Practice Exam #6

Freddie Mac does which of the following? 1. Issues pass-through securities 2. Purchases student loans 3. Purchases conventional residential mortgages from financial institutions 4. Issues securities backed directly by the full faith and credit of the U.S. government

- 1 & 3 *Freddie Mac is a publicly owned and traded U.S. government agency that issues pass-through securities based on a pool of conventional residential mortgages purchased from financial institutions. Ginnie Mae is the only U.S. agency that issues securities backed by the full faith and credit of the U.S. government.

Under Municipal Securities Rulemaking Board (MSRB) rules, a broker-dealer must disclose control relationships A) in all customer transactions. B) only for secondary market transactions. C) only for new issues. D) never.

A *If a municipal control relationship exists between an issuer and a municipal broker-dealer, this must be disclosed to the customer at, or prior, to confirmation of sale. This is required for all transactions where a control relationship exists

All of the following regarding Section 529 education savings plans are true except A) withdrawals at the federal level for qualified education expenses are tax free. B) tax-deductible contributions are at the federal level. C) they are not subject to income limitations. D) there are high contribution limits.

B *$15,000 contributions limits. Tax free withdrawal w/ qualified education expenses.

SEC rules require that open-end management companies distribute dividends to their investors from the firm's A) capital gains. B) net investment income. C) portfolio earnings. D) gross revenue.

B - Net Investment Income *SEC rules require that open-end management companies distribute dividends to their investors from the firm's: ---net investment income. Dividends must be paid from the net investment income.

A principal of a member firm with the responsibility of supervising registered representatives would perform all of the following duties except A) approve each securities transaction, whether for retail or institutional customers. B) review a registered representative's correspondence with the firm's customers in accordance with the firm's written procedures. C) write all sales material and advertising copy intended to be used as a means of communicating with the public. D) approve the opening of all new accounts, whether for retail or institutional customers.

C *There is no industry requirement that sales or advertising material intended to be used to communicate with the public be written by a principal of the firm. A principal must approve all new accounts and approve each transaction, and all correspondence must be reviewed by a principal. FINRA rules state that principal review of correspondence can take place before or after use in accordance with the member firm's written procedures.

Which of the following forms of business is preferred when the goal is raising a significant amount of capital? A) LLC B) General partnership C) S corporation D) C corporation

D

A customer of a member firm has just invested $100,000 into an equipment leasing DPP. Under FINRA rules, the maximum compensation allowable to the firm is A) $2,000. B) $15,000. C) $5,000. D) $10,000.

D *Industry rules allow a maximum total underwriting compensation of 10% of the gross proceeds of the offering in a limited partnership. Any subsequent trades that are executed in the secondary market are subject to FINRA's 5% policy on commissions and markups.

One of your clients has a margin account containing long and short positions. This is known as A) a combined equity account. B) an option account. C) a bull/bear account. D) a combined margin account.

D - Combined margin account

Your customer is interested in up-to-the-minute price information and transparency of municipal securities transactions. This information is available through third-party data vendors, with pricing information captured by A) the National Quotation Bureau. B) Thompson Muni Market Monitor. C) Morningstar. D) the Municipal Securities Rulemaking Board's (MSRB's) Real-Time Transaction Reporting System (RTRS).

D - the Municipal Securities Rulemaking Board's (MSRB's) Real-Time Transaction Reporting System (RTRS).

A customer, long 100 shares of QRS at 62.50, writes 1 QRS Sep 65 call at 1.50. If the call is exercised, which two statements are true? 1. The gain is $250. 2. The gain is $400. 3. For tax purposes, cost basis per share is $62.50. 4. For tax purposes, cost basis per share is $61.

- 2 & 3 *The customer has paid 62.50 for the stock and has received 1.50 for the call. If the Sep 65 call is exercised the customer will receive 65 for the sale of the stock. After exercise, total received is 66.50 (1.50 + 65). 66.50 received minus 62.50 paid equal's 4 points profit ($400). If a covered call writer is exercised, the cost basis for tax purposes is the purchase price of the stock. Sales proceeds for tax purposes are 66.50 per share (strike price plus premium).

An investor purchased an interest in a limited partnership, paying $10,000 in cash and signing a recourse note to the partnership under a letter of credit for $40,000. Which of the following statements are true? 1. The investor's tax basis will be $10,000. 2. The investor's tax basis will be $50,000. 3. The investor's maximum loss will be $10,000. 4. The investor's maximum loss will be $50,000.

2 & 4 *A recourse note means that the limited partner agrees to pay the note no matter what happens. He is legally liable for the $40,000, which makes both his tax basis and maximum loss potential $50,000.

One of your customers owns a variable annuity. When asking about how the performance of the separate account is measured, you would respond that A) the separate account performance depends on the performance of the selected subaccounts. B) the separate account performance is the same for all subaccounts. C) the primary determinant is the assumed interest rate (AIR). D) the insurance company's actuaries compute the separate account performance.

A

When viewing the municipal bond portfolio of one of your customers, you notice that the $250,000 of face value has 20% each in bonds rated AAA, AA, A, BBB, and BB. This is an example of A) quality diversification. B) duration diversification. C) maturity diversification. D) geographic diversification.

A *Diversification by "quality" refers to the credit quality of a portfolio. Therefore, you would evaluate the credit rating of the bonds in the portfolio.

If an investor buys a Jan 30 XYZ call for 4 and sells a Jan 35 call for 2, to become profitable, the spread between the prices of the two options must A) widen. B) narrow. C) fluctuate. D) remain the same.

A -Widen

When comparing a short call to a credit call spread, all of the following are true except A) maximum loss is limited in both positions. B) both positions generate premium income. C) maximum gain is limited in both positions. D) both positions are bearish.

A) maximum loss is limited in both positions. *In any spread, both maximum gain and maximum loss are limited. In a short call, gain is limited to the premium received, but loss is unlimited. Short calls and credit call spreads are bearish, and both generate premium income. The investor who writes a call spread receives premium income (a short call spread is a credit spread).

All of the following statements regarding industrial revenue bonds (IRBs) are true except A) interest is paid from rental payments received from corporations that have leased the property or equipment from the municipality. B) the credit rating of the bonds is dependent on the credit rating of the municipality. C) they can be issued by municipalities to build facilities that will be owned by the municipality but leased to a local corporation. D) they can be issued by municipalities to provide local industries with funds for expansion.

B

Once the IRS determines that a tax shelter is abusive, it may do all of the following except A) charge the taxpayer with intent to defraud. B) sentence the abuser to a prison sentence. C) disallow all deductions. D) charge interest on back taxes.

B

Which of the following statements regarding a bond trading flat is not true? A) It may be an income bond. B) It may be traded with accrued interest. C) It may have interest in arrears. D) It may be a bond in default.

B *A municipal or corporate bond trading flat is trading without accrued interest

You are reviewing the information on a new customer's options account agreement. Which of the following strategies would require the severest scrutiny for suitability purposes? A) Writing uncovered put options B) Writing uncovered call options C) Writing covered call options D) Taking long straddle positions

B) Writing uncovered call options

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

Nonmembers of a syndicate who are assisting in its sale of bonds buy the bonds at a discount called A) a takedown. B) the basis price. C) a concession. D) a net designated price.

C- Concession *Members of the syndicate buy the bonds at the offering price minus the takedown, nonmembers buy at offering price minus a concession. The basis price is the yield to maturity.

XYZ Corporation has set Friday, January 23, as the record date for its next quarterly dividend distribution. To receive the dividend, a customer, long 1 XYZ Feb 40 call, must issue exercise instructions on or before A) Friday, January 23. B) Monday, January 19. C) Tuesday, January 20. D) Wednesday, January 21.

C- Tuesday, January 20th *Dividends are paid to investors who are owners of record as of the close of business on the record date. When a call option is exercised, money and stock are exchanged on the third business day after notice is given to the OCC. Therefore, an investor who wishes to receive a dividend must exercise a call no later than the third business day prior to the record date (i.e., before the ex-date).

The Securities Exchange Act of 1934 applies to all of the following except A) registration of broker-dealers. B) secondary market trading. C) the extension of credit on purchase of securities. D) regulation of new issues.

D - Regulation of new issues

Which of the following rate commercial paper issued by corporations? 1. Moody's 2. Standard & Poor's 3. Municipal Securities Rulemaking Board 4. Securities Exchange Commission (SEC)

-1 & 2 *Moody's, Standard & Poor's and Fitch's as well are all recognized as rating companies that would rate commercial paper issued by corporations. The Securities Exchange Commission (SEC) is a federal government regulatory body.

Which of the following terms or phrases does not apply to real estate investment trusts (REITs)? A) Redeemable B) Managed C) Secondary market D) Dividends taxed at full ordinary income rates

-A *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 and are, therefore, taxed as ordinary income.

Regulation BI contains four key component obligations. Which two of them apply to registered representatives? 1. Disclosure Obligation 2. Care Obligation 3. Conflict of Interest Obligation 4. Compliance Obligation

1 & 2

Smith and Company, a FINRA member firm, is preparing to underwrite securities to be issued by KLC Corporation for a new business venture. For which of the following will Smith and Company be responsible? 1. Filing the registration statement with the SEC and state regulatory bodies 2. Providing advice on the type of security to be issued 3. Distributing the security to the public 4. Providing advice on how KLC can best use the funds raised

2 & 3 *The issuer is ultimately responsible for filing registration statements with federal and state regulatory bodies and has already determined how the money will be used. The underwriter confines his activities and advice to the type and sale of the securities.

A convertible corporate bond with an 8% coupon yielding 7.1% is available but may be called sometime this year. Which feature of this bond would probably be least attractive to your client? A) Near-term call B) Convertibility C) Current yield D) Coupon yield

A *The near-term call would mean that no matter how attractive the bond's other features, the client may not have very long to enjoy them.

The City of Podunk has an outstanding 25-year maturity issue that is callable in seven years. It has prerefunded the issue and established an escrow account containing the proper government securities with face amounts and maturities approximating the call provisions of the original issue. In quoting the original issue, which of the following must be used? A) Yield to call B) Yield to maturity C) The lower of the yield to call or the yield to maturity D) Current yield

A- Yield-to-Call *When a bond issue is prerefunded, the issuer is going to redeem the bond on the first call date. The yield must be quoted to call.

Which of the following statements is not true? A) Beta is a volatility measure of a security compared with the overall market. B) Beta is a measure of a security's deviation from its historical average returns. C) A stock with a beta of 1.2 will move 20% more than the market. D) A stock with a beta of 0.8 will move 20% less than the market.

B) Beta is a measure of a security's deviation from its historical average returns.

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/$200 loss C) $696/$196 gain D) $500/$196 loss

B: $500 , $200 loss.

Your customer lists liquidity as an important investment objective. Which of the following would be least suitable to meet the liquidity requirement? A) Preferred stock mutual fund B) A real estate investment trust (REIT) C) Hedge funds D) Money market fund

C

American depositary receipts (ADRs) are used to facilitate A) the foreign trading of U.S. government securities. B) the domestic trading of U.S. government securities. C) the domestic trading of foreign securities. D) the foreign trading of domestic securities.

C *An ADR is a negotiable security that represents an ownership interest in a non-U.S. company. Because they trade in the U.S. marketplace, ADRs allow investors convenient access to foreign securities.

An investor purchases a PQR convertible bond at 98 on June 18, 1994. The bond is convertible at $25, and on June 19, 1995, when the common stock is trading at $26 per share, the investor converts his bond into the stock. For tax purposes, these transactions will result in A) a $40 capital loss. B) a $60 capital gain. C) neither gain nor loss. D) a $40 capital gain.

C *The process of converting a convertible bond into common stock is not a taxable event. When the stock is sold, the taxable event occurs.

If a customer is long 1 GGZ Oct 50 call at 11 and short 2 GGZ Oct 60 calls at 5, the maximum loss potential is A) $1,000. B) $1,100. C) $100. D) unlimited.

D *Because the customer is short 2 calls and long 1 call, one of the short calls is uncovered. The loss potential for a naked call writer is unlimited on the upside.

Many investors diversify by adding foreign securities to their portfolios. Those who do so with ADRs are least likely to be concerned with A) market risk. B) currency risk. C) political risk. D) liquidity risk.

D- Liquidity

A registered representative's recommendations to a customer A) must be approved in advance by a principal. B) are not covered by FINRA rules. C) must be reviewed by a principal whether or not they result in a trade. D) must match the customer's risk tolerance and investment objectives.

D- must match the customer's risk tolerance and investment objectives.

An investor, age 36, has a net worth of $650,000, with an annual income of $65,000. Wanting to add to an existing portfolio, the investor is not concerned about generating more income, as that seems to be adequate already. However, the investor does note that keeping taxes to a minimum is an objective. Which of the following funds would be the most suitable, given the investor's objectives? A) Fund W: invests in utility companies; turnover ratio of 25% B) Fund Y: invests in companies that have capital appreciation potential; turnover ratio of 100% C) Fund X: invests in companies with long-term growth potential; turnover ratio of 25% D) Fund Z: invests in preferred shares; turnover ratio of 50%

C *This investor is not concerned about income. This would eliminate both the utility fund and the preferred share fund, which are associated with income due to the dividends one would expect. Of the remaining 2 funds, growth and appreciation oriented, the one with the lower turnover ratio would generate less tax liability. The portfolio turnover ratio reflects a funds holding period of securities being bought and sold by the fund manager. If a fund has a turnover ratio of 100%, the entire portfolio is likely to turnover in a year and capital gains distributions are likely to be short term and subject to the maximum tax rate, increasing the tax liability and therefore, not the best option. By contrast a 25% turnover ratio means the average holding period of the securities in the portfolio is 4 years. This would mean that any capital gains distributions are more likely to be long term and subject to a lower tax rate.

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 OTC Bulletin Board C) The Nasdaq Stock Market D) The grey market

D *A grey or gray market refers to the trade of a commodity through distribution channels that are not authorized by the original manufacturer or trade mark proprietor. Grey market products are products traded outside the authorized manufacturer's channel.

If an investor practices value investing, which of the following stock types is he least likely to purchase? A) A stock with a low (P/E) ratio B) A stock that is presently selling for two-thirds of net current assets C) A stock that has exhibited a high dividend yield in the past D) A stock with an above-average price-to-earnings (P/E) ratio

D *A growth investor looks for stocks with above-average price-to-earnings ratios. Conversely, a value investor focuses on stocks with low PE ratios, a low price-to-book value, and historically high dividend yields.

All of the following are risks of investing in publicly traded mortgage-backed securities except A) borrowers might default on their mortgage payments. B) rising interest rates might extend the date of repayment of principal. C) falling interest rates might accelerate early repayment of principal. D) the market for mortgage-backed securities is illiquid.

D *As publicly traded securities, liquidity risk is not a major concern to investors in mortgage-backed securities. When interest rates decline, there is generally an increase in mortgage refinancing and that results in investors receiving repayment of principal ahead of schedule. That is prepayment risk. Although it is nice to get the money back, there is reinvestment risk because these lower interest rates mean that reinvesting the principal into new securities will now be at a lower return than previously earned. The opposite happens when interest rates increase. Homeowners are unlikely to refinance, causing principal repayments to slow. Without the repayment, investors holding these securities are receiving below market returns. This is an example of extension risk. As is the case with any loan, there is always default risk. Recent history has shown that it is possible for a large number of foreclosures where the lender does not recoup the full principal.

Which of the following is not a source of revenue for a municipal revenue bond issue? A) Assessments B) Fees C) Tolls D) Ad valorem taxes

D *Fund generators, such as tolls, assessments, and fees, subsidize revenue bonds. Ad valorem taxes support general obligation bonds.

As a new registered representative, you overhear some of the "old hands" discussing tracking risk. More than likely, the topic of the conversation is A) railroad stocks. B) municipal bond UITs. C) stocks traded on the OTC Link Pink Market. D) index ETFs.

D *In finance, tracking error or active risk is a measure of the risk in an investment portfolio that is due to active management decisions made by the portfolio manager; it indicates how closely a portfolio follows the index to which it is benchmarked. ... Many portfolios are managed to a benchmark, typically an index.

Under FINRA's Rule 2210 on communications with the public, which of the following is excluded from the filing requirements? A) Retail communications concerning public direct participation programs B) Retail communications that previously have been filed with FINRA and that are to be used with material change C) Retail communications concerning collateralized mortgage obligations registered under the Securities Act of 1933 D) Correspondence with prospective clients that is delivered through electronic media

D *In most cases, retail communications must be filed with FINRA while correspondence, regardless of the method of delivery, is not. If the retail communication has previously been filed with FINRA and is being used without material change, it does not have to be refiled.

Rule 144A regulates A) personal trading by research analysts. B) the sale of restricted stock by control persons. C) companies traded on the Nasdaq Global Select Market. D) the sale of restricted stock to institutional investors.

D *Rule 144A regulates the trading of restricted securities to institutional investors known as qualified institutional buyers (QIBs).

SEC Rule 498 permits delivery of an abbreviated prospectus, usually referred to as a summary prospectus, in the sale of A) unit investment trusts. B) closed-end investment companies. C) investment-grade bonds. D) open-end investment companies.

D *Rule 498 permits an open-end management investment company that registers on Form N-1A (17 CFR 274.11A) (a "fund") to provide to investors a disclosure document called a "profile," which summarizes key information about the fund and gives investors the option of purchasing the fund's shares based on the information in the profile.

Which of the following documents would describe the roles of the general and limited partners in a limited partnership offering? A) The prospectus B) The subscription agreement C) The certificate of limited partnership D) The partnership agreement

D *The partnership agreement describes the roles of the general partners (GPs) and the limited partners (LPs). The certificate of limited partnership is a document filed with the limited partnership's home state for legal recognition. The LPs complete the subscription agreement (essentially the request to purchase) disclosing important personal information. The most important is the financial information, such as income and net worth. The GPs use that in determining suitability.The subscription agreement is not effective, and the LPs are not accepted into the partnership, until it is signed by the GPs.The prospectus is a document that discloses all material facts regarding the investment to investors. Note that if the program is a private placement, in lieu of a prospectus, the investor receives a private placement memorandum containing essentially the same information.

On which of the following positions does the potential loss equal the premium? A) Uncovered puts B) Covered puts C) Covered calls D) Long puts

D *The premium paid to acquire the option represents the most an investor stands to lose on a long option position. "Covered" and "uncovered" are terms that relate to short option positions.

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

D *The three categories of communications with the public designated by FINRA are retail, correspondence, and institutional. Market letters, as all sales or advertising pieces would, can fall under any of the three communications categories depending on to whom they are sent or made available to, and the number of recipients.

Margin requirements on exempt securities (U.S. government securities and municipal securities) are set by A) the Securities and Exchange Commission (SEC). B) the Department of Enforcement (DOE). C) the Federal Reserve Board (FRB). D) the designated examining authority (DEA).

D *The FRB sets the initial margin requirements for nonexempt securities. The margin requirements for exempt securities, such as U.S. governments, are set by a firm's self-regulatory organization or DEA.

Which of the following documents would include information about the issuer's financial condition? A) Notice of sale B) Trust indenture C) Bond resolution D) Official statement

D - Official statement *The official statement is used to disclose all material information about the issuer an investor would need to know to make a decision regarding issue purchase.

An investor in the 28% income tax bracket is considering purchasing either a 4% municipal bond or a 5% corporate bond. Which of the following statements regarding the two bonds' after-tax yields is true? A) The corporate bond's yield is higher than the municipal bond's yield. B) The yield difference cannot be determined. C) The two bonds' yields are equivalent. D) The municipal bond's yield is higher than the corporate bond's yield.

D- The municipal bond's yield is higher than the corporate bond's yield. *The municipal bond's yield is higher than the corporate bond's yield.To compare the two bonds, use the tax-free equivalent yield formula: (taxable yield) × (100% − tax bracket) = (tax-free equivalent yield). In this case, 5% × (100% − 28%) = 5% × .72 = 3.6%. Because the municipal bond yields 4% tax free, the investor should buy it; after taxes have been paid, the corporate bond yields only 3.6%.

Which of the following statements regarding corporate debentures are true? 1. They are certificates of indebtedness. 2. They give the bondholder ownership in the corporation. 3. They are unsecured bonds issued to finance capital expenditures or raise working capital. 4. They are the most senior security a corporation can issue.

D. 1 & 3

Which of the following transactions must occur in a margin account? 1. Short sale of stock 2. Purchase of stock to cover a short position 3. Long purchase of stock 4. Long sale of stock

1 & 2 *Short sales must always occur in a margin account because the investor is borrowing stock from the broker/dealer. Covering must take place in the same account.

An investment company that holds which of the following does not meet the definition of a diversified investment company under the Investment Company Act of 1940? A) Thirty-three percent of its assets in securities issued by a small-cap new issue B) Eighty percent of its assets in securities of 50 health care companies C) Four percent of its assets invested in the stock of a major publicly held corporation D) Eight percent of a given corporation's voting stock in its portfolio

A *An investment company that has invested 33% of its assets in any issue, small-cap or not, exceeds the limits set in the 75-5-10 test. This test requires that 75% of the assets be invested in securities issued by companies other than the investment company (regardless of the type of companies) so that no more than 5% of total assets are invested in any one company and no more than 10% of an outside corporation's voting securities are owned by the investment company.

There are a number of different types of orders that a registered representative can enter for a client. Of the following, which one would be most appropriate for a client wishing to protect a profit on a short stock position? A) A buy stop order B) A sell limit order C) A buy limit order D) A sell stop order

A *Protecting a profit on a short position means covering (buying back) the stock before its price increases above the original sale price. That means buying the stock. The investor would enter the buy stop order with a stop price above the current market, but below the original sale price. A buy limit order is placed below the market, and that is of no help if the price increases. A market order is executed at once, and selling the stock is not appropriate when the investor has already sold it.

Shareholder approval is required for all of the following corporate events except A) dividends. B) the issuance of convertible bonds. C) the acceptance of a tender offer from a nonaffiliated company. D) stock splits

A *Shareholder approval is not required for the payment of dividends, but is normally required for actions that increase (or potentially increase) the number of shares outstanding, such as stock splits and the issuance of convertible bonds. A corporation's acceptance of a tender offer requires shareholder approval.

A customer is long 100 XYZ currently trading at $40 per share. To generate income, the customer writes 2 XYZ Aug 40 calls at 4 for a maximum loss potential of A) unlimited. B) $4,000. C) $3,200. D) $3,600.

A *This is an example of ratio writing where a customer writes more calls than he has stock to cover. Because only one of the calls is covered, the other is uncovered and loss potential is unlimited.

A customer who sold a bond at a loss must wait how long before she can buy back a substantially identical bond and not have the sale classified as a wash sale? A) 30 days B) 5 days C) No waiting period D) 20 days

A - 30 days

Municipal bonds that are backed by the income from specific projects are known as A) general obligation bonds. B) revenue bonds. C) debenture bonds. D) income bonds.

B

On Monday, John bought and sold 1,000 shares each of MEDX and CETN stock. On Wednesday, he purchased an additional 500 shares of CETN and 1,600 shares of KRS, which he closed in two trades of 800 shares each, later that day. On Friday, John executed a trade to purchase 2,000 shares of BUV and sell 300 shares of the CETN he purchased on Wednesday. Under FINRA rules, John meets the definition of A) a designated expert. B) a pattern day trader. C) a frequent trader. D) a day trader.

B *A day trader buys and sells the same security on the same day. Pattern day trading is a regulatory designation for a day trader who executes four or more day trades in a five-business-day period. And, yes, the exam can be this specific.

A customer who is long 1 XYZ Sep 50 call could create a spread by combining it with which of the following positions? A) Long 1 XYZ Sep 50 put B) Short 1 XYZ Sep 60 call C) Long 1 XYZ Sep 60 call D) Short 1 XYZ Sep 50 put

B *A spread involves two simultaneous positions in related options of the same type-one long and the other short of the same underlying security.

An investor purchases a GFC Jan 40 call @ 4 and sells a GFC April 30 call @ 9. This is an example of A) a variable hedge. B) a diagonal spread. C) a vertical spread. D) a horizontal spread.

B - Diagonal Spread *A spread involves the purchase and sale of the same type of options (calls or puts). If the contracts differ in expiration, it is a horizontal spread. If the contracts differ in exercise (strike) price, it is a vertical spread. If both expiration and exercise price are different, it is a diagonal spread.

A 27-year-old client is in the lowest tax bracket and seeks an aggressive long-term growth investment. If his investment adviser representative recommends a high-rated general obligation municipal bond, the investment adviser representative (IAR) has A) made an unsuitable recommendation because a municipal revenue bond would have been more appropriate. B) committed no violation because municipal bonds are well suited for the market's volatility. C) made an unsuitable recommendation based on the client's needs and objectives. D) recommended a suitable investment because general obligations are good long-term investments.

C

Which of the following statements regarding collateralized mortgage obligations (CMOs) is true? A) CMOs may not trade at a premium. B) CMOs are considered high-yield bonds. C) CMO returns are affected by interest rate changes. D) CMO earnings are tax exempt.

C

Which of the following types of oil and gas limited partnership programs is the most risky? A) Existing property B) Income C) Exploratory D) Developmental

C

Under what circumstances will a dilution of equity occur? A) Issue of mortgage bonds to replace debentures B) Stock dividend C) The conversion of convertible bonds into common stocks D) Stock split

C *Dilution of equity occurs when stockholders experience a reduction in their percentage ownership of the company. If bonds are converted, more common shares are issued and the shareholder's equity is diluted. A stock dividend or stock split does not change a stockholder's percentage of ownership. Refunding debts has no effect on stockholders.

All of the following will affect special memorandum account (SMA) in a short account except A) the purchase of securities. B) the sale of securities. C) appreciation of CMV. D) a decline in CMV.

C *In a short account, the customer benefits if the CMV falls. If the CMV is falling, the equity is increasing, thus increasing SMA. If the CMV is rising, the equity is falling, with no effect on SMA.

An individual with $100,000 to invest will require these funds in six months for the purchase of a house. In which of the following circumstances did the registered representative act correctly? A) The registered representative convinced the client to invest in a REIT as a hedge against the rise of real estate values until the client purchases the house. B) The registered representative convinced the client to purchase a $100,000 lump sum fixed annuity on the basis of its backing by an insurance company. C) The registered representative convinced the client to invest in a Treasury bill on the basis of its safety. D) The registered representative convinced the client to invest in an IPO on the basis of its high-growth prospects.

C *Investment in a Treasury bill is the only suitable investment among the choices listed. Purchase of annuities and a real estate partnership are long-term investments not suitable to an individual who wants to invest funds on a short-term basis. Although an IPO may be liquid, it is not suitable for short-term funds earmarked for the purchase of a house because there is too much risk to the principal.

Last-sale information is always available for all of the following securities except A) Nasdaq. B) NYSE listed. C) over the counter (OTC), non-Nasdaq. D) CBOE listed option contracts.

C *Last-sale information is available for listed (exchange traded) securities and for all Nasdaq securities. While there are a number of sources for last sale information in general, it may not always be available for a security that is OTC non-Nasdaq.

An investor purchases $1,000 of the XYZ Growth Fund on a Tuesday. The order is time-stamped at 2:45 pm ET. When will the investor's price per share be determined? A) The next business day based on the market close B) The market close on the second business day after the order is entered C) That day based on the market close D) The previous business day's market close

C *Mutual funds use forward pricing when investors buy or sell. That means the investor will buy or sell at the price based on the next computed net asset value (NAV). The NAV must be calculated at least once each business day at market close (4:00 pm ET). This order was entered before the close. Therefore, the next time the price is calculated is that day's market close.

A customer buys a new issue municipal bond at a discount. If held to maturity, the amount of the discount is A) taxed as a short-term capital gain. B) taxed as a long-term capital gain. C) accreted and is not taxed. D) accreted and taxed as ordinary income.

C *Original issue discounts are accreted, which allows for a step-up in cost basis. Accretion on original issue discount municipal bonds is not taxed

When acting as an agent for a customer, Municipal Securities Rulemaking Board (MSRB) rules require the broker to make a reasonable effort to obtain which of the following? 1. A fair price in relation to prevailing market conditions 2. The best price 3. A reasonable price in relation to prevailing market conditions 4. Quotes from at least three municipal dealers or one broker's broker

1 & 3

A municipal issuer's net total debt is made up of which of the following? 1. Direct debt 2. Defeased debt 3. Overlapping debt 4. Paid-up debt

1 & 3 *Direct debt is debt issued by the municipality, and overlapping debt is the municipality's share of debt issued by authorities that draw revenues from the same sources as the municipality. Together, direct debt and overlapping debt constitute the municipality's total debt.

Characteristics common to penny stocks would include which of the following? 1. Market price less than $5 per share 2. Market price greater than or equal to $5 per share 3. Nasdaq over-the-counter (OTC) stock 4. Non-Nasdaq OTC stock

1 & 4 *A penny stock is a non-Nasdaq (Bulletin Board or "OTC Pink") stock trading under $5 per share. If a stock is listed on an exchange or is on Nasdaq, it is not a penny stock regardless of price.

A married couple with a two-year-old child wants a suitable investment to help meet the financial obligations for the child's college education. Which of the following choices are the most suitable alternatives? 1. A collateralized mortgage obligation (CMO) tranche scheduled to mature in five years 2. A STRIP scheduled to mature in 15 years 3. Treasury receipts 4. A money market fund

2 & 3 *STRIPs and treasury receipts are forms of zero-coupon bonds. STRIPs are backed in full by the US government and treasury receipts by the financial institutions that issue them. Purchased at a discount and maturing at face value in the future, they are suitable investments for those wishing to save for anticipated expenses such as college tuition sometime in the future. A CMO maturing in five years doesn't align with the time horizon for this child's college education and carry other unsuitable risks. A money market fund would hardly meet the growth requirement needed to meet college tuition needs.

A 45-year-old investor takes a lump-sum distribution from a nonqualified variable annuity. How is the distribution taxed? 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.

2 & 4 *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 59-½ and must pay an additional 10% penalty on the taxable amount.

An investor and his father own 8% and 5%, respectively, of a corporation's outstanding shares, and the father wants to sell his holding. According to Rule 144, which of the following statements are true? 1. He must file Form 144 to sell the shares. 2. He does not have to file Form 144 to sell the shares. 3. He is considered an affiliated person. 4. He is not considered an affiliated person.

2 & 4 *Under Rule 144, an affiliate is a person in a control relationship with an issuer. Because neither of the investors own at least 10% of the stock, they are not control persons under Rule 144 and do not have to comply with the rule. There is a requirement to combine holdings by certain family members, such as a spouse or other immediate family residing in the same home. If the question indicated that the father and son share the same residence, then the filing requirements of the rule would apply because the 13% total would make them control persons.

A corporation coming out of a bankruptcy proceeding would probably find it most attractive to issue A) an income bond. B) a subordinated debenture. C) a promissory note. D) a collateral trust certificate.

A

A customer calls the brokerage firm and turns in an order to buy 400 shares of Oscillate Pharmaceuticals, Inc. The instructions are for the firm to use its best judgement as to the right time to place the order. Which of the following are true about this order? A) It is good only for the day entered. B) It may be executed at any price or any time the broker-dealer feels is best. C) It requires written discretionary authorization. D) It cannot be accepted without a price being specified.

A

A registered representative recently had a child and is moving into a larger home. The representative must disclose this change in residential address on her Form U4 within A) 30 days. B) 90 days. C) 60 days. D) 45 days.

A

For a client to get immediate execution on an order, it should be placed as which of the following? A) Market B) Stop C) Good-til-canceled D) All-or-none

A

From time to time, an investor's situation arises where they may need to liquidate a portion of the portfolio. It could be a medical need, an emergency repair, or a joyous event such as a wedding. Getting the necessary cash would be most difficult from which of the following holdings? A) A DPP B) A mutual fund C) A listed option D) A unit investment trust

A

In recent years, the regulators have increased their concern over the financial exploitation of senior adults. FINRA's Rule 2165 became effective on February 5, 2018, and defines financial exploitation as A) the wrongful or unauthorized taking, withholding, appropriation, or use of a specified adult's funds or securities. B) making recommendations to a specified adult that are not suitable based on the client's objectives. C) charging markups or commissions on transaction in a specified adult's account that are excessive. D) excessive trading in the account of a specified adult.

A

Jack Mercure, age 72, has been a client of yours for many years. You have noticed he's a bit slower than before, but nothing troublesome. This morning, you get a call from Jack, and he wants you to wire a relatively substantial sum from his account to someone with a foreign address. Fearing this might be a case of senior exploitation, you discuss this with your manager. If the feeling is mutual, FINRA rules would permit your firm to A) put a temporary hold on releasing the funds for not longer than 15 business days. B) freeze the client's account for not longer than 15 business days. C) contact Jack's physician to inquire about any cognitive decline. D) report this situation to the Office of Foreign Assets Control (OFAC).

A

Obtaining all of the following complies with the regulations regarding customer identification programs except A) post office box, instead of a physical address, if it is the primary mailing address. B) date of birth. C) taxpayer identification number. D) name.

A

One of your customers is long 400 shares of MMLJ common stock. The price of the stock has risen sharply since the customer purchased it. The customer is concerned about a price pullback and asks you to recommend a hedging strategy. You recommend that the client A) buy 4 MMLJ puts. B) buy 1 MMLJ put. C) buy 1 MMLJ call. D) buy 4 MMLJ calls.

A

When an insured person becomes disabled or unable to work, that person may not be required to continue paying premiums on the contract if the contract included A) a waiver of premium option. B) a disability rider. C) a freeriding provision. D) a low-income provision.

A

An investor has researched XYZ Corporation and is convinced the company's stock will soon decline in value. If the investor wishes to act on that conviction, which investment strategy will allow the investor to take advantage of the anticipated decline in share value with the smallest cash investment? A) Purchase a put option B) Sell the company's stock short C) Purchase a call spread D) Purchase a call option

A *Buying a put is a basic option strategy utilized when one is bearish on a stock. If the stock declines as anticipated, the investor could exercise the put which allows the stock to be sold at the strike price and then repurchase it at its lower current market price for a profit. The premium paid to buy the put costs less than the margin required if one were to sell the stock short. Purchasing a call or a call spread are bullish options strategies

When an investor sells stock short on the ex-dividend date, the dividend belongs to A) the lender of the stock sold. B) the short seller. C) the issuer of the stock. D) the buyer of the stock.

A *If an investor is short a stock on the record date, they are not entitled to the dividend. 3 In fact, the investor is instead responsible for paying the dividend owed to the lender of the shorted stock that they borrowed.

All of the following are used to back collateralized mortgage obligations except A) Sallie Mae. B) Freddie Mac. C) Ginnie Mae. D) Fannie Mae.

A *Sallie Mae is the Student Loan Marketing Association, which purchases student loans and packages them for the secondary market. The FNMA, GNMA, and FHLMC sell mortgage-backed securities.

A 58-year-old investor owns a single premium deferred variable annuity with a current value of $500,000. The original investment was $150,000 and the contract has a death benefit provision. If this investor wished to exchange this policy for one offered by a competing company, A) using a 1035 exchange would avoid any current taxation. B) the tax-free exchange privilege applies only when the exchange is within the same insurance company. C) the investor would be liable for ordinary income taxes on $350,000. D) the investor would be liable for ordinary income taxes plus the 10% penalty on $350,000.

A *Section 1035 of the Internal Revenue Code permits the exchange of an annuity to another annuity, whether issued by the same or a competing company, with the tax-deferral on earnings continuing. These exchanges can also be made from an insurance policy to an annuity, but not from an annuity to an insurance policy.

Which of the following forms of soft-dollar compensation paid by a broker-dealer to an investment adviser is not allowable under the safe harbor provisions of Section 28(e)? A) Reimbursement for meal expenses incurred while attending an investment seminar B) Research reports C) Financial planning software D) Registration fees to attend an investment seminar

A) Reimbursement for meal expenses incurred while attending an investment seminar

The term trading flat means A) there is no accrued interest. B) the bond is in default. C) the price of the bond has remained level. D) the bond is sold without markup or commission.

A) there is no accrued interest.

If a customer is short 100 XYZ shares at 54 and long 1 XYZ 55 call at 2, what is the maximum potential loss? A) $300 B) $100 C) $200 D) Unlimited

A- $300

Municipal brokers' brokers deal with all of the following except A) individuals. B) institutions. C) municipal dealers. D) bank dealers.

A- Individuals.

A U.S. Treasury bond is quoted at 103:24. The dollar amount represented by this quote is A) $103.24. B) $1,037.50. C) $1,032.40. D) $1,030.24.

B

A taxpayer's most advantageous tax benefit is A) a tax deduction. B) a tax credit. C) a depletion allowance. D) straight-line depreciation.

B

An investor has losses on the sale of municipal bonds. Which of the following, for tax purposes, is true? A) The losses can be applied only against gains on the sale of other debt instruments (bonds). B) The losses can be applied against the gains on the sale of any other security. C) The losses can be applied only against gains on the sale of other municipal bonds. D) No losses on municipal bonds can be applied against gains on sales of any securities.

B

Covered put writing is a strategy where an investor A) sells a put on a stock that he owns. B) sells a put on a stock he has sold short. C) sells a put and buys a call on the same stock. D) sells a put and sells a call on the same stock.

B

During the cooling-off period, a registered representative (to highlight key points) marks a preliminary prospectus and sends it to a client. This action is A) permitted if the customer is an accredited investor. B) prohibited. C) permitted without restriction. D) permitted if approved by a principal.

B

In April, a customer sold short 100 shares of QRS stock at $50 and simultaneously wrote 1 QRS Jan 50 put for a premium of $7. If the January put is exercised when the market value of QRS is 43 and the stock acquired is used to cover the short stock position, what is the customer's profit or loss per share? A) $14 loss B) $7 gain C) $0 D) $7 loss

B

When customers receive their account statements, they will generally not include A) interest charged on debit balances in margin accounts during the statement period. B) trade dates of all transactions during the statement period. C) total cost of purchases and net proceeds of sales made during the statement period. D) security positions at the end of the statement period.

B

One of your customers has $135,000 in her cash account. She also has a long margin account with a market value of $17,000, a debit balance of $10,800 and no SMA. The customer wants to open a custodial account for her niece and transfer money from the cash and the margin accounts into that account. How much can be transferred into the niece's account? A) $6,200 B) $135,000 C) $15,000 D) $141,200

B *Custodial accounts for minors can only be opened as cash accounts. Clearly, the $135,000 in the cash account is no problem. Do not be concerned about the $15,000 annual gift limit because the question is not dealing with gift taxes. If the margin account had SMA, it could be withdrawn and the cash put into the child's account. Without SMA and with the account being restricted (below the 50% Regulation T requirement), it is only the money in the cash account that can be transferred.

An investor is long 10 XYZ calls with a strike price of 40 in his general account. XYZ stock is currently selling at 48. In addition to the fully paid calls, the account also contains a $3,000 credit balance. Cash withdrawal from the account would not be allowed to exceed A) $11,000. B) $3,000. C) $6,000. D) $5,000.

B *It must be assumed from the information given that the account has only fully paid for call options plus an additional $3,000 cash (credit balance). The investor can withdraw the cash because the options are fully paid for. The question here is whether or not he can withdraw additional cash to borrow against the value of the options contracts. The answer is no; he cannot borrow against long option positions. Or in other words, options have no loan value.

A schoolteacher has a 403(b) tax-qualified deferred retirement plan into which she has deposited $100,000 over a 12-year period. At retirement, if the teacher withdraws the total value of the account (now $220,000), how much of the withdrawal will be subject to taxation as ordinary income? A) $0 B) $220,000 C) $100,000 D) $120,000

B *The retirement plan is qualified, which means that contributions were made with pretax dollars. The teacher must pay taxes on the total value of the account when withdrawn.

Your firm has just assigned you a new client. Wanting to do the best job you can, you review the current investment holdings of the client. Included are the following mutual fund accounts: $50,000 in Class B shares of the STU Growth Fund $25,000 in Class A shares of the STU International fund $15,000 in Class A shares of the TUV Utility Fund STU and TUV offer rights of accumulation and breakpoints at $25,000, $50,000, and $100,000. If the client wishes to invest $20,000 into the Class A shares of the TUV Technology Fund, the sales charge would be based on A) the $100,000 breakpoint. B) the $25,000 breakpoint. C) the $50,000 breakpoint. D) the next computed net asset value.

B *There are several important points in this question. Rights of accumulation provide that a new purchase is added to the value of existing accounts to determine the breakpoint reached. However, only Class A shares count because the Class B shares never paid a front-end load. Of course, only shares in the same fund family are used - we cannot combine STU shares with TUV shares. As far as the math, we have $25,000 in one STU fund and are adding another $20,000. That brings the investor's account in STU funds to $45,000, which is enough to meet the $25,000 breakpoint, but not the breakpoint at $50,000. Finally, the sales charge is computed as a percentage of the public offering price (POP), not the NAV.SO UNDER 50,000 WHICH MEANS IT QUALIFIES FOR THE NEXT AVAILABLE BREAKPOINT 25000`

Which of the following accounts are billed a single fee annually for a group of services? A) Cash account B) Wrap account C) Option account D) Margin account

B *Wrap accounts are accounts for which firms provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. Wrap accounts are generally investment advisory accounts.

FINRA requires a member firm to develop, implement, and monitor anti-money laundering programs designed to achieve compliance the Bank Secrecy Act and related regulations. Which of the following is required of a broker-dealer's anti-money laundering program? A) Filing of the firm's AML program with FINRA B) Designating to FINRA an anti-money laundering compliance officer C) Updating the program every 36 months D) Approval of the firm's AML program by the SEC

B *designate and identify to FINRA (by name, title, mailing address, e-mail address, telephone number, and facsimile number) an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program. Such individual or individuals are associated persons of the firm with respect to functions undertaken on behalf of the firm.

A municipal bond dealer purchased $100,000 of municipal revenue bonds at a 3% yield less 3/8ths. The dealer marks the bond up by ½ point and reoffers them to his customers. The compensation to the firm on each bond is A) $8.75. B) $5.00. C) $3.75. D) $10.00.

B- $5.00

An investment banker purchasing what is left unsold from a rights offering is engaging in A) preemptive rights underwriting. B) all or none underwriting. C) standby underwriting. D) firm commitment underwriting.

C *In a standby underwriting agreement, the syndicate (in return for a fee) agrees to purchase any unsubscribed shares from the rights offering. If current shareholders fail to subscribe to the stock available through the rights offering, the investment banker will purchase the residual shares on a firm-commitment basis.

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) Take random withdrawals from the contract C) A straight life payout option D) A life with a 20-year period certain payout option

C *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 period of 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 sells 100 shares of ABC at $15 and uses the proceeds to purchase 200 shares of MNO for $7.50. In order to avoid a violation of FINRA's 5% markup policy, the member firm should not charge a commission of more than A) $150. B) $15. C) $75. D) $125.

C *This is an example of a proceeds transaction. In order to stay within compliance of FINRA's 5% markup policy, the member firm should treat this as a single transaction. The most the member firm should charge would be 5% of $1,500 (the principal value of one side of the trade), or $75.

All of the following are characteristics of Section 8 bonds except A) they are also known as Public Housing Authority (PHA) and New Housing Authority (NHA) bonds. B) they are used to finance subsidized housing. C) they are backed by the U.S. government. D) they are a type of general obligation bond.

D

An investor with no other positions buys 1 DWQ May 75 call at 6.50. If the investor exercises the call when the stock is trading at 77 and immediately sells the stock in the market, what is the investor's profit or loss? A) $350 profit B) $350 loss C) $450 profit D) $450 loss

D

Which of the following investments is likely to have the least reinvestment risk to interest? A) Double-barreled bonds B) U.S Treasury bonds C) High-yield bonds D) Zero-coupon bonds

D

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

Regulations regarding how contributions are made to tax-qualified plans relate to which of the following ERISA requirements? A) Nondiscrimination B) Reporting and disclosure C) Vesting D) Funding policy

D *Funding covers how an employer contributes to, or funds, a retirement plan.

The term wildcatting refers to A) small-cap mutual fund diversification. B) limiting your investment portfolio to initial public offerings. C) buying new-construction real estate for speculative appreciation value. D) drilling for oil or gas where none has occurred previously.

D *In an oil and gas drilling program, the term "wildcatting" is used to describe the most speculative type of program, which is drilling where none has occurred before (i.e., in an unproven location).

KLP common stock has been trading at or near $25 per share all day. Your client would like to buy 500 shares of KLP at 25, but he is willing to accept fewer shares at that price. Which of the following orders fulfills his intentions? A) Limit order to buy 500 shares of KLP at 25 AON (all-or-none) B) Market order to buy 500 shares of KLP C) Limit order to buy 500 shares of KLP at 25 FOK (fill-or-kill) D) Limit order to buy 500 shares of KLP at 25 IOC (immediate-or-cancel)

D *Partial execution is permissible on an IOC (immediate-or-cancel) order.

Which of the following mutual funds should an investment adviser representative recommend to a corporate client whose objective is current income with moderate risk? A) High-yield bond fund B) Money market fund C) Aggressive growth fund D) Preferred stock fund

D *Preferred stock generates current income in the form of dividends. Aggressive growth funds strive for capital appreciation rather than current income. Money market funds have low yields, not the high yields that an income investor wants. While high-yield bonds provide current income, they entail a high, rather than a moderate, degree of risk.

An investor purchases 100 shares of a bond ETF at a price of $50 per share on September 5, 2019. On November 1, 2019, and February 1, 2020, the fund distributes a $0.50 per share dividend. On May 11, 2020, the investor sells all the shares at $57 per share. What are the 2020 tax consequences of the sale? A) Short-term capital gain of $700, interest income of $50 B) Short-term capital gain of $700, dividend income of $50 C) Short-term capital gain of $600 D) Short-term capital gain of $700

D *Taxation of an ETF is similar to that of a mutual fund. The question asks about the tax consequences of the sale, so we ignore the dividend distributions. Buying at $50 per share in September and selling at $57 per share the next May is a $700 capital gain over a period of less than one year. It is not part of the question, but the dividends would be taxed as interest because they are coming from bonds.

Which of the following regarding yield-based (interest rate) debt options is true? A) Debt securities are delivered to the contract owner when exercised. B) Calls are purchased by those who believe prices of debt securities are rising. C) Their strike prices reflect dollar amounts. D) They are European-style exercise.

D *Yield-based debt options are European style contracts meaning that they can only be exercised on the last trading day before expiry. All yield-based contracts when exercised are settled in cash. There is no delivery of debt instruments when these contracts are exercised.

An investor purchases $5,000 of the Quality Performance Balanced Fund, an open-end investment company, on a Thursday. The order is time-stamped at 10:45 am ET. The Thursday morning financial pages show the fund's NAV at $9.60 and the POP at $10.00. The Friday morning financial pages show the fund's NAV at 9.84 and the POP at $10.25 per share. Approximately how many shares did this investor acquire? A) 500.000 B) 520.833 C) 508.130 D) 487.805

D) 487.805

If your customer bought an original issue discount bond from the Mount Vernon Port Authority, how is the discount on this bond taxed? A) Amortized during the life of the bond and not taxed B) As ordinary income C) As capital gains D) Accreted during the life of the bond and not taxed

D) Accreted during the life of the bond and not taxed