do so.
An investor has a short margin account. The current market value of the stock is $1.50 per share, and the investor owns 1,000 shares. Compliance with SRO minimum maintenance requirements is met with account equity of A) $1,950. B) $1,500. C) $2,500. D) $2,000.
B) $1,500. --For stock trading under $5 per share, a customer must maintain 100% of SMV or $2.50 per share, whichever is greater. $2,500 (1,000 shares @$2.50) is greater than 100% of $1,500.
A client purchased 500 shares of JSSP common stock at $28 a share in July of 202X. The following June, the client wrote 2 October 35 calls at 5 each against the stock position. If the market price of JSSP was $39 at expiration, what was the client's realized gain? A) $4,300 B) $2,400 C) $1,000 D) $1,700
B) $2,400 --see the T-Chart --SP 35 - sold CMV 39 DR out CR in 5600 $28x200 purch stock $35x200 exercise $7000 $500x2 premiums $1000 --------- ---------- 5600 8000 $2400 credit --note: she did not liquidate the entire 500 shares -> she wrote 2 calls / 200 ->so only 200 sh of stock at play
An investor with no other positions sells 1 ABC Jun 25 put at 1.50. If the put is exercised when the stock is trading at 24, and the investor immediately sells the stock in the market, what is the investor's profit or loss? A) $50 loss B) $50 profit C) $150 profit D) $150 loss
B) $50 profit --The investor obligate buy the stock at SP of 25. The stock is currently worth 24, which is a loss of 1. --The investor's premium of 1.50 minus loss of 1 = net profit of 0.50 (0.50 × 100 = $50). -- T CHART Debit (out) Credit (in) 100sh@25 Sell 25 put = $2500 @ 1.50= PREM $150 Sell 100sh@$24 $2,400 --------- ----------- $2,500 $2,550 Net profit $50
An abstract of a municipal securities issue official statement must be maintained on file for how long? A) 12 months B) 4 years C) There is no requirement to file abstracts of official statements. D) 5 years
B) 4 years --The Municipal Securities Rulemaking Board requires firms to retain abstracts of official statements for four years—the same as all pieces intended to communicate with the public.
BAKE-ALL, a U.S. manufacturing corporation, has purchased shares of stock in RE-FORM, a U.S. corporation that refines raw materials. RE-FORM pays a dividend to its shareholders. For BAKE-ALL corporation, taxes will be due on what percentage of the dividends received from RE-FORM? A) 100% B) 50% C) 70% D) 0% (all dividends received are tax free)
B) 50% --When a U.S. corporation receives dividends from another U.S. corporation it has invested in, 50% of the dividends received are excluded from taxation (tax free). Therefore, 50% of the remaining dividends received are taxable.
A married couple with a two-year-old child have $25,000 to deposit towards an investment to help meet the financial obligations for the child's college education. Given the following choices, which of the following is likely the most suitable investment? A) A collateralized mortgage obligation (CMO) tranche rated AAA and scheduled to mature in five years B) A treasury STRIP scheduled to mature in 16 years C) A diversified portfolio of insured municipal bonds with an average duration of 18 years D) A money market mutual fund
B) A treasury STRIP scheduled to mature in 16 years --Treasury STRIPs are zero-coupon bonds, backed in full by the U.S. government. Purchased at a discount and maturing at face value in the future, they are suitable investments for those wishing to save for anticipated future expenses, such as college tuition. --A CMO maturing in five years doesn't align with the time horizon for this child's college education and carries other unsuitable risks. --A money market fund would hardly meet the growth requirement needed to meet college tuition needs. --For exam purposes, municipal bonds are a suitable choice only when something in the question indicates that the investor is in a high income tax bracket.
American-style options traded on the Chicago Board Options Exchange are priced higher than European-style options on the same underlying stock, having the same expiration, because A) European-style option positions cannot be traded out of. B) American-style options can be exercised at any time until expiration, while European-style options can be exercised only at expiration. C) European-style options are not adjusted for stock splits and stock dividends. D) U.S. investors cannot use European-style options; thus, the demand is much less, leading to lower premiums.
B) American-style options can be exercised at any time until expiration, while European-style options can be exercised only at expiration.
A customer buys AC Growth Fund and enjoys a substantial paper capital gain. When he believes the market has reached its peak, he switches into AC Income Fund within the AC family of funds. He incurs a small service fee but is not charged an additional sales charge. What is the tax effect? A) It is a tax-free exchange. B) Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a purchase. C) The tax basis of AC Income Fund is adjusted to reflect the gain in AC Growth Fund. D) Any gain or loss is deferred until he liquidates the AC Income Fund.
B) Any gain in AC Growth Fund is taxable because the exchange is treated as a sale and a purchase. --The exchange is treated as a sale of the growth fund shares followed by a purchase of the income fund shares. --The gain or loss is determined by comparing the cost basis of the growth fund shares with the net asset value at the time of exchange. --Any difference is a capital gain or loss, even though the proceeds were immediately used to purchase the income fund.
An investor wanting to know about the tax consequences of a direct participation program should know which asset types can be depleted or depreciated. All of the following asset types can be depleted or depreciated except A) buildings. B) crops. C) gas. D) oil.
B) CROPS --Oil and gas are examples of asset types that can be depleted, whereas --buildings are a depreciable asset. --Farm crops are considered renewable assets.
A customer is considering an investment in a hedge fund, noting she has heard much about their high-yield potential from a business acquaintance. In a discussion with her about these types of funds, which of the following statements is true? A) Hedge funds tend to be more suitable for many different customer profiles, while mutual funds are generally more suitable for sophisticated, high-net-worth investors only. B) Hedge funds often use higher degrees of leverage and more sophisticated investment strategies than mutual funds. C) Mutual funds are subject to less regulatory oversight than hedge funds. D) Mutual funds pool investors' money and manage the entire portfolio with a single objective, whereas hedge funds manage each investor's assets separately to meet their individual investment objectives.
B) Hedge funds often use higher degrees of leverage and more sophisticated investment strategies than mutual funds.
Which of the following statements is true? A) All retail communications require prior principal approval. B) Institutional communications do not require prior principal review if associated persons receive training in the firm's procedures governing institutional communications. C) Institutional communications material always requires prior principal approval. D) All retail communications require submission to the FINRA Department of Advertising.
B) Institutional communications do not require prior principal review if associated persons receive training in the firm's procedures governing institutional communications.
Last week one of your customers placed a good-til-canceled order to sell 200 shares of ABC with an 18 stop when the stock was trading at $18.85. It is now the ex-date for a $0.55 dividend and the order has not yet been executed. What has happened to your customer's stop order? A) It is increased to $18.55. B) It is reduced to $17.45. C) It is canceled. D) It remains at $18.
B) It is reduced to $17.45. --Unless the customer has given DNR (do not reduce) instructions, open buy limit orders and open sell stop orders are reduced on the ex-dividend date by the amount of the dividend. open open sell limit buy stops ---------------------------------CMV open open buy limit sell stops --The two below CMV line, stock ex-date for div will reduce the order book so this is reduced. --18 minus .55 = $17.45
In February, a customer sells 1 GHI Oct 60 put for 3 and buys 1 GHI Oct 70 put for 11. If the customer closes the Oct 70 put before expiration, which of the following statements regarding the resulting profit or loss is true? A) It cannot be determined from the information given. B) It is treated as a capital gain or loss. C) It depends on the disposition of the short Oct 60 put. D) It is treated as ordinary income or loss.
B) It is treated as a capital gain or loss. --All listed options trades with resulting gains or losses are treated as capital gains or losses.
Which of the following is considered a source of debt service for a city-issued general obligation (GO) bond? A) Revenue generated by a hospital B) Real estate taxes C) Tolls on roads D) Sales taxes
B) Real estate taxes --RE Taxes and Licensing Fees are GO bond revenues. --State-issued GO bonds will also include sales taxes as a source of money. --Usage revenue, such as that generated from toll roads or hospitals, would be associated with funding revenue bonds.
One of your customers has established a long position in ABC Jan 50 calls. Which of the following details would not be on the confirmation of the trade? A) The exercise price and expiration month B) The aggregate exercise price C) The name of the underlying security D) The premium
B) The aggregate exercise price --The aggregate exercise price is what it would cost the investor to exercise the option. In this case, it would be the $50 exercise price multiplied by the number of shares in the contract (100). The confirmation does not include that $5,000 number; it isn't necessary.
Which of the following would have the least impact in marketing a municipal bond issue? A) The size of the block offered B) The dated date of the issue C) The rating of the issue D) The maturity of the issue
B) The dated date of the issue
Which of the following investment strategies would be permitted in your customer's IRA? A) Taking short positions on a stock B) Writing covered call options C) Buying stock on margin D) Selling uncovered put options
B) Writing covered call options --The covered call option is considered an appropriate investment strategy for an IRA and ERISA-compliant corporate plans as well. --The risk is actually less than simple ownership of the underlying stock, and that is what makes it an eligible strategy. --Margin (buying on credit) or selling short (unlimited potential loss) are never permitted in an IRA. --The sale of uncovered options is another strategy considered too risky for an IRA.
An employer-sponsored retirement plan that pays a specific benefit to participants at their normal retirement age is A) a defined contribution plan. B) a defined benefit plan. C) a supplemental employee retirement plan. D) a Section 401(k) plan.
B) a defined benefit plan. --A traditional defined benefit plan promises to pay a specific benefit to a participant at his normal retirement age, as specified by the plan document.
All of the following may be included in an advertisement for a collateralized mortgage obligation (CMO) issue except A) a disclosure of the CMO's coupon rate and final maturity date. B) a statement that the CMO is guaranteed by the U.S. government. C) a disclosure that payment assumptions may or may not be met. D) a generic description of the CMO tranche.
B) a statement that the CMO is guaranteed by the U.S. government.
According to Municipal Securities Rulemaking Board (MSRB) rules, a dispute between two member firms concerning municipal securities is settled through A) administration. B) arbitration. C) litigation. D) delegation.
B) arbitration.
All of the following must meet the nondiscrimination provisions of the Employee Retirement Income Security Act (ERISA) except A) 401(k) plans. B) deferred compensation plans. C) defined benefit plans. D) profit-sharing plans.
B) deferred compensation plans. --Deferred compensation plans are nonqualified, and therefore, do not have to meet the nondiscrimination provisions of ERISA.
Each of the following is a category of communication with the public designated by FINRA except A) correspondence. B) market letters. C) institutional. D) retail.
B) market letters. --The three categories of communication with the public designated by FINRA are retail, correspondence, and institutional. --Market letters, as with other pieces of sales or advertising, can fall under any of the three communication categories, depending on to whom they are sent or made available to and the number of recipients.
Under Regulation FD, if an officer of an issuer makes an unintentional disclosure of nonpublic, material information to an institutional investor, the issuer A) must prepare and distribute a press release by the close of business on the following day. B) must promptly make public disclosure of the same information. C) is not required to take any specific action because the disclosure was unintentional. D) must file Form 8-K at or prior to month end.
B) must promptly make public disclosure of the same information. --Whenever an issuer unintentionally discloses nonpublic, material information to any person outside of the issuer, the issuer must promptly make public disclosure of the same information. --"Promptly" means as soon as practical—more specifically, no later than 24 hours after known by a senior officer, or the start of the next day's trading on the New York Stock Exchange, whichever is later. --The press release by the end of the following day would likely be too late.
The self-regulatory organization (SRO) that issues, standardizes, and clears options is A) the Municipal Securities Rulemaking Board (MSRB). B) the Options Clearing Corporation (OCC). C) the Financial Industry Regulatory Authority (FINRA). D) the Securities and Exchange Commission (SEC).
B) the Options Clearing Corporation (OCC).
Corporate stocks trade in all of the following locations except A) the over-the-counter (OTC) market. B) the commodities market. C) stock exchanges. D) the third market.
B) the commodities market.
Which of the following activities are characteristic of a primary offering? choose two 1. Raising additional capital for the company 2. Selling previously issued securities 3. Increasing the number of shares outstanding 4. Buying previously issued securities
1. Raising additional capital for the company 3. Increasing the number of shares outstanding --A primary offering involves the sale of previously unissued securities. The issuing company receives the proceeds from the sale; once the securities are sold, more securities will be outstanding.
SEC regulations for securities issued by investment companies prohibit which of the following? choose two 1. Closed-end funds from issuing preferred stock 2. Open-end funds from issuing preferred stock 3. Closed-end funds from issuing bonds 4. Open-end funds from issuing bonds
2 and 4 2. Open-end funds from issuing preferred stock 4. Open-end funds from issuing bonds --Closed-end funds may issue more than one class of security, including debt issues and preferred stock. --Open-end funds may issue only one class of security: redeemable, voting common stock. They may not issue senior securities.
In which of the following markets would an investor expect to find closed-end investment company shares traded? choose two 1. A market maintained by the investment company itself 2. The over-the-counter market 3. The commodities market 4. The exchanges
2. The over-the-counter market 4. The exchanges --Closed-end company shares are like ordinary stock. Once issued, they trade on exchanges or in the over-the-counter market.
If an M&N 1 corporate bond issued at par with a 6% coupon is later purchased in August for 97 plus accrued interest of $16, how much taxable interest must the investor report for the year? A) $14 B) $30 C) $16 D) $60
A) $14 -> M&N is May - November -> Interest starts on May 1st -> Interest accrues paid to seller --A purchaser in August will pay accrued interest since May 1. --Then, on November 1, investor will receive the entire six months of interest. --We are told that the investor paid $16 in accrued interest. That is income to the seller. --Then, when the Nov payment of $30 (6% coupon is $30 semiannually) is made, --> the investor must report the amount of accrued interest paid out as income. --> In our question, that is $30 minus $16 = $14 is the taxable interest
If a customer has a margin account with a long market value of $140,000 and a debit balance of $60,000, what is the buying power in the account? A) $20,000 B) $5,000 C) $10,000 D) $0
A) $20,000 --With Regulation T at 50% (always assumed), the buying power of a margin account is twice the amount of the SMA LMV 140K (stock value) <DR> 60K (debit you owe) ------------- EQ 80K (LMV minus DR) LV 70K (1/2 LMV-Reg T 50%) -------------- EE 10K (excess liab = SMA) SMA 2x buy power so $20,000 buying power
What is the breakeven point on the following position? Buy 1 CDE Apr 30 put at 3.10 Write 1 CDE Apr 35 put at 5.85 A) $32.25 B) $33.10 C) $32.75 D) $30.10
A) $32.25 --This is a put spread established at a credit of 2.75. --To find the breakeven point on a put spread PUSH = Puts Subtract netted premium from Higher strike price (in this case, 35 − 2.75 = 32.25).
An investor has an established margin account with a long market value of $6,500 and a debit balance of $3,750, with Regulation T at 50%. A maintenance call would be triggered if the long market value decreased below A) $5,000.00. B) $4,875.00. C) $2,812.50. D) $8,666.67.
A) $5,000.00. --To determine long market value at maintenance, divide the debit balance of $3,750 by 75% ($5,000). --DUH
A registered representative of a FINRA member firm specializes in handling business accounts. In which of the following accounts are the business owners subject to double taxation? A) C corporations B) S corporations C) LLCs D) Sole proprietorships
A) C corporations --c me pay more taxes -It is the C corporation whose owners are subject to double taxation. --First, the corporation pays income tax on its earnings. --Then, any dividends paid from the after-tax income are taxed again, this time to the shareholders.
Which of the following debt securities does not have a fixed maturity date? A) Collateralized mortgage obligation (CMO) B) Subordinated debenture C) General obligation bond D) Treasury STRIPS
A) Collateralized mortgage obligation (CMO) --CMOs are mortgage-backed securities. Because mortgages are often paid off ahead of the scheduled maturity, the exact maturity date of a CMO is uncertain.
Which of the following is not true in jurisdictions that recognize the marital property designation known as community property? A) Community property applies to property that was owned individually before the marriage and is now joint property once the marriage has occurred. B) Community property laws do not apply to gifts. C) Community property laws do not apply to inheritances. D) There may be tax implications regarding the dissolution of community property at the time of a divorce, marriage annulment, or death.
A) Community property applies to property that was owned individually before the marriage and is now joint property once the marriage has occurred. --Community property applies to property obtained during a marriage but does not apply to property owned individually by one spouse before the marriage. --In addition, it does not apply to inheritances or gifts. --There can be federal tax implications for property designated as community property, and laws in states that recognize community property ownership differ from jurisdiction to jurisdiction.
A customer opens the following positions: Buy 100 shares of CDL @$40; sell 1 CDL Apr 40 call @2. What is the customer's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $200; maximum loss is $3,800, breakeven point is $38. B) Maximum gain is $200; maximum loss is $3,800; breakeven point is $42. C) Maximum gain is unlimited; maximum loss is $3,800; breakeven point is $38. D) Maximum gain is $200, maximum loss is unlimited; breakeven point is $38.
A) Maximum gain is $200; maximum loss is $3,800, breakeven point is $38. --long stock, short call --covered call --stock rules BE --stock cost 40 minus prem 2 = BE 38 --ML is BE in dollars =ML 3800 --MG is SP - BE in dollars =MG 200 (SP 40 - BE 38)
An investor, with a well-diversified portfolio oriented toward growth, has 60% invested in the stocks of 28 different companies. She would like to hedge the downside risk for the equities and is comfortable using options to do so. Which of the following is most suitable? A) Purchase index option puts B) Write index option calls C) Purchase puts on each of the individual stocks D) Write calls on each of the individual stocks
A) Purchase index option puts --Selling options to hedge adds income to the account (premiums received), but the protection is limited. --The best hedging protection is to purchase options, and to hedge long stocks, purchasing puts is the most suitable. --With so many stocks to hedge, doing so individually would not be cost effective due to commissions. --On the other hand, hedging the entire portfolio with index options allows the hedge to be done in fewer—if not a single—transaction.
Which of the following securities is sold at auction? A) T-bills B) Corporate bonds C) Freddie Macs D) Ginnie Maes
A) T-bills --T-bills, T-notes, and T-bonds are sold through auction. These auctions award securities to the most competitive bids. Agency securities are sold through selling groups appointed by the agency.
One broker-dealer receives a don't know (DK) notice from another. Which of the following would be a reason for a DK to be sent? A) The broker-dealer who sent the DK was expecting 200 shares of ABC common stock and received 200 shares of ABC preferred shares. B) The broker-dealer who sent the DK is confirming that the trade specifications are good. C) The broker-dealer who sent the DK wants to know if the other broker's customer wants to trade more stock at the same price. D) The broker-dealer who sent the DK is alerting the other broker that one of their clients has opened a new account with them.
A) The broker-dealer who sent the DK was expecting 200 shares of ABC common stock and received 200 shares of ABC preferred shares. --DKs are sent between brokers when a delivery is made that is not expected or when the specifications of the delivery do not match what was expected.
The Class B shares of the KAPCO Fund carry a conditional deferred sales charge beginning at 5% and reducing each year after the second by 1% per year until eliminated. An investor making an initial purchase of $10,000 of these shares will pay a sales charge of A) $500.00 B) $100.00 C) $0.00 D) $50.00
C) $0.00 --Unlike Class A shares, there is no front-end load when purchasing Class B shares. --All of the money is invested at the net asset value without any sales charge. --Should the investor wish to liquidate shares, there is a back-end load until the end of the seventh year, but that has nothing to do with the question.
XYZ Technology Fund permits rights of accumulation. A shareholder has invested $9,000 and signed a letter of intent for a $15,000 investment. If his reinvested dividends during the 13 months total $720, how much money must he contribute to fulfill the letter of intent? A) $9,000 B) $5,280 C) $6,000 D) $15,000
C) $6,000 --As is often the case, there is information in the question that is irrelevant. In this case it is the statement about rights of accumulation. --The question is about the letter of intent (LOI) signed by the investor in the fund. To meet the terms of the agreement, the shareholder must invest the full $15,000. With $9,000 already invested, an additional $6,000 must be invested to fulfill the terms of the LOI. --Reinvested dividends and changes in the net asset value do not count toward a breakpoint during the period of a letter of intent but do count under rights of accumulation after the letter has been completed.
The minimum maintenance requirement on short stock selling above $5 is A) 50% of the market value or $5 per share, whichever is greater. B) 25% of the market value or $5 per share, whichever is greater. C) 30% of the market value or $5 per share, whichever is greater. D) the same as the initial margin requirement.
C) 30% of the market value or $5 per share, whichever is greater. --The minimum maintenance in a short account is 30% of the market value or $5 per share (whichever is greater) for stocks trading above $5. --For stocks trading below $5, the minimum maintenance is $2.50 per share or 100% of market value (whichever is greater).
An investor buys GFC Jan 40 call @ 4 and sells GFC April 30 call @ 9. This is an example of A) a diagonal spread. B) a variable hedge. C) a horizontal spread. D) a vertical spread.
A) a diagonal spread. --An investor that buys and sells the same type of option has created a spread. --If the strike prices and/or the expiration months of the options are different, it is a diagonal spread. --think draw a line between the two SP or the months ->not horizonal (horiz-bop) ->not vertical (straight up/down) -diagonal is more of a geometric shape
Another term for municipal overlapping debt is A) coterminous debt. B) refunded debt. C) double-barreled debt. D) defeased debt.
A) coterminous debt. --In the context of municipal securities, the term coterminous refers to two or more taxing agencies that share the same geographic boundaries and are able to issue debt separately. --Overlapping debt occurs when two or more issuers are taxing the same property to service their respective debt.
A customer is choosing a payout option for a variable annuity. Maximizing monthly income for the rest of his life is the customer's key objective. This annuitant has no living relatives, so beneficiaries are not a concern. Which of the following options available would best meet the needs of this annuitant? A) A life with a 5-year period certain payout option B) A life with a 20-year period certain payout option C) A straight life payout option D) Take random withdrawals from the contract
C) A straight life payout option --The largest monthly check an annuitant can receive for the rest of his life is generated by a straight life (life income or life only) payout option. --Though there is no beneficiary designation during the annuitization, this is not an issue for this annuitant. --Life with period certain will produce a smaller check for life because the insurance company will guarantee payments to a beneficiary for a certain time designated in the contract, should the annuitant die within that period. But again, the need to designate beneficiaries is not an issue for this annuitant. --Random withdrawals do not guarantee how long the money will last because large withdrawals can deplete the funds before the annuitant dies.
A customer with a moderate income from a secure job is in the 28% tax bracket. She has a small diversified portfolio and has $10,000 she would like to invest in a limited partnership. If she is willing to accept only a moderate amount of risk, which of the following limited partnerships would be the most appropriate recommendation? A) A raw land real estate limited partnership B) An exploratory oil and gas drilling program C) An oil and gas income program D) A new-construction real estate limited partnership
C) An oil and gas income program --The customer is not in a high tax bracket and would not be able to take full advantage of the tax benefits produced by an exploratory oil and gas program or by new-construction real estate limited partnerships. --A raw land real estate partnership is usually speculative. --Of the answers listed, the income and moderate risk from an oil and gas income program would be of greatest benefit to this investor.
Which of the following terms or phrases does not apply to real estate investment trusts (REITs)? A) Secondary market B) Managed C) Redeemable D) Dividends taxed at full ordinary income rates
C) Redeemable --REITs trade in the secondary market and are not redeemable. --The real estate portfolio is actively managed, and dividends paid by REITs do not meet the requirements to be taxed as qualified dividends; therefore, they are taxed as ordinary income.
The practice of naked short selling is prohibited by A) Regulation T. B) the Options Clearing Corporation. C) Regulation SHO. D) FINRA.
C) Regulation SHO. --SHO me money no naked shorts --Naked short selling is when the broker-dealer accepts an order to sell stock short but is not able to ascertain the location of stock to deliver.
Which of the following positions does not expose a customer to unlimited risk? A) Short 200 shares of XYZ B) Short 2 XYZ uncovered calls C) Short 2 XYZ uncovered puts D) Short 200 shares of XYZ and short 2 XYZ puts
C) Short 2 XYZ uncovered puts --The max potential loss on a short put position is market price declining to zero reduced by the premium. --Remember, a stock's price can never go below "worthless." For example, if the investor sold 2 XYZ 90 puts and received a premium of 4 point each, the maximum loss would be $8,600 (worthless stock is put to the writer for $9,000 but the writer received the $400 premium) per contract or $17,200. --That is a significant loss, but all of the other positions expose the client to unlimited risk because a loss will occur if the stock price rises and there is no upper limit to a stock's price.
Your customer is opening a new options account. Which of the following need not occur to open the account? A) The background and financial information provided by the client must be verified by the client and returned within 15 days of the time the account was approved. B) The registered representative must document that the client has received a current OCC disclosure document. C) The OCC must verify the financial information supplied by the client to ultimately approve the account. D) The client must agree that any material change in financial status requires the broker-dealer be notified and the options agreement be amended.
C) The OCC must verify the financial information supplied by the client to ultimately approve the account. --Client must have current Options Clearing Corporation (OCC) disclosure do. Verified by client's signature on options agreement form, must be signed & returned within 15 days of account approval. --Client must agree to notify firm of any changes in financial status ASAP, and options agreement must be amended, if necessary. --OCC approval for an options account not required, nor do they verify any information given by the client.
In a new municipal offering, who is responsible for hiring bond counsel? A) Syndicate members B) The Municipal Securities Rulemaking Board C) The issuer D) The syndicate manager
C) The issuer --The issuer hires a bond attorney to render an opinion on the prospective municipal offering.
Three years ago, a customer purchased 300 shares of ACE Fund. --He sold the shares on August 15 for a loss of $400. -He then purchased 300 shares of the same fund on September 4 of the same year. -If the investor is in a 10% tax bracket, how will the loss be treated for tax purposes in the current year? A) The loss is fully deductible. B) The loss is only deductible to the extent that gains of an equal or greater amount were incurred. C) The loss is not deductible. D) Ten percent of the loss is deductible.
C) The loss is not deductible. --Because the customer repurchased the shares within 30 days of the loss transaction, the loss is disallowed under the wash sale rule, and therefore, is not deductible. A wash sale occurs when the same shares are purchased within 30 days before or after the date of sale in which the loss is incurred.
An arrangement in which the registered representative has the authority, or power of attorney, to make trades from funds in the account without prior approval from the investor is known as A) a nonapproval account. B) a stop-loss account. C) a discretionary account. D) a power-of-attorney account.
C) a discretionary account. --Discretionary accounts are arrangements in which the registered representative has the authority, or power of attorney, to make trades from funds in the account without prior approval from the investor.
The RJN Corporation has issued warrants where each warrant offers the holder the right to purchase one share of RJN's common stock for $20 per share. The warrants are exercisable anytime within the next five years. Chelsea purchases 80 warrants for $2 each. If three years after the purchase, the market price of RJN common stock has risen to $25 per share and Chelsea sells the warrants for their intrinsic value, she has realized A) a short-term capital gain of $240. B) a short-term capital gain of $400. C) a long-term capital gain of $240. D) a long-term capital gain of $400.
C) a long-term capital gain of $240. -three years after = long term -80 x 25 = $2000 purch price -80 x 20 = $1600 sell at Intr Value ->Difference is $400 ->Cost of warrants 80 x 2 = 160 ->400 minus 160 (80 x 2) = 240 So, $240 long-term gain
When an institution wishes to take a large position in a municipal bond issue but does not want its activities to be well known, it will generally make use of A) social media to find the bonds. B) EMMA. C) a municipal securities broker's broker. D) the bond buyers visible supply.
C) a municipal securities broker's broker. --The role of a municipal securities broker's broker is to act as a confidential conduit between municipal dealers with bonds to sell and potential buyers. Anonymity is preserved.
All of the following are allowable municipal dealer quotes except A) requests for bids only. B) bona fide quotes. C) an unidentified nominal quote. D) requests for offers only.
C) an unidentified nominal quote. --Municipal Securities Rulemaking Board Rule G-13 requires municipal brokers and dealers to give bona fide bids and offers for municipal securities. (Bona fide quotes are those good for trading.) --It also allows for requests for bids (BW = bids wanted) and requests for offers (OW = offers wanted). --A nominal quote (those for informational purposes only) is permissible, but only if it is identified as such.
Regulation BI established a new standard of conduct under the Securities Exchange Act of 1934 for broker-dealers and associated persons of a broker-dealer when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer. All of the following are examples of account recommendations except A) taking a distribution from an employer-sponsored plan and executing a rollover into a self-directed IRA. B) opening a margin account to go along with an existing cash account. C) changing the asset allocation in an existing account. D) opening an UTMA account for a grandchild.
C) changing the asset allocation in an existing account. --Account recommendations include recommendations of securities account types generally (e.g., to open an IRA or margin account), as well as recommendations to roll over or transfer assets from one type of account to another (e.g., a workplace retirement plan account to an IRA). --It has nothing to do with changing the strategy in an existing account. Rather, the desired result of an account recommendation is a new account
A customer buys a newly issued municipal zero-coupon original issue discount bond for 85. If the bond is held until maturity, the tax consequence A) is $150 gain. B) is $150 loss. C) is $0. D) cannot be calculated from the information given.
C) is $0. --Municipal original issue discount bonds (OID) must be accreted. --At maturity, the entire discount will be accreted, and the cost basis will be equal to the par value. --No gain or loss will occur at maturity.
Insiders (control persons or affiliates) of a company are prohibited from A) buying call options on the company's stock. B) engaging in any short sales on stock of competing issuers. C) selling short their own company's stock. D) buying shares of affiliated issuers.
C) selling short their own company's stock. --What a conflict of interest it would be for insiders to sell their own company's stock short! Wanting the shares to decline in price, then mismanaging the company into a loss to profit in their personal account at the expense of all the other stockholders? We don't think so and neither does the SEC. --There are no restrictions on insiders buying call options on their company's stock nor buying shares of affiliated companies. --The short sale restrictions apply only to the insider's company, not any others.
A corporation has gone out of business and the assets are being liquidated. Investors of the corporation have claim to those assets, including common stockholders. All the following terms apply to the common stockholders' claim except A) junior. B) last. C) senior. D) residual.
C) senior.
One of the key roles of a registered representative is matching a securities recommendation to a customer's risk tolerance. All of the following statements about risk are accurate except A) unsystematic risk plus systematic risk equals total risk. B) unsystematic risk is risk that affects only a particular company, country, or sector and its securities. C) systematic risk can be reduced or eliminated through diversification. D) systematic risk is a general risk component representing the variability of a stock's total return as it directly relates to overall movements in the general economy.
C) systematic risk can be reduced or eliminated through diversification. --All securities are subject to systematic risk, & this type of risk typically cannot be eliminated through diversification. --Systematic risk is based on the overall economy & affects some securities more than others. --The most common tool for measuring that variability in total return is the stock's beta coefficient. --Unsystematic risk is company- or industry-specific risk. The total risk is a combination of systematic and unsystematic risk.
Your customer opens a Coverdell ESA for his niece. To meet qualified education expenses of $9,000, she takes a distribution of $10,000. The amount of the distribution in excess of her education expenses that represents earnings in the account will be A) nontaxable to either party. B) taxable to the uncle, the donor to the plan. C) taxable to the niece, the beneficiary of the plan. D) automatically reinvested back into the plan.
C) taxable to the niece, the beneficiary of the plan. --Any excess distribution representing earnings that is not used to meet qualified education expenses is taxable to the beneficiary who took the distribution.
In a restricted margin account, if a customer fails to pay for a new purchase, the broker-dealer must sell out stock with a value of A) the margin call. B) stock cannot be purchased if the account is restricted. C) twice the margin call. D) three times the margin call.
C) twice the margin call. --Twice the value must be sold out of the account to meet a Regulation T margin call. --Cash buys stock in a margin account at a 2:1 ratio; therefore, stock will cover a cash debt at the rate of $2 of stock market value to $1 of cash debt.
Under SEC rules, firms must do all of the following except A) provide a customer with an updated customer account record within 30 days of a change in investment objectives. B) create a record containing the dated signature of each customer granting discretionary authority. C) update customer account records within 36 months of a change in investment objectives. D) create a record for each written agreement entered into with a client.
C) update customer account records within 36 months of a change in investment objectives. --it's 30 days, not 36 months
An investor wishes to invest $5,000 into the KAPCO Balanced Fund, an open-end investment company. How many shares will the investor receive if the next computed NAV per share after receipt of the order is $41.30 and the fund has a sales charge of 4%? A) 43.021 B) 121.065 C) 116.414 D) 116.225
D) 116.225 +5000 (invested) <200> (5000 x 4% sales charge) ------- =4800 / 41.30 next compute NAV 116.2227 which is 116.225
A customer contacted her registered representative requesting that her account be updated with her new residential address. The member firm must send a copy of the updated account record to the customer within A) 15 days. B) 45 days. C) 60 days. D) 30 days.
D) 30 days. --Whenever a change is made to a customer record, a copy of that record must be sent to the customer within 30 days.
Which of the following would be most likely to issue an equipment trust certificate? A) A user of farming equipment B) A social media company installing new servers C) A company using specialized equipment on an oil drilling rig D) An airline company
D) An airline company --When you see "equipment trust certificate," think transportation companies such as airlines and railroads.
If all other factors are equal, an investor would expect which type of preferred stock to pay the highest stated dividend rate? A) Convertible B) Cumulative C) Straight D) Callable
D) Callable --When the stock is called, dividend payments are no longer made. --With callable preferred stock, to compensate for that possibility, the issuer pays a higher dividend than with straight preferred. --Cumulative and convertible preferred have positive characteristics that would justify a lower fixed dividend than straight.
Which of the following are governed by the prudent investor rule? Trustee Executor Custodian Registered representative who has been granted discretionary authority A) II and III B) I and II C) III and IV D) I, II, III, and IV
D) I, II, III, and IV --The prudent investor rule applies to fiduciary accounts, or accounts in which someone is acting on someone else's behalf. With these accounts, the fiduciary must act prudently. A registered representative who has been granted discretionary authority is acting in a fiduciary capacity.
Advantages of oil and gas direct participation programs (DPP) do not generally include which of the following? A) Depletion B) Potential cash flow and/or income C) Intangible drilling costs (IDC) D) Potential alternative minimum tax
D) Potential alternative minimum tax --Alternative minimum tax is not considered an investment benefit of an oil and gas DPP. This tax arises from excess IDC that is considered a tax preference item. --An oil and gas limited partnership has the advantages of IDCs, depletion, depreciation, and the potential for cash flow and/or income. Such a program would also usually have the advantage of the deductions of operating expenses. --For the exam, IDC, as long as not treated as excess by the IRS, and depletion are advantages to an oil and gas program that are available to few other limited partnerships.
When a registered representative recommends a municipal bond purchase to a customer, which of the following would be of least consideration regarding suitability? A) The customer's state of residence B) The bond's rating C) The customer's tax bracket D) The intended use of funds raised by the issue
D) The intended use of funds raised by the issue --The customer's state of residence and tax bracket are important because these factors help establish the tax benefits offered by the municipal bond. The bond's rating is important in evaluating the credit risk assumed by the investor. While the intended use of the funds may be of interest to the customer, it would be of little consideration when making a purchase recommendation.
A risk associated with investing in most bonds is reinvestment risk. What type of bond can an investor buy that does not expose the investor to reinvestment risk of interest? A) Discount bonds B) Par bonds C) Premium bonds D) Zero-coupon bonds
D) Zero-coupon bonds ---Zero-coupon bonds do not expose investors to reinvestment risk of interest. --Reinvestment risk is that as periodic income is received from an investment, such as bond interest, the investor cannot find another investment to reinvest into offering the same rate of return for the same level of risk. --Because zero-coupon bonds do not pay periodic interest, (the return of the face value at maturity is the income), there is nothing to reinvest. The fact that a bond is selling at par, premium, or discount does not remove the reinvestment risk.
The term municipal fund security refers to A) an advance refunded municipal bond. B) a municipal bond with a sinking fund. C) a mutual fund whose portfolio is exclusively municipal bonds. D) a Section 529 savings plan.
D) a Section 529 savings plan. --Section 529 plans, used primary for saving for college, are legally considered municipal fund securities.
Due to a sudden drop in earnings, the board of directors of Amalgamated Metal Industries (AMI) has voted to suspend all dividend payments this year. This would have the least effect on holders of AMI's A) subordinated debentures. B) callable preferred stock. C) senior claim preferred stock. D) cumulative preferred stock.
D) cumulative preferred stock. --Regardless of the level of seniority of a preferred stock, it comes behind any debt security. --More importantly, interest on a debenture, subordinated or not, is a contractual obligation. Unlike the dividends on stock, the decision to pay or not to pay interest is not an optional one. --Failure to pay interest on a debt security can lead to foreclosure and bankruptcy proceedings.
If a corporation has a dividend payout ratio of 70%, the undistributed earnings will A) decrease book value. B) increase capital surplus. C) increase earnings per share. D) increase retained earnings.
D) increase retained earnings. --Retained earnings represent income that has not been paid out to shareholders.
An investor who is bearish on the outlook for Fernweh Travel Services (FTS) --sells 100 shares short at $52 per share. --Three months later, the market price of FTS shares is $58. Under FINRA rules, a maintenance call will be issued when the per share price of FTS A) increases by more than $9.60. B) increases by more than $17.40. C) decreases by more than $2. D) increases by more than $2.
D) increases by more than $2. ->sell 100 @ 52 =proceeds $5200 ->Reg T 50% required = $2600 -> proceeds -PLUS- Reg T = 5200 plus 2600 = 7800 CR -> CR of 7800 / 1.3 = $6000 -> $6000 is SMV -> CMV can go no higher than 60 --Dividing that $7,800 by 1.3 = $6,000. That tells us that the highest the price of FTS shares can be is $60 per share. --Anything above that will trigger the maintenance call. --With the current market price of $58, anything in excess of a $2 per share increase will result in a maintenance call. --Remember, when an investor sells short, losses occur as the market price rises.
An investor sells stock short to A) establish a permanent tax loss. B) defer taxes. C) liquidate a long stock position. D) profit if prices decline.
D) profit if prices decline. --Short sales are used to profit if prices fall. --? how TF do you profit
An investor desiring a limited partnership investment with capital gains potential would most likely select one investing in A) shopping centers. B) oil and gas. C) equipment leasing. D) raw land.
D) raw land. --Historically, raw land has been a source of appreciation. -Shopping centers might appreciate in value but are oriented more toward current income. -Equipment leasing offers income, and the asset ultimately depreciates. -Oil and gas provide income as well, and the asset ultimately depletes.
An investor owns 500 shares of JKL common stock. The investor's cost is $50 per share and the last quote on JKL was $60. One method the investor could use that would increase current income and offer some downside protection would be to A) sell a JKL $60 call @4. B) buy a JKL $60 put @4. C) buy five JKL $60 puts @4. D) sell five JKL $60 calls @4.
D) sell five JKL $60 calls @4. covered calls --Understand that with 500 shares, the protection needs five options. Selling five calls @4 generates $2,000 of premium income credited to the account one day after the sale. In addition, the sale has effectively lowered the cost from $60 to $56 per share. --That is the partial protection offered when writing a covered call. --Full protection would come from buying five JKL 60 puts, but the question specifically mentions receiving income and buying an option costs money rather than receiving money. --Please note that some questions, like this one, do require you to consider the number of shares or options. Others, such as breakeven points, ignore the number of contracts.
Interest on direct debt issued by the U.S. government is taxable at A) the state level only. B) different levels in different states. C) the federal and state level. D) the federal level and exempt at the state level.
D) taxable at the federal level and exempt at the state level --Interest on direct debt (T-bills, T-notes, T-bonds, and STRIPS) is taxable by the federal government but not by state or local governments.
The difference between the syndicate bid and the reoffering price on a competitive bid of a new municipal underwriting is A) the selling concession. B) the discount. C) the scale. D) the spread.
D) the spread. --The spread, or underwriter's compensation, on a competitive bid underwriting is the difference between the bid to the issuer and the dollar price at which the underwriter reoffers the bonds to the public.
Some limited partnership programs provide potential tax credits to partners. Which of the following typically provide potential tax credits? choose two 1. Rehabilitation of historic properties 2. Equipment leasing 3. Developmental oil and gas programs 4. Government-assisted housing programs
One and Four 1. Rehabilitation of historic properties 4. Government-assisted housing programs --Historic rehabilitation and government-assisted housing are two programs that offer potential tax credits. --Tax credits are no longer available for equipment leasing, and while developmental oil and gas programs offer high intangible drilling costs, these are not investment tax credits.
A prospectus for a variable annuity contract (choose two) 1. must provide full and fair disclosure. 2. is required by the Securities Act of 1933. 3. must be filed with FINRA. 4. must precede every sales presentation.
One and Two 1. must provide full and fair disclosure. 2. is required by the Securities Act of 1933. --The time of distribution of the prospectus can be before the sales presentation or at the same time as the presentation. It is incorrect to state that it must precede every sales presentation.
A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. How is the distribution taxed? choose two 1. The entire amount is taxed as ordinary income. 2. The growth portion is taxed as ordinary income. 3. The growth portion is taxed as a capital gain. 4. The growth portion is subject to a 10% penalty.
Three and Four 3. The growth portion is taxed as a capital gain. 4. The growth portion is subject to a 10% penalty. --On withdrawals from a nonqualified annuity, taxes are paid only on the amount that exceeds cost basis (the amount paid into the annuity). --In this case, the investor is taking a lump-sum distribution before reaching age 59½ and must pay an additional 10% penalty on the taxable amount.
Which of the following are considered sources of debt service for general obligation (GO) bonds? choose two 1. Tolls on roads 2. Real estate taxes 3. Revenue generated by a hospital 4. Liquor license fees
Two and Four 2. Real estate taxes 4. Liquor license fees --General revenues of the municipality, such as real estate taxes or licensing fees, may be used to pay the debt service on a GO bond. --Usage revenue, such as that generated from toll roads or hospitals, would be associated with funding revenue bonds.
Which of the following statements regarding callable municipal bonds are true? choose two 1. Call premiums tend to increase over time. 2. Call premiums tend to decrease over time. 3. Call prices are stated as a percentage of the principal amount to be called. 4. Call prices are stated as a percentage of the market value of the bonds to be called.
Two and Three 2. Call premiums tend to decrease over time. 3. Call prices are stated as a percentage of the principal amount to be called. --prems decrease --% of principal amount to be called
Under the rules regarding the sales of new equity issues, which of the following relationships to a registered representative are restricted purchasers? choose two 1. Aunts and uncles 2. In-laws 3. Supported persons 4. Grandparents
Two and Three 2. In-laws 3. Supported persons
Having held 100 shares of GHI stock for 15 months, a customer purchases 1 GHI Jan 50 put in December. If the put is exercised before the expiration date and the long stock is delivered, which of the following statements are true? choose two 1. The premium is added to the sale proceeds. 2. The premium is deducted from the sale proceeds. 3. Any gain is long term. 4. Any gain is short term.
two and three 2. The premium is deducted from the sale proceeds. 3. Any gain is long term. --Held stock before purchase of put so no effect on established holding period of 15 months. -> Long-Term --Puts is exercised, stock is sold at SP/exercise price and is REDUCED by the premium paid for buying put.
