Mock exam

An investor owns 300 shares of XYZ common stock, currently selling for $50 per share. The investor also owns 100 shares of XYZ's 5% $100 par preferred stock currently trading at $90 per share. A 2:1 stock split is declared. After the payment date, the investor will own A) 600 shares of common at $25 per share and 100 shares of the preferred at $90 per share. B) 150 shares of common at $100 per share and 100 shares of the preferred at $90 per share. C) 300 shares of common at $50 per share and 200 shares of the preferred at $45 per share. D) 600 shares of common at $25 per share and 200 shares of the preferred at $45 per share

A) 600 shares of common at $25 per share and 100 shares of the preferred at $90 per share. A stock split is always of common stock. In a 2:1 split, the number of shares doubles, and the price is 50% of the presplit price, which means 600 shares at $25 per share. The stock split has no effect on the preferred stock.

Which of the following best describes alpha for an investor's portfolio? A) It is a measure of performance that adjusts for risk, relative to a known benchmark. B) It is a measure of each portfolio asset's risk to arrive at the risk associated with the entire portfolio. C) It is a measure of risk that adjusts in accordance with the performance of a known benchmark. D) It is the prediction of performance aligning with the risk of a known benchmark.

A) It is a measure of performance that adjusts for risk, relative to a known benchmark. Alpha is a measure of performance that adjusts for risk, relative to a known benchmark. The alpha for any investment type, a particular asset, or portfolio is the abnormal rate of return on the investment in relation to what would normally be predicted by the benchmark.

If a client who seeks diversification through real estate is concerned about illiquidity associated with investing in real estate, which of the following investments is most suitable? A) Real estate investment trust B) Interest in a real estate limited partnership C) Privately placed investment D) Direct investment in a shopping center renting retail space to a broad variety of stores

A) Real estate investment trust Real estate investment trusts are best suited to the client because they are market-traded securities that provide an investor with a liquid market in which to invest in real estate

Level 1 Nasdaq service provides subscribers with all of the following information except A) bid and ask quotes for each market maker. B) volume information. C) the inside market. D) last-sale information

A) bid and ask quotes for each market maker. Level 1 Nasdaq service provides subscribers with information on the inside market, last sale, and volume. The bid and ask quotes of each market maker in a particular security are shown over Level 2.

All of the following have an impact on the marketability of a block of municipal bonds except A) the dated date of the bonds in the block. B) the length of time until the bonds mature. C) the price and date of call provisions. D) the quantity and quality of the bonds in the block available.

A) the dated date of the bonds in the block The dated date has no effect on marketability. A close call date or low call premium can make an issue less marketable because the chance of a call is greater. Maturity, quality, and the size of the block affect marketability

FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. FINRA's suitability rules would likely find a registered representative is not in violation of complying with those three if A) the recommendation made would be suitable for at least some customers. B) proper disclosures were made of the representative's compensation received. C) control relationships were disclosed. D) the recommendation was profitable for the investors.

A) the recommendation made would be suitable for at least some customers. This question refers to the three specific obligations under Rule 2111. Those three are reasonable-basis suitability, customer-specific suitability, and quantitative suitability. Complying with the first of the three means the registered representative has to have a reasonable basis to believe that a recommendation is suitable for at least some investors. Control relationships must always be disclosed, but that is not part of the three obligations. Compensation may have to be disclosed, but, once again, that is not part of the three obligations. Be sure to focus on answering the question being asked.

A municipality has an ad valorem tax rate of 10 mills. A piece of real property is assessed at $100,000 and has a market value of $125,000. The annual taxes paid on the property are A) $1,000. B) $1,250. C) $125. D) $100.

A) $1,000. Ad valorem tax rates are based on mills with one mill being equal to $0.001 (1/10th of a cent). The amount of taxes to be paid on the property is determined by multiplying the millage rate—in this case, one cent (10 mils at $0.001 = $0.01)—times the assessed property value ($100,000). The market value is irrelevant. For those who have difficulty determining where the decimal point goes, on any question like this, drop the last three 000s from the assessed value and multiply by the millage rate. In this question, that would be $100 times 10 and that equals the correct answer of $1,000.

A margin account with a short credit balance of $39,000 will receive a margin call if the SMV rises above A) $30,000. B) $10,000. C) $40,000. D) $20,000.

A) $30,000. With the margin call, the investor has to return the account to the margin maintenance requirement (30% of CMV here). Dividing the credit balance by 1.30 will give the call level: $39,000 divided by 1.30 equals $30,000.

Your client, who has not yet attained the age of 59½, wants to take a withdrawal from his traditional IRA. Not being disabled or meeting any other qualifying reason allowing for an early withdrawal, you explain that the amount taken will be subject to a penalty of A) 10%. B) 15%. C) 5%. D) 25%.

A) 10%. Except in the case of death, disability, or certain other qualifying reasons, withdrawals made before the account owner reaches age 59½ are subject to one-time penalties of 10% of the gross amounts withdrawn, in addition to ordinary income taxes.

Advertising relating to municipal securities must be approved by which of the following? A) A general securities principal or municipal securities principal B) A designated supervisory analyst C) The Securities and Exchange Commission (SEC) D) The Municipal Securities Rulemaking Board (MSRB) Explanation According to MSRB rules, advertising (communications with the public) must be approved by either a municipal securities principal or a general securities principal.

A) A general securities principal or municipal securities principal According to MSRB rules, advertising (communications with the public) must be approved by either a municipal securities principal or a general securities principal.

Which of the following positions has an unlimited dollar risk? A) Short 1 ABC Jan 35 call; long 1 ABC Jan 40 call B) Short 1 ABC Jan 50 put; short 100 shares of ABC C) Short 100 shares of ABC; long 1 ABC call D) Short 1 ABC Jan 50 put

A) Short 1 ABC Jan 35 call; long 1 ABC Jan 40 call An investor faces unlimited dollar risk when short stock, short a naked call, or when a short stock position is combined with a short put. In this position, the unlimited risk of the stock is only protected on the upside by the premium received.

Which of the following types of mutual funds has capital appreciation as its investment objective? A) Specialized B) Balanced C) Income D) Municipal bond

A) Specialized An objective of high-capital appreciation is most likely realized by a stock fund. A specialized fund is one that invests in stocks of one particular industry or region, and its main objective is capital or price appreciation.

A tombstone for a new bond issue announces that five-year warrants to purchase shares of the company's common stock at $75 are attached to the bonds. The current market value of the company's stock is $45. Why did the issuer attach the bonds to the warrants? A) To improve the marketability of the bond issue B) To make the bonds convertible into the issuer's common stock C) To decrease the dilution of the current shareholders D) To increase the dilution of the current shareholders

A) To improve the marketability of the bond issue Warrants are often issued as a bonus (or sweetener) to entice investors to purchase new bond issues. Dilution may occur at the time the warrants are exercised (if ever), but this would not be a reason for their issuance. A warrant has nothing to do with the bond's convertibility into the underlying common stock.

All of the following statements regarding municipal bond official statements are true except A) an official statement must be delivered only upon request of a retail customer. B) a retail customer must receive an official statement no later than the settlement date. C) all retail purchasers of a new municipal bond issue must receive a final official statement. D) a municipal securities broker-dealer may satisfy the delivery requirements by providing a notice advising the customer how to obtain the official statement from Electronic Municipal Market Access (EMMA).

A) an official statement must be delivered only upon request of a retail customer. A final official statement must be delivered to retail buyers of a new issue on or before the settlement date. With today's technology, most investors receive their official statement through EMMA.

In determining the suitability of an investor to invest in direct participation programs, the registered representative should evaluate each of the following except A) the investor's ability to borrow the required amount that will make up the initial investment. B) the investor's ability to commit the funds for a lengthy period. C) the investor's financial ability to lose the entire investment. D) the current and future tax needs of the investor.

A) the investor's ability to borrow the required amount that will make up the initial investment. If the investor needs to borrow the funds for the initial investment, investing in DPPs is not suitable. There is no evaluation necessary. Each of the other points is an important determinant as to whether or not an investor could be a suitable candidate for DPP investing.

One of your customers approaches you with an interest in investing in hedge funds. When checking the customer's profile, you notice that the annual income is $68,000 and the net worth is just under $100,000. How should you respond to the customer? A) Hedge funds would be an excellent way to increase your net worth. Let me send you some offering documents for ones that I like. B) In most cases, hedge funds are limited to accredited investors. Unless something has changed and you have not notified us, you do not qualify. C) Because hedge funds do not register with the SEC, they would not be a suitable addition to your portfolio. D) In most cases, hedge funds are limited to accredited investors. You do not appear to meet that standard, but, if you are really interested, I'll see if I can squeeze you in.

B) In most cases, hedge funds are limited to accredited investors. Unless something has changed and you have not notified us, you do not qualify. Hedge funds are suitable only for those who are sophisticated investors and have the financial wherewithal to deal with high risk. In almost all cases, it is necessary to be an accredited investor and this customer is far from that. Offering to "squeeze" a client into an unsuitable investment is against FINRA's code of conduct rules. It is true that hedge funds do not register with the SEC, but that is not the reason they are unsuitable for this customer.

If an investor buys 300 shares of FLB, and one month, later buys 1 FLB Jul 50 put, how does this affect the holding period on his stock? A) It erases the holding period on 300 shares. B) It erases the holding period on 100 shares. C) It has no impact on the holding period for any of the shares owned by the investor. D) It ends the holding period on the put.

B) It erases the holding period on 100 shares. Because the stock has not been held more than 12 months, the put purchase erases the holding period for any shares the put subsequently allows the holder to sell. Because the holder owns one put, this erases the holding period on 100 shares owned. The other 200 shares are unaffected.

When determining whether a tax swap of municipal bonds will result in a wash sale, which of the following is not considered? A) Issuer B) Principal amount C) Coupon D) Maturity

B) Principal amount In judging whether bonds purchased are substantially identical to bonds sold for a loss, the tax code considers maturity, issuer, and coupon rate. If at least two of the three are different, a wash sale will generally not result.

Regulation T applies to A) both cash and margin accounts for all unlisted securities. B) both cash and margin accounts for nonexempt securities. C) margin accounts only for nonexempt securities. D) margin accounts only for listed securities.

B) both cash and margin accounts for nonexempt securities. Regulation T controls the credit that broker-dealers extend in all types of accounts and only applies to nonexempt securities.

The primary purpose for creating ERISA was to A) promote a retirement fund for government employees. B) protect employees from the mishandling of retirement funds by corporations and unions. C) provide all employees, both government and nongovernment, with an additional source of retirement income in the event that the Social Security system defaults. D) establish a means for self-employed persons to provide for their own retirement.

B) protect employees from the mishandling of retirement funds by corporations and unions. ERISA was created to protect the retirement funds of union members and employees of large corporations. ERISA guidelines state that all qualified retirement plans must be in writing, segregate funds from corporate or union assets, make prudent investments, report to participants annually, and not be discriminatory. All of these activities are audited under ERISA.

Which of the following best describes the advantages of an oil and gas income program, as compared to other types of oil and gas programs? A) Greatest risk of capital B) Lowest risk of capital C) No depletion allowances D) Highest tax write-off

B) Lowest risk of capital Oil and gas income programs own producing wells and pass through their depletion allowances. There is little risk compared to other programs such as exploration.

Which of the following is federally tax exempt for a corporation? A) Preferred stock dividends B) Municipal bond interest C) Foreign corporate stock dividends D) Capital gains

B) Municipal bond interest Municipal bonds are tax exempt for corporations as well as for individuals. Preferred stock dividends are taxable but at a reduced rate for corporations due to the 50% dividend exclusion. That break does not apply to the dividends on foreign securities. Regardless of the security, capital gains are taxable.

A recommendation to purchase a security traded in which of the following venues would most likely result in the greatest scrutiny by your manager? A) The New York Stock Exchange B) The grey market C) The OTC Bulletin Board D) The Nasdaq Stock Market

B) The grey market Securities trading on the "grey market" are not quoted on any U.S. quotation system. Broker-dealers are not willing or able to publicly quote these securities because of a lack of investor interest, company information availability, or regulatory compliance. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

Under what circumstances would the fiduciary of a qualified corporate retirement plan be permitted to write covered calls on the securities in the portfolio? A) If specifically approved by the covered employees B) Under no circumstances C) If this strategy is consistent with the objectives of the plan D) If specifically approved by the SEC

C) If this strategy is consistent with the objectives of the plan As covered calls are not considered to be a speculative option strategy, they would be permitted as long as the strategy is deemed prudent and is consistent with the objectives of the plan. No outside approval is required.

For purposes of the SEC Rule 15g-9 dealing with penny stocks, the term established customer does not include a person who has A) purchased the securities of three different penny stocks on three different days involving three different issuers. B) effected a securities transaction in an account more than one year before the proposed penny stock transaction. C) both a cash and a margin account with the firm. D) deposited funds or securities in an account more than one year before the proposed penny stock transaction.

C) both a cash and a margin account with the firm. Rule 15(g)9 deals with sales practices relating to penny stocks. If a member is soliciting new customers to buy penny stocks, the member must prepare a suitability statement showing why the proposed penny stock trade is suitable for that customer. A suitability statement is not required if the member is soliciting an established customer. The type of account or the number of accounts is not part of the definition. An established customer is one who has effected a securities transaction, made a deposit of funds or securities in an account at least 1 year before the proposed penny trade, or made 3 purchases of penny stocks on 3 separate days involving 3 different issuers.

An investor would most likely purchase money market instruments for their A) inflation protection. B) appreciation potential. C) liquidity. D) yields.

C) liquidity. Money market instruments are frequently referred to as cash equivalents. That is largely due to their high liquidity. Yields on these instruments are very low, and as fixed-income instruments, they offer no appreciation potential or inflation protection.

Popular Investment Securities, a FINRA member firm, produces short videos describing the general characteristics of different types of securities. Periodically, an interstitial appears during the video. Under FINRA's rules on communications with the public, A) interstitials may not be used in public communication without the consent of the viewer. B) video presentations of any kind must be filed with FINRA within 10 days after first use. C) the appearance of the interstitial defines the video as retail communication requiring filing. D) as long as the presentation is strictly generic, filing with FINRA is not required.

C) the appearance of the interstitial defines the video as retail communication requiring filing Probably the best example of an interstitial is the pop-up ad. Sometimes it is a full-page ad causing the viewer to see the advertisement before being able to see the rest of the content. Without the interstitial, a generic video describing general characteristics of a type of security would not require filing. But, once that advertisement pops up, it is now retail communication and must be filed.

Trading in expiring options series concludes the same day as expiration at A) 12:00 pm ET. B) 5:00 pm ET. C) 4:00 pm ET. D) 11:00 pm ET.

C) 4:00 pm ET. The official close is 4:00 pm ET on the third Friday of the expiration month. Expiring options may be exercised until 5:30 pm ET on the same day

A general partner may do all of the following except A) act as an agent for the partnership in managing partnership assets. B) make general management decisions regarding the partnership. C) borrow money from the partnership. D) sell property to the limited partnership.

C) borrow money from the partnership. All these situations offer the potential for conflicts of interest. However, the general partner is not forbidden by law to engage in any of these acts, except for borrowing money; the general partner may never borrow money from the partnership.

The Municipal Securities Rulemaking Board (MSRB) writes the rules in the municipal bond market. The MSRB A) must comply with IRS regulations. B) is the enforcement body in the municipal bond market. C) does not enforce its own rules. D) is not regulated as an SRO by the SEC.

C) does not enforce its own rules. The MSRB writes the rules for the municipal bond market, but is not an enforcement authority. The rules are enforced by other regulatory bodies depending on who the bond dealer making the trade is. If it was completed by a community bank, the FDIC is the enforcement body. If it is done by a member bank of the Federal Reserve, the regulator is the Federal Reserve Board (FRB). If the trade is made through a FINRA member firm, then FINRA is the enforcer. The SEC has regulatory authority over the MSRB and all other self-regulatory organizations (SROs) not the IRS.

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) elects to make the exchange under the provisions of IRS Section 1035. B) has had another deferred variable annuity exchange within the preceding 60 months. C) has had another deferred variable annuity exchange within the preceding 36 months. D) has had another deferred annuity exchange within the preceding 36 months.

C) 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.

The predictions of the VIX Index reflect expected change over A) the next 91 days. B) the previous 30 days. C) the next 30 days. D) the next week.

C) the next 30 days. The current VIX Index value quotes the expected annualized change in the S&P 500 Index over the upcoming 30 days, as computed from options-based theory and current options-market data.

If an investor purchases 2 Dec 81.50 Swiss franc calls at 2.5 (each contract is 10,000 francs), how much does the investor pay for the position? A) $81,500 B) $2,500 C) $500 D) $250

C)$500 One call offered at 2.5 is equal to $250 multiplied by two contracts, for a total premium of $500.

If near-term liquidity were the only objective for a client, which of the following pairs of investments would represent the most/least liquid? A) 10-year corporate bonds/U.S. T-bills B) Variable annuity/money market mutual funds C) Variable annuity/direct participation programs D) Exchange-listed equities/direct participation program

D) Exchange-listed equities/direct participation program Of the pairings offered to choose from, exchange-listed equities are considered liquid, as they could be easily divested of, and direct participation programs, which all have predetermined (scheduled) end dates, would be the least liquid.

Your mutual fund has sent you a Form 1099, listing some long-term capital gains on which you must pay taxes. You are concerned that the 1099 is in error because you have owned your shares for only four months. Which of the following statements is true? A) The 1099 is incorrect because you have held your shares for less than one year, which indicates a short-term gain. B) The gain need not be reported because you have not redeemed your shares, and therefore, have not realized any gain. C) The gain need not be reported because you have instructed the company to reinvest your dividends and capital gains, thus deferring your tax liability. D) The 1099 is correct because in this case, the holding period to be considered is that of the investment company, not y

D) The 1099 is correct because in this case, the holding period to be considered is that of the investment company, not yours. The investment company designated the gains as long term because the company held the securities for more than a year before selling them. The holding period on your shares is relevant only if you redeem your shares for a gain.

One of the terms used in the discussion of SEC Rule 144 is affiliate. Which of the following would be defined as an affiliate? A) The CEO's mother-in-law, whose only source of income is her Social Security and a small pension B) The sister of the CEO living in a neighboring town C) The CEO's contract bridge partner D) The brother-in-law of the spouse of the issuer's CEO, who lives in the same home as the CEO

D) The brother-in-law of the spouse of the issuer's CEO, who lives in the same home as the CEO For purposes of Rule 144, an affiliate is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the issuer. In addition, any relative or spouse of such person, or any relative of such spouse, any one of whom has the same home as such person is considered an affiliate of the issuer. For test purposes, unless stated otherwise, spouses always live in the same home.

A registered representative has a client who wants to save for college for her child. The child will be entering college in five years. This would be an example of A) an investment objective. B) planning too late. C) tactical asset allocation. D) an investment constraint.

D) an investment constraint. Time constraints include such conditions as liquidity and time horizon, both of which are in play here. It may be true that the client has started too late, but that is not what the exam would be looking for as the correct answer. This is an investment goal, not an investment objective.

An issuer of a bond will apply to the rating services for a rating for the purpose of A) reducing interest rate risk. B) reducing liquidity risk. C) reducing the bond's duration. D) reducing credit risk.

D) reducing credit risk. What does the bond rating measure? It is a measurement of the credit risk. The higher the rating, the lower the credit risk and the reverse. With lower credit risk, the issuer will be able to borrow at a lower interest cost. Does the rating have an effect on the bond's liquidity? Possibly, but as is so often on the exam, you must select the answer that best fits the question.

In a new margin account, a customer sells short $60,000 worth of ABC stock and deposits $30,000 to meet the Regulation T requirement. If the value of ABC falls to $55,000, the special memorandum account (SMA) balance in the account would be A) $5,000. B) $10,000. C) $2,500. D) $7,500.

D) $7,500. For every $1 decrease in market value in a short account, $1.50 of SMA is created. Therefore, if the market value falls by $5,000, the SMA balance would be $7,500.

An investor seeking income combined with a conservative level of risk would purchase A) AAA-rated convertible debentures. B) unrated income bonds. C) junk bonds. D) AA-rated mortgage bonds.

D) AA-rated mortgage bonds. The conservative level of risk eliminates the income bonds and the junk bonds. Income bonds pay interest only if the issuer has the funds to do so. Junk bonds are named such because of their high risk. Even though the convertible debentures have a higher rating than the mortgage bonds, the difference is relatively insignificant at that level and either would be suitable for the conservative investor. However, because of the convertible feature, it is always true on the exam that the income return is lower than non-convertible issues. Therefore, the most suitable for this investor would be the mortgage bonds.

Which of the following statements regarding oil and gas limited partnerships are true? I. Developmental programs are more risky than exploratory programs. II. Exploratory programs are more risky than developmental programs. III. Successful developmental programs provide higher returns than exploratory programs. IV. Successful exploratory programs provide higher returns than developmental programs.

D) II and IV Exploratory oil and gas direct participation programs drill in areas where there are no proven oil reserves. While the chances of success are relatively small, successful exploratory wells provide large returns to investors. Developmental programs drill in areas adjacent to sites where proven oil reserves exist; while the probability of success is favorable, the returns will not be as great as a successful exploratory program.

Which of the following statements are true? I. Systematic risk can be diversified away. II. Systematic risk cannot be diversified away. III. Nonsystematic risk can be diversified away. IV. Nonsystematic risk cannot be diversified away.

II and III Systematic risk, which affects all investments, cannot be diversified away. Nonsystematic risk, or company risk, can.

Which of the following are exempt from the registration provisions of the Securities Act of 1933? I. Variable annuities II. Bonds issued by the State of Alaska III. Mutual funds IV. Commercial paper maturing in 90 days

II and IV Municipal bonds are always exempt from registration under federal law, as is commercial paper with a maturity of 270 days or less.

A customer sells 1 ABC Corporation put for 2 on February 22, 2019, with a strike price of 50 and an expiration date of March 16, 2019. On March 15, 2019, ABC is put to the customer. Which of the following statements about this transaction is correct? A) He has an acquisition cost of $4,800 and a date of acquisition of March 15, 2019. B) He has a $200 short-term gain on the sale of his put. His cost of acquisition is $5,000, and the date of acquisition is February 22, 2019. C) He has an acquisition cost of $4,800 and a date of acquisition of February 22, 2019. D) He has an acquisition cost of $5,000 and a date of acquisition of March 16, 2019.

A) He has an acquisition cost of $4,800 and a date of acquisition of March 15, 2019. When a put is exercised, the cost of acquisition is the cost that the writer has to pay (strike price) less the amount of premium the writer originally received. The date of acquisition is the trade date in exercising the option. Let's do the math. The sale of the put brings in a credit of $200. Almost one month later, the seller of the put receives an exercise notice. This means the seller is obligated to purchase 100 shares at the strike price of $50. That is a cost of $5,000. For tax purposes, the cost of $5,000 is reduced by the $200 premium received making the acquisition cost, $4,800. The date of acquisition (the date the holding period begins) is the date the option is exercised (March 15, 2019).

The price of DFEC common stock is $32 per share. Your customer owns one DFEC Sep 35 put purchased for a premium of 4. The option A) is 3 points in-the-money. B) is 3 points out-of-the-money. C) has no time value. D) is 1 point out-of-the-money.

A) is 3 points in-the-money. If an option has intrinsic value, it is in-the-money. Puts are in-the-money when the market price of the underlying asset is below the exercise price. The difference between the 35 strike and the 32 current market value represents 3 points of intrinsic value. Intrinsic value (the in-the-money amount) ignores the premium. However, the fact that the premium exceeds the intrinsic value by one point represents one point of time value.

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

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

A FINRA member firm wishes to encourage its registered representatives to sell more limited partnership DPPs. As an incentive, the firm offers an all-expenses-paid trip to a popular vacation resort for those reaching certain sales targets. FINRA rules provide that A) the target must be based on the total production of associated persons with respect to all direct participation programs offered by the member. B) the member can weight the credits differently for different investment companies. C) the target must be based on the total production of associated persons with respect to specific investment company securities distributed by the member. D) sales incentives are limited to gifts that do not exceed $100 in value.

A) the target must be based on the total production of associated persons with respect to all direct participation programs offered by the member. FINRA made a slight modification to its rules on noncash compensation because of the SEC's Regulation BI (best interest). Specifically, if there is to be any kind of sales contest or other method of incentivizing registered representatives, sales of the particular product type must give equal weighting to all of those investments sold by the firm. This applies largely, but not exclusively, to sales of investment companies, variable products of life insurance companies, and direct participation programs. Previously, firms could give higher weighting to sales of proprietary products, but that ended on June 30, 2020. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

Excess margin securities are defined as securities in excess of A) 140% of the customer's debit balance. B) the minimum maintenance margin requirements. C) the customer's debit balance. D) 70% of the customer's debit balance.

A) 140% of the customer's debit balance. Excess margin securities are securities in excess of 140% of the customer's debit balance. Margin securities (140% of the debit balance) are at a bank collateralizing the customer's debit. For example, if a customer purchases $20,000 of stock, the customer will put up $10,000 and borrow $10,000. The member will take $14,000 of the stock to a bank to collateralize the $10,000 debit. The balance ($6,000) of the stock must be placed in segregation (excess margin securities).

Certain events will affect the net asset value (NAV) per share of a mutual fund. Which of the following events will not affect NAV? A) Fund shares being redeemed by the fund upon the request of shareholders B) The fund receiving cash dividends on the securities in its portfolio C) The fund paying dividends to its shareholders D) The value of the fund portfolio's securities fluctuating

A) Fund shares being redeemed by the fund upon the request of shareholders Dividends paid and received by the fund directly affect NAV. Changes in the portfolio value affect NAV because the securities are marked to market daily. Although share redemption will reduce total NAV, the number of shares outstanding decreases in proportion, so the NAV per share stays the same.

The ratio of taxes collected to taxes levied might be used in the analysis of which of the following bonds? A) General obligation B) Industrial development revenue C) Pollution control D) Water control

A) General obligation General obligation bonds are mainly supported by taxes. Collection of these taxes is a factor in the issuer's ability to pay the debt service on the issue.

If DMF Corporation issues $10 million of convertible debentures at par, all of the following balance sheet items will be affected immediately except A) the net worth. B) the assets. C) the liabilities. D) the working capital.

A) the net worth Net worth (equity in the company) remains unchanged. Assets and liabilities both increase, as does the working capital.

DWQ declares a quarterly cash dividend of $0.20. After the ex-dividend date, what will be the exercise price of a listed DWQ May 25 call option? A) $25.00 B) $24.80 C) $25.25 D) $24.75

A)$25.00 Because a listed option is not adjusted for a cash dividend, the exercise price of a DWQ May 25 call option remains the same: $25.

An investor purchases $15,000 worth of stock in a margin account, depositing the Regulation T requirement. If the account is charged with interest amounting to $100, and no other activity has occurred in the account, the new debit balance is A) $7,600. B) $7,400. C) $100. D) $7,500.

A)$7,600. Because the Regulation T requirement is 50%, the investor deposits $7,500 and is loaned $7,500 (debit balance) for the $15,000 purchase. If the account is charged with $100 interest expense, the new debit balance is $7,600.

An investor opens the following options position: Long 1 ABC Aug 50 call @ 5½; short 1 ABC Aug 55 call @ 3½. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $200; maximum loss is $300; breakeven is $52. B) Maximum gain is $300; maximum loss is $200; breakeven is $52. C) Maximum gain is $200; maximum loss is $300; breakeven is $53. D) Maximum gain is $300; maximum loss is $200; breakeven is $53.

B) Maximum gain is $300; maximum loss is $200; breakeven is $52. The first step is to identify the position. This is a debit call spread. It is a debit spread because the option purchased costs more than the one sold. The debit of $200 is the most the investor can lose. This is a bullish spread (the investor bought the low strike price and sold the high strike price). If the investor is correct and the stock rises, the short call will be exercised. That means the writer will have to sell the stock at $55 per share. However, the investor will exercise the 50 call and deliver the stock purchased for $5,000 and receive proceeds of $5,500. The $500 profit is reduced by the $200 it cost to put on the spread. That means a net gain of $300. The fastest way to do a question like this is to subtract the debit from the strike price difference (5 points here) and you have your maximum gain. In this case, it is $5 ‒ $2 = $3. Breakeven follows the call-up rule; add the net premium (the debit of $2) to the lower strike price ($50) to arrive at $52.

Investors who are subject to the alternative minimum tax (AMT) will lose the tax benefits normally associated with A) gains associated with variable annuity portfolios. B) tax preference items. C) losses on options positions. D) capital losses.

B) tax preference items. Certain items receive favorable tax treatment from the IRS. One example is tax-exempt interest on private-purpose municipal revenue bonds. These types of items are known as tax preference items. For investors who are subject to the AMT, the benefits normally associated with tax preference items are lost because these items must be added back into the investor's taxable income.

A TIPS bond has a coupon of 3%. Over a two-year period, the annual inflation rate has been 4.5%. At the end of that time, the principal value of the TIPS would be A) $1,060.00. B) $1,093.08. C) $1,090.00. D) $1,061.36.

B) $1,093.08. TIPS bonds have the special feature of adjusting the principal value every six months by the inflation rate. With an annual rate of 4.5%, the adjustment is 2.25% semiannually. There are two ways to solve this. One is to take the calculator given to you at the test center and multiply $1,000 × 102.25%. Take the result and multiply that times 102.25%. Do that two more times (there are four adjustments in two years), and the ending number will be 1,093.08. A faster way is to take the simple interest of 4.5% per year. That is $45 per year or $90 for the two years. Add that to the original principal to get $1,090. That is not the correct answer, but the next highest number in the answer choices is.

If a customer owns a $10,000 8% U.S. Treasury Bond, and she is in the 28% federal tax bracket and a 2.5% state tax bracket, what amount of tax will she pay on the income received from the bond? A) $100 B) $224 C) $80 D) $20

B) $224 interest on U.S. Treasury bonds is taxable at the federal level only; $800 of interest taxed at 28% equals $224.

KLP Corporation has extensive investments in the stocks and bonds of other corporations. Its portfolio income this year amounts to $700,000 in interest income from bonds and $400,000 in dividend income from common and preferred stock. On how much of its portfolio income must it pay taxes this year? A) $1,100,000 B) $900,000 C) $120,000 D) $300,000

B) $900,000 The corporate exclusion is 50% of dividend income; therefore, KLP must pay taxes on all $700,000 of its interest income, but only 50% (or $200,000) of its dividend income, for a total of $900,000.

A customer tells a broker to buy 1,500 shares of ABC at 33.60 immediately for the full 1,500 shares. This is A) an immediate-or-cancel (IOC) order. B) a fill-or-kill (FOK) order. C) an all-or-none (AON) order. D) a good-til-canceled order.

B) a fill-or-kill (FOK) order. In an FOK order, the instruction is to fill the entire order immediately at the limit price or better. If this cannot be done, the order will be canceled (killed). An IOC order is similar, except that partial execution is acceptable. An AON order must be filled in its entirety. However, it can be filled over time; it does not require immediate execution.

A mutual fund can use the term, "no-load" as long as A) any 12b-1 charge does not exceed 1.00%. B) any 12b-1 charge does not exceed .25%. C) any 12b-1 charge does not exceed .75%. D) there is no 12b-1 charge.

B) any 12b-1 charge does not exceed .25%. Mutual fund can call themselves no-load as long as they do not have a 12b-1 charge that exceeds .25%. In addition, there cannot be any front-end load.

If a customer wants to open an account in the name of her adult son and wants the account to be approved for uncovered option writing, her request should be refused because A) uncovered options can only be written in margin accounts. B) opening an account for a third party is prohibited without the consent of that party. C) writing uncovered options is not suitable for minors. D) discretionary authorization may not be granted with respect to writing uncovered options.

B) opening an account for a third party is prohibited without the consent of that party. An adult cannot open an account and name another adult as the beneficial owner unless approval is granted by that adult. The type of option trades and the third party's investment experience are not relevant. Furthermore, the child is an adult, not a minor, and we have no suitability information.

A city and school district are coterminous. When evaluating the debt issues of the city, the school district debt would be considered A) secondary debt. B) overlapping debt. C) a double-barreled bond. D) underlying debt.

B) overlapping debt. The term overlapping debt refers to the issuer's proportionate share of the debt of other local governmental units that either overlap it (the issuer is located either wholly or partly with the geographical limits of the other units) or underlie it (the other units are located within the geographical limits of the issuer). In this case, the school district is probably within the geographical limits of the city. That's what coterminous means.

An investor engages in a wash sale when he repurchases the same security or purchases a substantially identical security of the issuer within 30-days of a sale resulting in a loss. If an issuer's common stock were sold at a loss, all of the following would be considered substantially identical except A) call options. B) preferred stock. C) convertible bonds. D) warrants.

B) preferred stock. Preferred stock is not substantially identical because it cannot be converted or exchanged into the common shares that were sold. All the other securities could be converted or exchanged into the common stock sold. That makes them considered substantially identical. Please note: Preferred stock is not convertible unless something in the question says it is.

A customer buys $10,000 worth of new issue municipal bonds at a price of 104, and the bonds have 10 years to maturity. Four years after purchasing the bonds, she sells them at 99. What is the tax loss on these bonds? A) 400 B) 340 C) 160 D) 500

B)340 To arrive at adjusted cost basis, the premium on a new issue municipal bond must be amortized (subtract). To amortize the premium annually, divide the premium amount (in this case, $400 on the total purchase of 10 bonds) by the number of years until maturity (10). Thus, the customer writes down the initial cost by $40 per year. After four years, the bonds purchased at a cost of $10,400 will be written down to $10,240 (4 years × $40 per year = $160). If the bonds are sold for $9,900, the tax loss is $340 ($10,240 − $9,900 = $340).

If interest rates are rising, which statements regarding collateralized mortgage obligations are true? I. Prepayment risk increases. II. Prepayment risk decreases. III. Extended maturity risk increases. IV. Extended maturity risk decreases.

B)II and III If rates are rising, homeowners are less likely to refinance. Therefore, prepayment risk will decrease. Similarly, if prepayments are declining, the estimated life of the underlying mortgages should increase.

How much would the special memorandum account (SMA) price increase if a customer bought $22,000 worth of marginable stock in the existing margin account and fully paid for the transaction? A) $0 B) $5,500 C) $11,000 D) $22,000

C) $11,000 Assuming the customer paid for the securities in full, he would generate $11,000 in SMA. Because the customer needs to pay only half of the securities' value ($11,000), the additional cash paid ($11,000) would be considered a nonrequired cash deposit and be credited to SMA. Another way to view the transaction is the customer has fully paid securities with a loan value of 50%, or $11,000.

Your customer is opening a new options account. Which of the following need not occur to open the account? A) The client must agree that any material change in financial status requires the broker-dealer be notified and the options agreement be amended. B) 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. C) The OCC must verify the financial information supplied by the client to ultimately approve the account. D) 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. The client must have a current Options Clearing Corporation (OCC) disclosure document. This is verified by the client's signature on the options agreement form, which must be signed and returned within 15 days of account approval. The client must agree to notify the firm of any changes in financial status as soon as possible, and the options agreement must be amended, if necessary. OCC approval for an options account is not required, nor do they verify any information given by the client.

A city has issued bonds to construct a new sewage treatment facility. If the bonds are not backed by the full taxing authority of the city, all of the following statements about the bond issue are true except A) there is no debt limitation on the issue. B) the interest on these bonds is not considered a preference item for the alternative minimum tax. C) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. D) if earnings fall short of the amount needed to make principal and interest payments, the debt service reserve can be used.

C) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. As an exclusion question, we are looking for the false statement. The public service commission would have no approval power over revenue bond interest and principal payments. Because the bond is not backed by the taxing authority of the city, it is a revenue bond rather than a general obligation bond. The funds for payment of interest and repayment of principal are generated through the fees paid by those using the city's water and sewage facilities. Being a public, rather than private, facility, these would not be alternative minimum tax bonds.

Under the USA PATRIOT Act of 2001, member firms must maintain records of reports of currency transactions involving more than $10,000 for A) 3 years. B) 6 years. C) 5 years. D) 1 year.

C) 5 years. The USA PATRIOT Act of 2001 requires that all currency transactions involving more than $10,000 be reported on a Form 112 Currency Transaction Report and that these forms be maintained for 5 years.

Securities transactions take place in the primary and secondary markets. Which of the following investment companies can trade in both? A) An open-end fund B) A unit investment trust C) A closed-end fund D) A face amount certificate company

C) A closed-end fund All of these can have primary market transactions. In the case of the closed-end investment company (CEF), it is the initial public offering and, if desired, an additional public offering. The CEF is the only one of these choices where shares trade in the secondary markets. Investors holding shares of a CEF can trade the shares freely, just like any other stock. However, owners of the other types of investment companies will find there is no market for their shares if they wish to sell. That is not a problem, though, because these investment companies stand ready to redeem shares continuously. Technically, when the UIT buys back its shares, it is considered a secondary market transaction. However, for exam purposes, because the trust is the only buyer in the marketplace and the price is not subject to negotiation, it is not a true secondary market transaction.

Which of the following statements regarding fixed municipal unit trusts are true? I. The trust is managed. II. The trust is not managed. III. The portfolio can be traded. IV. The portfolio cannot be traded.

C) II and IV Fixed unit trusts are not managed; the portfolio of securities does not change. As bonds mature or are called, the proceeds are distributed pro rata to the unit holders. These units are redeemable by the issuer or its agent.

An investor wants to maximize income using debt securities. Which of the following lists rank securities from the least suitable to the most suitable recommendation if income is the investment objective? A) Nonconvertible bond, convertible bond, income bond B) Treasury bills, convertible bond, income bond C) Income bond, convertible bond, nonconvertible bond D) Convertible bond, income bond, nonconvertible bond

C) Income bond, convertible bond, nonconvertible bond The income (or adjustment) bond is the least suitable because it is issued by companies coming out of bankruptcy with interest payable only if the money is available. Therefore, it is not suitable given the objective. A convertible bond has a lower coupon than a nonconvertible bond because of the convertibility feature. Therefore, if seeking to maximize income, the corporate bond would be the most suitable of the three choices (from least to most: income bond, convertible bond, and nonconvertible bond).

A technical analyst has been charting ABC stock and notes that the support/resistance levels are $20 and $30, respectively. If the analyst expects ABC to fall through support, which of the following orders should he enter? A) Buy 100 ABC 30.25 stop B) Sell 100 ABC 29.75 stop C) Sell 100 ABC 19.50 stop D) Buy 100 ABC 20.50 stop

C) Sell 100 ABC 19.50 stop An analyst who expects a stock to fall through support is anticipating that the stock will decline. He can take advantage of this trend by establishing a short position at the top of the decline. He will enter a sell stop order just below the support price

Each of the following is a category of communication with the public designated by FINRA except A) retail. B) correspondence. C) market letters. D) institutional.

C) 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.

An investor opens a long position in one XYZ Nov 140 put @7. Disregarding any commissions on settlement date, the investor A) receives $700. B) receives $14,000. C) must pay $700. D) must pay $14,000.

C) must pay $700. When an investor takes a long position in an option, it means the investor has purchased the option. As a buyer, the investor must pay the premium on the settlement date.

The yield to maturity of an outstanding revenue bond has just fallen from 3.8% to 3.4%. All of the following could explain the drop except A) the bond's rating has improved. B) market interest rates have fallen. C) the bond's debt coverage ratio has fallen. D) the bond has added insurance.

C) the bond's debt coverage ratio has fallen. A falling debt coverage ratio is bad news because it indicates that the facility is not generating as much revenue as planned. It would be similar to the effect on your credit rating if you took a 20% or so pay cut. When a bond's rating goes up, the added safety means less risk and that will lead to a lower yield to investors. If interest rates in the market drop, the yields of outstanding bonds will reflect that. Adding insurance to a bond always increases the safety and leads to lower yields.

On Friday, September 15, an investor goes long 1 OEX Dec 575 call at 7 when the index is at 581.96. At expiration, the investor closes out the long position at intrinsic value when the index is at 580. What amount of money will be deposited in the investor's account on the following Monday, and what will the profit or loss be to the investor? A) $500/$200 gain B) $500/$196 loss C) $500/$200 loss D) $696/$196 gain

C)$500/$200 loss Index options settle in cash on the next business day. Each point in an index option is valued at $100. On settlement, the investor will receive the difference between 580 and 575 (5 × 100), or $500. With a cost of 7 ($700), this will create a $200 loss.

Which of the following is a double-barreled bond? A) New Housing Authority (NHA) bond B) Anticipation note C) General obligation bond to construct a new grade school D) Hospital bond backed by revenues and taxes

D) Hospital bond backed by revenues and taxes A double-barreled bond is backed by a defined source of revenue other than property taxes, as well as the full faith and credit of an issuer with taxing authority. NHA bonds are not double-barreled. If rental income from the housing cannot meet servicing costs, the shortfall is covered by the federal government. To be double-barreled, the issue must be backed by more than one municipal source.

New issue municipal bond orders are allocated according to priorities the syndicate sets in advance. The MSRB requires syndicates to establish priority allocation provisions for orders. Which of the following is the most common priority? A) Group net, presale, designated, member B) Presale, designated, group net, member C) Member, designated, presale, group net D) Presale, group net, designated, member

D) Presale, group net, designated, member Remember our abbreviation: PGDM (Pro Golfers Don't Miss) and that will get you the correct answer to any of these order allocation questions.

Which of the following transactions would be acceptable investments for a pension fund? A) Writing a naked call B) Writing an S&P Index option C) Writing a put D) Writing a covered call

D) Writing a covered call Writing a covered call has less risk than writing a naked option. A covered call writer is merely using options to increase the income on his portfolio. Fiduciaries, such as those who invest for pension fund portfolios, should avoid risky transactions.

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) the bond buyers visible supply. D) a municipal securities broker's broker.

D) 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.

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) gas. C) oil. D) crops.

D) 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.

Although the Federal Reserve Board (FRB) and FINRA have rules that set margin requirements, member firms may A) choose to have no minimum maintenance requirements. B) follow requirements that are less stringent. C) increase or decrease these requirements through in-house rules. D) increase these requirements through in-house rules.

D) increase these requirements through in-house rules. Firms may set their own margin requirements at more stringent levels than the FRB and FINRA rules. However, a firm may never go below the FRB and FINRA margin requirements.

You are at a social gathering speaking with an individual who is a tenured professor of astrophysics at the state university. She mentions that she participates in the school's TSA plan. That means she A) is training employees of the Transportation Security Administration. B) has qualified for additional compensation because she has earned tenure. C) is a participant in the teacher-student-administration plan for school betterment. D) is participating in a retirement plan likely offering tax sheltered annuities.

D) is participating in a retirement plan likely offering tax sheltered annuities. TSA stands for tax-sheltered annuity and is the most common name for the 403(b) retirement plan. Although investments can be made into mutual funds, some 85% of the funding is through annuities.

All of the following statements regarding the tax treatment interest received from a collateralized mortgage obligation (CMO) investment is true except A) it is taxable at the state level. B) it is fully taxable at all levels. C) it is taxable at the federal level. D) it is nontaxable at the local level.

D) it is nontaxable at the local level. Interest received from CMOs is fully taxable at the federal, state, and local levels. It is treated exactly the same as interest on a corporate bond. The only testable debt securities where there is a tax benefit are those issued by the U.S. Treasury (exempt from state and local [city] income tax) and those issued by municipal issuers where the interest is exempt from tax at the federal level and possibly exempt on the state and local level (in-state issuer), as well.

The risk that is associated with changes to federal, state, and local laws is A) political risk. B) sovereign risk. C) reinvestment risk. D) legislative risk.

D) legislative risk. Legislative risk occurs when laws change at the federal, state, and local levels. Some companies can benefit from law changes and others can suffer. Political risk is when the political climate of a country changes dramatically. It usually refers to foreign countries but can also occur in the United States. Reinvestment risk is present when a fixed-income investment is refunded or matures in times of decreased interest rates. That means the money has to be reinvested at greater investment risk to get the same rate of return. Sovereign risk is inherent in the bonds of foreign governments and is essentially the default risk associated with the foreign bond.

A customer is receiving annuitized payments from a variable annuity. The annuitized payments are viewed for tax purposes as A) exempt from taxes. B) all return of cost basis and nontaxable. C) earnings only and taxable. D) part earnings and part cost basis.

D) part earnings and part cost basis. Annuitized payments from a variable annuity are viewed for tax purposes as part earnings and part cost basis. The earnings are taxable, but the cost basis is returned tax free.

When a customer sells $20,000 of securities from a margin account, all of the following are affected except A) the special memorandum account. B) the debit balance. C) the long market value. D) the equity.

D) the equity. Equity is only affected by changes in market prices and never by sales of securities in the account.

An initial public offering is conducted A) directly with principal shareholders. B) on the New York Stock Exchange. C) in the secondary market. D) with the issuer generally through an underwriter.

D) with the issuer generally through an underwriter. Initial public offerings are a type of primary offering, meaning the issuer (generally through an underwriter) sells the new shares to the public. While shares may trade in the secondary market (between members of the public) on the New York Stock Exchange, such transactions would be after the IPO.

A teacher has a 403(b) plan, and the school system he works for has deposited $10,000 into his plan over a 12-year period. At retirement, if the teacher withdraws the total value of $16,000, on what amount does he pay tax? A) $8,000 B) $10,000 C) $6,000 D) $16,000

D)$16,000 A 403(b) plan is a qualified retirement plan; contributions to the plan are made before taxes, and the growth of the contract is tax deferred. Any distribution from a 403(b) plan is fully taxable to the participant at the ordinary income tax rate.

When XYZ stock trades at 40, and an XYZ Oct 35 call trades at 5, which of the following is true? A) The option is out of the money. B) The option's time value equals its intrinsic value. C) The option is at the money. D) The time value is zero.

D)The time value is zero. An option's premium consists of time value and intrinsic value. In this situation, the call is in the money by 5 (intrinsic value is 5), because the market value of 40 exceeds the strike price of 35 by 5. If the total premium is 5, and the intrinsic value is 5, the time value must be zero. The option is at parity, which means the premium equals the intrinsic value. Remember P - I = T (Premium minus intrinsic value equals the time value)

A charge of churning would likely be brought against a registered representative who was found to have disregarded the FINRA rule on A) reasonable-basis suitability. B) investment goal suitability. C) customer-specific suitability. D) quantitative suitability.

D)quantitative suitability. FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. One of those obligations is quantitative suitability. Churning is generally defined as excessive trading in a customer's account. The registered representative, having control over a customer account, has to have a reasonable basis for believing that a series of recommended transactions, even if suitable when viewed in isolation, are not excessive and unsuitable for the customer when taken together.

A prospectus for a variable annuity contract I. must provide full and fair disclosure. II. is required by the Securities Act of 1933. III. must be filed with FINRA. IV. must precede every sales presentation.

I and II A variable annuity is a security and must be registered with the SEC, not FINRA. As part of the registration requirements, a prospectus must be filed and distributed to prospective investors. 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.

Which of the following affects the holding period of XYZ stock, a position that has been held for six months? I. Buying an in-the-money put II. Buy an out-of-the-money put III. Writing an in-the-money call IV. Writing an out-of-the-money call

I and II Buying a put (in or out of the money) on a stock held short term (one year or less) erases the holding period until the put is disposed of. At that time, the holding period starts over.

Which of the following have equity positions in a corporation? I. Common stockholders II. Preferred stockholders III. Convertible bondholders IV. Mortgage bondholders

I and II Common and preferred stockholders have equity, or ownership, positions. Bondholders (mortgage or otherwise) are creditors, not owners.

Under Municipal Securities Rulemaking Board (MSRB) rules regarding municipal securities, a control relationship exists when I. officers or employees of a broker-dealer hold positions of authority over the municipal issuer. II. officials of the municipal issuer hold policymaking positions at the broker-dealer. III. the municipal issuer is a public finance client of the broker-dealer. IV. an employee of the broker-dealer lives in the issuer's municipality.

I and II MSRB rules state that a control relationship exists when a broker-dealer controls, is controlled by, or is under common control with the issuer of the security.

Which of the following statements regarding Treasury bills T-bills are true? I. The government auctions T-bills at a discount. II. The difference between the cost of a T-bill and its value at maturity is treated as a capital gain. III. T-bills have longer maturities than T-notes. IV. The minimum denomination of a T-bill is $100 face amount.

I and IV T-bills are sold at a discount and can be purchased in minimum denominations of $100. The difference between the purchase price and the maturity value is taxed as interest income, not as a capital gain. Treasury bills are short-term investments maturing in 1 year or less. T-notes have maturities of 2 to 10 years. T-bonds have maturities of longer than 10 years.

Which of the following statements regarding corporate zero coupon bonds are true? I. Interest is paid semiannually. II. The discount is in lieu of periodic interest payments. III. The discount must be accreted and is taxed annually. IV. The discount must be accreted annually with taxation deferred until maturity.

II and III The investor in a corporate zero coupon bond receives the return in the form of growth of the principal amount over the bond's life. The bond is purchased at a deep discount and redeemed at par at maturity. That discount from par represents the interest that will be earned at maturity date. However, the discount is accreted annually, and the investor pays taxes yearly on the imputed interest.

While watching the financial news on TV, you hear an internationally recognized economist say that she expects a significant devaluation of the U.S. dollar. If she is correct, what would be the likely effect on foreign trade? I. The price of foreign goods would decrease, leading to an increase in imports. II. The price of foreign goods would increase, leading to a decrease in imports. III. The price of U.S.-made goods would decrease, leading to an increase in exports. IV. The price of U.S.-made goods would increase, leading to a decrease in exports.

II and III only If the dollar is devalued, it becomes less valuable in foreign countries. That means that more dollars are required to purchase the same amount of foreign goods. The increased cost of those foreign goods will reduce imports of them. On the other side, because the foreign currency now goes further in the United States, goods made here become cheaper to buy, so exports will increase.

Which of the following are part of the depreciable basis of a limited partner in a real estate direct participation program? I. Land II. Buildings III. Supplies used for cleaning and maintenance IV. Air conditioning equipment

II and IV Only fixed plant (buildings) and equipment can be depreciated. Land, as well as any up-front costs charged to the limited partners, cannot be depreciated. Those nondepreciable costs, however, are part of the limited partner's beginning basis but not part of the depreciable basis