Q&A Exam questions

An individual's home has a resale value of $500,000 and an assessed value of $200,000. If the tax rate is 10 mills, the property tax is: a. $2,000 b. $5,000 c. $20,000 d. $50,000

Property tax is computed by multiplying the assessed value by the millage rate. A mill equals 0.001 or $1 per $1,000 assessed value. The tax is $2,000 ($200,000 x .001 x 10 mills).

A municipal bond is currently trading at 92 and is callable in 10 years at par. What is the effective yield that must be disclosed on a customer's confirmation? a. Yield to call b. Yield to maturity c. Fixed yield d. Current yield

B. yield to maturity The MSRB regulates the yield that must be disclosed on a client's confirmation. The yield disclosed is the lower of the yield to maturity or yield to call. In other words, the yield to worst. If a bond is callable and trading at a discount, the lower of the two would be the yield to maturity.

Short-term municipal obligations payable from funds that usually are received from the federal government are: a. Bond anticipation notes b. Revenue bonds c. Grant anticipation notes d. Tax anticipation notes

C. Grant anticipation notes Grant anticipation notes are short-term municipal notes issued on the expectation of receiving grant money, usually from the federal government.

Which TWO of the following metrics may be calculated by examining the income statement of a company? I. The debt-to-equity ratio II. The operating profit margin III. The bond coverage ratio IV. The current ratio a. I and III b. I and IV c. II and III d. II and IV

C. II and III The operating profit margin is found by dividing the sales by the operating income or profit. The bond coverage ratio is found by dividing the interest expense by EBIT. All of this information can be found in the income statement. The debt-to-equity ratio and current ratio can be calculated by examining a company's balance sheet.

A registered representative is sending an email to banks and investment advisers in anticipation of a new product being offered by the firm. This is defined as a(n): a. Correspondence b. Institutional communication c. Retail communication d. Public appearance

FINRA's Communications with the Public Rule defines different types of communication. - Correspondence, which is defined as any written or electronic communication that is distributed or made available to 25 or fewer retail investors within any 30 calendar-day period. - Institutional communication, which is defined as any written or electronic communication that is distributed or made available only to institutional investors. This would not include any internal communication by the broker-dealer. - Retail communication, which is defined as any written or electronic communication that is distributed or made available to more than 25 retail investors within a 30 calendar-day period. - Public appearances are situations where employees associated with a broker-dealer or sponsor participate in a television or radio interview, seminar, or forum, or make a public appearance, or engage in speaking activities that are unscripted and are not otherwise considered retail communication. Social media sites, which permit real-time communication or interactive, electronic forums, fall under the guidelines of a public appearance (e.g., Facebook, Twitter, and LinkedIn).

Which TWO of the following statements are normally TRUE regarding the pricing of municipal bonds? I. Serial bonds are priced on a yield-to-maturity basis II. Serial bonds are priced on a dollar basis III. Term bonds are priced on a yield-to-maturity basis IV. Term bonds are priced on a dollar basis a. I and III b. I and IV c. II and III d. II and IV

I and IV b. Normally, traders quote municipal bonds issued in a serial maturity on a yield basis, where the yield quoted is the lower of yield to call or yield to maturity. Term bonds are normally quoted using the dollar pricing (percentage of par) method and are sometimes referred to as dollar bonds. For example, a trader may quote a serial bond at a basis price of 5.35, which means a yield to maturity of 5.35%. A term bond would be quoted at a price of 98, which means that the bond is quoted at 98% of par value, or $980 ($1,000 par x 98%).

Net working capital (equation)

NWC = Current Assets (cash, accounts, receivable, inventories etc.) - Current Liabilities (notes payable, accounts payable, taxes payable)

XYZ corporation has 7,000,000 shares of common stock ($1 par value) authorized, of which 5,000,000 shares have been issued. There are 500,000 shares of treasury stock. The current market price of XYZ is 20. The market capitalization of the outstanding common stock is: a. $90,000,000 b. $7,000,000 c. $5,000,000 d. $4,500,000

Outstanding shares are issued shares minus treasury stock (shares repurchased by the company). There are 4,500,000 shares outstanding with a market value of $20.00 per share. Therefore, the market capitalization is $90,000,000

When comparing an Albany, New York hospital revenue bond to a Buffalo, New York hospital revenue bond, you notice that they have similar maturities but the Buffalo bond has a higher yield. A possible reason for this is: a. Income taxes in Buffalo are higher than in Albany b. The cost of living is greater in Buffalo than in Albany c. Per-capita debt is higher in d. Buffalo than in Albany There are more hospitals located in Buffalo than in Albany

There are more hospitals located in Buffalo than in Albany Competing hospitals could affect the project's revenue and, therefore, could reduce the bond's security. Each of the other choices relates to taxes, which do not secure revenue bonds.

An investor buys a 5% municipal bond at 102 1/2. The bond has a yield to maturity of 4 1/2%. If the investor holds the bond to maturity, he will have a loss for tax purposes of: a. 0 b. $25 c. $50 d. $100

a. $0 The IRS requires that a premium paid for a municipal bond be amortized over the life of the bond. At maturity, the investor will have an adjusted cost (after amortization) of par ($1,000). Since this is the amount received at maturity, there is no loss for tax purposes.

Which of the following political contributions made by a municipal finance professional will NOT violate the provisions of the MSRB Rule G-37? a. $100 to a candidate for whom you may vote b. $100 to a candidate for whom you may not vote c. $500 to a candidate for whom you may vote d. $500 to a candidate for whom you may not vote

a. $100 to a candidate for whom you may vote for Municipal finance professionals (MFPs) are allowed to make political contributions of up to $250 per person to candidates for whom they are permitted to vote. Any contribution made to a candidate for whom they are not entitled to vote would be a violation. For example, if you are an MFP and a resident of New Jersey, you may not contribute to an election campaign for the governor of New York.

A municipality is issuing 40,000 bonds at a public offering price of $1,000. The manager of the underwriting syndicate receives $1.50 per bond. The total takedown is $6.50 per bond and the selling concession is $4.00 per bond. Assume the entire issue is sold with the selling group distributing 20,000 of the bonds sold. Calculate the amount of compensation the syndicate will receive for its risk on selling group sales. a. $2.50 per bond for a total of $50,000 b. $2.50 per bond for a total of $100,000 c. $4.00 per bond for a total of $80,000 d. $4.00 per bond for a total of $160,000

a. $2.50/bond total $50,000 The members of the syndicate receive $2.50 per bond for their risk. This is the total takedown of $6.50 minus the selling concession of $4.00. Since the selling group sold 20,000 bonds, the syndicate will receive $50,000 for its risk on those bonds ($2.50 per bond on 20,000 bonds).

Public orders on a designated market maker's book show an inside market comprised of Broker A bidding for 100 shares of ABC Corporation at 42.25. Broker B is offering to sell 300 shares of ABC at 42.63. If the designated market maker wanted to offer stock, what is the highest price at which he may offer the stock? a. 42.62 b. 42.63 c. 42.64 d. 42.88

a. 42.62 On the offer side, the DMM must be willing to sell for at least one cent lower than the offer on his book. There is an offer of 42.63 on his book. He must offer at least one cent lower, which is 42.62.

Mr. Smith sells an ABC Corporation April 30 put for $5 and an April 30 call for $3. ABC Corporation is selling in the market at $28. ABC Corporation subsequently declines to $25 per share. The call option expires and the put side of the straddle is exercised. Mr. Smith then sells the 100 shares of ABC Corporation put to him, at the current market price of $25. The overall profit or loss for Mr. Smith is a: a. $300 profit b. $300 loss c. $500 profit d. $500 loss

a. $300 profit Mr. Smith received $800 in premiums. The call option expires. The put side of the straddle is exercised. Mr. Smith must buy 100 shares of ABC Corporation that is put to him at the exercise price of $30. He then sells the shares purchased for $30 at the current market price of $25, realizing a loss of $5. However, he has received $8 in premiums. Therefore, he will have an overall $300 profit ($8 premium received for the straddle minus the $5 loss on the sale of 100 shares of ABC Corporation equals a $3 profit).

A customer's margin account has a market value of $800,000 and a debit balance of $375,000. He also has a commodities account that has equity of $150,000. If the firm went bankrupt, SIPC would provide coverage to this customer for: a. $425,000 in the margin account and nothing for the commodities account b. $150,000 in the commodities account and nothing for the margin account c. $425,000 in the margin account and $150,000 in the commodities account d. $500,000 in the margin account and nothing in the commodities account

a. $425,000 in the margin account and nothing for the commodities account SIPC will cover the customer's equity in the margin account ($425,000). SIPC does not provide coverage for commodities or futures accounts.

In a limited partnership, a general partner's minimum participation in profits and losses is: a. 1% b. 5% c. 10% d. 15%

a. 1% According to tax law, a general partner must have at least a 1% participation in profits and losses for a business to maintain limited partnership status.

Company AZX has announced a partial tender offer for Company BHQ. A shareholder of Company BHQ is long 1,000 shares of stock and long 2 BHQ puts. For the purpose of tendering shares, the stockholder may tender: a. 1,000 shares b. 800 shares c. 500 shares d. 300 shares

a. 1,000 shares An investor who holds stock in a company that is the subject of a tender offer may tender only stock that he holds long. Short tendering is not permitted. The long puts do not affect the client's net long position. If a shareholder had written call options positions against the long stock, the options positions will reduce his net long holdings in the stock.

A corporation has $125,000,000 of convertible bonds outstanding. The conversion price is $50. The corporation refunds $75,000,000 of the bonds for nonconvertible bonds. How many additional shares of common stock will be outstanding if the remaining bonds are converted? a. 1,000,000 shares b. 1,500,000 shares c. 2,000,000 shares d. 2,500,000 shares

a. 1,000,000 shares After the refunding, $50,000,000 of convertible bonds will remain outstanding. If these bonds are converted, there will be an additional 1,000,000 shares of common stock outstanding ($50,000,000 of bonds / the conversion price of $50 = 1,000,000 shares of common stock).

ABC Corporation has net income of $10,000,000 and 5,000,000 common shares outstanding. ABC Corporation pays out $1,000,000 in dividends annually. ABC Corporation's dividend payout ratio is: a. 10% b. 20% c. 40% d. 50%

a. 10% The dividend payout ratio is the percentage of earnings per share that is being paid in the form of dividends. The EPS is $2.00 ($10,000,000 divided by 5,000,000 shares). ABC pays a $0.20 dividend per share ($1,000,0000 dividends divided by 5,000,000 shares). The $0.20 dividend divided by the $2.00 EPS equals a 10% dividend payout ratio.

A corporation calls for the redemption of 1,000,000 shares of convertible preferred stock. The corporation announces that the convertible preferred will be redeemed at a price of $20 plus an accumulated dividend of 12 cents. Each share of preferred can be converted into 1/2 share of common. The preferred stock is selling at $19. There are 2,000,000 shares of common outstanding. Earnings for the common stock are $2.50 per share. The common stock is selling at 35.75. What will the market price of the preferred stock be if it is selling at parity with the common stock? a. 17.88 b. 19 c. 20 d. 71.50

a. 17.88 The preferred stock is convertible into 1/2 share of common stock. The common stock is selling for 35.75. Parity (or equality in dollar value) for the preferred stock is 1/2 of 35.75 (17.88).

A customer entered a GTC sell stop order for GM at $35. GM was selling at $38 when the order was entered. GM sells ex-dividend by the amount of the dividend which is $1.60. The customer's order will appear on the designated market maker's book after the stock goes ex-dividend as: a. 33.40 b. 35 c. 36.40 d. 38

a. 33.40 All GTC orders that are entered below the current market on the designated market maker's (DMM) book (buy limit, sell stop, and sell stop-limit orders) will be reduced by the amount of the dividend when the stock sells ex-dividend. The stock will always be reduced by an amount to cover the dividend entirely. The dividend is $1.60, so the order will be reduced 1.60, which will reduce the stop price on the order to 33.40.

The closing prices of two mutual funds on Monday, July 17th are: Bid Offer Change WORLD FUND 18.30 20.00 +.10 OCEAN FUND 5.25 5.50 +.02 The sales charge of the OCEAN Fund is: a. 4.5% b. 4.8% c. 8.5% d. 9.3%

a. 4.5% The sales charge of the OCEAN Fund is the difference between the bid price of $5.25 and the offer price of $5.50, equals $.25 ($5.50 - $5.25 = $.25). The sales charge is always expressed as a percentage of the offering price. The sales charge divided by the offering price of $5.50 equals a sales charge for OCEAN Fund of 4.5% ($.25 sales charge divided by the $5.50 offering price).

In May, a customer sells an STC July 40 listed call for a $6 premium and buys an STC July 30 listed call for $10. The customer has created a: I. Bullish spread II. Bearish spread III. Debit spread IV. Credit spread a. I and III b. I and IV c. II and III d. II and IV

a. I and III The investor bought the more expensive call. Therefore, this is a debit spread. A call debit spread is a bullish strategy.

An investor is in the 28% tax bracket. Which of the following investments affords him the BEST tax advantage? a. A 5% municipal bond b. A 5 3/4% corporate bond c. A 6% preferred stock d. A 6 3/4% convertible bond

a. 5% muni bond The 5% municipal bond offers the best tax advantage because the interest income is completely free from U.S. government taxes. The income received on the other investments is subject to U.S. taxes at the 28% tax rate. The taxable equivalent yield of the 5% municipal bond is 6.9% (5% municipal yield divided by 72%, the complement of tax bracket), which is greater than the other choices.

At what age must IRA withdrawals begin? a. 70 1/2 b. 65 1/2 c. 60 1/2 d. 59 1/2

a. 70 1/2 IRA withdrawals may begin at any age, but a penalty may be assessed if withdrawals begin prior to age 59 1/2. Withdrawals in traditional IRAs must begin by age 70 1/2. There is no required minimum distribution (RMD) for Roth IRAs. (Note: If the question does not specifically use the term Roth, students must assume it covers the traditional IRA.)

Which of the following bonds results in the highest real interest rate? a. A bond yields 8% when inflation is at 3% b. A bond yields 12% when inflation is at 8% c. A bond yields 10% when inflation is at 7% d. A bond yields 6% when inflation is at 4%

a. A bond yield 8% when inflation is at 3% The real interest rate, also called the real rate of return, refers to yields adjusted for inflation (yield minus inflation rate). Choice (a) provides the highest real interest rate (8% bond yield minus 3% inflation rate equals 5% real interest rate).

Which of the following choices is LEAST important to an investor considering a bond swap? a. Accrued interest b. Annual income c. Capital loss d. Maturity dates

a. Accrued interest A bond swap involves selling one bond and using the proceeds to buy another bond with either a different yield, interest rate, or maturity date. This is usually done to establish a capital loss for tax purposes. Of the choices given, the least important factor to consider in the swap or exchange is accrued interest since accrued interest paid will be included in the next interest payment and all accrued interest received has been earned prior to the bond being sold.

According to technical analysis, a head and shoulders top formation indicates a trend that is: a. Bearish b. Bullish c. Neutral d. Highly unpredictable

a. Bearish A head and shoulders chart formation is one of the classical patterns agreed upon by technical analysts or chartists as being a reversal of a trend in the price of a stock. If the head and shoulders pattern appears at the top of an upward trend (head and shoulders top), as in this example, it indicates the reversal of an upward trend (bearish indicator). If the head and shoulders pattern appeared at the bottom of a downward trend (head and shoulders bottom), it indicates a reversal of a downward trend in the price movement of a particular stock (bullish indicator).

A limited partner lends money to the partnership. The limited partner will: a. Become a general creditor of the partnership b. Be considered a general partner now c. Lose his limited liability d. Be violating his fiduciary responsibility

a. Become a general creditor of the partnership A limited partner is permitted to lend money to the partnership. He will be considered a general creditor since he was a lender.

Which of the following option positions is an example of a spread? a. Buy an XYZ June 60 call and sell an XYZ June 65 call b. Buy an XYZ June 60 call and buy an XYZ June 60 put c. Buy an XYZ June 60 call and buy an XYZ June 65 put d. Sell an XYZ June 60 call and sell an XYZ June 60 put

a. Buy an XYZ Jone 60 call and sell an XYZ June 65 call A spread is defined as the simultaneous sale and purchase of two options of the same class (same stock and same type of option), but it will have different strike prices and/or expirations. A long straddle is defined as the simultaneous purchase of two options that have the same expiration and strike price, but consist of one call and one put. A short straddle is defined as the simultaneous sale of two options that have the same expiration and strike price, but consist of one call and one put. Choice (b) is a long straddle and choice (d) is a short straddle. A combination is similar to a straddle, however, the strike prices and/or expirations must be different. Choice (c) is a long combination.

An article in The Wall Street Journal states that yields on Treasury bills have declined in the past month to 4.58% from 4.61%. This indicates that: a. Buyers of new bills paid more than buyers paid the previous month b. Buyers of new bills paid less than buyers paid the previous month c. Interest rates are increasing d. Buyers of new bills purchased the bills above par

a. Buyers of new bills paid more than buyers paid the previous month Treasury bills are purchased at a discount from the dollar amount on its face. The larger the discount, the higher the discounted yield to maturity. In this example, the discounted yield to maturity has gone down to 4.58% from 4.61% from the previous month. This indicates that buyers of new bills paid more for the Treasury bills (meaning the discount was less) than buyers paid the previous month.

How often is a broker-dealer required to calculate the amount of margin a customer is required to deposit? a. Daily b. Every three business days c. Every five business days d. Monthly

a. Daily FINRA requires a broker-dealer to calculate the amount of initial and maintenance margin that must be maintained in a customer's account on a daily basis.

Gross Domestic Product (GDP) has declined for two consecutive quarters in the U.S. Which of the following industries will most likely be negatively affected by this downturn in the economy? a. Cosmetics b. Transportation c. Food d. Medical

b. Transportation Two consecutive quarters of declining GDP figures would be considered recessionary by most economists. Transportation stocks (e.g., railroads, trucking, airlines) are cyclical and the performance of these companies will be affected directly by this event.

Municipal securities Dealer A quotes a price for a block of bonds to Dealer B for one hour with a five-minute recall. This means: a. Dealer A may recall Dealer B within the one-hour period and demand a decision of Dealer B in five minutes b. Dealer B may call Dealer A within the one-hour period and demand a decision of Dealer A in five minutes c. Dealer B must take the bonds if he does not call Dealer A back within five minutes after the one-hour quote period has ended d. Dealer A may cancel its quote within the one-hour period by recalling Dealer B within the first five minutes

a. Dealer A may recall Dealer B within the one-hour period and demand a decision of dealer B in five minutes When municipal bonds are offered on a firm basis to Dealer B for one hour with a five-minute recall, the offering dealer, Dealer A, may not offer the bonds to anyone but Dealer B without giving Dealer B the first opportunity to take the bonds. Since the recall period is five minutes, if Dealer A recalls Dealer B, Dealer B then has five minutes to take the bonds or else Dealer A is free to sell the bonds to someone else.

Morris Investments is working a leveraged buyout deal to purchase Simon Entertainment Group. The fundamental financing for the deal will consist mostly of: a. Debt issued using the assets of Simon Entertainment Group as collateral b. Debt issued using the assets of Morris Investments as collateral c. Equity issued by Simon Entertainment Group d. Equity issued by Morris Investments

a. Debt issued using the assets of Simon Entertainment Group as collateral A leveraged buyout (LBO) is the acquisition of a company primarily using debt to finance the purchase. The assets of the acquired company are generally used as collateral for the borrowed funds. This type of acquisition allows the acquiring company, which is referred to as a private equity (PE) firm, to make the purchase without using much of its own equity. In many circumstances, since a large amount of borrowed funds are used to make the purchase, they are usually non-investment-grade.

An announcement in the financial section of the newspaper states that the money supply (M1) has dropped for the week. This means that: a. Demand deposits and currency in circulation in the banking system have declined b. Savings deposits and currency in circulation in the banking system have declined c. Stock transactions have declined d. U.S. government bond sales have declined

a. Demand deposits and currency in circulation in the banking system have declined M1 is demand deposits, (checking accounts) checkable deposits, and currency in circulation in the economy, and constitutes what is called the money supply. If the announcement in the financial section of the newspaper states that M1 (the money supply) has dropped for the week, this means that demand deposits (checking accounts) and currency in circulation have declined.

To be considered a regulated investment company, a mutual fund must: a. Distribute a minimum amount of its net investment income to shareholders b. Pay tax on all net investment income prior to making distributions to shareholders c. Retain all net investment income to avoid paying tax d. Distribute all of its net investment income to shareholders

a. Distribute a min amount of its net investment income to shareholders. To qualify as a regulated investment company, the company must distribute a minimum of 90% of its investment income to its shareholders. Meeting this requirement allows the investment company to pass on distributions to shareholders without the company having to first pay taxes on the income distributed.

Total operating costs divided by average net assets is the formula used to find the expense ratio of a(n): a. Equity mutual fund b. REIT c. Corporation d. ADR

a. Equity mutual fund The expense ratio of any mutual fund is the percentage of a fund's assets that is used to pay its operating costs. It is determined by dividing total expenses by the average net assets in the portfolio. Thus, a fund with $500 million in average net assets and total expenses of $5 million will have an expense ratio of 1% ($5 million divided by $500 million equals .01 or 1%). Expense ratios typically range between .20% and 2.0% of a fund's average net assets and must be disclosed in the fund's prospectus. The formula is: Expense Ratio = Total Expenses / Average Net Assets

The call feature on callable bonds is most relevant when the economy is: a. Experiencing a slowdown and the FRB is trying to stimulate growth b. Experiencing a slowdown and inflation is increasing c. Growing and the FRB is trying to slow down the economy d. Growing and inflation is stable

a. Experiencing a slowdown and the FRB is trying to stimulate growth The call feature on callable bonds is most relevant when the general level of interest rates is declining. Rates will tend to decline when the FRB is trying to stimulate the economy by increasing the money supply. The goal is to bring down interest rates to allow the economy to grow. Rising inflation usually causes the FRB to decrease the money supply in order to drive up interest rates. If the economy is growing and inflation is stable, this is a beneficial situation and the FRB may simply leave rates unchanged.

Mr. Smith is associated with two other partners in an insurance partnership. He opens a cash account for the partnership. If Mr. Smith dies, what will the firm do as far as the partnership account is concerned? a. Freeze the assets of the account b. Allow the account to continue trading as is c. Open new separate accounts for the remaining partners d. Await instructions from the executor of Mr. Smith's estate

a. Freeze the assets of the account If Mr. Smith died, the firm would freeze the assets of the account. The firm would then await the proper legal documents needed to release the assets.

Which TWO of the following orders will be reduced when XYZ Corporation sells ex-dividend? I. A GTC order to sell 100 XYZ at $50 stop II. A GTC order to sell 100 XYZ at $50 stop-limit III. A GTC order to buy 100 XYZ at $50 stop IV. A GTC order to buy 100 XYZ at $50 stop-limit a. I and II b. II and III c. II and IV d. III and IV

a. I and II Open or good-until-cancelled (GTC) orders that are entered below the market are automatically reduced when a stock sells ex-dividend unless they are marked Do Not Reduce (DNR). Orders that are entered below the current market at the time they are entered are buy limit orders, sell stop orders, and sell stop-limit orders. Open orders that are entered above the market are sell limit orders, buy stop, and buy stop-limit orders. The GTC sell stop and sell stop-limit orders are entered below the market and are reduced on the ex-dividend date.

Which TWO of the following financial products are defined as derivatives? I Collateralized mortgage obligations II. Commercial paper III. Call options IV. Corporate high-yield bonds a. I and III b. I and IV c. II and III d. II and IV

a. I and III A derivative is a financial product that derives its value from movements in another financial product. If the price of the underlying security changes in value, the price of the derivative will fluctuate. For example, a CMO is a security backed by other mortgage-backed securities. If changes occur to the prices of these securities due to fluctuating interest rates and other factors, the price of the CMO will change. The price of an option contract is based on changes in the underlying security. A call option provides the holder the right to buy a security at a specified price. If the underlying security increases in value, the value of the call option will rise. Other types of derivatives include warrants and convertible bonds.

A client has a margin account with a long market value of $950,000 and a debit balance of $550,000. If the broker-dealer declares bankruptcy, which TWO of the following statements are TRUE? I. The client is permitted to pay $550,000 and receive $950,000 of securities II. The client is permitted to pay $500,000 and receive $950,000 of securities III. The client is covered for $400,000 of securities IV. The client is covered for $500,000 of securities a. I and III b. I and IV c. II and III d. II and IV

a. I and III According to SIPC, if a client has a margin account, the net equity is covered (the long market value minus the debit balance). In this example, the client is covered for $400,000 of securities. A client is also permitted (but not required) to pay off the debit balance and receive the full value of the securities. If the client paid $500,000, she would only receive $900,000 of securities.

Mr. Jones is a small business owner who has purchased Treasury bills and other short-term securities during times when he has excess funds available in the business. He likes the aspects of liquidity and safety. A friend has told him he can get higher rates from auction rate securities. He wants to know why you have not recommended this investment to him. Which TWO of the following explanations would you cite as your reasons? I. Auction rate securities are long-term investments II. Interest or dividend rates are reset at established intervals based on a Dutch auction III. If the auction fails, the client may not have immediate access to his funds IV. The interest or dividend rate is set as the lowest rate to match supply and demand at the auction a. I and III b. I and IV c. II and III d. II and IV

a. I and III Although auction rate securities are usually sold as an alternative to other short-term securities, they are long-term securities. An RR must disclose to a client that, if the auction fails, the client may not have immediate access to his funds. The RR also has a duty to disclose to clients any material fact relating to the specific features of the auction rate securities and the customer's need for a liquid investment when recommending this type of product. The fact that the interest or dividend rate is reset at specified intervals is a material fact, but is not a reason to avoid recommending the investment. The same reasoning applies to the fact that the rate is set at the lowest rate that matches supply and demand. These investments may not be suitable for investors who have a need for liquidity.

In easy money periods, bonds of similar quality generally will have: I. Short-term yields lower than long-term yields II. Long-term yields lower than short-term yields III. Both short-term and long-term yields below normal IV. Both short-term and long-term yields higher than normal a. I and III b. I and IV c. II and III d. II and IV

a. I and III In periods of easy money, there is availability of money. Therefore, interest rates will decline or be lower. In periods of easy money, bonds of similar quality generally will have short-term yields lower than long-term yields. Both short-term and long-term yields will be below normal. This situation creates a positively sloped yield curve where yields rise from short to long term.

Which TWO of the following statements are TRUE regarding REITs? I. They may invest in both commercial and residential real estate II. They may retain a majority of their income III. Dividends paid are taxed as ordinary income IV. They may be sold only to retail investors a. I and III b. I and IV c. II and III d. II and IV

a. I and III REITs invest in many different types of residential and commercial income-producing real estate such as apartment buildings, hotels, shopping centers, office complexes, storage facilities, hospitals, and nursing homes. Income is received from the rental income paid by the tenant leasing the real estate owned by the REIT. REITs must pay a minimum of 90% of their taxable income and the dividends received by investors are taxed at the same rate as ordinary income. The dividends paid to shareholders of REITs do not qualify for the lower 20% tax rate given other types of common and preferred stock. They can be suitable for both retail and institutional investors.

The term fast market is characterized by which TWO of the following descriptions? I. An imbalance of orders II. A very low number of trades III. Highly volatile prices IV. The quotes of market makers being updated very quickly a. I and III b. I and IV c. II and III d. II and IV

a. I and III The term fast market is characterized by very heavy trading, fast moving prices, and high volatility. There also may be an imbalance in the number or shares clients are willing to buy or sell. For example, there are 500,000 shares to buy and only 100,000 shares to sell. Quotes may take a long time to update since prices and trades are moving so quickly. A client's order may take a longer time to execute, and if a market order is entered by a client, the price received may be significantly higher or lower then the quoted price.,,mm

When raising capital, which TWO of the following securities are required to be registered with the SEC under the Securities Act of 1933? I. Common stock in a software company that will be listed on Nasdaq II. Debentures issued by a finance company sold only to qualified institutional buyers III. An American Depositary Receipt issued by a Canadian company IV. A revenue bond issued to finance a stadium a. I and III b. I and IV c. II and III d. II and IV

a. I and III There is no specific exemption under the registration provisions of the Securities Act of 1933 for ADRs or shares of a software company that will be listed on Nasdaq. Both securities, if sold to the public in the U.S., require SEC registration. A security sold only to qualified institutional buyers (QIBs) is exempt and may be resold under a 144A exemption. Also exempt are municipal securities, which include both revenue bonds and general obligation bonds.

Which of the following statements are TRUE relating to the auction of T-bills? I. Three- and six-month T-bills are auctioned weekly II. Three- and six-month T-bills are auctioned on a discount-yield basis but one-month T-bills are auctioned on a coupon equivalent yield basis III. Noncompetitive tenders are awarded at the highest yield of the accepted competitive tenders IV. The purchaser must hold the securities until maturity a. I and III b. I and IV c. II and III d. II and IV

a. I and III Three- and six-month T-bills are auctioned weekly. All T-bills are auctioned on a discount-yield basis with noncompetitive tenders awarded first and receiving the highest yield (lowest price) of the accepted competitive tenders. These securities are highly liquid and may be sold by a purchaser anytime prior to maturity.

A transaction for a stock that is not DTCC eligible, settles on a regular-way basis. This means that settlement occurs: I. In three business days II. In five business days III. At the buyer's premises IV> At the seller's premises a. I and III only b. I and IV only c. II and III only d. II and IV only

a. I and III Regular-way settlement for stock transactions is in three business days. In most cases, settlement occurs electronically through DTCC. In this case, since the seller must make physical delivery of the securities, settlement takes place at the buyer's premises.

List the order of priorities that you would follow when opening an options account for a customer. I. Have the customer sign the options agreement II. Have the registered options principal approve the account III. Send the customer an Options Clearing Corporation risk disclosure document IV. Enter the order a. III, II, IV, I b. II, III, IV, I c. II, III, I, IV d. III, I, II, IV

a. III, II, IV, I The customer needs to receive the Options Clearing Corporation risk disclosure document at or before the time the account is approved for options trading. The registered options principal then approves the account for options trading. Orders may then be entered. Finally, the customer has 15 days from the time the account is approved for options trading to sign the options agreement.

If the federal tax exemption for municipal bond interest were eliminated, expectations are that yields on newly issued municipal bonds would: a. Increase Decrease Remain the same Decrease temporarily but remain stable over a period

a. Increase If the tax-exempt status were eliminated, yields on newly issued municipal bonds would need to increase to compete with the higher yields of non-tax-exempt bonds.

Which of the following statements is TRUE regarding TRACE? a. It is a reporting system for corporate bonds b. It is a reporting system for U.S. government bonds c. It is a reporting system for stocks listed on Nasdaq d. It is a reporting system for municipal bonds

a. It is a reporting system for corporate bonds TRACE is a reporting system that was created to provide greater transparency in the corporate bond market. RTRS is the reporting system for municipal bonds and the TRF is the reporting system for stocks listed on Nasdaq. There is no reporting system for U.S. government bonds.

Which of the following descriptions regarding the Capital Asset Pricing Model (CAPM) is NOT TRUE? a. It predicts future values for the stock b. It was developed to explain the behavior of security prices c. It provides a mechanism to assess risk and return d. It is based on the efficient market theory and assumes investors act rationally

a. It predicts future values for the stock CAPM does not establish a price objective for the stock. All of the other descriptions listed are correct.

The credit rating agencies have downgraded an issuer of an exchange-traded note. Which of the following statements is TRUE? a. It will have a negative impact on the security b. It will have a positive impact on the security cIt will have no impact on the security d. The issuer will be obligated to repay the investor his principal immediately

a. It will have a negative impact on the security Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates and the credit rating agencies downgrade the issuer of the ETN, it would impact the value of the ETN negatively.

The credit rating agencies have downgraded an issuer of an exchange-traded note. Which of the following statements is TRUE? a. It will have a negative impact on the security b. It will have a positive impact on the security c. It will have no impact on the security d. The issuer will be obligated to repay the investor his principal immediately

a. It will have a negative impact on the security Exchange-traded notes (ETNs) are a type of unsecured debt security. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates and the credit rating agencies downgrade the issuer of the ETN, it would impact the value of the ETN negatively.

If a customer bought stock for cash (on a cash contract basis) on Friday, July 5, when will the trade settle? a. July 5 b. July 6 c. July 8 d. July 11

a. July 5 Securities bought or sold for cash or a cash trade have a same-day settlement for payment and delivery. The settlement date is July 5, which is the same day the trade was made.

To compute equity in a margin account with both short and long positions, the formula is: a. The long market value plus the credit balance minus the short market value minus the debit balance b. The long market value minus the credit balance minus the short market value minus the debit balance c. The long market value plus the debit balance minus the short market value minus the credit balance d. The long market value plus the credit balance plus the debit balance minus the short market value

a. LV + CB - SV - DB The long market value plus the credit balance minus the short market value minus the debit balance equals the equity in both a long and short margin account.

A municipal dealer gives another dealer a firm quote of par for a block of municipal bonds. The dealer that gave the quote: a. Must do the trade at par b. Must give the other dealer ten minutes to accept the quote c. Has given a nominal quote to the other dealer d. Has given a subject quote

a. Must do the trade at par The dealer that gave the firm quote must do the trade at par.

A manager with a portfolio of oil and gas stocks will most likely hedge against a downward movement by purchasing: a. Narrow-based index puts b. Narrow-based index calls c. Broad-based index puts d. Broad-based index calls

a. Narrow-based index puts Put options are commonly used to protect (hedge) a long stock position against a downward movement. As prices decline, the value of puts rises thus offsetting the decrease in the stock owned. For a portfolio consisting of companies from one industry, narrow-based index options are the best hedge since their performance will closely follow that industry.

An investor purchased $200,000 of 6% general obligation bonds on margin. The customer has a debit balance of $50,000 and is paying interest of 10% yearly on the debit balance from the purchase of the municipal bonds. How much interest expense may the investor use as a deduction for federal income tax purposes? a. None b. $5,000 c. $10,000 d. $12,000

a. None The investor may not use any of the interest expense as a deduction against ordinary income. Interest charges on money borrowed to purchase federally tax-exempt municipal securities may not be used as an interest expense deduction for federal income tax purposes. The investor is already receiving the benefit of tax-free interest income from the municipal bond and the IRS will, therefore, not allow the interest expense to be deducted as well.

The most detailed financial information regarding a municipal securities issuer is found in the: a. Official statement b. Prospectus c. Notice of sale d. Registration statement

a. Official Statement Municipal securities are exempt from the registration provisions of the SEC. Therefore, a registration statement and prospectus are not required. Municipal issuers voluntarily provide the same financial information that would be found in a prospectus. This detailed financial information is found in the official statement. The notice of sale contains information pertaining to a competitive offering of bonds such as the time, place, date of sale, and type of offering.

The tool most commonly used by the FRB to regulate the amount of money and credit in the banking system is: a. Open market operations b. The discount rate c. Margin requirements d. Reserve requirements

a. Open market operations Of all of the tools of the Federal Reserve Board listed, the one most commonly used is open market operations. This is the most flexible tool and can be changed or fine tuned very easily by buying or selling more or less U.S. government securities in the open market. The other choices are not as flexible, but are used to implement FRB policy. The margin requirement is another tool the FRB can use, but the margin requirement is the least likely tool the FRB would use since it only affects a small segment of the economy.

A municipality may issue a Direct Pay Build America Bond to finance all of the following activities, EXCEPT to: a. Refund a mass transportation bond b. Raise capital to expand its school system c. Make a primary offering to establish a public sewer system d. Raise additional capital for a government housing project

a. Refund a mass transportation bond A Direct Pay Build America Bond may be used to raise capital for the same purposes as regular tax-exempt municipal debt, except for refundings, working capital, and private activity bonds.

An investor is long 1,000 shares of XYZ at $32 per share. The current market value of XYZ is $38. While the investor believes the stock is not likely to fluctuate over the next few months, she also feels the long-term outlook is bullish. Which of the following positions will allow the investor to increase the portfolio's yield without increasing the downside risk? a. Short 10 XYZ 40 calls b. Long 10 XYZ 40 calls c. Short 10 XYZ 40 puts d. Long 10 XYZ 40 puts

a. Short 10 XYZ 40 calls This investor is a perfect candidate to establish a covered call position. Since she owns 1,000 shares of XYZ, 10 XYZ calls could be sold in her account without exposing her to the risk of having to go to the market to purchase stock should the calls be exercised. The total premiums received will reduce the amount she needs to receive when ultimately selling XYZ to recover her initial investment ($32 per share). Also, since she believes the stock is not likely to fluctuate over the next few months, she is not overly concerned that XYZ will appreciate to a point at which the short calls will be exercised ($40). If the investor had purchased either the calls (b) or the puts (d), it would have cost her money. While selling the puts (c) would generate income, it would expose her account to the risk of having to purchase 1,000 shares of XYZ at $40 per share if the puts were exercised.

A client wants to purchase 10 RSR July 45 calls and 10 RSR July 45 puts. This transaction: a. Should be executed on one order ticket b. Should be executed on two order tickets c. Should not be executed d. Must be approved in advance by a registered options principal

a. Should be executed on one order ticket This type of option transaction is a long straddle. Advanced option strategies such as spreads and straddles should be executed on one order ticket. They do not need to be approved in advance by a registered options principal (ROP).

On Tuesday, the S&P 500 Index closed at 1,600. At 11:30 the next morning, the S&P 500 Index is at 1,488. All NMS stocks will: a. Stop trading for 15 minutes b. Stop trading for 30 minutes c. Stop trading for the remainder of the day d. Continue to trade

a. Stop trading for 15 minutes If the S&P 500 Index falls by 7% from the previous trading day's closing price, it is defined as a Level 1 Market Decline and triggers a 15-minute trading halt. In this question, the drop from the closing price of 1,600 to 1,488 the next day (112 points) is a 7% decline.

The initial FRB margin requirement is 50%. A customer purchases 1,000 shares of XOP at $48 per share and makes the necessary deposit. If XOP increases in value to $57 per share and later declines to $45 a share, which of the following statements is TRUE? a. The SMA in the account is $4,500 and the equity is $21,000 b. The SMA in the account is $4,500 and the equity is $33,000 c. There is no SMA and the equity is $21,000 d. The SMA is $9,000 and the equity is $33,000

a. The SMA in the account is $4,500 and the equity is $21,000 First, determine the amount of the debit balance. If the customer purchased $48,000 worth of stock at a 50% margin requirement and deposited $24,000, the debit balance is $24,000 ($48,000 market value - $24,000 margin requirement = $24,000 debit balance). XOP increased to $57 per share, making the market value $57,000. The equity increases to $33,000. The excess equity (SMA) is found by subtracting the FRB-required equity of $28,500 (50% of $57,000) from the actual equity in the account of $33,000. The SMA is, therefore, $4,500. The SMA remains in the account until it is used. The SMA balance will never decrease because of market movements. Securities held in a margin account that increase in value can create excess equity (SMA) but, if these securities later decline in value, this will not decrease SMA. The equity decreases since the market value declined to $45 per share and is now $21,000 ($45,000 - $24,000).

A 6% bond is selling at a 6.25% basis. The bond will mature in 25 years and has 3 call dates. Which of the following bonds will give the investor the best return? a. The bond is called after 10 years at 103 b. The bond is called after 15 years at 102 c. The bond is called after 20 years at 101 d. The bond is held to maturity

a. The bond is called after 10 years at 103 The bond is selling at a discount. The first call in 10 years at 103 will give the investor the best return. The investor receives the highest call price in the shortest number of years.

A director of BDG owns 180,000 shares of BDG stock, which were purchased in the secondary market. If the director wants to sell 17,000 shares of BDG that she has owned for nine months, which of the following statements is TRUE? a. The director is permitted to sell the shares if the trade is reported b. The director is permitted to sell the shares only if they are held for three additional months and the trade is reported c. The director is permitted to sell the shares and no report is required d. The director is permitted to sell the shares only if the transaction will result in a loss

a. The director is permitted to sell the shares if the trade is reported An insider, as defined by the Securities Exchange Act of 1934, is a director, officer, or owner of more than 10% of the voting stock of a corporation. Immediate family members of the insider are also subject to the same limitations. An officer or director is required to register with the SEC regardless of her ownership levels in the company. The director as an insider is required to report the transaction to the SEC within two business days. Insiders are not permitted to make short-swing profits (based on ownership of six months or less in their own company's stock). Since the director owned the shares for nine months, there is no violation. Since the shares were purchased by the director in the secondary market, the shares are considered control, not restricted stock, and are not subject to the six months' holding.

On the day prior to the ex-dividend date for an ordinary cash dividend, a holder of a call tenders an exercise notice. The investor will be: a. Entitled to the dividend b. Required to pay the dividend to the writer only if the writer owns the underlying security c. Entitled to the dividend only if the holder owns the underlying stock d. Required to pay the dividend to the writer

a. entitled to the dividend The holder of a call will get a dividend only if the option is exercised prior to the ex-dividend date. This will result in the buyer being listed as holder of record on the books of the transfer agent.

A broker-dealer has two municipal bonds in its inventory. One is a non-AMT bond that yields 4.50% and the other is an AMT bond that yields 4.85%. Which of the following statements is TRUE of a recommendation that is made to a client who is subject to the AMT and is in the 28% tax bracket? a. The non-AMT bond is a better recommendation b. Both bonds offer the same after-tax return c. The AMT bond is a better recommendation d. Municipal bonds are not suitable for the client

a. The non-AMT bond is a better recommendation If the person receiving the bond's interest payments is subject to the alternative minimum tax (AMT), the interest is taxable at the federal level. The after-tax yield on the AMT bond is 3.49% (4.85% x [1.00 - 28%]), while the after-tax yield on the non-AMT bond is 4.50%. Ultimately, these types of bonds are unsuitable for an investor who is subject to the AMT.

Investors may receive disclosure and secondary market information concerning municipal securities: a. Through the EMMA system b. Through the TRACE system c. Directly from the issuer d. From the OATS system

a. Through the EMMA system The MSRB has established the Electronic Municipal Market Access (EMMA) system as the primary market disclosure service for official statements, other related primary market documents, and information. The EMMA system also contains information related to the continuing disclosure requirements submitted by municipal issuers and secondary market transactions submitted by municipal securities dealers. EMMA receives transactional information from the MSRB's Real-Time Transaction Reporting System (RTRS).

Your client owns a portfolio of blue-chip equity securities and wants to increase the overall rate of return through the use of options. The most conservative strategy to achieve this objective is to: a. Write covered calls b. Buy calls c. Write covered puts d. Buy puts

a. Write covered calls The most conservative strategy for the investor to achieve her objective is to write covered calls. The call premium received will increase the yield on her portfolio of stocks because it will add to the income generated by the dividends received from the stock.

Discretionary accounts require: a. Written authorization from the customer b. Oral authorization from the customer c. Written authorization from the client for each trade the registered representative executes d. The registered representative to send the client a letter detailing the proposed transaction

a. Written authorization from the customer Discretionary accounts require written authorization from the customer. In addition, each discretionary order must be approved on the day the order is entered by a manager, partner, or authorized person.

If a put or call option expires, the amount of the premium paid by the purchaser of the option is considered for tax purposes to be: a. A capital loss at the time the option expires b. A capital gain at the time the option expires c. An ordinary loss at the time the option was purchased d. An ordinary loss at the time the option expires

a. a capital loss at the time the option expires. If a put or call option expires, the amount of the premium paid by the purchaser of the option is considered for tax purposes to be a capital loss at the time the option expires.

If a municipal bond has a basis of 6.35 and a coupon rate of 6.15%, the bond is selling at: a. A discount b. Par value c. A premium d. A price that cannot be determined from the information given

a. a discount Municipal bonds may be quoted on a yield to maturity basis, which in this example is a 6.35 basis. This means the bond has a yield to maturity of 6.35%. If the nominal yield (coupon rate) is 6.15%, this means that the bond is selling at a discount, below the par value ($1,000). If the yield to maturity (6.35%) is greater than the nominal yield (6.15%), the bond is selling at a discount.

A corporation is in the 34% tax bracket. Which of the following choices provides the best return if the corporation wants to invest some of its surplus cash? a. A preferred stock paying a 7.50% dividend b. A corporate bond yielding 8% c. A common stock yielding 6% d. A municipal bond yielding 6%

a. a preferred stock paying a 7.5% dividend Corporations have a tax advantage on dividends received from investments in preferred stock and common stock of other corporations. If the corporation owns at least 20% of the distributing corporation, it must declare, as income, only 20% of the dividends received (80% is excluded). If the corporation owns less than 20% of the distributing corporation, it must declare as income only 30% of the dividends received (70% is excluded). The 7.50% preferred stock provides the best return since at least 70% is excluded for tax purposes.

A client sells short 1,000 shares of KPL at $46 a share. Fourteen months later the client covers the short and on the same day delivers the stock to close out the short position at $35 a share. For tax purposes, the client will report: a. A short-term capital gain b. A long-term capital gain c. Neither a gain nor a loss since the trade involved a short sale d. A short-term capital loss

a. a short-term capital gain The gain or loss on a short sale is typically treated as a short-term capital gain or loss, since a holding period for the security is not established. The customer closed out the short position the same day, so the holding period was less than one day. In this example, the client has a short-term capital gain taxable in the year the short sale was covered and the stock was delivered.

Which of the following statements is TRUE regarding dollar cost averaging? a. It is a systematic method of investing b. If employed, the average price will be less than the average cost c. It can only be set up through a payroll deduction plan d. The benefits can be obtained if one invests in a money-market fund

a. it is a systematic method of investing. Dollar cost averaging is a systematic method of investing that results in the average cost of the securities purchased being less than the average of the prices paid (not the other way around). The benefits are not obtained with funds that have a stable asset value, such as money-market funds.

ABC Corporation has issued two $1,000 par value bonds with the same coupon rate, one paying interest annually and the other paying interest semiannually. If both bonds are held to maturity in 10 years, the bond paying interest annually will have a total return that is: a. Less than the bond paying interest semiannually b. More than the bond paying interest semiannually c. The same as the bond paying interest semiannually d. Two times greater than the bond paying interest semiannually

a. less than the bond paying interest semiannually The bond paying interest annually will have a yield to maturity that is less than the bond paying interest semiannually. Yields to maturity assume a reinvestment and compounding of interest. The compounding of interest will be greater for the bond paying semiannual interest.

In an effort to secure more trading activity with a high net worth customer, a registered representative agrees to return part of the commission on trades to reduce the cost of the transactions. This practice is: a. Not permitted b. Permitted if the amount rebated is not greater than 50% of the commission c. Permitted if it is disclosed to the firm prior to the rebate d. Permitted under any circumstance

a. not permitted This practice is known as rebating and is prohibited.

A designated market maker (DMM) may not accept which of the following orders? a. Not-held order b. Market order c. Good-'til-cancelled (open) order d. Day order

a. not-held order A designated market maker (formerly known as a specialist) may accept all of the orders listed except a not-held order, which allows a floor broker to use discretion in executing an order. If the question asked which orders may be accepted and placed on his book, the answer would be open (GTC) and day orders only. A DMM may accept a market order but must execute it immediately and may not place it in his book.

A client creates an opening sale in a LEAP and closes out the position 15 months later by buying back the option. The tax consequence is a: a. Short-term gain or loss b. Long-term gain or loss c. Passive gain or loss d. Gain or loss that may not offset other trading positions or ordinary income

a. short-term gain or loss A LEAP is a long-term option that can have an expiration of up to 39 months. The client held the position for more than one year, but any gain or loss on a short position is treated as short-term. The IRS does not recognize a holding period on a short sale of a stock or an opening sale of an option. If the client created an opening purchase by buying a LEAP and held the position for 15 months before closing it out, the resulting gain or loss would be long-term.

In periods of easy money, when interest rates are declining, yield curves tend to: a. Slope upward from the shorter to the longer maturities b. Slope downward from the shorter to the longer maturities c. Remain flat d. Slope upward from the longer to the shorter maturities

a. slope upward from the shorter to the longer maturities In periods of easy money when interest rates are declining, yields on shorter maturities would be less than those of longer maturities. Yield curves tend to slope upward from the shorter to the longer maturities.

When a stock sells ex-rights, which of the following orders on a designated market maker's book will be reduced? I. Buy limit order II. Sell stop order III. Buy stop order IV. Sell limit order a. I only b. I and II only c. II and III only d. III and IV only

b. I and II only When a stock sells ex-rights (similar to ex-dividend), the designated market maker will reduce those orders on his book that were entered below the market. A buy limit order and a sell stop order will be reduced by the amount the stock sells ex-rights since these orders are entered below the market.

A registered representative's broker-dealer is an underwriter of an initial public offering of stock. The RR's father-in-law may purchase: a. The IPO from a different broker-dealer b. The IPO from the RR's broker-dealer c. Only a limited quantity of the IPO from any broker-dealer d. The IPO but only from a member of the selling group

a. the IPO from a different B-D A restricted person is not permitted to purchase any shares of a new issue unless an exemption applies. There is no exemption for restricted persons to purchase limited quantities of an IPO. An immediate family member of an employee (an RR) of a member firm may be a restricted person. Immediate family members include a spouse, children, parents, siblings, in-laws, and any other person who is materially supported by an employee of a member firm. An exception exists if a nonsupported, immediate family member buys the IPO from a different broker-dealer. There is no requirement to purchase the shares only from a selling group member.

An investor purchases a U.S. Treasury bond in the secondary market. When is settlement? a. The next business day b. 3 business days c. 5 calendar days d. 5 business days

a. the next business day Transactions for Treasury securities in the secondary market settle on the next business day.

Which of the following statements is TRUE regarding a registered representative who has not completed the Continuing Education Regulatory Element training within 120 days of his registration anniversary? a. The representative will be placed in inactive status b. The broker-dealer must request an extension from an SRO c. The representative will be suspended The representative has 30 days to complete the requirement

a. the representative will be placed in inactive status FINRA will notify a representative within 30 days of the second anniversary date of initial registration, and every three years thereafter. If the representative then fails to complete the required training within 120 days of the anniversary date, that person's registration will become inactive and any activity that requires registration, including receipt of commissions, will be prohibited.

Municipal bearer bonds that are in default of interest, trade: a. With unpaid coupons attached b. Without unpaid coupons attached c. In registered form only d. Without a legal opinion attached

a. with unpaid coupons attached Municipal bonds that are in default, trade flat (without accrued interest) and must be delivered with all unpaid coupons attached. If the bonds begin paying interest, the present holder is entitled to the past interest payments.

A corporation is issuing 5,000,000 shares of stock at a public offering price of $13 per share. The manager of the underwriting syndicate receives $0.15 per share. The syndicate members' compensation is $0.65 per share for each share they sell. The selling group's concession is $0.40 per share for each share they sell. The syndicate is allocated 4,000,000 shares and the selling group is allocated 1,000,000 shares. Assuming that all of the shares are sold, what amount will the syndicate members receive for their risk on shares sold by the selling group? a. $0.25 per share for a total of $250,000 b. $0.25 per share for a total of $1,000,000 c. $0.40 per share for a total of $400,000 d. $0.65 per share for a total of $650,000

a.$0.25 per share for a total of $250,000 The members of the syndicate receive $0.25 per share for their risk. Since the selling group was allocated 1,000,000 shares, the syndicate will receive $0.25 per share on 1,000,000 shares for a total of $250,000.

In terms of the number of stocks in each category, rank the components of the Dow Jones Composite Index from greatest to least. a. Utilities b. Industrials c. Transportation

b, c, a

Before accepting a DVP order from a customer, a broker-dealer must: a. Notify FINRA b. Obtain the name of the customer's agent from the customer c. Receive approval for the trade from the contrabroker d. Notify the appropriate banking regulator

b, obtain the name of the customer's agent from the customer Before accepting a DVP (delivery versus payment) or RVP (receipt versus payment) order from a customer, a broker-dealer must receive the name of the customer's agent and the customer's account number. The order ticket must be marked DVP or RVP.

An investor sold 100 shares of STC short at $40 per share and wrote an STC Oct 40 put at 4. How much cash did the investor need to deposit? a. $1,200 b. $1,600 c. $2,000 d. $2,800

b. $1,600 Since margin requirements are different for equities than for options, each transaction must be treated separately. - The margin requirement for a short sale of stock is 50%. Since the investor sold short $4,000 (100 shares x $40) of stock, the margin requirement is $2,000. - If an investor writes a put and is short the stock, the put is considered covered and there is no margin requirement. - The investor received $400 for writing the put and would, therefore, need to deposit $1,600. ($2,000 margin requirement on the short sale minus the $400 premium received.)

An investor owns 1,000 shares of an open-end investment company. The bid price is $11.00 and the offer price is $11.58. The investment company charges a 1/2% redemption fee. If the investor redeems his 1,000 shares, how much will he receive? a. $10,450 b. $10,945 c. $11,000 d. $11,522

b. $10,945 When redeeming shares of an open-end investment company (mutual fund), an investor receives the NAV (bid price) minus any redemption fee. The investor would receive $11,000 (1,000 shares x $11.00 NAV) minus the redemption fee of $55 ($11,000 x 1/2%), which equals $10,945.

An investor owns 1,000 shares of an open-end investment company. The bid price is $11.00 and the offer price is $11.58. The investment company charges a 1/2% redemption fee. If the investor redeems his 1,000 shares, how much will he receive? a. $10,450 b. $10,945 c. $11,000 d. $11,522

b. $10,952 When redeeming shares of an open-end investment company (mutual fund), an investor receives the NAV (bid price) minus any redemption fee. The investor would receive $11,000 (1,000 shares x $11.00 NAV) minus the redemption fee of $55 ($11,000 x 1/2%), which equals $10,945.

Mr. Blue's margin account has a market value of $20,000 and a debit balance of $9,000. If he purchases $2,000 of options, he will need to deposit: a. 0 b. $1,000 c. $2,000 d. $3,000

b. $1000 The margin requirement when purchasing options is 100% of the purchase price (premium). Since the purchase price of the options is $2,000, Mr. Blue may use the $1,000 SMA and will be required to deposit an additional $1,000. The SMA is found by subtracting the required equity, $10,000 ($20,000 x 50%) from the current equity in the account ($11,000).

A customer purchased on margin 100 shares of ABC stock at 120 and sold short 100 shares of XYZ stock at 100. The customer also wrote an ABC 120 call @ 3 and an XYZ 100 put @ 2. What is the margin requirement for the combined transactions? a. $10,500 b. $11,000 c. $11,500 d. $22,000

b. $11,000 The FRB margin requirement for the purchase or short sale of stock is 50%. Therefore, the margin requirement for the stock purchase is $6,000 (50% of $12,000) and for the short sale is $5,000 (50% of $10,000). The call is covered since the customer owns the underlying stock and the put is covered since the customer is short the underlying stock. Since there is no margin requirement for a covered call or put, the total margin requirement is $11,000. If the question had asked for the cash deposit, subtract the total premiums received ($500) from the margin requirement of $11,000.

Total Market Value = $12,000 Debit Balance = $8,400 How far could the market value of the securities in the account decline, before a maintenance call will be sent? a. $8,000 b. $11,200 c. $11,400 d. $12,500

b. $11,200 To determine how far the securities worth $12,000 in the account can decline before the customer receives a maintenance call, multiply the debit balance of $8,400 by 4/3. $8,400 x 4 = $33,600 divided by 3 = $11,200. Another method that can be used is to take 1/3 of the debit balance, which is $2,800, and add it to the debit balance of $8,400. The result would be 4/3rds of the debit balance and would equal $11,200. ($8,400 + $2,800 = $11,200.)

An investor's margin account has a market value of $20,000 and a debit balance of $9,000. Based on these balances, the investor has buying power of: a. $0 b. $2,000 c. $1,000 d. $3,000

b. $2,000 To determine the amount of buying power, first determine the amount of excess equity. The formula for calculating the account's equity is long market value ($20,000) minus the debit balance ($9,000); therefore, the current equity balance is $11,000. The Regulation T requirement of 50% indicates that the customer should have equity of $10,000 ($20,000 x 50%), but has actual equity of $11,000. By comparing these two numbers, the result is excess equity of $1,000. The $1,000 of excess equity is recorded in the special memorandum account (SMA). The amount of buying power is ultimately calculated by multiplying the SMA balance by two (SMA x 2). In this example, the buying power is $2,000 ($1,000 x 2).

A customer has a long margin account with a market value of $30,000 and a debit balance of $20,000. His short margin account has a $7,000 market value and a $10,000 credit balance. The FRB margin requirement is 50%. What is the minimum equity requirement for the short position? a. 0 b. $2,100 c. $9,000 d. $11,000

b. $2,100 The SRO minimum maintenance requirement for a short position is 30% of the market value. The market value is $7,000, and 30% of $7,000 equals $2,100.

A client has a margin account with the following positions: short 2,000 shares of EXA at $22 and long 2,000 shares of EXA at $24. The client's maintenance requirement is: a. $2,200 b. $2,400 c. $11,500 d. $13,200

b. $2,400 If a client is long and short an equal number of shares of the same security, the maintenance requirement is equal to 5% of the long position. 5% of $48,000 (2,000 shares x $24) equals $2,400.

A corporation has the following capital structure: 5% Convertible Bonds (conversion price is $20) $100,000 5% Preferred Stock $100,000 $1 Par Value Common Stock (5,000 shares outstanding) $ 5,000 Tax Rate is 34% Find the earnings per share after dilution, assuming earnings before interest and taxes is $50,000. a. $2.47 b. $2.80 c. $2.97 d. $3.30

b. $2.80 If the bonds are converted, there will be an additional 5,000 shares outstanding ($100,000 face value bonds divided by the conversion price of $20 equals 5,000 shares). The company will not need to pay the interest on the bonds since they were converted. The calculation is as follows. Taxable Income $50,000 - Taxes (34%) 17,000 Net Income $33,000 EPS = Net Income - Preferred Dividends/ Number of Common Shares Outstanding EPS = $33,000 - $5,000 (5,000 shares of Common Stock plus 5,000 additional shares (fr/ conversion)) EPS = $28,000= $2.80EPS 10,000 shares

A customer makes an initial investment of $75,000 in a high-yield bond fund with a purchase of 3,850 shares. Over the next four years, the customer deposits another $48,000 and also reinvests $17,000 of distributions for a total of 2,895 additional shares. If the fund is currently valued at $26.51, what is the customer's cost basis using the average cost method? a. $19.48 b. $20.76 c. $20.90 d. $22.45

b. $20.76 To calculate the cost basis using the average cost method, divide the sum of all investments (including reinvested distributions) by the total number of shares owned by the investor. The investor purchased $75,000 of the fund, giving him 3,850 shares. Over the next four years, the customer deposited another $48,000 and also reinvests $17,000 of distributions for a total of 2,895 additional shares. The sum of all investments is $140,000 ($75,000 + $48,000 + $17,000) and the total shares owned is 6,745 (3,850 + 2,895). Therefore, the average cost is $20.76 ($140,000 ÷ 6,745). The current value of the fund is not relevant

If an investor wrote one OEX March 725 put option and the option was exercised when the index was 722.00, the writer is obligated to deliver: a. 100 shares of the OEX index b. $300 c. $72,200 d. $72,500

b. $300 If a stock index option is exercised against the writer, the writer is obligated to deliver the cash difference between the exercise price and the index value as of the close of trading on that day if the option is in-the-money. The exercise price of the put option is 725 and the lower index value is 722.00. The writer is obligated to deliver the cash difference of $300 Exercise price 725 x $100 = $72,500 Index value 722.00 x $100 = - 72,200 Difference $300

A customer in the highest tax bracket has $1,500 in long-term capital gains from stock transactions at the end of the year. The customer will need to pay taxes of: a. $150 b. $300 c. $420 d. $525

b. $300 Long-term capital gains are gains on securities held in excess of 12 months and are taxed at a maximum rate of 20%. Although the investor is in the highest tax bracket, the investor will be taxed at a rate of 20%. Therefore, the customer will need to pay taxes of $300 ($1,500 x 20% = $300).

A client purchases $900,000 of stock in a margin account and deposits the Regulation T margin requirement. If the current value of the stock is $800,000 and the broker-dealer declares bankruptcy, SIPC would cover: a. $100,000 b. $350,000 c. $450,000 d. $500,000

b. $350,000 When the customer met the original Reg. T call, he deposited $450,000 (50% of $900,000) and borrowed $450,000, which is the debit balance. Now the market value (MV) has fallen from $900,000 to $800,000, so the new equity level is $350,000 ($800,000 MV minus the debit balance of $450,000 equals $350,000). SIPC will cover the customer's current equity in the margin account of $350,000. SIPC does not cover a decline in the market value of securities.

The initial FRB margin requirement is 50%. A customer purchases 1,000 shares of Depaul Corporation stock at $70 per share and makes the necessary deposit. If the stock increases in value to $78 per share and later declines to $67 a share, how much SMA would the customer have in the account? a. 0 b. $4,000 c. $8,000 d. $16,000

b. $4,000 First, determine the amount of the debit balance. If the customer purchased $70,000 worth of stock at a 50% margin requirement and deposited $35,000, the debit balance is $35,000 ($70,000 market value - $35,000 margin requirement = $35,000 debit balance). Depaul increased to $78 per share, making the market value $78,000. The equity increases to $43,000. The excess equity (SMA) is found by subtracting the FRB-required equity of $39,000 (50% of $78,000) from the actual equity in the account, $43,000. The SMA is, therefore, $4,000. The SMA remains in the account until it is used. The SMA balance will never decrease because of market movements. Securities held in a margin account that increases in value can create excess equity (SMA). However, if these securities later decline in value, this will not decrease SMA.

A client has a margin account with the following positions: short 2,000 shares of EXA at $22 and long 40 EXA convertible bonds at $1,150 that are convertible at $20. If the client is using the convertible bonds as a hedge, the maintenance requirement is: a. $4,400 b. $4,600 c. $11,500 d. $13,200

b. $4,600 If a client is long a security that is convertible into an equal number of shares of a short position carried by the same client, the maintenance requirement is 10% of the current market value of the long position. This is an industry rule, not a Regulation T requirement. Each bond is convertible into 50 shares (the par value of $1,000 divided by the conversion price of $20). The client may convert the 40 bonds into a total of 2,000 shares (50 shares x 40 bonds), which is equal to the number of shares the client is short. The maintenance requirement is 10% of the long position, which is equal to $4,600 ($1,150 x 40 bonds x 10%).

An investor owns 280 shares of XYZ Corporation. XYZ Corporation pays a 15-cent quarterly dividend. XYZ Corporation announces a 5-for-4 split. The dividend per share is adjusted to reflect the split. How much will the investor receive in dividends each quarter after the split? a. $40.00 b. $42.00 c. $52.50 d. $80.00

b. $42.00 After the split, the investor would own 350 shares (280 x 5/4 = (280 x 5) / 4 = 350) and would receive $42.00 each quarter (350 shares x $0.12 = $42.00) in dividends. To find the adjusted dividend per share, multiply the inverse of the split by the original dividend of $0.15 ([$0.15 x 4] / 5 = $0.12). Since the dividend is adjusted for the split, the investor would receive the same total dividends after the split as before (280 shares x $0.15 per share = $42).

An investor's market order to buy 10 ABC June 45 calls is executed when the bid price was $5.10 and the offer price was $5.15. The investor later placed a market order to conduct a closing sale of the 10 contracts when the bid price was $5.20 and the offer price was $5.25. What is the investor's capital gain on these transactions? a. $10 b. $50 c. $100 d. $150

b. $50 An investor placing a market order will normally buy at the offer and sell at the bid. In this case, the investor purchased 10 contracts at the offer price of $5.15 and then closed out that position by selling 10 contracts at the bid price of $5.20. The investor's cost basis for 10 contracts is $5,150 (10 contracts x $515 per contract) and the investor's sales proceeds are $5,200 (10 contracts x $520 per contract). The investor's capital gain of $50 is based on the difference between the cost basis and sales proceeds.

A customer writes an XYZ June 60 straddle for a 5-point premium. At expiration, the market price of XYZ is 50 and the put side is exercised. The customer then sells the stock that was put to her at the current market price. The customer has realized a: a. $500 profit b. $500 loss c. $1,000 profit d. $1,000 loss

b. $500 loss The customer has received a total of $5 in premiums or $500 for the straddle. The call side of the straddle expires, but the put is exercised. The writer must buy the stock at $60 per share (the exercise price). The stock is then sold at the $50 market price, which results in a $1,000 loss ([$60 - $50] x 100 shares). However, since the customer initially received a premium when she wrote the straddle, the loss is only $500 ($1,000 loss from exercising the put - $500 premium).

A customer purchases $15,000 in convertible bonds (15 bonds at $1,000 par). The Federal Reserve Board margin requirement is 50% and the customer deposits $7,500. If the bonds increase in value to 108 ($16,200), how much excess equity will the customer have in the account? a. $300 b. $600 c. $1,200 d. $8,700

b. $600 If the bonds increase in value to $16,200, the equity in the account will be $8,700 (market value of $16,200 - $7,500 debit balance). The initial FRB requirement on $16,200 market value is $8,100 (50% x $16,200). Since there is $8,700 of equity, there is $600 of excess ($8,700 equity - $8,100 requirement).

Wilsons Chemicals bonds have a nominal yield of 6.6%. They closed the previous day at 91 7/8. An owner of 10 bonds will receive a yearly interest payment of: a. $66 b. $660 c. $91.88 d. $918.75

b. $660 A nominal yield of 6.6% for a corporate bond with a $1,000 par value equals $66 in interest payments. If an investor owns 10 bonds, he will receive an annual interest payment of $660.

The FRB initial margin requirement is 50%. A customer's initial transaction in a margin account is a purchase of 100 shares of XYZ at $15 per share. The customer would need to deposit what amount in this new account? a. $375 b. $750 c. $1,500 d. $2,000

b. $750 Securities purchased in a new margin account require a minimum equity of $2,000. If the securities are worth less than $2,000, then the securities must be paid for in full. In this example, the purchase is for $1,500, requiring the customer to deposit the full amount of the purchase.

In April, a customer purchased 1 ABC July 85 call for 5 and purchased 1 ABC July 90 put for 8. ABC stock is currently trading at $87. If both options are sold for the amount each is in-the-money, the investor will realize a(n): a. $500 profit b. $800 loss c. $1,000 loss d. $1,100 loss

b. $800 loss The call is in-the-money by $200 and the put is in-the-money by $300. If the call is sold for $200, the loss on the call would be $300. If the put is sold for $300, the loss would be $500.

A municipality is issuing 50,000 bonds at a public offerings price of $1,000. The manager of the underwriting syndicate receives $1.25 per bond. The total takedown is $8.75 per bond and the selling concession is $5.00 per bond. What amount will the issuer receive? a.$991.25 per bond for a total of $49,562,500 b. $990.00 per bond for a total of $49,500,000 c. $985.00 per bond for a total of $49,250,000 d. $1,000.00 per bond for a total of $50,000,000

b. $990.00/bond total of $49,500.00 In a new municipal bond offering, the underwriting syndicate assumes the risk and is, therefore, entitled to make a profit on all bonds sold. Members of the selling group do not assume any risk and make a profit on only the bonds they sell (selling concession). The members of the underwriting syndicate receive $8.75 for bonds they sell. This is the total takedown which is composed of a selling concession of $5.00 per bond and an additional takedown of $3.75 per bond for their risk. The total spread is $10.00 ($1.25 manager's fee plus $3.75 to the syndicate for risk plus a $5.00 profit for the sale of the bonds). The issuer will receive $990 per bond ($1,000 offering price minus $10.00 underwriting spread) for a total of $49,500,000 ($990 x 50,000 bonds).

A limited partner has a $10,000 basis in a partnership. During the year, he receives a $6,000 cash distribution and a $9,000 loss. The limited partner's basis at the end of the year is: a. $5,000 b. 0 c. $1,000 d. $9,000

b. 0 A cash distribution and an operating loss will decrease a partner's basis. The $6,000 cash distribution reduces the partner's interest in the partnership to $4,000. As a rule, a partner may receive losses to the extent of his adjusted basis (the amount that is at risk). After $4,000 of loss is deducted, the partner's basis is reduced to zero. $5,000 of the loss may not be deducted. This amount will be left in suspense and may be subsequently deducted when the individual's basis increases above zero.

Federal funds are: I. Excess reserves loaned by commercial banks to other commercial banks II. Funds used by the government to pay principal on retiring Treasury securities III. A lagging money-market indicator IV. A leading money-market indicator a. I and III only b. I and IV only c. II and III only d. II and IV only

b. I and IV Federal funds are excess reserves loaned by commercial banks to other commercial banks and are a leading money-market indicator.

Your firm is a syndicate member and an underwriter of an initial public offering (IPO). How many days must the firm's research analyst wait before issuing a research report in this IPO? a. There is no waiting period and research may begin anytime after the effective date b. 10 days c. 25 days d. Cannot initiate research on this IPO

b. 10 days If a firm is involved in an underwriting of an initial public offering and is the manager or comanager, it must maintain a quiet period of 10 days following an IPO or three days following a secondary offering. During this time, the firm may not issue research reports on its investment banking clients' stock. If the firm was a syndicate member or selling group member, the firm would need to wait 10 days.

A municipal bond with an 8% coupon and eight years to maturity is purchased for 106. If the bond is sold six years later, what will be its cost basis? a. 100 b. 101.50 c. 104.50 d. 106

b. 101.50 When a bond is purchased at a premium (above par value), the premium must be amortized (reduced) over its life. The premium in this example is six points, which must be amortized over its 8-year life. It must be amortized 3/4 point each year (6 points divided by 8 years to maturity). After six years, it will be reduced by 4 1/2 points (3/4 x 6). Its cost basis will, therefore, be 101 1/2 (106 original cost - 4 1/2 points amortized premium).

There are 2,600,000 shares of XYZ Corporation outstanding, which are listed on the NYSE. Mr. Smith owns 300,000 shares of restricted securities, which he has held for more than six months. He is not an affiliate of XYZ. Mr. Smith would like to sell some of his securities under Rule 144. The weekly trading volume for the last six weeks is: 1 week ago 25,000 shares 2 weeks ago 26,000 shares 3 weeks ago 27,000 shares 4 weeks ago 28,000 shares 5 weeks ago 27,000 shares 6 weeks ago 27,000 shares How many shares of XYZ Corporation is Mr. Smith able to sell according to Rule 144? a. 26,000 shares b. 26,500 shares c. 27,250 shares d. 30,000 shares

b. 26,500 shares Mr. Smith is be able to sell 26,500 shares. Under Rule 144, the amount that may be sold during any 90-day period is 1% of the outstanding shares or the average weekly volume of trading for the four weeks prior to the sale, whichever is greater. One percent of the outstanding shares is 26,000. The average weekly volume from the prior four weeks is 26,500 shares.

A corporation's earnings per share on its common stock, after paying preferred dividends of $3.00 per share, is $5.00 per share. The corporation also paid a dividend of $2.00 per share on the common stock. The dividend payout ratio is: a. 25% b. 40% c. 60% d, 100%

b. 40% Since the earnings per share on the common stock is given, the $3.00 preferred dividend can be disregarded. To find the dividend payout ratio, divide the yearly dividend on the common stock ($2.00) by the earnings per share on the common stock ($5.00). This equals a dividend payout ratio of 40%.

An investor owns a $1,000,000 diversified portfolio of stocks with a beta of 1.5. He wishes to hedge his portfolio by buying S&P 100 Index options. He can accomplish this by buying: a. 40 S&P 100 puts with a strike price of 250 b. 60 S&P 100 puts with a strike price of 250 c. 40 S&P 100 calls with a strike price of 250 d. 60 S&P 100 calls with a strike price of 250

b. 60 S&P 100 puts with a strike price of 250 Beta is a measure of a stock's (or portfolio of stock) volatility in relation to the market as a whole. The market as a whole (represented in this question by the S&P 100 Index) is assigned a beta of 1. The portfolio's beta of 1.5 means the portfolio's price will change 1 1/2 times as much as the market. Buying puts provides a hedge since a decrease in the value of the portfolio can be offset by a profit in the puts. A strike price of 250 represents an overall value of $25,000 (250 strike price x $100 multiplier). Therefore, 40 puts represent a total value of $1,000,000 (the value of the portfolio). Since the portfolio will change by $1.50 for each $1 change in the market (beta = 1.5), 60 puts (1 1/2 x 40) will be necessary to effectively hedge the portfolio.

A doctor, who is covered under a corporate pension plan, retires. The doctor can roll over the distribution received from the pension plan into an IRA, with no tax consequences, within: a. 30 days b. 60 days c. 90 days d. 1 year

b. 60 days When a lump-sum withdrawal is made from a qualified retirement plan and the check made payable to the participant is deposited in an IRA, it is referred to as a rollover. If the rollover is done within 60 days, it will be tax-free. Only one rollover is permitted once every twelve months. However, the distributing corporation will withhold 20% of the distribution for the IRS.

There are 2,600,000 shares of XYZ Corporation outstanding, which are listed on the NYSE. Mr. Smith owns 300,000 shares of restricted securities, which he has held for more than six months. He is not an affiliate of XYZ. Mr. Smith would like to sell some of his securities under Rule 144. According to Rule 144, Mr. Smith would need to file with the SEC a notice of intent to sell which is valid for: a. Four weeks b. 90 days c. 6 months d. Whatever amount of time is necessary to complete the offering

b. 90 days The notice of offering for a Rule 144 sale is valid for 90 days.

Structured products are typically comprised of two components including: a. A fixed-income note and common stock b. A fixed-income note and a derivative product c. A fixed-income note and a fixed-equity contract d. Two different types of derivative products

b. A fixed-income note and a derivative product A structured product is typically built around a fixed-income instrument and a derivative product. The note pays a specified rate of interest to the investor at defined intervals. The derivative component establishes the amount of payment at maturity.

An investor with an investment objective of tax-exempt income will need access to the funds in four months. An RR should NOT recommend which of the following municipal securities? a. A variable-rate demand obligation (VRDO) b. An auction-rate security (ARS) c. A tax-anticipation note (TAN) d. A bond anticipation note (BAN)

b. ARS A VRDO and an ARS are both long-term securities with short-term trading features. A VRDO has a put feature that permits the holder to sell the securities back to the issuer or third party. An auction rate security (ARS) does not have this feature and, if the auction fails, the investor may not have immediate access to his funds. TANs and BANs are short-term municipal notes and, if their maturities extend four months, these securities can easily be sold in the secondary market.

A client wants to invest $250 a month and have broad exposure to the U.S. equity market. Which of the following recommendations is the most suitable for this client? a. A managed closed-end fund b. An S&P 500 Index mutual fund c. An S&P 500 Index exchange-traded fund d. An DJIA exchange-traded fund

b. An S&P 500 index mutual fund Although all of these investments are suitable for a client seeking broad exposure to the U.S. equity market, the mutual fund is the most cost-effective method for an investor to accomplish this goal with $250 per month. The closed-end fund and ETFs are purchased on an exchange and the client pays the current market price plus a commission. Most index mutual funds do not charge the client a sales charge (no-load). If the investor were to purchase a large dollar amount at one time, any of these funds may be appropriate.

An IRA contribution may be claimed for a tax year providing the contribution is deposited in the IRA no later than: a. December 31 of the year for which the contribution is claimed b. April 15 of the subsequent year c. December 31 of the subsequent year d. The filing date of the person's tax return

b. April 15 of the subsequent year Regardless of when a person files his tax return, the IRA contribution must be made no later than April 15 of the following year.

What information can be found on the Consolidated Quotation System? a. Bid/asked quotations for OTC stocks not listed on Nasdaq b. Bid/asked quotations for listed stocks reported by national exchanges and OTC third market makers c. Indications of interest on private placements to be sold to qualified institutional investors d. Bid/asked quotations for small-cap OTC securities

b. B/A quotes for listed stocks reported by national exchanges and OTC 3rd mkt makers The Consolidated Quotation System (CQS) provides subscribers with bid/asked quotations for securities listed on national exchanges, including quotes from OTC market makers in those securities (the third market).

Roundville Bank is considering an investment in Roundville County bonds. The bonds contain a provision that permits banks to deduct 80% of the interest cost being paid to depositors on the funds used to purchase the bonds. These securities are known as: a. Alternative minimum tax bonds b. Bank-qualified bonds c. Private activity bonds d. Moral obligation bonds

b. Bank Qualified bonds Bank-qualified municipal bonds allow banks to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds. This is done to encourage banks to invest in municipal securities. To qualify, a municipality may only issue up to $10,000,000 annually.

An investor buys an 8% municipal bond in the secondary market at a 10.00 basis. If the bond is held to maturity, the investor's after-tax return will be: a. 8% b. Between 8% and 10% c. 10% d. Greater than 10%

b. Between 8 and 10% Since the yield (10%) is higher than the coupon (8%), the bond was purchased at a discount. Since the bond was purchased in the secondary market at a discount, the interest on the bond is exempt from federal taxation but the discount will represent ordinary income at maturity. Since the investor must pay federal income tax on the ordinary income, the after-tax return will be between 8% and 10%.

A customer is willing to accept a partial execution on an order to buy up to 800 shares of XYZ stock at 30. If the client does not want the unexecuted portion to be left open, this order should be entered as: a. Buy 800 XYZ NH b. Buy 800 XYZ at 30 IOC c. Buy 800 XYZ at 30 Day Order d. Buy 800 XYZ at 30 GTC

b. Buy 800 XYZ at 30 IOC An immediate-or-cancel (IOC) order must be executed immediately but does not need to be executed in its entirety. Part of the order may be executed. The unexecuted portion of a day order or a GTC order is placed on the designated market maker's book. A not-held (NH) order gives the floor broker discretion as to when to execute the order.

In mutual fund advertising, it is NOT permissible to state that: a. A fund does not charge a 12b-1 fee b. Dollar cost averaging assures long-term growth c. Funds of competitors have higher expense ratios d. The investment adviser has 20 years' experience

b. Dollar cost averaging assures long-term growth Mutual fund advertising may not state that any systematic method of investing will assure a profit or a specific rate of return. Historical rates of return may be disclosed. The other statements are acceptable.

Dynasty Corporation is planning to acquire Regal Corporation. If a trader purchased 12,000 shares of Regal Corporation and sold short 4,000 shares of Dynasty Corporation, the trader is: a. Creating an optional hedge b. Engaging in a risk arbitrage c. Creating a reverse hedge d. Creating a bullish spread

b. Engaging in a risk When there is an acquisition or merger taking place, traders will try to take advantage of the activity between the common stocks of the two companies. The trader or risk arbitrageur will go long the company being acquired and sell short the shares of the acquiring company. This process is known as risk arbitrage. If the acquisition is successful, Regal Corporation's stock will increase and Dynasty Corporation's stock will decline.

A broker-dealer is underwriting an initial public offering (IPO) for a company that will be listed on the NYSE. The broker-dealer is required to deliver prospectuses: a. Only on purchases made, at the public offering price b. For 25 days after the effective date c. For 40 days after the effective date d. For 90 days after the effective date

b. For 25 days after the effective date When a company that is the subject of an IPO is listed, on the effective date of the offering, prospectuses must continue to be delivered on all purchases in the aftermarket for 25 days. The prospectus delivery requirement for an IPO that will not be listed on an exchange continues for 90 days after the deal closes.

If an issue of commercial paper is rated P-1 by Moody's, it is considered: a. Speculative b. Highest quality c. Intermediate quality d. On credit watch

b. Highest quality P-1 (also called Prime 1) is the highest rating that Moody's will assign to commercial paper. Intermediate ratings are P-2 and P-3. Speculative commercial paper would receive a rating of NP (not prime).

An investor would like to trade exchange-traded funds (ETFs) in her brokerage account. Which TWO of the following statements are TRUE concerning purchasing and selling short ETF shares? I. Purchases may be executed in a cash or margin account II. Short sales may be executed in a cash or margin account III. Short sales may be executed only in a margin account IV. Leveraged ETFs may be purchased only in a margin account a. I and II b. I and III c. II and III d. II and IV

b. I and III ETFs may be purchased in a cash or margin account. This applies to long positions in regular ETFs, inverse ETFs, or leveraged ETFs. If an investor sells short an ETF, this transaction must be executed in a margin account similar to selling short any equity security.

Which TWO of the following statements are TRUE relating to the notes issued by the Federal Farm Credit Banks Consolidated System? I. They are issued at a discount II. They are issued at par III. They are interest-bearing IV. They are non-interest-bearing a. I and III b. I and IV c. II and III d. II and IV

b. I and IV

Blue-Sky laws apply to which TWO of the following choices? I. Registered representatives II. Securities issued by the City of Chicago III. Commercial paper IV. Securities issued by a REIT a. I and III b. I and IV c. II and III d. II and IV

b. I and IV Blue-Sky laws are state securities laws. These laws apply to the registration of sales personnel (registered representatives), the registration and sale of nonexempt securities. REITs (real estate investment trusts) are considered nonexempt securities and are, therefore, regulated by state laws. Municipal securities and commercial paper are considered exempt securities.

A customer owns foreign securities that were purchased from a U.S. broker-dealer. Which TWO of the following amounts will be reported to the customer concerning the tax treatment of interest and dividends? I. The gross amount of dividends and interest II. The net amount of interest and dividends III. The amount of tax paid to the Internal Revenue Service IV. The amount of tax withheld by the foreign government a. I and III b. I and IV c. II and III d. II and IV

b. I and IV Dividends and interest paid to a U.S. investor on foreign securities may be subject to withholding tax by the country from which they were paid. If the investor has securities that paid dividends and/or interest that were subject to foreign tax, the broker-dealer will send the investor a form that will report the gross amount of the dividends or interest, and the amount of tax withheld by the foreign government.

Which TWO of the following statements are TRUE regarding brokered CDs sold by registered representatives? I. These instruments are insured by the FDIC if the issuer declares bankruptcy II. These instruments are covered by SIPC if the issuer declares bankruptcy III. These instruments are insured by the FDIC if the broker-dealer declares bankruptcy IV. These instruments are covered by SIPC if the broker-dealer declares bankruptcy a. I and III b. I and IV c. II and III d. II and IV

b. I and IV Long-term brokered CDs generally have maturities from 2 to 20 years and are not considered money-market securities. These instruments are issued by banks and, although sold by broker-dealers, they are insured up to certain limits by the FDIC if the issuing bank declares bankruptcy. If the broker-dealer that sold the brokered CD to the client declares bankruptcy, SIPC coverage will apply since these products are defined as securities.

Which TWO of the following statements are TRUE concerning the characteristics of preferred stock? I. The securities do not have a fixed maturity date II. The price of these securities is more volatile than common stock III. The dividend will be paid annually IV. The price will fluctuate based primarily on changes in interest rates a. I and III b. I and IV c. II and III d. II and IV

b. I and IV Most preferred stock does not have a maturity date and, therefore, one of the risks of purchasing this type of security is that there is no fixed date when you will receive your principal back. These securities are less volatile than common stock, and the prices of preferred stocks are inversely related to the movement of interest rates, as are bonds. The dividend usually is paid quarterly, not annually.

Which TWO of the following statements are TRUE about a divided account? I. It is called a Western account II. It is called an Eastern account III. Each member is responsible for the unsold bonds based on the member's original participation IV. Each member is liable only for its own participation in the syndicate a. I and III b. I and IV c. II and III d. II and IV

b. I and IV In a divided account (Western account), the member is responsible for its own participation in the syndicate. If any bonds remain unsold, it is the responsibility of that member. In an undivided or Eastern account, any unsold bonds are the responsibility of the entire syndicate. Each member would then be liable for the same proportion as his original participation.

Which TWO of the following investment companies are NOT open-end? NAV Offered I. $8.00 $ 7.00 II. $9.20 $10.00 III. $7.00 $ 7.00 IV. $8.00 $10.00 a. I and II b. I and IV c. II and III d. II and IV

b. I and IV Open-end companies are not offered below their current net asset value. According to the Conduct Rules, the maximum sales charge permitted for an open-end company is 8 1/2%. Choices (I) and (IV) must be closed-end companies. Choice (I) is a closed-end company because it is offered below its net asset value. Choice (IV) must be a closed-end company because when doing the sales charge calculation (sales charge divided by offering price), the result is a 20% sales charge, which is above the allowable maximum. Therefore, choice (IV) is a closed-end fund trading at a 25% premium to NAV.

If a broker-dealer is preparing sales literature on CMOs, which TWO of the following statements is TRUE? I. The term collateralized mortgage obligation must be included within the name of the product II. The basis point spread that a client will receive in interest above a comparable III. Treasury security must be included IV. The lower of the yield-to-call or yield-to-maturity must be included The backing of a government agency only applies to the face value of the securities a. I and III b. I and IV c. II and III d. II and IV

b. I and IV Retail communications (e.g., sales literature) and correspondence that relate to collateralized mortgage obligations (CMOs) are subject to special rules. The term collateralized mortgage obligation must be included within the name of the product and it must disclose that the backing of a government agency only applies to the face value of the securities (not any premium paid). In other words, if the client paid a premium to purchase a CMO, only the par value is backed by the entity backing the security. Only the actual coupon rate, not the spread above Treasuries, is required to be disclosed. Due to the prepayment risk of CMOs, the yield to average life is required to be disclosed, not the yield-to-call or yield-to-maturity.

Stagflation is best defined as a period where the economy is experiencing which TWO of the following events? I. Inflation for a long period II. Deflation for a long period III. Low unemployment IV. High unemployment a. I and III b. I and IV c. II and III d. II and IV

b. I and IV Stagflation is defined as a prolonged period of a high rate of inflation together with a high rate of unemployment. This does not happen too often since high unemployment usually leads to a period of low inflation or even deflation (falling prices) and the possibility of a recession. A period of low unemployment usually leads to rising prices and increased inflation.

Which TWO of the following statements are TRUE concerning the death benefit on a variable annuity? I. The benefit skips the probate process II. The benefit must go through probate prior to distribution III. The beneficiary receives the proceeds tax-free IV. The beneficiary may have a tax liability when receiving the proceeds a. I and III b. I and IV c. II and III d. II and IV

b. I and IV The death benefit on a variable annuity skips the probate process. Probate is a lengthy legal process in which the decedent's bills are paid and remaining assets distributed based on instructions generally left in a will. The recipient of a death benefit from a variable annuity may need to pay taxes on any amount above the contract's cost basis. For example, if a client invested $100,000 and died when the contract was worth $150,000, a non-spouse beneficiary may be required to pay taxes on the $50,000 above the decedent's contributions.

If the FRB engages in repurchase agreements, which TWO of the following statements are TRUE? I. The money supply is being increased II. The money supply is being decreased III. The fed funds rate could rise IV. The fed funds rate could decline a. I and III b. I and IV c. II and III d. II and IV

b. I and IV The immediate result of an FRB repo is an increased money supply, which would have the effect of lowering interest rates.

Which TWO of the following option strategies will be suitable recommendations for an investor who thinks interest rates will rise? I. Buying yield-based calls II. Buying yield-based puts III. Selling yield-based calls IV. Selling yield-based puts a. I and II b. I and IV c. II and III d. III and IV

b. I and IV Yield-based options are cash-settled options based on a particular Treasury security's movement in yield. If an investor expects yields (interest rates) to rise, he will buy yield-based calls or sell yield-based puts.

Which TWO of the following statements are TRUE concerning a company that becomes delisted from the NYSE or Nasdaq? I. It may be quoted on the OTC Bulletin Board II. It may only be quoted in the OTC Pink market III. Firm quotes would no longer be available IV. Firm quotes may still be available a. I and III b. I and IV c. II and III d. II and IV

b. I and IV A company that fails to meet the maintenance requirements of securities listed on the NYSE or Nasdaq will become delisted. When this occurs, the company may be quoted (but not listed) on the OTC Bulletin Board or in the OTC Pink Market (also called the Pink Sheets). Quotes on the OTCBB or the electronic Pink Sheets generally are firm quotes. Firm quotes obligate the offering dealer to buy or sell the amount quoted.

Which of the following choices represent logical strategies for a technical analyst? I. Buy calls when a stock breaks through a resistance level II. Buy calls when a stock breaks through a support level III. Buy puts when a stock breaks through a resistance level IV. Buy puts when a stock breaks through a support level a. I and III b. I and IV c. II and III d. II and IV

b. I and IV A technical analyst believes that if a stock's price breaks through a resistance level, it will continue to rise until it reaches the next resistance level. The analyst will purchase calls if the stock's price breaks through a resistance level. The analyst will buy puts if the stock's price breaks through a support level, since the analyst believes the stock's price will continue to decline until the next support level.

A customer contacts her registered representative concerning the bid and offer prices of mutual funds listed in various financial publications and Web sites. Which TWO of the following statements are TRUE? I. The bid price is equal to the net asset value II. The bid price is equal to the net asset value minus the redemption fee III. The offer price is equal to the net asset value plus a commission IV. The offer price is equal to the net asset value plus the sales charge a. I and III b. I and IV c. II and III d. II and IV

b. I and IV The bid price of a mutual fund is also equal to the net asset value (NAV) and is the price a customer will receive if shares are sold. It does not include the redemption fee, which may be charged when the customer sells her shares. The offer price is equal to the NAV plus the sales charge, if any, and is the price a customer pays to purchase shares of a mutual fund. The term commission is not used in the mutual fund industry as the term sales charge or sales load is used, and is built into the price the customer pays for the fund.

If the FRB engages in repurchase agreements, which TWO of the following statements are TRUE? I. The money supply is being increased II. The money supply is being decreased III. The fed funds rate could rise IV. The fed funds rate could decline a. I and III b. I and IV c. II and III d. II and IV

b. I and IV The immediate result of an FRB repo is an increased money supply, which would have the effect of lowering interest rates.

Variable annuities sold by insurance companies must be registered with: I. The SEC II. The FRB III. FINRA IV. The State Insurance Commission a. I and III only b. I and IV only c. III and IV only d. I, II, III, and IV

b. I and IV only Variable annuities are generally sold by agents of insurance companies. In recent years, more and more brokerage firms and banks have begun selling variable annuities. Variable annuities are considered securities by the SEC and, therefore, must be registered with the SEC. Variable annuities must also be registered with the State Insurance Commission. The agents that sell variable annuities must be registered representatives with a Series 6 or Series 7 registration and must be licensed insurance agents.

The four bonds listed have the same maturity. Place them in their order of yield (during most economic times), from highest to lowest. I. Treasury bond II. Investment-grade corporate bond III. Investment-grade municipal general obligation bond IV. Investment-grade municipal revenue bond a. I, II, III, IV b. II, I, IV, III c. II, IV, III, I d. III, I, IV, II

b. II, I, IV, III A corporate bond would have the highest yield followed by Treasuries, then municipals. The municipal bond typically has the lowest yield since it is exempt from federal income tax. General obligation bonds are generally considered safer than revenue bonds and, therefore, carry a lower yield. The corporate bond is of lower quality than the Treasury bond (a U.S. government obligation) and will, therefore, have a higher yield.

According to CAPM, all of the following choices are examples of diversifiable, nonsystematic risk, EXCEPT: a. Credit risk b. Interest-rate risk c. Business risk d. Industry risk

b. Interest-rate risk Interest-rate risk is the systematic risk for bonds just as beta measures the systematic risk for stocks. Systematic risk is market risk, which persists despite diversification.

Which of the following statements is TRUE regarding the Interbank market? a. It is the market for fed funds between banks b. It helps establish the spot prices for foreign currencies c. It administers loans to foreign countries d. It is the guarantor of foreign currency options

b. It helps establish the spot prices for foreign currencies The Interbank market is the purchase and sale of foreign currencies among large banks. The market helps establish the cash (spot) prices for foreign currencies. Spot prices are often referred to as the spot rate.

Rosewood Securities LLC has been accused of buying and selling securities for the purpose of creating artificial trading activity. Which of the following choices BEST describes this activity? a. Churning b. Matched orders c. Capping d. Stabilization

b. Matched orders A matched order is also known as painting the Tape. It is an illegal activity based on a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity. The intention of this activity is to lure unsuspecting investors into trading the stock because of the appearance of unusual trading volume. The manipulators have already taken a position in the stock, and hope to influence the market (illegally) to make their position profitable through this fake heavy trading volume.

An aunt wishes to give her niece securities as a gift. The niece's parents have recently died and a court has appointed a guardian other than the aunt. The aunt: a. Must register the securities in the guardian's name b. May give the securities without the permission of the guardian c. May give the securities only if they would qualify under the state's legal list requirements d. May give the securities only if the guardian is also appointed the custodian

b. May give the securities without the permission of the guardian The aunt may give securities to the minor as a gift. There are no restrictions on a donor giving a gift.

Knowing a client's tax bracket is particularly useful when evaluating the suitability of which type of investment? a. Variable annuities b. Municipal bonds c. Preferred stocks d. Common stocks

b. Municipal Bonds Knowing a client's tax bracket is particularly useful when evaluating the suitability of municipal bonds. The interest on municipal bonds is typically tax-exempt, which is less of an advantage if the client is in a low tax bracket.

A member of a municipal new issue syndicate is entering an order for an accumulation account being used for a unit investment trust that the firm underwrites. This order must be entered as a(n): a. Presale order b. Related portfolio order c. Contingency order d. AON order

b. Related portfolio order MSRB rules require a syndicate member to disclose to the syndicate an order for a unit investment trust or an accumulation account to be used for a unit investment trust. The disclosure is accomplished by entering the order as a related portfolio order.

Which of the following securities would be LEAST suitable for an investor interested in preservation of capital? a. Long-term CDs b. Reverse convertible bonds c. A corporate bond fund d. A floating rate bond maturing in five years

b. Reverse convertible bonds Reverse convertible securities would not be suitable for an investor interested in preservation of capital. Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of his principal (the most beneficial option). If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal.

Mrs. Jones is interested in selling 500 shares of her REIT. The sale will be handled in a manner similar to the: a. Redemption of an open-end fund b. sale of a closed-end fund listed on the NYSE c. Liquidation of a real estate limited partnership d. Redemption of EE bonds

b. Sale of a closed-end fund listed on the NYSE There is a secondary market for REITs (real estate investment trusts). The vast majority of REITs trade on the NYSE with prices determined by supply and demand. Closed-end funds are funds that are often bought and sold on the NYSE that trade in a similar manner.

Which of the following is primarily found on a broker's broker communication system? a. News on municipal issuers b. Secondary market bids and offers c. Primary offerings d. Research recommendations

b. Secondary market bids and offers Broker's broker communication systems are primarily used to carry bids and offers in the secondary market.

The Federal Reserve Board was given the authority to set margin requirements according to the provisions of the: a. Securities Act of 1933 b. Securities Exchange Act of 1934 c. Securities Investor Protection Act of 1970 d. Investment Company Act of 1940

b. Securities Exchange Act of 1934 The Securities Exchange Act of 1934 gave the Federal Reserve Board the power to set margin requirements. This is done through Regulation T (for broker-dealers) and Regulation U (for banks and lenders other than broker-dealers).

When opening an account for an employee of FINRA, the member firm is required to: a. Send duplicate confirmations only b. Send duplicate account statements only c. Send both duplicate confirmations and account statements d. Have the account approved by the chief compliance officer

b. Send duplicate account statements only A member firm is required to send duplicate account statements to FINRA when a customer of the firm is an employee of FINRA. The member firm would need written instructions from the employee of FINRA when opening an account in order to send the duplicate account statements. There is no requirement to send duplicate confirmations or have the account approved by a chief compliance officer.

Which of the following choices is NOT considered a tax-preference item when calculating the alternative minimum tax (AMT)? a. Accelerated depreciation in excess of straight-line depreciation b. Straight-line depreciation c. Excess intangible drilling costs d. Excess mining, exploration, and development costs

b. Straight-line depreciation Under AMT rules, taxpayers must compute their income taxes twice. An individual subject to the AMT must first calculate his taxes using the standard method, and then he must recalculate his tax liability using the AMT method. The taxes due are the greater of the two calculations. Tax-preference items are used in calculating the alternative minimum tax. Straight-line depreciation is not a tax-preference item.

Which of the following choices is NOT considered a tax-preference item when calculating the alternative minimum tax (AMT)? a. Accelerated depreciation in excess of straight-line depreciation b. Straight-line depreciation c. Excess intangible drilling costs d. Excess mining, exploration, and development costs

b. Straight-line depreciation Under AMT rules, taxpayers must compute their income taxes twice. An individual subject to the AMT must first calculate his taxes using the standard method, and then he must recalculate his tax liability using the AMT method. The taxes due are the greater of the two calculations. Tax-preference items are used in calculating the alternative minimum tax. Straight-line depreciation is not a tax-preference item.

Which of the following parties is responsible for the safekeeping of the securities owned by a mutual fund? a. The registrar b. The custodian bank c. The sponsor d. The transfer agent

b. The Custodian bank The custodian bank is responsible for the safekeeping of the securities owned by a mutual fund. The custodian bank has no responsibility relating to the management of the fund's portfolio.

A registered representative is permitted to borrow from, or lend funds to, customers in all of the following situations, EXCEPT: a. The customer is an immediate family member of the registered representative b. The customer is an accredited investor c. The loan is based on a business relationship independent from the member firm customer relationship d. The customer has a personal relationship with the registered representative

b. The customer is an accredited invest Registered personnel of a member firm are generally prohibited from borrowing money from, or lending money to, any customer. However, if the firm has written rules and procedures that allow borrowing and lending between registered personnel and their customers that meet one of the following conditions, the activities are permissible. The customer is an immediate family member of the registered person. The customer is a financial institution or other entity that engages in the business of providing credit, financing, or loans in the course of its business. The customer and the registered person are both registered with the same member firm. The customer has a personal relationship with the registered person wherein the loan would not have been solicited, offered, or given if the relationship did not exist. The loan is based on a business relationship other than that of a member firm customer. There is no exception based on the type of customer, for example, an accredited investor.

Which of the following factors would be LEAST useful when analyzing the credit risk of an issuer of revenue bonds? a. Engineering reports b. The ratio of the amount of net overall debt to assessed valuation c. Debt service coverage ratio d. Special taxes

b. The ratio of the amount of net overall debt to assessed valuation

One of the major differences between an open-end and closed-end investment company is: a. The composition of their portfolios b. The types of securities that each may issue c. The method of calculating net asset value d. A closed-end investment company is exempt from new issue registration requirements

b. The types of securities that each may issue A major difference between open-end and closed-end investment companies is their capitalization, the types of securities they issue to raise money. Open-end companies may only issue common stock. Closed-end companies may issue common stock, preferred stock, or bonds.

Which of the following persons establishes positions in secondary market municipal bonds for a broker-dealer? a. Underwriter b. Trader c. Agent d. Principal

b. Trader A trader is responsible for positioning (carrying inventory) secondary market municipal bonds. An underwriter is involved in the distribution of new issues.

An exercise limit is the maximum number of options contracts that a customer may exercise in a five-consecutive-business-day period for each: a. Account that she maintains at each brokerage firm b. Underlying stock on each side of the market c. Series of options in an underlying stock d. Underlying stock on the long side of the market only

b. Underlying stock on each side of the market Exercise limits relate to the maximum number of contracts that an individual may exercise during a five-business-day period for each underlying stock on each side of the market. Exercise and position limits apply cumulatively to all accounts that a customer maintains at all brokerage firms, not for each account at each firm.

What information would NOT be found on a municipal bond confirmation? a. Whether the bonds are subject to the alternative minimum tax (AMT) b. Whether the bonds are subject to state income tax c. Whether the bonds were issued as original issue discount securities d. Whether the bonds are subject to federal income tax

b. Whether the bonds are subject to state income tax A municipal bond confirmation must disclose certain tax information such as whether the bonds are subject to the alternative minimum tax (AMT), whether the bonds are issued as an original issue discount security, and whether the bonds are subject to federal income tax.

Which of the following investments will permit a customer to purchase publicly traded shares of a company that is MOST similar to a private equity fund? a. An exchange-traded fund b. A business development company c. An exchange-traded note d. A real estate investment trust

b. a business development company A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. A BDC will use the money it raises to invest mostly in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm.

The stock of which of the following companies is most likely considered cyclical stock? a. An oil and gas company b. A home appliance company c. A utility company d. A pharmaceutical company

b. a home appliance company A cyclical company is one whose sales correspond to changes in the business cycle and, therefore, will be affected by a recession. Examples of cyclical stock includes the stock of household appliance companies, steel companies, and construction companies. A defensive company is one whose sales are not as affected by changes in the business cycle (i.e., it resists recession). Examples of defensive stock includes the stock of pharmaceutical, health care, tobacco, oil and gas, utility, and supermarket companies.

According to MSRB rules, which of the following documents need not be approved by a principal prior to being sent to a customer? a. An abstract of an official statement b. A preliminary official statement c. An advertisement regarding the firm's products and services d. A research report

b. a preliminary official statement A preliminary official statement is prepared by or for the issuer. Since the MSRB does not have the power to regulate issuers, a preliminary official statement cannot be considered advertising under MSRB rules. However, an abstract (summary) of the official statement is prepared by a dealer and is, therefore, considered advertising. A final official statement and a firm's offering list are also not considered advertising.

If a mutual fund changes or adds a portfolio manager, the greatest effect would be on the fund's: a. Expense ratio b. Alpha c. Rating d. Beta

b. alpha Alpha is a measure of an investment's performance on a risk-adjusted basis. The excess return of the investment relative to the return of the benchmark index is its alpha. Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio's return. On the other hand, beta is a measure of the volatility of a security or a portfolio in comparison to the market as a whole. In other words, it is the tendency of an investment's return to respond to swings in the market (i.e., the S&P 500 Index). Essentially, the market has a beta of 1.0 and security and portfolio values are measured based on how they deviate from the market.

Which of the following indicators is bullish? a. A breakout below a support level b. The bottom of a saucer pattern c. The top of an inverse saucer pattern d. A decrease in the amount of short interest

b. bottom of a saucer patterns A saucer is a chart pattern used by technical analysts that indicates that a stock has formed a bottom in its trading cycle and is ready to rise. The bottom of the saucer pattern is a bullish indicator for the stock. The reverse of the saucer pattern is the inverse saucer, where the stock forms a top in its pattern and is expected to fall. Following the logic used in the saucer, this is a bearish indicator. A breakout below the support level is a bearish signal. The term short interest refers to the amount of a company's shares of common stock that have been sold short and have not yet been covered (closed out). An increase (not decrease) in short interest has historically been considered a bullish indicator by a technical analyst.

Someone who wishes to hedge a portfolio of preferred stocks will: a. Buy yield-based puts b. Buy yield-based calls c. Write a yield-based straddle d. Write a yield-based combination

b. buy a yield-based call The prices of preferred stocks are inversely related to the movement of interest rates, as are bonds. Therefore, if the investor is concerned that rising interest rates will erode the value of the preferred stock portfolio, the purchase of an option that does well when interest rates rise will provide an effective hedge. Yield-based calls (which are yield-based options) increase in value when interest rates rise, also creating a viable hedge.

In a soft-dollar arrangement between an investment adviser and a broker-dealer, the broker-dealer would be permitted to pay: a. The cost of a coach flight for a portfolio manager to attend a conference b. The cost of a conference concerning the future of the computer software industry c. The cost of computer terminals used to deliver market data services d. A percentage of the salaries of the adviser's internal research staff

b. cost of a conference concerning the future of the computer software industry Soft dollars are products and services that an investment adviser receives from a broker-dealer in exchange for customer order flow. It is a means of paying brokerage firms for their services through trade commissions. The key here is that the services that the adviser receives as part of a soft-dollar arrangement must benefit its clients. The broker-dealer is permitted to pay for the cost of the conference that an adviser attends concerning securities within an industry in which the adviser will be invested.

An individual is interested in an investment that offers annual income, has the potential of appreciating in value if interest rates decline and, in the event that the issuer fails to make a payment, having the missing amount added to future distributions. For this investor, which of the following securities is the most suitable? a. Callable preferred stock b. Cumulative preferred stock c. Participating preferred stock d. Convertible preferred stock

b. cumulative preferred stock Individuals generally purchase preferred stock for income. As with any security that pays a fixed rate, there is the potential for appreciation if interest rates decline. There are several types of preferred stock. Cumulative preferred stock will add all unpaid dividends to a future payment if a cash dividend is to be paid to common shareholders. Participating preferred stock allows the owners to share in the extraordinary earnings of a company. Essentially, participating preferred has a stated dividend, but these shareholders may receive more than that amount based on the profits of the issuing company. Convertible preferred stock allows the owner to convert the stock into a fixed number of common shares. Callable preferred stock allows the issuer to retire (call) the stock in at a predetermined price.

An airport deducts all of the following expenditures before arriving at its net revenues, EXCEPT: a. Runway maintenance expenses b. Debt service expenses c. Hangar expenses d. Salaries of airport personnel

b. debt service expenses Debt service expenses are paid first only in gross revenue pledges. It is assumed that the airport is using a net revenue pledge that results in all maintenance and operation expenses being deducted before arriving at net revenues.

Which of the following information does NOT have an effect on the credit quality of an airport revenue bond? a. Tourism b. Debt per capita c. Airport traffic d. Energy costs

b. debt/capita Debt per capita is used when analyzing a general obligation bond and would not be considered for a revenue issue.

Which of the following choices is NOT a typical characteristic of a 401(k) plan? a. Employee contributions are fully and immediately vested b. Employers must match employee contributions c. An employee's taxable income is reduced by employee contributions d. Employee contributions grow on a tax-deferred basis

b. employers must match employee contributions In a 401(k) plan, an employee can usually make a pretax contribution in the plan and reduce taxable income. Employee contributions and growth in the account are tax-deferred. Employers are not required to match contributions, but may do so.

A charity has received restricted stock from the director of a corporation. The director owned the stock for two years before giving it to the charity. According to SEC Rule 144, the charity may sell the stock: a. Only if sold to a qualified institutional buyer b. Freely under Rule 144 c. After holding the stock for an additional six months, subject to the volume restrictions of Rule 144 d. After holding the stock for an additional six months, but not subject to the volume restrictions of Rule 144

b. freely under Rule 144 The charity may sell the stock freely (immediately) since the required holding period for restricted stock has already been met by the director. Since the charity is a not affiliated with the issuer (a nonaffiliated person), it is not subject to the volume restrictions. However, the stock is still restricted (unregistered) and must be sold under Rule 144. Rule 144A, not Rule 144, requires the purchaser to be a qualified institutional buyer.

A registered representative employed by the research department of a member firm is NOT permitted to be supervised by which department of a broker-dealer? a. Trading b. Investment banking c. Operations d. Sales

b. investment banking Current regulations require a member firm's research department to be separate from its investment banking department to avoid conflicts of interest. An RR employed by the research department is not allowed to be supervised by the investment banking department. The rules do not specify which area of a broker-dealer must supervise an RR working in research, but they do state which department is not permitted to supervise.

A customer purchases a step-up, long-term certificate of deposit. The initial interest rate: a. Is higher than current market rates b. Is lower than current market rates c. Offers the client protection from interest-rate risk d. Offers the client protection against call risk

b. is lower than current market rates A long-term (maturity exceeding one year), step-up CD offers an investor an interest rate that is initially lower than current market rates will pay for that maturity period. The rate will then be adjusted upward at predetermined intervals established by the offering bank. Since they are traded in the secondary market, changes in interest rates will cause the price of this security to fluctuate. Some long-term CDs will be callable by the issuing bank, and the investor may be required to reinvest the funds at prevailing lower interest rates.

Which of the following statements BEST describes a banker's acceptance (BA)? a. It facilitates the trading of foreign stocks in the United States b. It helps to finance foreign trade between importers and exporters c. It is used by a municipal issuer in raising funds to meet a seasonal need for cash d. It is issued by nondomestic banks and is secured by Eurodollar deposits

b. it helps to finance foreign trade between importers and exporters Bankers' acceptances (BAs) help facilitate foreign trade. ADRs permit the trading of foreign stocks in the U.S.

A syndicate is formed on an undivided (Eastern) account basis to sell $10 million of a new municipal bond issue. A dealer has committed to sell $1 million (10% of the issue). The dealer sells the $1,000,000 committed for, but $2 million of the issue remains unsold. The dealer is: a. Not liable to sell the unsold bonds b. Liable to sell 10% of the unsold bonds c. Liable to sell $1,000,000 of the unsold bonds d. Liable to sell all of the unsold bonds

b. liable to sell 10% of the unsold bonds In an Eastern (undivided) account, the dealer is responsible for a proportionate amount of the bonds in the account. If the dealer sells all the bonds committed for, and there are bonds left unsold in the account, the dealer is liable for bonds based on his original commitment. In this example, the dealer is also responsible to sell 10% of the unsold bonds.

Which of the following choices best describes a wrap account? a. A personal, joint, and IRA account with one account number b. A managed account in which advisory and transaction charges are included in one comprehensive fee c. A consolidated account in which the investor can buy or sell options, equities, or bonds d. An investment club account with no more than 99 investors

b. managed account w/ advisory and transaction charges included in one comprehensive fee The term wrap account refers to the fee arrangement where one fee, usually ranging from one to three percent annually, is charged by a broker-dealer. The fee is used to cover administrative, portfolio management, and transaction costs. A wrap account is usually managed by an investment adviser.

A registered representative has limited discretion over a customer's account. The registered representative may: a. Remove money freely from the account b. Place orders before the order has been approved by a principal c. Not enter buy stop orders d. Have all confirmations of transactions sent only to himself

b. place orders before the order has been approved by a principal Limited discretion does not permit free withdrawal of funds. The account owner must receive confirmations. Buy stop orders are permitted. The RR may place orders which can be approved promptly afterward.

A retail salesperson has helped his firm win the role as the lead underwriter in a local municipal bond issue. If the underwriting was conducted on a negotiated basis, which of the following statements is TRUE? a. The retail salesperson would not be considered a municipal finance professional b. The retail salesperson could not have made a $300 political contribution to a local elected official in the past two years c. The retail salesperson is required to register as a municipal securities principal d. The action by the retail salesperson would be a violation of MSRB rules

b. salesperson could not have made a $300 political contribution Since the retail salesperson has helped his firm obtain negotiated municipal bonds business, he is defined as a municipal finance professional (MFP). A two-year look-back period applies to municipal finance professional contributions. If an individual has made contributions to a political candidate that would have resulted in a violation of MSRB Rule G-37 (contributing more than $250 to a candidate for whom he is entitled to vote for), the firm that employs the individual is subject to the underwriting ban if the individual was employed in the role of an MFP within two years of the contribution. A retail salesperson is not required to register as a principal and is permitted to solicit elected officials of municipal bond issuers, provided the retail salesperson does not contribute more than $250 for the official for whom he is entitled to vote.

ABC Corporation has filed a registration statement with the SEC. A registered representative may: a. Send a research report about ABC to prospective clients b. Send a preliminary prospectus to clients to obtain indications of interest c. Accept orders from clients d. Accept money from clients to buy the securities

b. send a preliminary prospectus to clients to obtain indications of interest During the registration period, a registered representative may not send research reports to clients nor accept orders and payments for new issues from clients. The registered representative may send a preliminary prospectus and receive indications of interest from his clients.

Which of the following transactions is not prohibited under the Securities Exchange Act of 1934? a. A trader buys shares late in the day to prevent the price of a security from falling b. Short sales of municipal bonds c. Selling short shares of an exchange-traded stock without borrowing the security d. Two traders enter into transactions where ownership does not actually change, in order to increase trading volume

b. short sale of muni bonds All of the choices listed are prohibited according to the Securities Exchange Act of 1934 except short sales of municipal bonds. Short sales of securities are subject to the borrowing requirements of Regulation SHO. This makes choice (c) a violation. Municipal bonds are exempt securities and are not subject to the borrowing requirements of Regulation SHO. Any person that buys or sells a security for the purpose of attempting to stop the price from falling (pegging) or rising (capping) is engaging in a manipulative action. Persons who enter into transactions to increase volume, without ownership changing, have engaged in painting the Tape. This is a manipulative act and is a violation.

Which of the following statements is TRUE concerning registered nontraded real estate investment trusts (REITs)? a. They offer investors the same amount of liquidity as exchange-traded REITs b. They are required to distribute the same percentage of taxable income as exchange-traded REITs c. They are not required to make periodic disclosures that are required of exchange-traded REITs d. They are suitable for the same investors as exchange-traded REITs

b. the are required to distribute the same percentage of taxable income as exchange-traded REITs Most REITs are traded on an exchange, such as the NYSE, and offer investors a high degree of liquidity. Nontraded REITs do not have their shares listed on an exchange and offer very limited liquidity, similar to limited partnerships. They would not be suitable for investors seeking liquidity. Both invest in various types of real estate and are subject to the same tax consequences (90% distribution on taxable income). Since they are both registered, they are required to make the same disclosures to investors.

Municipal bond unit investment trusts do NOT include which of the following characteristics? a. Investors can buy units in the fund, usually in multiples of $1,000 b. The certificates have coupons attached and are in bearer form c. Investors can redeem the units at any time through the fund's trustee d. The value of the unit will decline if interest rates rise

b. the certificates have coupons attached and are in bearer form All of the characteristics listed are true, except that the certificates have coupons attached and are in bearer form. Some unit investment trusts are funds that buy bonds for a portfolio and usually hold the bonds until maturity. The life of these funds is usually limited to the life of the bonds in the portfolio. Units can be bought in multiples of $1,000. The units can be redeemed at any time. If the general level of interest rates change, so will the price of the units. The funds are issued in book-entry form and registered form.

All of the following statements are TRUE concerning marketwide circuit breakers, EXCEPT: a. They are based on the S&P 500 Index b. The levels are calculated on a monthly basis c. A trading halt on one exchange applies to all exchanges d. A 7% decline will halt trading for 15 minutes

b. the levels are calculated on a monthly basis Marketwide trading halts are based on the S&P 500 Index and are calculated daily (not monthly). A trading halt on one exchange applies to all exchanges that trade the same security. A Level 1 Market Decline (7%) and a Level 2 Market Decline (13%) will halt trading for 15 minutes. For a Level 3 Market Decline (20%), trading will be halted for the remainder of the day.

Which of the following actions by the Federal Reserve Board results in a decrease in the money supply? a. The purchase of securities in the open market b. The sale of securities in the open market c. A decrease in the discount rate d. A decrease in the reserve requirements

b. the sale of securities in the open market The sale of securities by the Federal Reserve Board in the open market results in the withdrawal of reserves from the banking system, thereby decreasing the money supply. All the other actions by the FRB result in an increase in the money supply.

During periods of tight money, when the yield curve becomes inverted, the highest yield would probably be found in: a. Two-year Treasury notes b. Three-month Treasury bills c. Five-year Treasury notes d. Thirty-year Treasury bonds

b. thirty-year treasury bonds When interest rates have increased due to a tight monetary policy, the yield curve may become inverted, causing short-term rates to be higher than long-term rates. Three-month Treasury bills, having the shortest maturity, would have the highest yield. If the premise of the question was an easy money policy and a normal yield curve, the correct answer would be choice (d).

A customer is short 100 ABC at $120. The market is moving up sharply and the customer decides to cover her short position. The customer instructs her registered representative to cover the short position at the market on the close. The order: a. Will be executed only at the closing price of the day b. Will be executed as close as possible to the closing price c. Will be executed at any price within the last 15 minutes of trading d. Is not permitted to be entered by a retail customer

b. will be executed as close as possible to the closing price A market-on-close (MOC) order will be executed as close as possible to the closing price of the day

A customer would like to open an account designated by number. The registered representative should: a. Open the account b. Not open the account because it is a violation of SEC rules c. Open the account if the customer signs a written statement acknowledging the account is the customer's d. Not open the account because it is a violation of industry rules

c. A customer may open a numbered account for reasons of confidentiality. However, the registered representative should open the account only if the customer signs a written statement acknowledging the fact that the account is the customer's. This must be kept on file at the brokerage firm.

A customer's margin account has a market value of $15,000, a debit balance of $8,000, and SMA of $1,000. If the customer sold $1,000 of securities, what is the maximum amount the customer is permitted to withdraw after the sale? a. None b. $1,000 c. $1,500 d. $2,000

c. $1,500 This account is restricted since the equity ($7,000) is less than the Reg T requirement of the account's market value ($15,000 x 50% = $7,500). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds multiplied by the Reg T requirement of 50%. In this question, the sale of $1,000 worth of stock will result in a $500 credit to the customer's current SMA ($1,000). The customer is then at liberty to borrow the total SMA of $1,500.

An individual purchases two BP (British pound) 150 calls @ 7.50. The contract size is 10,000 BP. The total cost for the contracts is: a. $15,000.00 b. $7,500.00 c. $1,500.00 d. $750.00

c. $1,500.00 British pound option premiums are quoted in cents per unit. To convert to dollars, the decimal point must be moved two places to the left. The total cost is calculated by multiplying the contract size (10,000) by the premium expressed in dollars ($0.0750), yielding $750.00 per contract. Since the individual purchased two contracts, the total cost is $1,500.00.

A customer's margin account has a credit balance of $20,000 and a debit balance of $15,000. On what amount will the customer be charged interest? a. 0 b. $5,000 c. $15,000 d. $20,000

c. $15,000 Customers are charged interest on the average daily amount of the debit balance in their account. Generally, they are not charged interest in a short account.

A customer's initial trade in a margin account is the short sale of 500 shares of DEF stock at $20. After making the required deposit, the credit balance in the account is: a. $5,000 b. $10,000 c. $15,000 d. $20,000

c. $15,000 The credit balance in a short margin account is determined by adding the short sale proceeds and the Reg T deposit. In this example, the short sale proceeds are $10,000 (500 shares x $20). The Reg T requirement is $5,000 ($10,000 x 50%). The credit balance is $15,000.

A customer's margin account is as follows. Long Market Value $25,000 MNO $11,000 XYZ Debit Balance $20,000 SMA $ 800 The customer sells $3,000 of stock in the account. What will the value of the SMA be after the sale? a. $800 b. $1,500 c. $2,300 d. $3,800

c. $2,300 This account is restricted since the equity ($16,000) is less than the Reg T requirement of the account's market value ($36,000 x 50% = $18,000). When stock is sold in a restricted account, 100% of the sale proceeds will be used by the brokerage firm to reduce the customer's debit balance. The broker-dealer will also credit the customer's SMA with an amount equal to the sale proceeds multiplied by the Reg T requirement of 50%. In this question, the sale of $3,000 worth of stock will be used to reduce the customer's debit balance to $17,000 and the SMA will be credited by $1,500 ($3,000 sale x 50% Reg T). This will bring the SMA up to $2,300 ($800 + $1,500).

A 60-year-old individual has invested $30,000 in a nonqualified variable annuity. The annuity's value is currently $40,000. If the individual withdraws $20,000 and is in a 28% tax bracket, his tax liability will be: a. 0 b. $1,400 c. $2,800 d. $5,600

c. $2,800 The amount invested in a nonqualified variable annuity may not be deducted from income. All earnings accrue tax-deferred. A withdrawal will be taxed on a LIFO method, meaning the earnings (last in) will be considered the first to be withdrawn. Earnings are taxed as ordinary income. Withdrawal of the invested amount is considered return of capital and is not taxed. The annuity has earnings of $10,000 and, therefore, $10,000 of the $20,000 withdrawn is taxable and the remaining $10,000 is considered return of capital. The tax liability is $2,800 ($10,000 taxable amount x 28% tax bracket). Had the individual been under 59 1/2 years of age when the withdrawal was made, the distribution also would have been subject to a 10% penalty on the taxable portion.

A closed-end fund trading on the NYSE has a current bid price of $21.50 and an offer price of $21.70. A customer purchasing the fund would pay: a. $21.50 plus a commission b. $21.50 plus a sales charge c. $21.70 plus a commission d. $21.70 plus a sales charge

c. $21.70 plus a commission The customer would pay $21.70 plus a commission. A closed-end fund is purchased and sold like any other stock traded on the NYSE. The customer would pay the offer price plus a commission or receive the bid price less a commission when selling the security. The term sales charge refers to the built-in compensation charged by an open-end (mutual fund) company when a customer buys shares of the fund.

If ABC stock is currently trading at 35.25 and the October 35 put option has a premium of 2.25, what is the time value of this option? a. Zero b. $200 c. $225 d. $250

c. $225 Time value is calculated by taking the difference between an option's premium and its intrinsic value. - Since the market price of the stock is greater than the strike price of the put option, - this option is out-of-the money and has no intrinsic value. - The entire premium of this option, $225, is considered the time value.

Mr. Smith, a self-employed computer analyst, has total annual earnings of $125,000. What is the maximum deductible contribution he can make to his Keogh plan? a. $2,000 b. $5,500 c. $25,000 d. $53,000

c. $25,000 A Keogh plan allows a maximum annual contribution of 100% of compensation or $53,000, whichever is less. (For 2014, the limit was $52,000.) This question is asking the amount deductible. The amount deductible is limited to the lesser of 20% of compensation or $53,000 (also $52,000 for 2014). A self-employed individual may make a deductible contribution of 20% of self-employed income, up to a maximum of $53,000, to a Keogh account. Twenty percent of Mr. Smith's income ($125,000) is $25,000.

An investor owns convertible preferred stock that was originally purchased at $106. The stock is convertible at $25, pays a 5% annual dividend, is callable at $110, and is trading at a current market price of $112. If the common stock is currently trading at $27.75 and the investor decides to convert the preferred stock into common stock, what would be the cost basis per share for the newly acquired common stock? a. $27.75 b. $27.50 c. $26.50 d. $28.00

c. $26.50 To determine the cost basis of the common stock, the first step is to calculate the conversion ratio (i.e., the number of common shares to be received if the preferred stock is converted). To calculate this, the par value of the preferred stock ($100) is divided by the conversion price ($25). As a result, four shares of common stock are received upon conversion. The cost basis of the newly acquired common shares is found by dividing the original purchase price of the preferred stock ($106) by the number of shares received (4). $106 ÷ 4 = $26.50. Any future gains or losses on the sale of the common stock are based on this price.

An investor has taken the following gains and losses during the tax year: a $19,000 capital gain on stock positions and a $24,000 loss on option positions. What amount of ordinary income may the investor offset this year? a. 0 b. $2,000 c. $3,000 d. $5,000

c. $3,000 Capital gains may be offset against capital losses regardless of whether they are from stocks or options. The maximum capital loss an investor may write off against ordinary income in one tax year is $3,000. The balance of the $2,000 capital loss must be carried forward to the next year.

A customer owns 20 ABC Corporation October 30 calls in a margin account. The customer exercises the calls and on the same day sells the stock at $32. The customer will need to deposit what amount in the account? a. No cash deposit is required b. $15,000 c. $30,000 d. $60,000

c. $30,000 If a client exercises an option in a margin account, he is required to meet the Reg T deposit on the underlying shares. The client owns 20 ABC Corporation October 30 calls and if he exercises the contract he purchases $60,000 worth of stock. (100 shares per contract x 20 contracts = 2,000 shares. 2,000 shares x 30 strike price equals $60,000.) Under Reg T, the client must meet the deposit requirement of 50% ($30,000) on this purchase. This requirement must be met even if the shares are sold the same day the contract is exercised.

A customer owns 20 ABC Corporation October 30 calls in a margin account. The customer exercises the calls and on the same day sells the stock at $32. The customer will need to deposit what amount in the account? a. No cash deposit is required b. $15,000 c. $30,000 d. $60,000

c. $30,000 If a client exercises an option in a margin account, he is required to meet the Reg T deposit on the underlying shares. The client owns 20 ABC Corporation October 30 calls and if he exercises the contract he purchases $60,000 worth of stock. (100 shares per contract x 20 contracts = 2,000 shares. 2,000 shares x 30 strike price equals $60,000.) Under Reg T, the client must meet the deposit requirement of 50% ($30,000) on this purchase. This requirement must be met even if the shares are sold the same day the contract is exercised.

A customer purchased 10 ABC January 50 calls, paying a $2 premium and 10 ABC January 50 puts, paying a $2 premium. The market price of ABC stock is $50 per share.The buyer of these 10 straddles will need to deposit: a. $1,000 b. $2,000 c. $4,000 d. $10,000

c. $4,000 When buying options, 100% of the purchase price (the premium) must be deposited. The customer paid a $2 ($200) premium for the call and a $2 ($200) premium for the put (a $4 premium for one straddle). The customer has purchased 10 straddles and paid $400 per straddle for a total of $4,000 (10 straddles x $400 = $4,000).

With no other securities position, a customer sells short 100 shares of ABC at $40 and sells 1 ABC October 40 put for $500. The customer will break even when the price of the stock is at: a. $35 b. $50 c. $45 d. $40

c. $45 An individual who sells short risks a loss if the price of the stock rises. If the price rises to $50 and the stock is bought in the open market to cover, the loss will be $1,000 minus the premium, for a net loss of $500. If the market price rises to 45, the loss of $500 is exactly matched by the premium income of $500 and the investor breaks even. The breakeven point for a short seller who writes a put is the market price of the short sale plus the premium.

An individual owns 800 shares of stock at an original cost of $55 per share. If the company distributes a 15% stock dividend, what is the client's cost basis per share? a. $63.25 b. $55.00 c. $47.83 d. $47.75

c. $47.83 A stock dividend is not a taxable event when received. The investor must adjust her cost basis. The investor would now own 920 shares (800 shares x 1.15). The new cost basis would be $47.83 (original cost of $44,000 [800 shares x $55] divided by 920 shares).

A customer buys an ABC July 50 call, paying a $3 premium. Seven months later, the customer exercises the call when the market price of ABC stock is $60 per share. The customer immediately sells the stock for $6,000. When computing the profit, the customer will use a cost basis of: a. $4,700 b. $5,000 c. $5,300 d. $6,000

c. $5,300 The customer paid $300 for the call option plus $5,000 when he exercised the option at the $50 strike price. The customer's cost basis is, therefore, $5,300. The strike price plus the premium equals the cost basis for a buyer of a call who is exercising the option.

An accountant earns $200,000 and wishes to make the maximum IRA contribution for himself and his nonworking spouse. He can contribute a maximum of: a. $5,500 and it must be in his name b. $5,500 and it must be in the wife's name c.$5,500 in her account plus $5,500 in his account d. $11,000 in a joint account

c. $5,500 in her account plus $5,500 in his account An individual with earned income and a nonworking spouse may contribute a total of $11,000 for himself and his wife. However, the contribution must be made in two separate accounts, each housing $5,500.

An investor purchases a $100,000 face value municipal bond with a 5-year maturity at 105. After two years, the bond is sold at 95. For tax purposes, the investor has a(n): a. $2,000 loss b. $4,000 loss c. $8,000 loss d. $10,000 loss

c. $8,000 loss When a municipal bond is purchased at a premium, the bond's premium must be amortized to find an adjusted cost basis. If the bond is sold above the adjusted cost basis, the result is a capital gain. If the bond is sold below the adjusted cost basis, the result is a capital loss. If the bond is held to maturity, there is neither a loss nor a gain for tax purposes. This is because the adjusted basis would equal the par value after the premium is amortized. This bond is purchased at $105,000 with a 5-year maturity. The premium of $5,000 ($105,000 - $100,000 = $5,000) must be amortized over a 5-year period ($5,000 divided by 5 years equals $1,000 per year). Therefore, each year the original cost of the bond is reduced by $1,000. If the bond is sold after 2 years, the adjusted cost basis is $103,000 ($105,000 - $2,000 = $103,000). Since the bond is sold at $95,000, there is a capital loss of $8,000 ($103,000 - $95,000).

An individual invested $100,000 in a real estate limited partnership. The individual's portion of the income and expenses are as follows. Gross revenue $220,000 Operating expenses $150,000 Interest on mortgage $35,000 Depreciation $50,000 The cash flow of the real estate program is: a. +$15,000 b. - $15,000 c. +$35,000 d. - $35,000

c. +$35,000 After reducing the gross revenue by all of the expenses listed above you determine the net loss which is $15,000. From the loss you would add back any depreciation expense to determine the cash flow. Depreciation is a non-cash expense and it is added to cash flow. So the $15,000 loss plus the $50,000 in depreciation expense would equal $35,000. Cash flow = Net Income or Loss + Depreciation Expense.

A customer has funded his Roth IRA with $200,000. The account has grown to $470,000. At age 70 1/2, the customer is considering taking his first distribution. His distribution this year is based upon a 27.4 period of time. If he fails to take his distribution, what is his penalty? a. $17,153 (the account balance divided by 27.4) b. 10% of the required distribution amount of $17,153 c. 0 d. $8,576 (50% of the required distribution amount)

c. 0 This question contains information that is not essential to answering the question and is used as a distracter. There is no required minimum distribution (RMD) requirement for a Roth IRA. If the question had focused on a traditional IRA, the penalty would be 50% of the RMD amount.

A designated market maker places a GTC order in his book to buy 1,000 shares of XYZ at $30. XYZ declares a 50% stock dividend. The designated market maker should adjust the order when the stock sells ex-dividend to: a. 1,000 shares at $20 b. 1,000 shares at $30 c. 1,500 shares at $20 d. 1,500 shares at $30

c. 1,500 shares at $20 The order must be adjusted to reflect the change in XYZ stock. The number of shares will be increased to reflect the dividend and will now be 1,500 shares (1,000 shares plus 50% of 1,000). The price of ABC will be adjusted downward to $20. The total value of the order before the dividend (1,000 shares at $30 = $30,000) must equal the value after the dividend (1,500 shares at $20 = $30,000).

XYZ Mutual Fund, an open-end investment company, has an NAV of $20 and a public offering price of $21.40. The prospectus states that the sales charge for purchases of fund shares of $25,000 through $49,999 is 4%. Approximately how many shares can the customer buy for $35,000? a. 1,600 shares b. 1,635 shares c. 1,680 shares d. 1,750 shares

c. 1,680 shares To compute the number of shares that can be purchased, first determine how much of the investment will go to the sales charge. This amount is $1,400 ($35,000 investment x 4% sales charge). This leaves $33,600 for purchasing shares. The investor will purchase 1,680 shares ($33,600 divided by $20 NAV per share). You do not divide by the public offering price since it includes a sales charge and you have already deducted $1,400 in sales charges.

XYZ Mutual Fund, an open-end investment company, has an NAV of $20 and a public offering price of $21.40. The prospectus states that the sales charge for purchases of fund shares of $25,000 through $49,999 is 4%. Approximately how many shares can the customer buy for $35,000? a. 1,600 shares b. 1,635 shares c. 1,680 shares d. 1,750 shares

c. 1,680 shares To compute the number of shares that can be purchased, first determine how much of the investment will go to the sales charge. This amount is $1,400 ($35,000 investment x 4% sales charge). This leaves $33,600 for purchasing shares. The investor will purchase 1,680 shares ($33,600 divided by $20 NAV per share). You do not divide by the public offering price since it includes a sales charge and you have already deducted $1,400 in sales charges.

An investor has invested heavily in energy stocks and the S&P Index is up by 22% from the prior year. If that sector of the S&P 500 has a beta of 1.6 and the S&P 500 increased by 10%, the investor would expect an increase in her portfolio of: a. 1.6% b. 10% c. 16% d. 22%

c. 16% Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. If the beta of a stock is greater than one, it implies a higher level of risk and volatility compared to the stock market. If the beta of the stock is less than one, it is less risky and volatile than the market. The S&P 500 is assigned a beta of +1.0. If the energy sector of the S&P 500 has a beta of 1.6, it is assumed to be more volatile than the S&P 500. An increase of 10% in the S&P 500 would translate into an increase in the energy stocks of approximately 16% (1.6 x 10%). The fact that the S&P Index is up 22% from the prior year is not relevant.

A customer enters a sell stop-limit order for 100 shares at 18.50. The last round-lot sale that took place before the order was entered was 18.88. Round-lot sales that took place after the order was entered were at 18.60, 18.25, 18.38, 18.50, and 18.63. The execution price is: a. 18.25 b. 18.38 c. 18.50 d. 18.63

c. 18.50 After the order was activated by the round-lot sale of 18.25 (which is at or lower than 18.50), the order became a limit order to sell 100 shares at 18.50 or better. 18.50 is the first price that meets this requirement and is the execution price.

Ashton purchased 100 shares of XYZ common stock in January 2003, at a price of $25 per share. XYZ pays a quarterly dividend of $.25 per share. Today, XYZ closed at $30 per share. What is the dividend yield of XYZ common stock? a. .83% b. 1.25% c. 3.33% d. 4.00%

c. 3.33% The dividend yield for a stock is equal to the annualized dividend divided by the current market price. Since dividends are paid quarterly, the annual dividend is $1 per share ($.25 x 4). The annualized dividend of $1 divided by the current market price of $30 per share results in a dividend yield of 3.33%.

On February 22, an investor sells ABC stock at $31 for a 3-point loss. On March 10, the investor purchases ABC stock at a price of $27. For tax purposes, the investor's cost basis for the stock purchased on March 10 is: a. 24 b. 27 c. 30 d. 31

c. 30 When the wash sale rule is activated, the investor must add the loss to the new cost of the stock regardless of whether the stock is repurchased at a price that is higher or lower than the original cost. In this example, the investor's cost basis for tax purposes is found by adding the 3-point loss to the new cost of $27.

Which of the following transactions qualifies a customer as a pattern day trader? a. 3 day trades executed in one week b. 3 day trades executed in one day c. 4 day trades executed in one week d. 10 day trades executed in one month

c. 4 day trades executed in one week. A customer is considered a pattern day trader if 4 or more day trades are executed over any 5-business-day period. The minimum equity required for a pattern day trader is $25,000.

According to Regulation T, when purchasing an option contract the transaction must be paid for within: a. 1 business day b. 3 business days c. 5 business days d. 7 business days

c. 5 business days According to Regulation T, securities must be paid for within 2 business days of the standard (regular-way) settlement date. Since regular-way settlement is three business days, payment is required within five business days from the trade date. Therefore, while option transactions settle next day, the customer has five business days in which to pay for a purchase.

An investor who is currently in the 15% tax bracket receives a promotion that puts her in the 33% tax bracket. If an RR offers to sell her a 3.75% tax-free municipal bond, what yield would the investor need in a taxable bond to receive the same after-tax yield as the municipal bond? a. 2.51% b. 4.41% c. 5.60% d. 11.36%

c. 5.60% If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is now in the 33% tax bracket. (The 15% rate is no longer relevant). The municipal bond has a yield of 3.75%. 3.75% (Municipal Bond Yield) / 67% (100% - 33%) = 5.60% Equivalent Taxable Yield

The Barge Towing Corporation has announced in a tombstone ad that it will issue $500,000,000 of 6 1/2% convertible subordinated debenture bonds convertible into common stock at $10.50. The bonds will mature in November 2040 and are being issued at a $1,000 par value. The conversion ratio of the bonds is approximately: a. 75 to 1 b. 85 to 1 c. 95 to 1 d. 100 to 1

c. 95:1 ratio The conversion price is given as $10.50. To find the conversion ratio, divide the par value ($1,000) of the bond by the conversion price of $10.50. This equals a conversion ratio of 95 to 1 ($1,000 divided by $10.50 equals 95).

Cash dividends received from which of the following securities will be taxed as ordinary income? a. Preferred stock issued by a bank b. Common stock issued by an oil company c. A real estate investment trust d. Convertible preferred stock issued by a software company

c. A real estate investment trust Currently, dividends paid on both common and preferred stock are taxed at a maximum rate of 20% if the stock is held for more than 60 days. Dividends from a REIT are still taxed at the same rate as ordinary income since a REIT does not pay corporate income tax if it distributes a minimum percentage of its income. The type of company that issued the shares is not relevant to the tax status of the cash dividend.

ABC Brokerage, a broker-dealer, purchases 600 shares of stock from a market maker to fill a customer's buy order. ABC has acted as a: a. Dealer b. Designated market maker c. Agent d. Underwriter

c. Agent When a broker-dealer buys a security from a market maker (dealer) on behalf of its customer, it is acting as a broker (agent).The client is charged a commission on the transaction. If the firm bought the security for its own account, or sold the security to a client from its inventory, it is acting as a dealer (principal). The client in this case is charged a markup or markdown.

An exercise notice for an August European-style stock index option may be entered on: a. August 7 b. August 14 c. August 21 d. August 28

c. August 21 European style options may be exercised only on the day the contract expires—the expiration date. As of February 15, 2015 the expiration date for standardized option contracts, including European-style options, is the third Friday of the expiration month. In this question, an exercise notice for the August option may be entered on Friday, August 21.

Which of the following types of debt BEST defines a municipal issuer's total bonded debt? a. Long-term debt only b. Both short-term and long-term debt c. Both long-term and short-term debt plus overlapping debt d. Long-term debt plus overlapping debt

c. Both long-term and short-term debt plus overlapping debt Total bonded debt is the sum of both long-term and short-term debt of a municipality plus its applicable share of overlapping debt. Overlapping debt is that portion of the debt of other government units for which residents of a particular municipality are responsible, such as services or facilities shared by several municipalities.

Accrued interest on new municipal bonds is calculated from the: a. Purchase date b. Settlement date c. Dated date d. Last interest payment

c. Dated Date Interest on new municipal bonds is calculated from the dated date, which is the date from which interest starts to accrue on a municipal bond.

Which of the following statements is TRUE concerning a customer who purchases an out-of-state original issue discount (OID) general obligation bond? a. Each year the customer will pay both federal and state income tax b. Each year the customer will pay only federal income tax c. Each year the customer will pay only state and local income tax d. The customer will not pay any tax

c. Each year the customer will pay only state and local income tax The upward adjustment in the purchase price of an original issue discount bond is called accretion. The amount accreted each year is considered interest income, which may or may not be taxable depending on the type of security. The interest on an out-of-state municipal security is exempt from federal tax, but subject to state and local income tax. The tax rate is based on the state in which the customer maintains his primary residence.

A customer may make a single, lump-sum contribution of which of the following amounts to a 529 college savings plan without incurring any taxes? a. An unlimited amount b. The annual gift tax exclusion c. Five times the annual gift tax exclusion d. Ten times the annual gift tax exclusion

c. Five times the annual gift tax exclusion States that offer 529 plans determine the specific plan rules such as allowable contributions, investment options (e.g., mutual funds), and deductibility of contributions for state tax purposes. A person may contribute to a 529 college savings plan up to the federal annual gift tax exclusion ($14,000) without paying a gift tax, or the contributor may make a single, lump-sum gift of up to the five-year cumulative limit ($70,000) for tax-free gifting.

Buy-stop orders or sell-stop orders can provide all the following features, EXCEPT: a. Provide price protection for a short position b. Provide price protection for a long position c. Give a broker discretion when the order is activated d. Possibly cause a fluctuation in the market price of a stock

c. Give a broker discretion when the order is activated Buy-stop or sell-stop orders do not give a broker discretion when the order is activated. When activated, the order becomes a market order and should be executed immediately. All of the other choices are correct.

A 60-year-old individual has been putting money in an annuity for 15 years and has been informed of another variable annuity that is offering higher returns. He is not in need of income at this time and is looking to defer income for several more years. Which of the following suggestions is most suitable in light of this individual's circumstances? a. He should use the provisions of a 1035 exchange to move the money from his current annuity to the new annuity offering higher returns b. An exchange would be suitable if he hasn't made an exchange within the last 36 months c. He should maintain his existing variable annuity and not begin taking distributions until such time as he needs them d. The individual can begin taking tax-free distributions from his existing annuity

c. He should maintain his existing variable annuity and not begin taking distributions until such time as he needs them In most situations, senior citizens should not be starting, or exchanging into, a new variable annuity since they are designed primarily as long-term investments. Contributions grow tax-deferred and the earnings are taxable only when the annuitant starts taking distributions. While a 1035 exchange allows a person to move from one annuity to another without the exchange being taxable, the new annuity is subject to its own sales charges and the benefits of the original annuity contract will be lost. Exchanges done within 36 months of a previous exchange can be viewed as churning and being unsuitable.

Relative to a sales tax, which TWO of the following statements are TRUE? I. It is a progressive tax II. It is a regressive tax III. It affects low income individuals the most IV. It affects all individuals equally a. I and III b. I and IV c. II and III d. II and IV

c. II and III A regressive tax applies the same tax rate regardless of a person's income. This has an adverse effect on a low-income person since the tax represents a higher percentage of income.

The market price of XYZ Company's stock is $60. The price-earnings ratio is 10 and earnings per share is $6.00. If the stock were to split 2-for-1, which of the following statements are TRUE? I. The price-earnings ratio will be reduced to 5 II. The price-earnings ratio will remain at 10 III. The earnings per share will be reduced to $3.00 IV. The earnings per share will remain at $6.00 a. I and III b. I and IV c. II and III d. II and IV

c. II and III A stock split will increase the number of shares outstanding while decreasing the market price of the stock. The split will also have the effect of reducing earnings per share since the number of shares outstanding will increase. The 2-for-1 split will reduce the market price to $30 ($60 x 1/2) and the earnings per share to $3.00 ($6.00 EPS x 1/2). However, the price-earnings ratio (market price/EPS), which was 10 before the split, will remain the same since both the market price and the earnings per share are reduced by the same percentage ($30/$3.00 EPS = 10).

Which TWO of the following statements are TRUE regarding the cash value in a variable universal life policy? I. It is fixed during the life of the contract II. It can fluctuate with the performance of the separate account III. Any loans taken will reduce the cash value IV. Loans have no effect on the cash value a. I and III b. I and IV c. II and III d. II and IV

c. II and III In a variable universal life policy, the performance of the separate account could increase or decrease the cash value. Loans against the policy will reduce the cash value available.

Which TWO of the following statements are normally TRUE of money-market mutual funds? I. They are load funds II. They are no-load funds III. Dividends are computed daily and credited monthly IV. Dividends are computed weekly and credited monthly a. I and III b. I and IV c. II and III d. II and IV

c. II and III Money-market funds are normally no-load, open-end investment companies. Their portfolio consists of short-term, fixed-income securities such as Treasury bills, commercial paper, and bankers' acceptances. Dividends on money-market fund shares are usually computed daily and credited monthly. Investors may elect to reinvest the dividends each month, thereby buying more shares.

Which TWO of the following statements are TRUE concerning revenue bonds? I. Revenue bonds may be issued only with voter approval II. Revenue bonds may be issued even though local debt limits have been reached III. Revenue bonds usually pay higher interest than general obligation bonds IV. Revenue bonds are not exempt from federal income taxes a. I and III b. I and IV c. II and III d. II and IV

c. II and III Revenue bonds may be issued without voter approval and may be issued even though a local debt limit has been reached. They are backed by the revenue derived from a project and not the taxing power of a municipality. They usually pay higher rates of interest than general obligation bonds since they have no taxing power as do general obligation bonds. The interest from both GO and revenue bonds is exempt from federal income taxes.

An insider of XYZ Corp. buys company stock in the open market at $63/share. Ten months later, the insider wishes to sell the stock at the current market price of $68/share. Which TWO of the following statements are TRUE regarding this transaction? I. The sale is subject to the six-month holding period under Rule 144 II. This sale is not subject to the six-month holding period under Rule 144 III. The sale is subject to the volume limitations under Rule 144 IV. The sale is not subject to the volume limitations under Rule 144 a. I and III b. I and IV c. II and III d. II and IV

c. II and III Rule 144 requires that restricted (unregistered) stock be held for six months before it may be resold. Control stock (registered stock purchased by insiders) is not subject to a holding period requirement under Rule 144. Both restricted and control stock are subject to the volume limitations under the rule.

A customer has received a Regulation T margin call. He can meet the call by depositing in his account which TWO of the following choices? I. NYSE-listed stock with a market value equal to the amount of the call II. Cash equal to the amount of the call III. Nasdaq-listed stock with a loan value equal to the call IV. 50% of the cash amount of the call a. I and III b. I and IV c. II and III d. III and IV

c. II and III Stock listed on the NYSE or Nasdaq is marginable. The customer can meet the call by either depositing in his account cash equal to the amount of the call or marginable stock with a loan value equal to the dollar amount of the call. Choice (I) is incorrect because it indicates stock with a market value equal to the amount of the call can be deposited, when it should be stock with a loan value equal to the amount of the call. Choice (IV) is incorrect because it states 50% of the cash amount of the call is required, whereas 100% of the cash amount of the call is required.

A tombstone ad states that Southern California Gas is issuing 8 3/4% first mortgage bonds at a price of 96.35% of their par value. Which TWO of the following statements are TRUE? I. The bonds are being sold to yield 9.635% annually II. The bonds will pay interest of $87.50 annually III. The bonds are subject to the Trust Indenture Act of 1939 IV. An investor purchasing the bonds would not pay federal income tax on the interest received a. I and III b. I and IV c. II and III d. II and IV

c. II and III The rate of interest stated in the tombstone is 8 3/4%. This means the company will pay 8 3/4% of $1,000 or $87.50 per year in interest. The bonds are corporate bonds being issued by Southern California Gas Company (not the state of California) and are subject to the Trust Indenture Act of 1939. In addition, the interest received on a corporate bond is subject to federal and state income tax.

Fred's Auto Centers is looking to raise $10 million to expand its business. The company has entered into an agreement to raise the capital through Winco Securities, a local investment banking firm. Winco Securities has made no guarantee that it will be able to raise the full amount of the offering. Which TWO of the following statements regarding this scenario are TRUE? I. This is an example of a firm-commitment underwriting II. This is a best-efforts underwriting III. Winco is acting as an agent for Fred's Auto Centers IV. Winco is acting as principal in this underwriting a. I and III b. I and IV c. II and III d. II and IV

c. II and III The underwriting is being done best-efforts, since no guarantee to raise the $10 million has been made by Winco Securities. Winco is acting as an agent in the transaction because any unsold shares will be retained by Fred's Auto Centers. Winco will be compensated only for the shares it sells and assumes no liability in the deal.

Which TWO of the following securities are typically sold at a discount? I. TIPS II. Treasury bills III. Bankers' acceptances IV. Collateralized mortgage obligations a. I and III b. I and IV c. II and III d. II and IV

c. II and III Treasury bills and bankers' acceptances are typically sold at a discount. The amount of interest is based on the difference between the purchase price and the face value.

A registered representative is the custodian of a UTMA account, which will be held at another member firm. Which TWO of the following statements are TRUE? I. There is no requirement for the RR to notify the employing firm before opening the account II. There is a requirement for the RR to notify the employing firm before opening the account III. The RR is required to notify the executing firm before opening the account IV. The RR is not required to notify the executing firm before opening the account a. I and III b. I and IV c. II and III d. II and IV

c. II and III An employee of a FINRA member firm who wishes to open an account or place an order at another member firm must notify her firm and the executing firm, in writing, prior to opening a securities account. Since the RR is the custodian for the UTMA account, she will be placing orders for this account.

A registered representative wants to open a joint account for the dentists in his office building. Dr. White and Dr. Enamel will each contribute equally to the account but each dentist wants his portion of the account to pass to his own estate. Which TWO of the following statements are TRUE? I. The account should be established as Joint Tenants with Right of Survivorship II. The account should be established as Tenants in Common III. All dividends and capital gains in the account will be reported by the brokerage firm under one Social Security number IV. All dividends and capital gains in the account will be reported by the brokerage firm on a percentage-of-ownership basis a. I and III b. I and IV c. II and III d. II and IV

c. II and III The dentists should open a Tenants in Common account. If a Joint Tenants with Right of Survivorship account is used, all assets pass to the surviving owner upon the death of one of the participants. All joint accounts use only one Social Security number for tax reporting purposes. The dentists must indicate the percentage of dividends, bond interest, and capital gains they are responsible for on their individual returns.

An investor purchased 100 shares of ABC stock at $53 and on the same day purchased an ABC June 50 put at 2. After the put expired, the investor sold the ABC stock at $60. The investor's: I. Cost basis for tax purposes was 53 II. Cost basis for tax purposes was 55 III. Profit was $500 IV. Profit was $700 a. I and III only b. I and IV only c. II and III only d. II and IVonly

c. II and III only When a married put (stock and put purchased on the same day) expires, the premium is added to the cost basis of the stock. The cost basis, therefore, will be $55 (53 + 2). The sale at $60 results in a profit of $5 per share (60 - 55), for a total of $500.

In which of the following documents are bid limitations for a new municipal bond issue found? a. The official statement b. The indenture c. The notice of sale d. The syndicate agreement

c. the notice of sale The notice of sale is published by the issuer. It announces the issuer's intention to sell an issue and invites securities firms to compete for the issue. All information pertaining to the bidding would be contained in the notice of sale.

The Federal Reserve will normally: I. Buy securities in the open market during inflationary times II. Sell securities in the open market during inflationary times III. Buy securities in the open market during deflationary times IV. Sell securities in the open market during deflationary times a. I and III only b. I and IV only c. II and III only d. II and IV only

c. II and III only When buying securities in the open market, the FRB adds money to the banking system. The FRB takes this action during deflationary times to make more funds available (looser credit), causing interest rates to decline, and thereby hoping to stimulate a sluggish economy. The Fed sells securities to take money out of the banking system when combating inflation.

The value of an investor's interest in a variable annuity during the accumulation period is subject to fluctuation according to the: AIR Amount of money deposited Performance of the separate account a. I and II only b. I and III only c. II and III only d. I, II, and III

c. II and III only In a variable annuity, as investors add additional deposits to the separate account, the value of their investment will rise through the purchase of additional accumulation units. If the account performance is positive, the value of each accumulation unit will rise. The AIR is important in valuing a variable annuity only during the annuity (payout) period.

Which of the following statements is NOT TRUE regarding the characteristics of options and warrants? a. Warrants are created by the corporation whose stock underlies the instrument, and options are created by contract between an option buyer and an option writer b. Both options and warrants can expire worthless if they are not exercised c. If options are exercised, a set price must be paid for the underlying security and, if warrants are exercised, the securities are received at no additional cost d. Both options and warrants can be bought and sold in the secondary market

c. If options are exercised, a set price must be paid for the underlying security and, if warrants are exercised, the securities are received at no additional cost. Both options and warrants have a strike price. If exercised, the transactions for the underlying security will occur at that set price. It is in the case of convertible bonds or convertible preferred stock that investors can convert the security into the underlying stock with no additional payment of money.

A customer who has purchased an exchange-traded fund (ETF) may be extended credit by a broker-dealer: a. If the position has been held for at least 10 days b. If the position has been held for at least 30 days c. Immediately d. Under no circumstances

c. Immediately Some investment companies, such as mutual funds, are marginable under Reg. T. However, they are considered new issues of securities. The Securities Exchange Act of 1934 prevents a dealer from extending credit on a new issue for at least 30 days. Once the mutual fund shares have been held for 30 days, these securities may be used as collateral for a loan in a margin account at the dealer. In this question, the client is purchasing an ETF, which is not considered a new issue. In this case, credit may be extended immediately.

When evaluating numerous mutual funds, what is meant by net investment income? a. Interest only b. Dividends only c. Interest + dividends - expenses d. Dividends + capital gains - expenses

c. Interest + dividends - expenses Net investment income of a mutual fund is derived from the total interest plus dividends earned by the fund's portfolio minus the expenses of the fund.

Treasury arbitrage restrictions generally prohibit issuers of municipal securities from: a. Selling municipal securities with coupon rates that are lower than Treasury securities b. Selling municipal securities with coupon rates that are higher than Treasury securities c. Investing bond proceeds in higher-yielding Treasury securities d. Investing bond proceeds in lower-yielding Treasury securities

c. Investing bond proceeds in higher-yielding Treasury securities Because of the tax exemption allowed on municipal bond interest, municipalities are normally able to issue bonds with coupon rates below those of Treasury securities. This presents an excellent arbitrage opportunity. A municipality can borrow at a low rate of interest and invest the money in higher-yielding risk-free Treasury securities. Congress has enacted laws, known as Treasury arbitrage restrictions, that prevent state and local governments from misusing the tax exemption.

Which of the following statements does NOT describe an equity-indexed annuity? a. It offers a guaranteed minimum rate of return b. It provides a return based on the performance of a c. stock market index c. It is considered a security d. It provides tax-deferred growth

c. It is considered a security Equity-indexed annuities (EIAs) are annuities that provide a guaranteed minimum rate of return (unlike variable annuities), but can yield a greater rate of return based on the performance of a linked stock market index. They also provide tax-deferred growth. Currently, EIAs are not considered securities.

Which of the following statements does NOT describe an equity-indexed annuity? a. It offers a guaranteed minimum rate of return b. It provides a return based on the performance of a stock market index c. It is considered a security d. It provides tax-deferred growth

c. It is considered a security Equity-indexed annuities (EIAs) are annuities that provide a guaranteed minimum rate of return (unlike variable annuities), but can yield a greater rate of return based on the performance of a linked stock market index. They also provide tax-deferred growth. Currently, EIAs are not considered securities.

An individual who adds an option to an existing position to create a straddle is said to have: a. Straddled into the position b. Combined into the position c. Legged into the position d. Settled into the position

c. Legged into the position When an individual buys or sells an option to add to an existing position to create a more complex option position, such as a straddle or spread, it is said the individual has legged into the position. For example, if a customer who is long an XYZ March 55 call then purchases (adds) a March 55 put, it is referred to as having legged into a long straddle.

During periods of deflation, which of the following investments tends to perform the best? a. Common stock b. Treasury inflation-protected securities c. Long-term debt d. Short-term debt

c. Long-term debt During deflationary periods, interest rates and the price of goods will be declining, which generally has a negative impact on the stock market. The consumer price index (CPI), to which the principal on TIPS is linked, declines in value during periods of deflation resulting in decreasing principal on TIPS. The fixed interest on TIPS would also decline. Bonds perform better when interest rates decrease, with long-term debt appreciating more than short-term debt. Long-term zeros would tend to perform best during deflationary periods.

If interest rates are expected to rise over a given period, a municipality that must raise money would probably issue securities with: a. Short-term maturities b. Intermediate-term maturities c. Long-term maturities d. Call provisions

c. Long-term maturities By issuing securities with long-term maturities, the municipality can lock in the rate of interest it needs to pay on the bonds. Therefore, if interest rates are expected to rise over a given period, the municipality would not be subject to these changes. This would provide the municipality with the capital it needs, without borrowing again at higher rates of interest, as it would need to do if it issued shorter-term or intermediate-term securities.

When a client buys a bond above par, the confirmations must indicate the: a. Rating b. Contraparty c. Lower of yield to call or yield to maturity d. Catastrophe call provisions

c. Lower of yield to call or yield to maturity A bond's confirmation must disclose the lower of the yield to maturity or the yield to call. This is sometimes referred to as the yield to worst.

A reverse repurchase agreement is sometimes called a(n): a. Repo b. Arbitrage c. Matched sale d. Treasury sale

c. Matched sale A reverse repurchase agreement (matched sale) occurs when the Federal Open Market Committee (FOMC) sells securities to dealers with the intention of buying the securities back at a future date. This has the short-term effect of absorbing (removing) funds from the money supply.

A narrow-based index option may be used to hedge a portfolio of: a. Treasury bonds b. Money-market securities c. Oil company stocks d. Diversified blue-chip stocks

c. Oil company stock A portfolio consisting of stocks from the same industry may be protected (hedged) against adverse market movements by using narrow-based index options. A narrow-based index gives a measurement of stocks in a particular industry or sector of the economy. A broad-based index option would be used to hedge a diversified stock portfolio.

Prior to the maturity of a variable-rate demand obligation, an investor has the right to receive the: a. Current market value b. Par value c. Par value plus accrued interest d. Par value less accrued interest

c. Par value plus accrued interest A variable-rate demand obligation (VRDO) can be redeemed prior to maturity on any date the interest rate on the obligation is reset. Rates can be reset on a monthly, weekly, or daily basis. The obligation will be redeemed at par value plus accrued interest.

What information would an analyst be MOST concerned with when evaluating a revenue bond? a. The population growth of the municipality b. Debt to assessed valuation c. A rate covenant d. Property taxes

c. Rate of Covenant An analyst would be most concerned with rate covenants. This is an agreement made by the municipal issuer to maintain rates high enough to cover maintenance and operating charges and to meet annual debt service requirements. The other terms are applicable to general obligation bonds.

Taxable income normally includes: a. The interest on municipal bonds issued in the state in which the taxpayer lives b. The taxpayer's annual 401(k) contributions c. Reinvested dividends paid on a mutual fund investment d. Any unrealized capital appreciation on stocks that the taxpayer owns

c. Reinvested dividends paid on a mutual fund investment Taxable income includes income from all sources after all applicable deductions and adjustments are made. Reinvested dividends must be declared as income and are thus taxable. Interest on municipal bonds issued in the state in which the owner resides is usually exempt from both federal and state income taxes. 401(k) contributions are made on a pretax basis and are not included in taxable income until the taxpayer begins taking distributions. Unrealized capital gains on stocks are not included in taxable income.

Income that is derived from which of the following sources may NOT be used to fund an IRA contribution? a. Money earned from a part-time job b. A bonus c. Rental income received from a summer rental d. Taxable alimony

c. Rental income received from a summer rental Contributions that are made to an IRA must be based on taxable compensation which includes salary or wages (part-time or full-time), bonuses, tips, commissions, net income from self-employment, and taxable alimony. IRA contributions may not be based on rental income from properties, funds received from annuity contracts, or funds received from dividends and interest from securities in a portfolio.

Income that is derived from which of the following sources may NOT be used to fund an IRA contribution? a. Money earned from a part-time job b. A bonus c. Rental income received from a summer rental d. Taxable alimony

c. Rental income received from a summer rental Contributions that are made to an IRA must be based on taxable compensation which includes salary or wages (part-time or full-time), bonuses, tips, commissions, net income from self-employment, and taxable alimony. IRA contributions may not be based on rental income from properties, funds received from annuity contracts, or funds received from dividends and interest from securities in a portfolio.

Which of the following money-market instruments does NOT trade in the secondary market? a. Directly placed commercial paper b. Eurodollar CDs c. Repurchase agreements d. Bankers' acceptances (BAs)

c. Repurchase agreements Repurchase agreements typically are not traded in the secondary market. Eurodollar CDs are certificates of deposit payable in Eurodollars (U.S. currency on deposit in foreign banks). Eurodollar CDs, commercial paper, and BAs are traded in the secondary market.

The 5% policy applies to transactions involving: a. Shares of a mutual fund purchased with a sales charge b. A registered secondary distribution requiring a prospectus c. Securities found on Nasdaq d. Municipal securities

c. Securities found on Nasdaq The 5% policy does not apply when a security is being issued with a prospectus or for municipal securities. In this example, a prospectus is required for a primary distribution as well as a registered secondary distribution. Securities traded on Nasdaq would be the only choice given for which the 5% guideline would apply.

A customer believes a stock will have a wide fluctuation in price over a short period. If he wants to engage in an option strategy that will be profitable from a sharp movement either on the upside or downside, he will buy a: a. Put b. Call c. Straddle d. Spread

c. Straddle The customer will buy a straddle, which is the simultaneous purchase of a put and a call with the same expiration dates and the same strike prices. If the market moved up sharply, the call could be exercised and if it moved down sharply, the put could be exercised, resulting in a profit.

Which of the following issues will most likely have a mandatory sinking fund? a. Serial issues b. Balloon issues c. Term issues d. Convertible issues

c. Term issues A term issue is one in which all the bonds mature in one specific year. To accumulate monies to help retire the bonds, the issuer will deposit monies (above the amount to pay interest) in a sinking fund. These monies will generally be used to retire some of the bonds prior to maturity. A serial issue is one in which a portion of the bond issue is paid off each year, versus all being paid in one specific year as with a term bond issue.

A 1% increase in the federal funds rate will NOT have an effect on: a. Short-term bond prices b. Long-term bond prices c. The discount rate d. Treasury bill prices

c. The Discount rate The federal funds rate is the rate one bank charges another bank when loaning excess reserves. It is the most sensitive of all interest rates and affects all bond prices and other interest rates except the discount rate which is set by the Federal Reserve Board.

A registered representative is preparing to leave her firm. Her clients will be assigned to another representative at the same firm. To accomplish this: a. A new account form must be completed b. The customer must approve of the change c. The account records must be amended to reflect the change d. The SEC must be notified of the change

c. The account records must be amended to reflect the change Account records must be amended whenever an internal transfer of an account is made. This change does not require approval of the customer, the completion of a new account form, or the notification of any regulatory authority.

Industrial development revenue bonds are backed by: a. The local municipal district in which the facility is domiciled b. The state in which the facility is domiciled c. The corporate guarantor d. Both the corporate guarantor and municipality

c. The corporate guarantor The corporation that uses the facility that was built by the industrial development revenue bond becomes the party that is backing the bonds. The credit rating of these bonds is dependent on that corporation, not on the municipality issuing the bonds.

Which of the following groups will approve an over-the-counter stock for purchase on margin? a. A State Securities Commission b. The Securities and Exchange Commission c. The Federal Reserve Board d. FINRA

c. The federal Reserve Board (FRB) Under Regulation T, the Federal Reserve Board is responsible not only for setting margin requirements but also for determining which securities may be sold on margin.

An individual purchases 10 ABC June 90 calls @ 4 and writes 10 ABC June 95 calls @ 2. Above what market price for ABC will there no longer be an effect on the individual's profit? a. 90 b. 92 c. 94 d. 95

d. 95 The spread will widen as the market price rises. The maximum spread occurs at a market price of 95. If it rises above 95, the spread will not widen beyond 5 (the difference between the strike prices).

Which of the following statements is NOT TRUE about defined benefit plans? a. Contributions are based on a predetermined distribution amount b. The employee does not know the amount her employer will contribute each year c. These plans provide tax-free distributions to participants d. These plans are ERISA-qualified retirement plans

c. These plans provide tax-free distributions to participants An ERISA-qualified retirement plan is generally established as either a defined contribution or a defined benefit plan. In a defined contribution plan, a specific contribution is made each year and benefits are equal to the amounts provided by the total of contributions and earnings in the plan. A defined benefit plan promises specific benefits at retirement. Contributions to the plan are calculated to provide the promised benefits upon retirement and, therefore, the employee does not know the amount her employer will contribute each year. Distributions from a pension plan are not tax-free and are typically considered ordinary income.

A FINRA member subscribing to CQS, calls a market maker displaying a quote on the system and executes a trade. This transaction is considered to have occurred in the: a. Primary market b. Private market c. Third market d. Fourth market

c. Third Market CQS displays quotations by members for NYSE and NYSE MKT (formerly NYSE Amex) listed securities. Transactions in listed securities between FINRA members in the over-the-counter market are considered third-market transactions. Although executed in the over-the-counter market, such transactions must still be reported to the Tape.

Which of the following orders would you place for a customer who wants to hold her auction rate security if the interest rate is set at 3.4% or higher? a. A hold order b. A limit order c. A bid order d.A sell order

c. a bid order A current holder of an auction rate security may indicate she wants to continue to hold the security only if the rate is set at or above a specified rate. If the clearing rate sets below the interest or dividend rate that the holder or prospective holder specifies in her bid, the holder will be required to sell the securities subject to her bid, and the prospective buyer will not acquire the securities. Auction dealers refer to bids by prospective holders as buy orders and bids by holders as roll-at-rate orders.

Which of the following corporations will be LEAST affected by an increase in interest rates? a. A manufacturing company b. A utility company c. A cosmetics company d. An automotive company

c. a cosmetics company When interest rates are rising, industrial corporations that market big-ticket items as well as utilities that are heavy borrowers will be adversely affected. Cosmetic companies, due to the nature of the business and the low cost of their products, are not affected as much by rising interest rates.

Which of the following persons may contribute to a 457 plan? a. A computer programmer employed by IBM b. A federal government employee c. A local government employee d. A self-employed IT consultant

c. a local government employee A Section 457 plan is a type of retirement plan used by many public sector workers (state and local, not federal). These plans grow tax-deferred and are generally subject to the same contribution limits as 401(k) and 403(b) plans. Each has similar tax features and contribution allowances. The difference is in who may use them. 401(k) plans are used by for-profit employees, 403(b) plans by nonprofit and public school employees, while 457 plans are designed for the benefit of some local government workers.

Advertising for municipal fund securities investments must be approved prior to its official use by: a. The Municipal Securities Rulemaking Board b. The state sponsoring the municipal fund securities investment program c. A principal of the firm who is selling the program d. The portfolio manager of the municipal fund security investment

c. a principal of the firm who is selling the program A 529 College Savings Plan is a type of municipal fund security. All advertising regarding municipal securities and municipal fund securities must be approved by a municipal securities principal of the firm prior to its initial use.

Which of the following would increase a partner's basis in a limited partnership? a. Cash distributions b. Losses c. A pro-rata portion of a recourse loan d. Assessments not met by the partner

c. a pro-rata portion of a recourse loan A partner's basis in a limited partnership represents the maximum loss that the limited partner may sustain in the program. It is increased by income, additional contributions made by the partner, and the portion of a recourse loan for which the partner is responsible. The basis is reduced by cash distributions and losses. Assessments not met by the partner normally result in a dilution of the partner's ownership interest.

A direct participation program in real estate does NOT have which of the following characteristics? a. Passive income b. The tax benefit of depreciation c. Cash dividends d. A tax rate on capital gains that is lower than ordinary income

c. cash dividends A direct participation program in real estate, which is also known as a real estate limited partnership (RELP), would distribute either passive income or passive losses. Both depreciation of the buildings and a lower tax rate on capital gains if the property is sold after one year, are characteristics found in any real estate investment. A REIT, not a RELP, pays cash dividends that are taxable at the same rate as ordinary income.

A fundamental analyst could use a corporation's balance sheet to determine all of the following metrics, EXCEPT: a. Net working capital b. Common stock ratio c. Cash flow d. Debt-to-equity ratio

c. cash flow Cash flow (net income or loss plus depreciation expense) is found by using an income statement. All of the other choices are derived from the balance sheet.

A member bank wishes to borrow money from the Fed. What rate will be charged? a. Prime rate b. Federal funds c. Discount rate d. Call rate

c. discount rate The member bank is charged the discount rate when it borrows from the Fed.

Regulation NMS modernized the U.S. markets for trading equity securities and prohibited: a. Trading exchange-listed securities over-the-counter b. A broker-dealer from selling a security to a customer from its own inventory c. The execution of a buy order at one market center at a price above the lowest ask price in another market center d. Trading ADRs on U.S. exchanges

c. execution of a buy order at one market center at a price above the lowest ask price in another market center. Regulation NMS modernized the U.S. markets for trading equity securities. Among other rules, Regulation NMS prohibits a trade-through of a protected quote. A protected quote is the highest bid and lowest offer (the inside market) in a market center that allows electronic executions. A trade-through occurs when there is an execution of a buy order at a price above the lowest ask price, or an execution of a sell order below the highest bid. For example, assume the same security is quoted on two market centers (NYSE and Nasdaq). If the NYSE has an ask price of $23.50 and Nasdaq has an ask price $23.60, it is a violation to execute an electronic buy order at $23.60 when there is a better or lower price of $23.50. The other choices are not prohibited. If a broker-dealer sells a security to a customer from its own inventory, it is acting as a principal. Trading exchange-listed securities over-the-counter is allowed and is referred to as a third-market trade. ADRs (American Depositary Receipts) may be listed and traded on U.S. exchanges, such as the New York Stock Exchange or Nasdaq. ADRs may also be quoted on the OTCBB or in the Pink Market and may trade over-the-counter.

MSRB rules state that subject or nominal quotes may be given for: a. Revenue bonds only b. General obligation bonds only c. Informational purposes d. Municipal notes only

c. informational purposes only MSRB rules state that a dealer who does not wish to buy or sell securities based on a quote given, must identify the quote as a subject or nominal quote. Such quotes can be given for informational purposes only.

A call premium is best described as the amount the: a. Investor pays above the par value b. Investor will receive if the bond is sold above the par value c. Issuer pays above 100 to retire bonds prior to maturity d. Bondholder receives at maturity

c. issuer pays above 100 to retire bonds prior to maturity. A bond issue's indenture will usually require that, if an issuer calls bonds (redeems prior to maturity), it must pay the bondholder a premium (above par value). For example, a bond that matures in 30 years is callable at 103.5 in 10 years. The issuer must pay a premium of $35 per bond (103.5% of $1,000 is $1,035) above par to retire the bonds prior to maturity.

For variable annuities, which of the following payout options provide the highest payout? a. Joint and last survivor life annuity b. Life annuity with period certain c. Life annuity d. Unit refund life annuity

c. life annuity Annuitants will receive the greatest cash flow from the life annuity payout option. This option allows an annuitant to receive payments for his lifetime. At death, the payments cease since no beneficiary is designated and, therefore, the insurance company is relieved of its obligation to make payments. The annuitant assumes the greatest degree of risk with this type of payout.

A customer wishes to open an account with a brokerage firm to trade options. The customer provides all the necessary new account information required but refuses to provide financial information. The brokerage firm: a. May not open the account under any circumstances b. Must record the customer's refusal on its records and may open the account with the approval of the Options Clearing Corporation only c. Must record the customer's refusal on its records and use whatever information it can obtain on its own in determining whether it should accept the account for options trading d. May open the account without restrictions but requires the customer to sign a waiver

c. must record the customer's refusal on its records and use whatever information it can obtain on its own in determining whether it should accept the account for options trading According to the rules of the options exchanges, the brokerage firm must record the customer's refusal on its records, and must use whatever information it can obtain on its own in determining whether it should accept the account for options trading.

Money received by a corporation when it sells its stock above its par value is called: a. Excess capital b. Earned surplus c. Paid-in capital d. Stockholders' capital

c. paid-in capital Money received by a corporation when it sells its stock above its par value is called capital surplus or paid-in capital. This is different from earned surplus (retained earnings), which is profits that have been retained by the company and have not been paid as dividends.

What type of risk do zero-coupon bonds eliminate? a. Credit risk b. Purchasing power risk c. Reinvestment risk d. Market risk

c. reinvestment risk Zero-coupon bonds are issued at a discount and do not pay semiannual interest. Therefore, there are no interest payments to reinvest, eliminating reinvestment risk. When investing in fixed-income investments, one of the uncertainties is whether interest rates will allow an investor to realize the total return that was calculated at the time of the investment (yield to maturity). Zero-coupon bonds do not have reinvestment risk, but they do have extreme interest-rate risk because the bonds' duration will equal the years to maturity.

The 5% Markup Policy applies to: a. A primary distribution (new issue) b. A registered secondary distribution requiring a prospectus c. Securities quoted on Nasdaq d. Municipal securities

c. securities quoted on Nasdaq The 5% Markup Policy does not apply when a security is being issued with a prospectus or for municipal securities. In this example, a prospectus would be required for a primary distribution as well as a registered secondary distribution. Securities quoted on Nasdaq would be the only choice given for which the 5% guideline would apply.

An investor has made the following purchases of XAM stock: Shares bought at $39 in May 2013 Shares bought at $56 in September 2013 Shares bought at $36 in January 2014 Shares bought at $36 in June 2014 The investor sells some of his XAM shares in March 2015 at $51. Based on the various purchases, which shares may be sold to result in the greatest gain with the lowest tax liability? a. Sell from the shares that were purchased in May 2013 b. Sell from the shares that were purchased in September 2013 c. Sell from the shares that were purchased in January 2014 d. Sell from the shares that were purchased in June 2014

c. sell shares purchased on Jan 2014 When an investor sells a portion of his holdings, unless his sell order ticket identifies the specific shares that he is selling, the IRS will assume that first-in, first-out (FIFO) will be the method to be used. To find which shares should be sold to generate the largest gain with the lowest tax liability, let's consider each possibility separately. Choice (a) results in a 12-point long-term gain. Choice (b) results in a long-term loss, not a gain. Choice (c) results in a 15-point long-term gain. Choice (d) results in a 15-point short-term gain (due to the shares having been held for one year or less). Since the tax rate on long-term gains (20%) is lower than the tax rate on short-term gains (as ordinary income), selling the shares that were held the longest is the best option. Although the sale of shares that were purchased in January 2014 will result in the same gain as the sale of shares that were purchased in June 2014, the tax liability will be lower.

A corporation's shareholders must vote for: a. Cash dividends b. Stock dividends c. Stock splits d. Stopping dividends

c. stock splits The board of directors has control over dividends but must have shareholder approval for a stock split.

If an investor had cash and securities in his account, why would the investor write call options against the securities? a. To hedge his position b. To engage in an arbitrage c. To increase the overall rate of return of the portfolio d. To postpone paying taxes

c. to increase the overall rate of return of the portfolio The purpose of writing calls against securities owned is to increase the overall rate of return of the portfolio. The premium the purchaser of the call pays the writer will be added to whatever dividends the writer was receiving to increase the yield of the portfolio to the writer. If the stock declines in value, the writer will make the premium on the expiring call. However, the investor is still exposed to large downside risk in the stock. Therefore, generating income for the portfolio is a better choice than to hedge.

Which of the following securities are NOT issued at a discount and mature at par? a. Commercial paper b. Bankers' acceptances c. Unit investment trusts d. Treasury bills

c. unit investment trusts Unit investment trusts are not usually issued at a discount. They are issued at par and mature at par. The other securities listed are all issued at a discount and mature at par.

As it relates to an initial public offering, the term spread is BEST defined as which of the following? a. The amount of profit that a member of the syndicate will make when it sells a new issue to a customer b. The amount of the firm's markup or markdown to a customer who buys or sells a security c. The difference between the price at which a firm will buy a security and the price at which it will sell a security d. The difference between the price that an issuer will receive for its securities from its underwriter and the price that the public will pay for the securities

d. When used in reference to an initial public offering, the spread represents the difference between the price that the issuer receives from an underwriter for its IPO and the price that a customer pays for the IPO (i.e., the public offering price or POP). For example, if the POP is $15.00 and the issuer receives $13.95, the spread is $1.05. Choice (c) is referring to the spread of a Nasdaq market maker which is the difference between the price at which the firm is willing to buy (bid) and the price at which the firm is willing to sell (ask or offer) a security. Choice (a) is not defined as the spread since it does not include the manager's fee component. The markup or markdown is the difference between the prices the customer paid or received compared to the best bid or offer price of all Nasdaq market makers (the inside market). For example, if the inside market is $25.50 - $25.70 and the customer paid $25.90 to purchase the stock, the markup is $.20.

An investor purchases $40,000 of a mutual fund when the price of the fund is $18.50. In the same year, the investor receives a $700 dividend distribution and a capital gain distribution of $1,100. Both distributions are reinvested in additional shares at a price of $17.90. If the fund has a current value of is $22.80 and the investor sells $9,000 worth of the fund, what is the investor's capital gain using the average cost method? a. No gain or loss is reported b. $118 c. $456 d. $1,710

d. $1,710 Using the average cost method, the gain is found by subtracting the cost basis from the sales proceeds. To calculate the cost basis using the average cost method, divide the sum of all investments by the number of shares owned by the investor. The investor purchased $40,000 of the fund at a price of $18.50, The total number of shares purchased is 2,162.16. The investor also received a total of $1,800 in distributions, all reinvested in additional shares when the price is $17.90. The total number of shares purchased is 100.59. The total amount invested is $41,800. The total number of shares owned is 2,262.75. Therefore, the average cost is $18.47. The number of shares being sold is 394.74 ($9,000 / 22.80). If we subtract the cost basis of $7,290 (394.74 x $18.47) from $9,000, this equals a capital gain of $1,710.

Mr. Green, a new client, decides to short 100 shares of JRF at $18 per share. What is the initial margin requirement for this trade? a. $2.50 per share b. 30% of current market value c. $1,800 d. $2,000

d. $2,000 If the initial transaction in a margin account is a short sale, industry rules require a minimum equity deposit of $2,000 or the required Reg. T deposit, whichever is greater. Since $2,000 is greater than $1,800, the required deposit is $2,000. For a purchase, the minimum equity requirement is the lesser of $2,000 or 100% of the purchase price.

An investor established the following positions. Long 100 shares of XYZ at $37 per share Long 1 XYZ 35 put at 1.75 This investor breaks even when XYZ is at: a. $33.25 per share b. $35.25 per share c. $36.75 per share d. $38.75 per share

d. $38.75/share The investor purchased the stock at $37 per share and protected it by purchasing the right to sell XYZ at $35, paying a premium of 1.75 (long XYZ 35 put). The investor will break even when the price of XYZ is at $38.75 ($37 purchase price of the stock + the 1.75 premium on the put).

An investor shorts a stock at $6 per share. What is the SRO minimum maintenance requirement for this position? a. $1.50 per share b. $1.80 per share c. $3.00 per share d. $5.00 per share

d. $5.00/share The SRO minimum maintenance requirement for a stock sold short at $5 per share or above is $5 per share or 30% of the market value, whichever is greater.

A customer has a cash account that has securities valued at $320,000 and $180,000 in cash. The customer and a spouse also have a joint account with securities valued at $120,000 and $270,000 in cash. If the member firm were to become bankrupt, the coverage under SIPC would be: a. Full coverage of cash and securities for both accounts b. $500,000 for the individual account and $290,000 for the joint account c. $500,000 for the individual account and $390,000 for the joint account d. $500,000 for the individual account and $370,000 for the joint account

d. $500,000 for the individual account and $370,000 for the joint account Both the individual account and the joint account are considered separate customers and will each receive independent coverage of $500,000, of which no more than $250,000 may be for cash. In the individual account, full coverage will be provided of $500,000 ($320,000 of securities and $180,000 in cash). In the joint account, the full value of the securities is covered. However, only $250,000 of the cash in the account is covered. The total coverage for the joint account would be $370,000 ($120,000 + $250,000). For the balance of $20,000 cash, the customer will become a general creditor of the broker-dealer.

Ms. Green buys 300 shares of RSW at 15. She then writes 3 RSW July 20 calls at 1 and writes 3 RSW July 10 puts at 50 cents. Ms. Green's maximum potential loss is: a. Unlimited b. $4,050 c. $4,950 d. $7,050

d. $7,050 Ms. Green has written 3 covered calls and 3 uncovered puts. In both cases, the maximum loss occurs if the underlying stock (RSW) becomes worthless. If the market price of RSW is zero, the 3 covered calls would result in a $4,200 loss (300 shares x $15 purchase price - $300 premium received). At zero, the 3 uncovered puts are exercised for a net loss of $2,850 (3 contracts x $10 strike price - the premium received of $150). Thus, the total loss is $7,050 ($4,200 + $2,850).

XYZ Corporation has issued $50 million 7% bonds at a premium. The bonds have a current yield of 6% and a yield to maturity of 5%. An investor purchasing $1,000,000 face value of bonds at the offering will receive a yearly income of: a. $35,000 b. $50,000 c. $60,000 d. $70,000

d. $70,000 An owner of the bonds will receive 7% of the par value yearly regardless of the cost. In this example, the investor purchased $1,000,000 face value of bonds and will, therefore, receive $70,000 (7% of $1,000,000 = $70,000) in yearly income.

An individual invested $30,000 in an oil and gas balanced program as a limited partner. His portion of a recourse loan is $50,000. What is the individual's basis? a. $0 b. $30,000 c. $50,000 d. $80,000

d. $80,000 Under the IRS at-risk rule, an investor may include in his basis those monies for which he is in fact liable. Since the loan is a recourse loan, the investor is liable for its repayment. The investor's basis is, therefore, $80,000 ($30,000 investment + $50,000 recourse loan).

A customer has the following accounts with a brokerage firm. Cash Account $20,000 securities (market value) $10,000 cash Long Margin Account $60,000 securities (market value) $30,000 debit balance $10,000 SMA Short Margin Account $40,000 securities (market value) $60,000 credit balance The Federal Reserve Board margin requirement is 50%. The total equity in all the accounts is: a. $50,000 b. $60,000 c. $70,000 d. $80,000

d. $80,000 The equity in the cash account equals $20,000 market value of the securities plus $10,000 in cash, for a total of $30,000. The equity in the long margin account is the market value of the securities ($60,000) minus the debit balance ($30,000). This equals $30,000. The $10,000 SMA is not taken into account when computing equity. The equity in a short margin account is computed by subtracting the current market value of the securities ($40,000) from the credit balance ($60,000). This equals $20,000. Adding the equity in all of the accounts, the total equity is equal to $80,000. ($30,000 equity in the cash account + $30,000 equity in the long margin account + $20,000 equity in the short margin account = $80,000.)

What is the maximum amount a customer may withdraw from a Special Memorandum Account? a. 2 times the SMA b. 3 times the SMA c. 25% of the SMA d. 100% of the SMA

d. 100% of the SMA The full amount or 100% of the SMA may be withdrawn. The buying power is 2 times the SMA.

An investor purchases a zero-coupon municipal bond maturing in 15 years that is callable in five years at 102. If the bond is called, the investor will receive: a. Par value b. 102% of the par value c. 102% of the original cost d. 102% of the compound accreted value

d. 102% of the compound accreted value The investor would receive 102% of the compound accreted value since the security is a zero-coupon bond or original issue discount (OID) bond. The compound accreted value is equal to the original value of the bond plus the annual accretion as of the call date. If the bond was not an OID bond and was called, the investor would receive 102% of par or $1,020.

A DEF corporation convertible bond is convertible at $40. DEF common is selling at $50. At what price should the bond be selling for it to be at a 10% premium to the common? a. 80 b. 88 c. 125 d. 137 1/2

d. 137 1/2 Since the bond is convertible at $40 a share, the bond can be converted into 25 shares of common stock ($1,000 par value divided by $40 per share). If the bond is converted, the total value of common stock will be $1,250 (25 shares x $50 market value). A 10% premium to the parity price is $1,375 ([10% x $1,250] + $1,250).

An individual has an IRA account. He is 75 years old, but has not withdrawn funds from the plan. What is the penalty that the individual will be subject to for not withdrawing funds from the plan? a. No penalty will be levied b. 6% penalty on the actuarial amount c. 10% penalty on the actuarial amount d. 50% penalty on the actuarial amount

d. 50% penalty on the actuarial amount The individual will be subject to a penalty of 50% of the actuarial amount (the amount specified by the IRS that should have been withdrawn). This is the penalty for not making withdrawals from the plan. Distributions must start after the planholder reaches age 70 1/2.

According to current regulations, if a client redeems his mutual fund shares, the fund company must send the payment within: a. 3 days b. 5 days c. 10 days d. 7 days

d. 7 days Federal regulations require that funds send payment for the redemption of mutual fund shares within seven days.

A municipal bond with a 6% coupon is priced at a 7.20 basis. If the bond's yield to maturity increases by 40 basis points, the yield to maturity is: a. 5.60% b. 6.40% c. 6.80% d. 7.60%

d. 7.60% The term priced at a 7.20 basis refers to a serial bond that is priced to yield 7.20 or a YTM of 7.20%. If the bond's basis increased by 40 basis points, the new yield to maturity is 7.60%. The 6% coupon rate is relevant if the question asked about whether the bond was trading at a discount or a premium. Since the YTM is greater than 6%, the bond is trading at a discount.

A municipal bond with a 6% coupon is priced at a 7.20 basis. If the bond's yield to maturity increases by 40 basis points, the yield to maturity is: a. 5.60% b. 6.40% c. 6.80% d. 7.60%

d. 7.60% The term priced at a 7.20 basis refers to a serial bond that is priced to yield 7.20 or a YTM of 7.20%. If the bond's basis increased by 40 basis points, the new yield to maturity is 7.60%. The 6% coupon rate is relevant if the question asked about whether the bond was trading at a discount or a premium. Since the YTM is greater than 6%, the bond is trading at a discount.

A registered representative is provided with the following financial information concerning a company: Debt of $225 million, par value of the common stock $40 million, paid-in capital of $70 million, and retained earnings of $750 million. The common stock ratio is: a. 21% b. 26% c. 74% d. 79%

d. 79% The common stock ratio is found by dividing total shareholder equity by a company's total capital. Shareholder equity is equal to the par value of the common stock + paid-in capital + retained earnings, and the total capital is found by adding the debt to shareholder equity. The common stock ratio is 79% [par value of the common stock is $40 million + paid-in capital of $70 million + retained earnings of $750 million = $860 million / $1,085 million ($225 million + $860 million)]. The common stock ratio is used to analyze the capital structure of a company.

A customer has a federal tax rate of 35% and a state tax rate of 5%. Which of the following investments would afford him the BEST after-tax yield? a. A 6.40% in-state municipal bond b. A 7.05% out-of-state municipal bond c. A 10.85% investment-grade corporate bond d. A 11.45% real estate investment trust (REIT)

d. A 11.45% REIT The major advantage of municipal bonds for most investors is that the interest received from the bond is exempt from federal taxes. In addition, most states also exempt interest from bonds issued within their state from a resident's state and local income taxes. However, if a state resident earns interest from an out-of-state municipal security, that interest is usually subject to state and local taxation. If an investor in a particular tax bracket would like to compare the benefit of tax-free interest income to after-tax income of a taxable bond, it is necessary to find the equivalent taxable yield. The investment grade corporate bond and REIT are fully taxable. Since the investor can purchase an in-state municipal bond and out-of-state municipal bond, we use the combined rate of 40% for the in-state bond and the federal rate of 35% for the out-of- state bond. The formula is: Municipal Bond Yield / (100% - Investor's Tax Bracket) = Equivalent Taxable Yield The customer is in the 40% combined tax rate. The municipal bond has a yield of 6.40%. 6.40% (Municipal Bond Yield) / 60% (100% - 40%) = 10.67% Equivalent Taxable Yield The out-of-state municipal bond has a yield of 7.05% and the equivalent taxable yield is 10.85% (7.05% / 65%). The REIT has the best or highest after-tax yield.

Approval by a principal is NOT required when sending a customer which of the following documents? a. An abstract from an Official Statement b. A form letter c. A research report d. A red herring

d. A red herring An abstract from an Official Statement, a form letter, and a research report are considered advertising or sales literature and must be approved. A red herring (preliminary prospectus) is used to provide a potential investor with information and is regulated by the SEC.

A company based in Europe with offices located in New Jersey would like to have its stock traded on the NYSE. This most likely will be accomplished through the issuance of: a. Yankee bonds b. Eurodollar bonds c. Bankers' Acceptances d. American Depositary Receipts

d. American Depositary Receipts (ADRs) American Depositary Receipts (ADRs) facilitate U.S. investment in the stock of foreign corporations. When the foreign securities are deposited in a U.S. bank based in that country, a receipt for those securities is issued and traded in the U.S. as if it were the foreign security itself.

An investor purchases a two-year ABC call. Which of the following designations accurately describes the exercise of the option? a. European style, next business day settlement b. European style, three business days' settlement c. American style, next business day settlement d. American style, three business days' settlement

d. American Style, Three business days' settlement Long-term anticipation securities (LEAPS) may be exercised on any day prior to expiration (American style). Exercise settlement is in the underlying stock, in three business days.

Investors who are seeking income may invest in all of the following securities, EXCEPT: a. Special tax bonds b. Lease rental bonds c. Moral obligation bonds d. Capital appreciation bonds

d. Capital appreciation bonds A capital appreciation bond (CAB) has a similar structure to a zero-coupon bond. CABs do not pay periodic interest and are NOT suitable for investors who seek income.

A fundamental analyst, evaluating the common stock of a corporation, will examine all of the following choices, EXCEPT the: a. Sales of the corporation b. Management of the corporation c. Current amount of earnings paid as dividends to shareholders d. Current amount of short interest positions for the stock

d. Current amount of short interest positions for the stock A fundamental analyst will examine all the factors listed relating to a common stock except the current amount of short interest positions for the stock. Short interest is a statistic examined by a technical analyst. It represents the total amount of shares sold short that will be covered in the future.

A buy stop order is entered: I. Below a support level II. Above a resistance level III. To limit a loss on a long stock position IV. To limit a loss on a short stock position a. I and III b. I and IV c. II and III d. II and IV

d. II and IV A stop order may be used to limit a loss or protect a profit on an existing position. If an investor is short stock, he can enter a buy stop order which, if activated, will cover his short position and protect the profit or limit the loss on the short position. A technical analyst may also place a buy stop above the resistance level to purchase the stock should there be a price breakout.

A corporation declares a 2-for-1 stock split payable on November 30 to holders of record on November 1. The ex-date is December 1. The first day that the stock will trade without a due bill attached is: a. October 28 b. November 29 c. November 30 d. December 1

d. December 1 Whoever is the stockholder of record on the record date (Nov. 1) will be credited with the additional shares resulting from the split. If that person liquidates the position prior to the ex-date (Dec. 1), the buyer must receive a due bill upon settlement of that trade. This is because on Dec. 1 the value of the stock will be cut in half. If the buyer does not receive the additional shares, then the position loses half its value on the ex-dividend date. The first day that the purchaser is not entitled to the additional shares is the ex-date, and this is the first day the stock will not trade with a due bill.

An investor is expecting a sharp decline in interest rates in the near future. To capitalize on this situation, the investor should buy: a. Premium bonds with short maturities b. Premium bonds with long maturities c. Discount bonds with short maturities d. Discount bonds with long maturities

d. Discount bonds with long maturities Long-term bond prices are more volatile than short-term bond prices. Discount bond prices are more volatile than premium bond prices. If the investor expects interest rates (yields) to decline, she is anticipating rising bond prices. The bonds that will rise (fluctuate) the most are long-term, discount bonds.

A customer at your firm has an online trading account. If the customer places a limit order for a Nasdaq-listed stock and your firm is a market maker in this security, the order will be: a. Executed automatically b. Sent to an ECN c. Displayed only if it improves the inside market d. Displayed only if it improves the market maker's quote

d. Displayed only if it improves the market maker's quote The SEC Order Handling Rules require that a customer's limit order be displayed in a market maker's quote if it improves that quote. This is true even if the customer's order does not improve the inside market. The order may (not will) be sent to an electronic communication network (ECN). The order will be executed automatically only if the price and size of the order can be matched in the Nasdaq trading system.

The U.S. government does NOT guarantee the payment of interest and principal for which of the following securities? a. GNMA (Ginnie Mae) securities b. Treasury notes c. Savings bonds d. FHLMC (Freddie Mac) securities

d. FHLMC Freddie Mac securities The U.S. government guarantees the payment of interest and principal on all Treasury securities, savings bonds, and securities issued by the Government National Mortgage Association (GNMA or Ginnie Mae). Securities issued by the Federal Home Loan Mortgage Corporation (FHLMC [Freddie Mac]), a government-sponsored enterprise (GSE), are not guaranteed or backed by the U.S. government.

The interest rate that fluctuates the most is the: a. Prime rate b. Broker loan rate c. Discount rate d. Federal funds rate

d. Fed Funds rate Short-term rates fluctuate more than long-term rates. The federal funds rate, which is the rate of interest one bank charges another bank for the use of excess reserves for short-term periods (usually overnight), fluctuates the most since it has the shortest maturity. Although long-term bond prices fluctuate more than short-term bond prices, the yields of short-term securities fluctuate more than those for long-term securities.

Mr. Jones earns $40,000 per year and has contributed to his Individual Retirement Account (IRA) for each of the past two years. The company he works for has recently instituted a pension plan. Since he is now covered by a corporate pension plan, which of the following statements is TRUE regarding his IRA? a. He must liquidate the IRA by taking a lump-sum distribution b. He may keep the IRA but additional contributions are prohibited c. He may keep the IRA and may make a tax-deductible contribution of up to $18,000 this year d. He may keep the IRA and may make a tax-deductible contribution of up to $5,500 this year

d. He may keep the IRA and may make a tax-deductible contribution of up to $5,500 this year. An individual who is covered by a corporate pension plan may continue to make pretax contributions of up to $5,500 to an IRA providing the individual's income does not exceed specified levels.

Which TWO of the following types of municipal securities does NOT require voter approval? I. A general obligation bond backed by income taxes II. A special tax bond III. A bond backed by ad valorem taxes IV. . A certificate of participation a. I and III b. I and IV c. II and III d. II and IV

d. II and IV A general obligation bond would require voter approval since it is backed by the full faith and credit of the issuing municipality. A bond backed by ad valorem or real estate taxes is a type of general obligation bond. A special tax bond is financed by a tax other than an ad valorem tax, such as a tax on cigarettes, liquor, or gasoline, and would not require voter approval. A certificate of participation (COP) is a revenue bond backed by a lease payment that does not require voter approval.

Which TWO of the following types of municipal securities does NOT require voter approval? I. A general obligation bond backed by income taxes II. A special tax bond III. A bond backed by ad valorem taxes IV. A certificate of participation a. I and III b. I and IV c. II and III d. II and IV

d. II and IV A general obligation bond would require voter approval since it is backed by the full faith and credit of the issuing municipality. A bond backed by ad valorem or real estate taxes is a type of general obligation bond. A special tax bond is financed by a tax other than an ad valorem tax, such as a tax on cigarettes, liquor, or gasoline, and would not require voter approval. A certificate of participation (COP) is a revenue bond backed by a lease payment that does not require voter approval.

A registered representative has recommended the purchase of a variable annuity to a customer who subsequently completes the application. Which TWO of the following statements are TRUE concerning the application? I. The contract is forwarded directly to the insurance company II. The contract is forwarded to the representative's Office of Supervisory Jurisdiction (OSJ) III. A principal need not approve the transaction IV. A principal must approve the transaction within 7 business days a. I and III b. I and IV c. II and III d. II and IV

d. II and IV Annuity suitability rules require that contracts sold through FINRA members be forwarded to the representative's OSJ and be approved by a principal within 7 business days of receipt before being sent to the insurance company.

Which TWO of the following statements are TRUE regarding the Code of Arbitration? I. If a public customer is involved, all arbitrators must come from outsides the securities industry II. Arbitration decisions are binding and may not be appealed III. Rule violations will be settled between FINRA and a registered representative by arbitration IV. Arbitration is more cost-effective than litigating the matter in court a. I and II b. II and III c. I and IV d. II and IV

d. II and IV Disputes among members must be submitted to arbitration. However, if a dispute involves a customer, the customer may not be forced into arbitration. If a public customer does go to arbitration, a majority of arbitrators must come from outside the securities industry. All arbitration decisions are binding. Rule violations will be settled between FINRA and a registered representative through the Code of Procedure, not arbitration. Arbitration is usually chosen over litigation because arbitration is less costly.

Which TWO of the following choices are differences between exchange-traded funds (ETFs) and exchange-traded notes (ETNs)? I. ETFs may be traded in the secondary market and ETNs cannot II. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note and ETFs do not have issuer credit risk III. ETF returns are based on the performance of an index and ETNs pay a fixed coupon rate IV. ETNs have a maturity date and ETFs do not a. I and III b. I and IV c. II and III d. II and IV

d. II and IV ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it could negatively impact the value of the ETN, regardless of how its underlying index performs.

A client is notified by his broker-dealer that certain trades may be executed by an Electronic Communication Network (ECN). Which TWO of the following choices are risks of using this type of system? I. Trades are not subject to SRO regulations II. There may be a limited ability to execute transactions III. Higher commissions are possible IV. The system may only accept certain types of orders a. I and III b. I and IV c. II and III d. II and IV

d. II and IV Some broker-dealers use ECNs to execute customer orders. ECNs act as matching systems to execute orders from subscribers. Some broker-dealers will use a market maker during normal business hours and an ECN to execute trades after normal business hours (after 4 p.m.). If the system cannot match a buyer and seller, a client's order may have a limited ability to be executed. Some ECNs will accept only certain types of orders, such as limit orders. Trades are subject to SRO regulations and the commissions clients are charged generally are not higher if a broker-dealer uses an ECN.

A registered representative is reviewing a corporation's financial statements. Which TWO of the following statements are TRUE concerning an issuer's bond interest expense? I. The annual interest payments are found on the balance sheet II. The annual interest payments are found on the income statement III. The interest payment is deducted from net income IV. The interest payment is deducted from EBIT a. I and III b. I and IV c. II and III d. II and IV

d. II and IV The annual interest payment or bond interest expense may be found on a company's income statement. The amount of debt or bonds outstanding may be found on the balance sheet. The annual interest payment is deducted from the earnings before interest and tax (EBIT). Bond interest is paid in pretax dollars, whereas cash dividends are paid from net income or in after-tax dollars.

Which TWO of the following sources of income would MOST likely be used by a school district to meet its debt service for general obligation bonds that it issued? I. Income tax II. Real estate tax III. Sales tax IV. Traffic fines a. I and III b. I and IV c. II and III d. II and IV

d. II and IV General obligation bonds are backed by the full faith, credit, and taxing power of the municipality that issues the bonds. The income to pay debt service on these bonds is derived from taxes and other general revenues. For smaller local governments, such as school districts, it would include primarily real estate taxes (also called property or ad valorem tax). In addition, traffic and other types of local fines may also be used. Income taxes and sales taxes would most likely be used to meet the debt service of larger issuers, such as states and large cities.

XYZ Corporation has 4,000,000 shares of common stock authorized and 2,500,000 shares issued, of which 100,000 shares are treasury stock. The corporation is issuing an additional 1,000,000 shares through a standby underwriting. If only 600,000 shares are subscribed to in the corporation's offering, the number of outstanding shares will: a. Remain the same since the entire issue was not fully subscribed b. Increase by 600,000 to 3,000,000 shares c. Increase by 600,000 to 3,100,000 shares d. Increase by 1,000,000 to 3,400,000 shares

d. Increase by 1,000,000 to 3,400,000 shares Since 100,000 shares of the 2,500,000 shares issued is treasury stock (repurchased by the corporation), there are 2,400,000 shares outstanding prior to the new issue. On a standby underwriting, the underwriting syndicate agrees to purchase any shares that the corporation does not sell. Since the corporation only sold 600,000 shares, the underwriters will purchase the remaining 400,000 shares. After the new issue, there will be 3,400,000 shares outstanding (2,400,000 + 1,000,000).

The provisions for the flow of funds of a revenue bond issue appear in the: a. Syndicate letter b. Account summary statement c. Notice of sale d. Indenture

d. Indenture The indenture contains all the agreements and covenants pertaining to a bond issue, and also contains the provisions for the application and allocation of funds of a revenue bond.

A pension fund manager wants to protect the fund's diversified stock portfolio against a market downturn. To best meet this objective, he should write: a. Yield-based calls b. Covered puts c. Uncovered calls d. Index options

d. Index options Index options will move with the market as a whole and, therefore, provide a better hedge than the other choices.

A customer wants safety of income and preservation of capital. Which of the following securities is MOST suitable? a. High-yield corporate bonds b. Collateralized mortgage obligations c. Convertible bonds d. Investment-grade corporate bonds

d. Investment-grade corporate bonds Investment-grade (highly rated) corporate bonds offer an investor safety of income and preservation of capital. The risk of default is minimal. The investor realizes income as well as preservation of capital. The other choices offer income, but have a higher degree of capital risk and, therefore, less preservation of capital.

A when, as, and if distributed contract settles: a. Same day b. T + 1 c. T + 3 d. On the day determined by FINRA

d. On the day determined by FINRA When, as, and if issued contracts are contracts for securities that are trading but are not yet available for delivery. They are also referred to as a when-issued (WI) security. FINRA determines when the date of settlement will be, i.e., when a sufficient percentage of the issue is outstanding.

A broker-dealer appears on the Nasdaq system as a market maker for DCIR common stock. An employee of the firm responsible for maintaining the firm's inventory in DCIR is known as a: a. Designated market maker b. Floor broker c. Compliance director d. Position trader

d. Position trader A position trader is responsible for maintaining a broker-dealer's inventory as well as trading the firm's account.

In a municipal bond underwriting, the difference between what the issuer receives and the public offering price is known as the: a. Manager's fee b. Total takedown c. Concession d. Spread

d. Spread The spread in a municipal bond underwriting is the gross profit earned by the syndicate. It is the difference between the amount the issuer receives for the bonds and the public offering price for the bonds. The takedown is the discount given to syndicate members by the manager of the syndicate on any bonds sold. The concession is a trade discount given to dealers who are not members of the syndicate. For example, a syndicate member may take down bonds at par minus 5/8 and sell them to the public at par, making a 5/8-point profit. The dealer who is not a member of the syndicate may buy the bonds at par minus 1/4-point concession and sell them to the public at par, making a 1/4-point profit.

hich of the following choices represents the percentage of new municipal issues brought to market during a particular week that has already been sold? a. The Bond Buyer Index b. The Blue List c. The Visible Supply d. The Placement Ratio

d. The Placement Ratio The placement ratio represents the percentage of new municipal bond issues of $5,000,000 or more that has been sold in a particular week. The Bond Buyer compiles this ratio.

Which of the following indexes or averages is made up of the largest number of stocks? a. The Dow Jones Composite Index b. The S&P 500 Index c. The NYSE Index d. The Wilshire Associates Equity Index

d. The Wilshire Associates Equity Index It shows the market value in dollars of roughly 7,000 NYSE, NYSE MKT (formerly NYSE Amex), and Nasdaq stocks. It contains the most stocks of the choices listed.

What information would NOT need to be disclosed by a broker-dealer in a research report? a. The broker-dealer received compensation for assisting the company in an acquisition b. The analyst provided a target price for the company c. The analyst is a director of the company d. The analyst had owned shares in the company one year before writing the report

d. The analyst had owned shares in the company one year before writing the report A broker-dealer is required to make certain disclosures in its research reports. Any investment banking compensation paid during the last 12 months, the anticipated price target, and the fact that the analyst is a director of the company are all required disclosures. In addition, any ownership in the company held by the analyst or a member of the analyst's immediate family at the time the report is issued must be disclosed. The fact that the analyst formerly owned shares that were sold does not need to be disclosed.

The Founders Income Fund has declared a dividend payable to stockholders of record Friday, May 29. This mutual fund would typically sell ex-dividend on: a. Monday, May 25 b. Tuesday, May 26 c. Wednesday, May 27 d. The date set by the fund or its principal underwriter (sponsor)

d. The date set by the fun or its principal underwriter (sponsor) Mutual funds sell ex-dividend whenever the fund or its principal underwriter (sponsor) determines. The ex-dividend date for a mutual fund is usually the same day as the record date.

The Founders Income Fund has declared a dividend payable to stockholders of record Friday, May 29. This mutual fund would typically sell ex-dividend on: a. Monday, May 25 b. Tuesday, May 26 c. Wednesday, May 27 d. The date set by the fund or its principal underwriter (sponsor)

d. The date set by the fund or its principal underwriter (sponsor) Mutual funds sell ex-dividend whenever the fund or its principal underwriter (sponsor) determines. The ex-dividend date for a mutual fund is usually the same day as the record date.

Which of the following rates is set by the Federal Reserve Board? a. The broker call rate b. The federal funds rate c. The prime rate d. The discount rate

d. The discount rate Of the choices given, only the discount rate is set by the Federal Reserve Board. The prime rate is the rate of interest that commercial banks charge their best-rated customers and is established by each bank. The call rate, which is the rate of interest charged to brokerage firms for margin loans, is set by each bank. The federal funds rate is the charge for overnight loans between banks and is set by each bank.

An individual purchases 600 shares of BAZ preferred stock. One week later the stock pays a dividend of $1.20 per share and the investor sells the stock the next day. For tax purposes, how will the dividends be taxed? a. 70% of the dividend will be tax-exempt and the remainder will be taxed as ordinary income b. 70% of the dividend will be tax-exempt and the remainder will be taxed as a capital gain c. The dividend will be taxed at long-term capital gains rates d. The dividend will be taxed as ordinary income

d. The dividend will be taxed as ordinary income Currently, dividends paid on stock held by individuals for more than 60 days during the 120-day period beginning 60 days before the ex-dividend date are taxed at a maximum rate of 20%. This is the same maximum tax rate as long-term capital gains. Since the individual held the stock less than the 60-day period, the dividend is taxed as ordinary income. The corporate dividend exclusion allows a corporation to exclude from taxation 70% of the dividends it receives from other corporations.

Which of the following parties states that a municipality may legally issue bonds? a. FINRA b. The MSRB c. The SEC d. The issuer's bond counsel

d. The issuer's bond counsel The issuer's bond counsel writes the legal opinion. It states that the interest is exempt from federal taxation and that the issue is valid and legal. Prior to giving an opinion as to the validity and tax exemption of the issue, the issuer's bond counsel examines all federal, state, and local legislation to be sure that the issue meets all requirements. Neither the MSRB, the SEC, nor any other regulatory agency states that a municipality may legally issue bonds.

According to SRO rules, what information must be obtained when an RR opens an account in which mutual fund shares will be purchased? a. The name of the beneficiary for the customer's account b. Whether the customer is subject to IRS backup withholding rules c. A written acknowledgment that the customer has received the fund's prospectus d. The name of the RR responsible for the account and the manager who approved the account

d. The name of the RR responsible for the account and the mgr who approved the account Under industry rules, the following items MUST be obtained when opening an account. The customer's name and residence Whether the customer is of legal age The name of the registered representative introducing the account and the signature of the member or partner, officer, or manager who accepted the account If the customer is a corporation, partnership, or other legal entity, the names of any persons authorized to transact business on behalf of the entity The name of the beneficiary is not required when opening an account.

A customer does not have a discretionary account with his brokerage firm. The firm may decide which of the following factors for the customer? a. Whether to buy or sell b. The quantity if the customer specifies the security and price c. The security if the customer specifies the quantity and price d. The price if the customer specifies the security and quantity

d. The price if the customer specifies the security and quantity If a customer indicates the specific stock and amount that he wishes to buy or sell, the registered representative is permitted to choose the time and price of execution. This would not be considered a discretionary order and written trading authorization would not be necessary.

An individual considering the purchase of an equity-indexed annuity should understand that: a. The return over long periods of time will equal the underlying index b. These products tend to outperform the stock market over long periods of time c. These products do not have sales charges or surrender fees like mutual funds and should only be purchased by seniors who want a death benefit and life payout d. The return over long periods of time will equal the greater of the participation rate of the underlying index (adjusted rate of return) or the guaranteed minimum

d. The return over long periods of time will equal the greater of the participation rate of the underlying index or the guaranteed min. Equity indexed annuities (EIAs) are a hybrid product that combines the elements of fixed and variable annuities. They provide a guaranteed minimum rate of return, but their performance is linked to a securities stock market index. Participation in the return found in the index is usually less than 100% and the calculation excludes dividends, which are normally based solely on appreciation. These products typically have surrender charges, fees based upon the riders selected, generally making these unsuitable for senior citizens or those needing access to their money.

When analyzing a mutual fund's expenses, an analyst does NOT consider: a. The management fees charged by the investment adviser b. The fees charged by the fund's custodian c. The fund's expense ratio d. The sales load charged to buy fund shares

d. The sales load charged to buy fund shares. When analyzing a mutual fund's expenses, an analyst is concerned about the amount of expenses as compared to the amount of money managed by the fund. This comparison is made by calculating the fund's expense ratio (operating expenses divided by total net assets). The operating expenses include management fees (which is usually the largest expense) and the fee paid to the fund's custodian. Total net assets are the fund's assets minus liabilities. Sales charges are not considered expenses of the fund.

All of the following statements are TRUE concerning both auction rate securities (ARSs) and variable-rate demand obligations (VRDOs), EXCEPT: a. Interest rates are set at specified intervals b. They are often issued by municipalities c. They are long-term securities with short-term trading features d. They have a put feature allowing the holder to redeem the security at par

d. They have a put feature allowing the holder to redeem the securities @ par Although they are both long-term securities with short-term trading features, only VRDOs have a put feature that permits the holder to sell the securities back to the issuer or third party. Auction rate securities (ARSs) do not have this feature and, if the auction fails, the investor may not have immediate access to her funds. In addition, ARSs use an auction process to reset the interest rate on the securities, whereas the interest rate on a VRDO is reset by the dealer at a rate that allows the securities to be sold at par value.

As far as open-end investment companies are concerned, which of the following statements is TRUE regarding dividend and capital gain distributions? a. They may be combined to determine the total yield b. The taxes may be deferred if they are invested in additional mutual fund shares c. Dividends are taxed as long-term capital gains d. They may be reinvested automatically in additional shares if the fundholder chooses to do so

d. They may be reinvested automatically in additional shares if the fundholder chooses to do so Of the choices listed, the only true statement regarding dividend and capital gain distributions from an open-end investment company (mutual fund) is that they may be reinvested automatically in additional shares if the fundholder chooses to do so. They may not be combined to determine yield. The taxes must be paid in the year that the distribution is realized, even if the distribution is reinvested. Dividends are always taxable as ordinary income regardless of how long the fund is held. Long-term capital gain distributions are taxable as long-term capital gains regardless of how long the fund shares are held.

What is a client's maximum loss if he is short KNP stock and short a KNP put? a. The difference between the market price and the strike price plus the premium b. The market price plus the premium c. The market price minus the premium d. Unlimited

d. Unlimited This is an example of a covered put (short stock + short put). The maximum loss is unlimited since there is no limit as to how high the stock price can rise. For example, if a client sells short at $46 and writes a $40 put for a premium of $3 and the put expires unexercised, the client will have a $3 profit. If the market price of KNP rises, the put option will expire unexercised but the client will still need to cover the short sale (short stock). The maximum loss on a short sale is unlimited, since there is no limit on how high the stock price may rise.

When purchasing a straddle, an investor's maximum profit is: a. The premium b. The strike price minus the premium c. Limited to the narrowing of the spread d. Unlimited

d. Unlimited A long straddle consists of purchasing both a call and put with the same expiration and strike price. Since it involves purchasing a call, there is an unlimited profit potential.

A customer in his late twenties wants capital appreciation and tax-deferred growth. He is willing to take a moderate degree of risk in his initial investment. The customer is also concerned about the inflationary risk to his portfolio. Which of the following investments is MOST suitable? a. Equities b. Corporate debt c. Municipal debt d. Variable annuities

d. Variable annuities Since the investor is concerned about inflationary risk, wants tax-deferred growth, and is willing to accept a moderate degree of risk to his initial investment, variable annuities are the most appropriate investment. If the investor did not want a tax-deferred investment with the same objectives, equities would be the most suitable choice.

An investment in which of the following securities requires a customer to sign a statement attesting to her annual income and net worth? a. A variable annuity b. A collateralized mortgage obligation c. A variable-rate demand obligation d. A direct participation program

d. a DPP An investor purchasing a limited partnership or DPP is required to sign a subscription agreement. As part of this agreement a customer would be required to sign a statement attesting to her annual income and net worth. In order to be suitable for this type of investment, the customer must meet minimum annual income and net worth requirements. By signing this statement, the customer has acknowledged the information she disclosed is accurate. The other investments do not require this type of statement signed by the customer.

Which of the following parties would consider the information obtained in an annual report of a corporation to be the most important factor in making an investment decision? a. A technical analyst b. A chartist c. A Dow theorist d. A fundamental analyst

d. a fundamental analyst The performance of management, sales, expenses, and earnings, which are items that could be obtained from the annual report of a corporation, are considered the most important factors in making an investment decision by a fundamental analyst. A technical analyst (chartist) is concerned with forces within the market, such as new highs and new lows, trading volume, and the number of advances and declines.

Which of the following funds is the least suitable for investors mainly seeking income? a. A mortgage-backed securities fund b. A municipal bond fund c. A balanced fund d. A sector fund

d. a sector fund A sector fund invests in securities of a specific industry or specific geographic location and typically does not have income as a primary objective.

XYZ Corporation will need to borrow funds in the bond market soon. While current interest rates are not attractive from its viewpoint, the company knows that interest rates could drop suddenly. The company would like to be ready to sell the bonds quickly. It would also like the bonds to be as liquid as possible in order to attract investors. Which of the following choices is most appropriate for its needs? a. A private placement under Regulation D b. An intrastate offering under Rule 147 c. A traditional registration statement d. A shelf registration under Rule 415

d. a shelf registration under rule 415 While the sales described in choices (a), (b), and (d) will usually be faster than a full registration, both Regulation D and Rule 147 place various restrictions on resales, reducing the liquidity of the issue. A shelf registration under Rule 415 will satisfy all of XYZ Corporation's needs.

Which of the following municipal entities would NOT issue overlapping debt? a. A park district b. A library district c. A school district d. A turnpike authority

d. a turnpike authority Overlapping debt involves only general obligation borrowing. A turnpike authority would typically issue only revenue bonds.

If a corporation is in liquidation, the holder of a subordinated debenture is paid: a. Before bank loans and before accounts payable b. Before bank loans and after accounts payable c. After bank loans and before accounts payable d. After bank loans and after accounts payable

d. after bank loans and after accounts payable In a liquidation of a corporation, the subordinated debenture holders are paid after bank loans and after accounts payable or other creditors. The subordinated debenture holders are paid after everyone except preferred and common stockholders.

By buying a put option, an investor: I. Can avoid selling a security for a large capital gain and yet participate in additional gains if the security continues to increase in price II. Can avoid selling a security for a large capital gain and be assured of selling the security at the strike price during the term of the option III. Can protect a profit on his current stock position a. I and II only b. I and III only c. II and III only d. I, II, and III

d. all of the above If investors are long stock, they can lock in an existing profit, or protect themselves against a market decline, by buying a put. If the market price continues to rise, investors will realize an additional profit, minus the premium paid for the put. For example, an investor owns stock that has a current market value of $60 and buys a July 60 put for 3. If the market price advances to $70, there will be an additional profit of $700 ($1,000 increase in profit minus $300 premium). The investor can provide protection against a loss by using a put. For example, if the stock in the preceding example dropped to $40, the investor would exercise the put and sell stock at $60. The entire cost would be the premium of $300.

A husband or wife may give a lifetime tax-free gift to a spouse of: a. $14,000 b. $70,000 c. $140,000 d. An unlimited amount

d. an unlimited amount A husband or wife may give a lifetime tax-free gift of an unlimited amount to a spouse. Any person may give a gift or $14,000 per person, per year without incurring a gift tax.

An investor is expecting a sharp decline in interest rates in the near future. To capitalize on this situation, the investor should buy: a. Premium bonds with short maturities b. Premium bonds with long maturities c. Discount bonds with short maturities d. Discount bonds with long maturities

d. discount bonds with long maturities

The City of Fremont, Nebraska is issuing revenue bonds to increase its electric power generating facilities and to replace outstanding bonds. Interest on the bonds will be: a. Subject to federal income tax and exempt from state taxes b. Subject to federal and state income tax c. Subject to state income tax and exempt from federal income tax d. Exempt from federal income tax

d. exempt from federal income tax For individual investors, the interest derived from state and municipal bonds is exempt from federal income tax. The investor may need to pay state taxes, depending on the tax status of the investor's home state.

A corporation will be considered in default if it does not pay interest on all of the following bonds, EXCEPT a(n): a. Second mortgage bond b. Debenture c. Subordinated debenture d. Income bond

d. income bond Interest on an adjustment (income) bond needs to be paid only if the corporation has sufficient income. Interest on all other debt securities must be paid regardless of the corporation's income.

Which of the following choices gives the best indication of current interest rates on revenue bonds? a. Visible supply b. Placement ratio c. List of 20 bonds d. List of bonds with 30-year maturities

d. list of bonds with 30-yr maturities The Bond Buyer computes the Revenue Bond Index which is the average yield of 25 revenue bonds with 30-year maturities.

The 5% markup policy applies to: a. Mutual funds b. New issues c. Municipal bonds d. Nonexempt securities

d. non exempt securities The 5% markup policy does not apply to transactions requiring a prospectus (new issues, mutual funds, and registered secondaries) or transactions in certain exempt securities (such as municipal securities).

The MSRB performs all of the following functions, EXCEPT: a. Regulate municipal securities dealers b. Regulate municipal securities representatives c. Regulate municipal securities advertising d. Set fixed commissions for municipal dealer agency transactions

d. set fixed commission for muni dealer agency transactions The MSRB does not set fixed commissions for municipal dealer agency transactions. MSRB rules regarding commissions state that they shall be fair and reasonable and negotiated between buyer and seller.

An investor who sells 1 GE Dec 50 call and sells 1 GE Dec 40 put has: a. Created a vertical spread b. Created a horizontal spread c. Sold a straddle d. Sold a combination

d. sold a combination Selling a call and put on the same security with different strike prices, or different expiration dates, is a short combination.

An investor purchases an EPG Jan 40 put at 5 and writes an EPG Jan 50 put at 13. The investor would profit in all of the following situations, EXCEPT: a. The spread narrows b. Both options expire c. The Jan 50 put is closed out at 10 and the Jan 40 put is closed out at 4 d. The spread widens

d. spread widens This is an example of a credit spread (more premium received for the option sold than paid for the option purchased). In a credit spread, the investor will profit if the spread (difference in premium) narrows.

A client has a brokerage account with a broker-dealer in New York City. She decides to move to Montana to retire. She still intends to maintain the account with the broker-dealer, which is registered only in New York. Which of the following statements is TRUE? a. This is permitted provided the client maintains a P.O. Box in New York b. This is permitted since the account was opened in New York prior to the client's move to Montana c. The client can maintain the brokerage account if the firm registers as an investment adviser in Montana d. The client can maintain the brokerage account if the firm registered as a broker-dealer in Montana

d. the client can maintain the brokerage account if the firm registered as a broker-dealer in MO A broker-dealer must be registered in each state in which it conducts business. In addition, the securities and the registered representative must be registered in all states in which the issue is sold. Registration as an investment adviser is not the same as registration as a broker-dealer.

A 7% convertible bond has a conversion ratio of 40. The bond has a nondilutive feature and the common is selling at $43 a share. If the company distributes a 10% stock dividend, which of the following statements is TRUE regarding the convertible bond? a. The conversion ratio remains at 40, but the conversion price is reduced b. The conversion ratio increases to 45.50 and the conversion price remains constant c. The conversion price decreases to $22.73 and the conversion ratio remains the same d. The conversion price decreases to $22.73 and the conversion ratio increases to 44

d. the conversion price decreases to $22.73 and the conversion ratio increases to 44 A nondilutive feature requires that the conversion features be adjusted should there be a stock split or stock dividend. The conversion ratio will be increased and the conversion price will be reduced. The new conversion ratio will be 44 [the old ratio (40) plus the old ratio times the percentage dividend (40 x 10% = 4)]. The new conversion price will be the par value of the bond divided by the new conversion ratio ($1,000 divided by 44 equals $22.73).

Which of the following statements is TRUE concerning reverse convertible securities? a. An investor will receive a coupon rate below prevailing market rates b. An investor is anticipating a decrease in the value of the underlying asset c. They would be suitable for an investor who wants to own shares of the underlying asset d. The investor is anticipating that the price of the underlying asset would be above the knock-in value

d. the investor is anticipating that the price of the underlying asset would be above the knock-in value Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a coupon rate above prevailing market rates. They are considered structured products because, in addition to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the investor if the price of the security falls below a specified value known as the knock-in level. If the price of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the full return of her principal (the most beneficial option). If the underlying asset falls below the knock-in level, the investor will be obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have depreciated below the knock-in level and the investor may receive substantially less than the original principal. The investor is anticipating a stable price for the underlying asset and is not able to participate in any increase in the value of the underlying asset. Choice (c) is incorrect since the investor does not want to own the underlying asset.

Volume and holding-period restrictions do NOT apply to the resale of private placements when: a. Purchasers' representatives assist investors b. Both parties are accredited investors c. The transaction is initiated by a registered principal d. The purchaser is a qualified institutional buyer

d. the purchaser is a qualified institutional buyer Under Rule 144A of the Securities Act of 1933, the owner of securities obtained through a private placement may resell those securities to a qualified institutional buyer (QIB) without the volume and holding-period restrictions of Rule 144. Qualified institutional buyers must have at least $100 million dollars of investable assets.

Which of the following statements is NOT TRUE regarding municipal bond quotes? a. They can be nominal quotes b. They can be subject quotes c. They can be firm quotes d. They must be written quotes

d. they must be written quotes All of the choices given about municipal bond quotes are true except they must be written quotes. MSRB rules relate to quotes that are communicated or published in any manner.

The largest portion of the underwriting spread in a new municipal securities issue is the: a. Commission b. Additional takedown c. Concession d. Total takedown

d. total takedown The largest portion of the underwriting spread in a municipal securities issue is the total takedown, which is made up of the additional takedown plus the concession.

Alan and Marie Johnson have one child and have just purchased a home. The Johnsons count on Marie's regular income from her medical practice to pay their mortgage and other regular bills. Alan's irregular income from the sale of his sculptures provides investment and discretionary income. The Johnsons want to purchase life insurance that will provide the potential for appreciation of future benefits, but are uncertain how much to purchase due to the unpredictable nature of Alan's income. Which of the following types of insurance is MOST appropriate for the Johnsons? a. Whole life insurance b. Variable life insurance c. Universal life insurance d. Variable universal life insurance

d. variable universal life insurance Universal life insurance will allow the Johnsons to vary their premiums based on current income levels and insurance requirements, while variable life insurance will provide returns based on the performance of a separate account. A combination of the two types, called variable universal life or flexible premium variable life, is most appropriate.

Which of the following positions/strategies is NOT bullish? a. A married put b. A short put c. A long 40 call and a short 50 call d. Writing a straddle

d. Straddle writers expect a neutral market and obtain the maximum gain if each option expires.

Which of the following advantages is NOT a benefit of owning a real estate investment trust? a. Stable dividend income b. The ability to buy and sell shares easily c. Diversification d. Protection against rising interest rates

d. protection against rising interest rates Real estate investment trusts (REITs) offer investors a stable dividend based on the income produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange, offering investors liquidity. Since investors usually purchase REITs for their high dividend yield, if interest rates increase, the value of their shares will usually decrease as other newly issued income earnings securities become more attractive.

Debt-to-Equity ratio

- The debt-to-equity ratio is used to analyze the capital structure of a company. - The debt-to-equity is found by dividing the dollar amount of debt (bonds) by the dollar amount of shareholder equity (common stock + paid-in capital + retained earnings)

Which of the following statements is TRUE concerning periodic payment variable annuities? a. A client's number of annuity units never changes b. A client's number of accumulation units never changes c. Annuity contracts never have a beneficiary d. The monthly payout is fixed by the inflation index

a. During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins.

Which TWO of the following statements are TRUE concerning bank-qualified municipal bonds? I. To qualify, the municipality may only issue up to $10,000,000 annually II. To qualify, the municipality must issue more than $10,000,000 annually III. Commercial banks are not permitted to purchase this type of security IV. Commercial banks are permitted to purchase this type of security a. I and III b. I and IV c. II and III d. II and IV

b. I and IV Bank-qualified bonds are issued by small municipalities and, to qualify, a municipality may only issue up to $10,000,000 annually. This is done to encourage commercial banks to invest in locally issued municipal securities. Commercial banks that purchase this type of security are permitted to deduct 80% of the interest cost paid to depositors on the funds used to purchase the bonds.

Type of orders for new municipal issue that can be placed with a syndicate (4)

1. A presale order is any order placed before the syndicate that actually purchases the issue from the issuer 2. A group order is a situation where all members of the syndicate share in the profit 3. A designated order is usually placed by a large institution that designates two or more members to receive credit for the sale 4. A member order is an order placed by members for their customers

The penny stock rules would apply under which of the following circumstances? a. The stock is listed on Nasdaq b. The stock is quoted on the OTC Bulletin Board c. The transaction is not recommended by the broker-dealer d. The customer is an active trader in penny stocks

A penny stock, according to SEC rules, is a stock that sells for less than $5.00, that is not listed on Nasdaq or the NYSE. A stock quoted on the OTC Bulletin Board or OTC Pink Market (Pink Sheets) that has a bid price of less than $5.00 is defined as a penny stock. Penny stock rules would not apply under the following conditions. - The customer is defined as an existing customer, which is a person who has maintained an account with a broker-dealer for more than one year, or has previously engaged in 3 or more transactions involving penny stocks (i.e., an active trader of penny stocks) - In non-recommeneded or unsolicited transactions - In transactions by a broker-dealer that is not a market maker in that security - In transactions by an institutional accredited investor

a tender offer

A tender offer takes place when an entity offers to buy a corporation's shares at a premium to the current market price. It is normally done for the purpose of acquiring control of the company.

Stockholders' Equity (net worth) =

Assets (items owned) - Liabilities (items owed)

Charlene contacts her registered representative to buy an OTC stock. Rather than buying it directly from a market maker, Charlene's broker-dealer contacts another broker-dealer, who buys it from a market maker creating two levels of transaction fees. This is known as: a. Free-riding and withholding b. Interpositioning c. Backing away d. Churning

b. Interpositioning which occurs when a broker-dealer, executing an order for a customer, places another broker-dealer between itself and the market. This is generally prohibited.

On September 14, a customer purchases an ABC December 60 call and sells an ABC November 60 call. The customer: I. Has engaged in a debit spread II. Has engaged in a credit spread III. Wants the spread to widen IV. Wants the spread to narrow a. I and III only b. I and IV only c. II and III only d. II and IV only

a. -To determine whether the customer wants the spread to widen or narrow, it is necessary to determine whether the spread is a debit or credit spread. - The premium for an option is determined by two factors: the in-the-money amount of the option (intrinsic value) and the time value. Since both options have the same strike price, the intrinsic values (in-the-money amount) are equal. - Therefore, any difference in premium is the result of a difference in time value. Since the December contract has longer to go until expiration than the November contract, it has more time value. Therefore, the premium for the December contract will be larger than for the November contract. - Since the customer purchased the December contract (higher premium), it is a debit spread and will profit if the spread widens.

Which TWO of the following statements are TRUE concerning the Securities Act of 1933? I. Registration provisions apply if the securities beings sold are listed on the NYSE II. Antifraud provisions do not apply if the securities being sold are listed on the NYSE III. Registration provisions do not apply to securities issued by a municipality IV. Antifraud provisions do not apply to securities issued by a municipality a. I and III b. I and IV c. II and III d. II and IV

a. - The registration provisions of the 1933 Act apply if securities sold are listed on the NYSE or Nasdaq, but do not apply to securities issued by a municipality. - The anti-fraud provisions of the Securities Act of 1933 apply to all securities, even those exempt from registration.

A client contacts an RR after reviewing the financial statements of the S-Works Carbon Company. The client is confused since the company paid a cash dividend but had a loss for the last fiscal year. Which of the following statements is TRUE? a. The company is permitted to pay a cash dividend even though it had a loss b. The company is not permitted to pay a cash dividend if it had a loss c. If the company has a loss in its last fiscal year, it may pay a cash dividend only with prior approval from shareholders d. If the company has a loss in its last fiscal year, it may pay a cash dividend only with prior approval from the SEC

a. A company is permitted to pay cash dividends in excess of its net income even if it had a loss. In terms of financial accounting, cash dividends are paid out of retained earnings that are part of shareholders' equity. Therefore, cash dividends paid will reduce shareholders' equity. The company could have paid the cash dividend easily based on retained earnings from previous years.

I. Negatively impact the stock market II. Positively impact the stock market III. Negatively impact the bond market IV. Positively impact the bond market a. I and III only b. I and IV only c. II and III only d. II and IV only

a. I and III Rising inflation tends to have a negative impact on both the bond and stock markets. In the bond market, when there is rising inflation, bond investors look to trade out of fixed-income investments, which will have their returns eroded by rising consumer prices. This selling pressure negatively affects bond prices in the market. In the stock market, rising inflation often translates into an assumption that the Fed will raise interest rates to curb consumer borrowing and consumer demand. Rising rates should, in theory, lead to decreased economic activity and shrinking corporate earnings. This also tends to lead to some form of a sell-off and a falling stock market. From a technical perspective, the dividend discount model would project falling stock prices during inflationary times because the discount rate applied when calculating the present value of the projected dividend cash flows would be higher. This would lead to a lower present value.

When interest rates are trending upward, the economy will normally be in which phase of the business cycle? a. Expansion b. Contraction c. Trough d. Peak

a. Increasing interest rates, along with increased costs and lower unemployment, are frequently associated with an expanding economy where there is an increasing demand for goods. As demand overtakes supply, prices begin to rise due to the scarcity of goods. This rise in prices is known as inflation. The Federal Reserve will look to raise interest rates in an attempt to curb demand and combat inflation.

XYZ corporation has income before taxes of $2 million and received $100,000 in preferred dividends from a company in which it owns 25% of the outstanding shares. If XYZ corporation is in the 34% tax bracket, it will pay taxes of: a. $686,800 b. $926,900 c. $966,000 d. $1,050,000

a. Since XYZ corporation owns 25% of the outstanding shares, it is exempt from paying taxes on 80% of dividends received from the stock. The corporation would need to pay taxes on only $20,000 of the dividends received (20% of the $100,000 in preferred dividends) plus the $2,000,000 of income the corporation earned. Since the corporation is in the 34% tax bracket, the tax would be $686,800. (34% of $2,020,000 = $686,800.)

An investor reading the newspaper sees that yesterday's effective federal funds rate was 3.47%. On the previous day, the rate was 3.41%. This information indicates: a. The average rate charged on overnight loans throughout the country increased b. The Federal Reserve took measures to inject money into the banking system c. The Federal Reserve increased the federal funds rate d. Member banks that needed to obtain overnight loans from the Federal Reserve paid more than the previous day

a. avg. rate charged on overnight loans t/o the country increased The effective federal funds rate is the daily average rate that commercial banks charge throughout the country for overnight loans. It is influenced, but not set by, the Federal Reserve Board. An increase in the federal funds rate normally signifies that the Fed has taken money out of the banking system.

The largest deduction generated by a DPP in real estate is: a. Depreciation b. Depletion c. Recapture d. Tax credit

a. depreciation The largest deduction in a real estate program is generally depreciation.

A newly issued bond has a provision that it cannot be called for five years after the issue date. This call protection would be MOST valuable to a recent purchaser of the bond if: a. Interest rates are falling b. Interest rates are rising c. Interest rates are stable d. The yield curve slopes downward

a. interest rates are falling The call protection provision of five years would be most valuable to a recent purchaser of the bond if interest rates are falling. If interest rates fall, outstanding bond prices will rise. Issuers of bonds will call or retire bonds when interest rates decline, and will issue new bonds with lower rates of interest. Bonds are usually callable at a small premium above par value. If the bonds are not callable, the investor can realize the full benefit of an increase in the market price of the bonds.

A sales breakpoint of a mutual fund is: a. The minimum dollar amount of a purchase of a mutual fund where a volume discount is given b. The minimum share amount of a purchase of a mutual fund where a volume discount is given c. The point at which a letter of intent can be obtained d. The point at which a letter of intent can be backdated

a. minimum dollar amount. A sales breakpoint of a mutual fund is the minimum dollar amount (not the share amount) of a purchase of a mutual fund where a volume discount is given. The percentage of the sales charge declines when certain minimum dollar amounts are reached.

A customer sells an XYZ April 30 put for $5 and an XYZ April 30 call for $3. If the put is repurchased at $4 and the call is repurchased for $1, the customer will have: a. A profit of $300 b. A loss of $300 c. A profit of $800 d. A loss of $800

a. profit of $300 The customer sold a straddle and received $500 for the put and $300 for the call or a total of $800 for the straddle. The put was repurchased for $400 and the call for $100, or a total cost of $500. The difference between the amount of premiums received from the sale of the straddle ($800) and the cost of repurchasing the straddle ($500) is a profit of $300 for the customer.

A charge to a customer for the collection of dividends, holding of securities, and other services must be: a. Reasonably fair and not discriminate between customers b. No more than 1/2 of 1% of the customer's free credit balance c. No more than 5% of the value of the securities d. At least 1% of the value of the securities

a. reasonably fair Under industry rules, a brokerage firm is allowed to charge a customer for collection of dividends, holding of securities, and other services. Most brokerage firms do not charge for these services, but if they do charge, the amount must be reasonably fair and not discriminate between customers.

The Federal Reserve Board's Open Market Committee (FOMC) buys and sells which of the following securities most often to accomplish its aims? a. Treasury bills b. Treasury notes c. Treasury bonds d. Agency bonds

a. treasury bills The Federal Reserve Board's Open Market Committee (FOMC) purchases and sells U.S. government securities in the open market to accomplish the Federal Reserve Board's aims of influencing the money supply. The securities most often used are Treasury bills.

An investor owns $10,000 worth of XYZ Corporation convertible bonds that are callable at 102. The bonds are currently selling in the market at 103. If the corporation calls the bonds at the call price, the investor will receive: a. $10,000 b. $10,200 c. $10,300 d. $10,500

b. $10,200 When bonds are called for redemption, the owner receives the call price. The call price is 102 for a total of $10,200 ($1,020 per bond x 10 bonds). If the investor were able to sell the bonds at the current price, she would receive $10,300 ($1,030 x 10 bonds). However, the question states that the bonds are called, which means the market price of the bond will gravitate to the call value of $10,200.

An investor has sold a stock short. If the present market value is $2.00 per share, the minimum maintenance requirement will be: a. 50% b. $2.50 per share c. $2.00 per share d. 30%

b. $2.50/shares When selling short securities that have a market value less than $5 per share, a minimum maintenance requirement of $2.50 per share or 100% of the market value, whichever is greater, applies. Since $2.50 a share is greater than $2.00 per share, this is the correct answer.

On Monday, June 15, an investor purchases for regular-way settlement, $20,000 face value of 8% municipal bonds that mature on November 1, 2035. What is the dollar amount of accrued interest that the investor is required to pay? a. $75.55 b. $208.88 c. $213.33 d. $1008.88

b. $208.88 With the maturity falling on November 1, the other interest payment date would be May 1. The trade on Monday, June 15, would settle on Thursday, June 18. Accrued interest on municipal bonds is calculated on a 30/360 day basis resulting in 30 days for the month of May and 17 days for June, (up to but not including settlement), for a total of 47 days. The amount of interest paid is calculated based on the following Accrued Interest formula. Accrued Interest = (Principal x Rate x Days of Interest) / 360 = ($20,000 x 8% x 47) / 360 = $208.88

The minimum equity requirement for a pattern day trader is: a. $25,000, which the client has five business days to deposit b. $25,000, which must be deposited before the client may continue day trading c. Four times the maintenance requirement for the account d. $2,000 or 100% of the short market value

b. $25k, his amount must be deposited in the account before the customer may continue day trading and must be maintained in the customer's account at all times. Day-trading buying power is limited to four times the trader's maintenance margin excess, determined as of the close of the previous day.

An investor purchases 1 XYZ October 40 put when the market price of XYZ is $41 per share, and pays a premium of $3. What is the maximum profit the investor can have? a. $300 b. $3,700 c. $3,800 d. Unlimited

b. $3700 XYZ shares could possibly become worthless. The investor can then buy 100 shares for pennies and put (sell) it to the writer for the $40 per share strike price. This equals $4,000 ($40 x 100 shares). The investor's profit is $4,000 minus the $300 premium paid for the put, which equals $3,700. The $3,700 is the maximum profit the investor can have since the share's price cannot go lower than zero.

Which of the following statements is TRUE concerning electronic communication networks (ECNs)? a. They can be used only by retail investors b. They can be used to obtain automatic execution c. They can be used only by institutional investors d. They can be used by clients that do not want to use a broker-dealer

b. - Electronic communication networks (ECNs) are trading systems designed to match buyers with sellers of securities. - They can be used by both institutional and retail investors. - One of the benefits of their use is immediate automatic execution if a matching buy or sell order can be found on the system.

A client owns shares of stock purchased at $46 a share. If the current market price is now $70 and the client wants to protect her profit if the price should fall 10%, the RR should recommend which of the following orders? a. A market order b. Sell stop $63 c. Sell limit $63 d. Sell stop-limit $63

b. - This client only wants to sell her position if the stock declines by 10% or $7.00. The RR should recommend a sell stop at $63 - A sell limit is an order to sell at a specified price or higher and is usually placed above the current market price. Therefore, a sell limit at $63 is not suitable. - Since the client never mentioned a specific limit selling price she is willing to accept, a stop limit order should not be recommended. In addition, a stop limit order may be activated but never executed, and the client would not be able to protect her profit.

Which TWO of the following events may be reasons for a revenue bond issue to be called? I. There is a change in the tax status of the issuer II. Surplus funds are not available III. Interest rates rise dramatically IV. The facility is destroyed by fire a. I and III b. I and IV c. II and III d. II and IV

b. - if the tax status of an issuer is in doubt at the time of issuance, there is usually a provision requiring that the issue be called if the tax status of the issuer changes and the bonds become taxable.

A municipal revenue bond is secured by the revenues of a toll road system showing the following information. Annual Debt Service $3,000,000 Annual Gross Revenues $6,000,000 Annual Operating and Maintenance Expenses $2,000,000 Based on this information, the annual debt service coverage ratio is: a. .667 to 1 b. 1.33 to 1 c. 2 to 1 d. 3 to 1

b. 1.33 to 1 Step 1: Calculate the net revenue for the municipal revenue bond. Annual Gross Revenues $6,000,000 - Annual O/M Expenses $2,000,000 Net Revenue $4,000,000 Step 2: Divide net revenue of $4,000,000 by the debt service of $3,000,000 to calculate the annual debt service coverage ratio which is 1.33 to 1.

An XYZ Corporation convertible bond is selling in the market at $1,248.75. It is convertible at $30. XYZ common stock's market price is 37.50. The bond has been called at 103. Which of the following activities is the LEAST attractive alternative for a holder of the bond? a. Sell the bond b. Convert to common and sell the common c. Allow the bond to be called d. Convert common stock to a bond

c. Allow the bond to be called The holder could sell the bond and receive $1,248.75. If he converted, he would receive 33 1/3 shares ($1,000 par divided by $30 per share conversion feature) with a total value of $1,249.88 (33 1/3 x $37.50). The least attractive alternative is to allow the bond to be called and receive $1,030.

As it relates to a Nasdaq market maker, the term spread is BEST defined as which of the following? a. The difference between the price that an issuer will receive for its securities and the price that the public will pay for the securities b. The difference between the price at which a firm will buy a security and the price at which it will sell a security c. The amount of profit that a firm will make when it buys a security from or sells a security to a customer d. The amount of the firm's markup or markdown to a customer who buys or sells a security

b. =/ between price buy and sell of a security When used in reference to a Nasdaq market maker, the spread represents the difference between the price at which the firm is willing to buy (bid) and the price at which the firm is willing to sell (ask or offer) a security. For example, if the bid price is $21.20 per share and the offer price is $21.30 per share, the market maker's spread is $.10. Choice (a) is the spread or profit that an underwriter makes when it sells an IPO to a customer. Choice (c) is a market maker's profit based on its inventory cost for a security (i.e., the price at which it purchased a security from a customer compared to the price at which it was sold to a different customer.

A customer has a significant gain in shares of LRR that she has held for 10 months. If she buys a put option on LRR, which TWO of the following statements are TRUE? I. The customer still has upside potential in the stock II. The holding period on the stock is not affected III. The customer can achieve a long-term gain by holding the put and stock for three months IV. The customer has created a position that could reduce a loss a. I and III b. I and IV c. II and III d. II and IV

b. I and IV If a stock is held short-term (one year or less) and a put is purchased, the holding period is terminated and would not resume until the put is sold or expires. When the holding period resumes, it will do so as if the stock was purchased on that day. If a long-term holding period were established on the stock, then the acquisition of the put would not affect the investor's holding period. If the stock and the put are purchased on the same day, that is termed a married put. In that case, the price of the put will be added to the price of the stock to arrive at a cost basis for the entire position. When the put expires, there will not be a taxable event since the stock must be sold to trigger a capital gain or loss. The purchase of the put will create a hedge by allowing the investor to sell the stock at the strike price, thereby reducing a loss. There is still potential for the stock to rise and for the customer to achieve large gains.

ABC Corporation bonds are convertible at $50. If the bonds are selling in the market for 90 ($900) and the common stock is selling for $43, which TWO of the following statements are TRUE? I. The stock is selling at a discount to parity with the bond II. The stock is selling at a premium to parity with the bond III. Liquidating the stock after converting the bond would be currently profitable IV. Liquidating the stock after converting the bond would not be currently profitable a. I and III b. I and IV c. II and III d. II and IV

b. I and IV The conversion ratio, which is not given, is found by dividing the par value of the bond ($1,000) by the conversion price ($50). This equals 20 to 1 ($1,000 divided by $50 equals 20). The market price of the common stock is $43 per share. The stock is selling at a discount to parity with the bond ($43 stock x 20 shares = $860 which is below the $900 market price of the bond). If the bonds were converted and the stock was then sold at the market price, the investor would have a loss.

An investor takes the following position. Long 1 GHI Nov 65 put Short 1 GHI Nov 55 put Which TWO of the following statements are TRUE regarding this position? I. The investor paid money to create the position II. The investor received money to create the position III. The investor is bullish IV. The investor is bearish a. I and III b. I and IV c. II and III d. II and IV

b. I and IV - This position is referred to as a debit put spread. It cost the investor more than was received since the long put has a strike price greater than the short put. - As a result, the long put is exercised first (since it has a higher strike price), allowing the investor to make money if the stock declines in value (a bearish move).

A registered representative opens an option account for a customer on October 1 and buys 5 ABC November 30 calls at 4. On October 16, the premium of the calls has decreased to 2 and the registered representative has not received a signed options agreement. The registered representative may: a. Not accept any orders from the customer until the signed options agreement is received b. Accept an order to sell the 5 ABC November 30 calls that were previously purchased c. Accept an order to buy 5 additional ABC November 30 calls d. Accept an order to buy 5 XYZ December 40 calls

b. If the customer does not return the options agreement within 15 days of the approval of the account, the customer is permitted only to close out existing positions. Since the account was approved on October 1, the customer must sign the options agreement and return it to the firm by October 16. As of October 16, the customer may only open new options positions after the signed form is returned to the firm.

Foreign currency spot transactions normally settle in: a. One business day b. Two business days c. Three business days d. Five business days

b. Settlement for foreign currency spot transactions is usually two business days.

Which of the following items is NOT found by reviewing a company's balance sheet? a. The dollar value of the inventory b. The amount of interest paid on the company's bonds outstanding c. The amount of short-term debt d. The value of the treasury stock

b. The amount of interest paid on the company's bonds outstanding (interest expense) is found in a company's income statement. A company's assets (inventory), liabilities (debt or bonds), and shareholders' equity (treasury stock), are found on the balance sheet.

Which of the following parties is responsible for the safekeeping of the securities owned by a mutual fund? a. The registrar b. The custodian bank c. The sponsor d. The transfer agent

b. The custodian bank is responsible for the safekeeping of the securities owned by a mutual fund. The custodian bank has no responsibility relating to the management of the fund's portfolio.

Your client is president of XYZ Corporation and is selling XYZ shares pursuant to Rule 144. A filing must be made with the SEC: a. 15 days before the sale b. At the time of the sale c. 30 days after the sale d. 90 days after the sale

b. The filing must be made at the time of the sale and is effective for 90 days.

The purchaser of a variable life insurance policy bears which of the following risks? a. The death benefit may fall to zero due to poor market performance b. The policy may have no cash value if the separate account performance is negative b. The insurance company may increase the premiums if the investment performance of the separate account is poor b. The increasing cost of doing business may force the insurance company to raise expense charges against the separate account

b. The policy may have no cash value if the separate account performance is negative. The cash value of a variable life insurance policy increases or decreases in relation to the performance of the separate account. Poor performance could cause the cash value to decline to zero. Although the death benefit can also increase or decrease, it may never fall below a set minimum. The premiums for variable life policies are fixed for the life of the policy. An expense guarantee clause in life insurance contracts prevents the insurance company from raising expense charges for the administration of the policy.

Which of the following choices makes a financial commitment in the distribution of a new issue of securities? a. The selling group b. The underwriting syndicate c. A customer who provides an indication of interest d. The exchange on which the security will be listed

b. The underwriting syndicate - The underwriting syndicate makes a commitment to the issuer to purchase the entire offering. If the syndicate cannot resell the offering at the public offering price, it may suffer a loss.

A transaction occurs between two dealers for a Nasdaq stock. The trade must be reported BY: a. The buyer within 10 seconds b. The seller within 10 seconds c. Both within 10 seconds d. Both by the end of the day

b. Transactions in Nasdaq stocks must be reported to FINRA by the SELLER within 10 seconds of the trade.

Which of the following bonds has the most interest-rate risk? a. A 3-month Treasury bill b. A 30-year Treasury STRIP c. A 6%-coupon, 30-year Treasury bond d. A 3%-coupon, 5-year Treasury note

b. a 30-year treasury STRIP The bond with the most interest-rate risk or price volatility is the one with the longest maturity and lowest coupon. Zero-coupon bonds would have the most interest-rate risk and a STRIP is a type of zero-coupon bond.

A registered representative would NOT need to notify his employer to open an account at another member firm if he effects transactions in which of the following securities? a. Investment-grade, nonconvertible bonds b. An actively managed emerging markets mutual fund c. An exchange-traded fund (ETF) that is indexed to the S&P 500 d. A real estate investment trust listed on the NYSE

b. actively managed emerging markets mutual funds Normally, an employee of a FINRA member firm who wishes to open an account at another member firm must notify his firm and the executing firm, in writing, prior to opening a securities account. An exception is made if the employee effects transactions only in mutual funds, unit investment trusts, and variable annuities.

Which one of the following events will NOT result in a profit to an uncovered call writer? Ta. he price of the underlying security falls below and remains below the exercise price of the option b. The call is exercised and the underlying security price is greater than the exercise price plus the premium received c. The price of the option contract declines d. The option contract expires without being exercised

b. call is exercised An uncovered call writer does not own the underlying stock. If the market price of the underlying stock rises above the exercise price, the stock will be called away. If the market price rises above the exercise price by an amount exceeding the premium, the difference in prices will represent the loss to the writer. For example, if an individual writes 1 XYZ July 50 call for 5 and the market price rises to 60, the stock will be called away. The writer will be required to buy the stock at 60. Since the investor received only 55 (exercise price of 50 plus premium of 5), there will be a 5-point loss.

A customer has a nondiscretionary account at a broker-dealer. The customer received a research report and instructs the registered representative to purchase 500 shares of a specific stock on the recommended list. Which of the following actions is MOST appropriate for the registered representative to take? a. Contact the customer and ask her to place a limit order to buy the security b. Purchase the stock no later than the end of that business day c. Purchase the stock any day that you think is best d. Have the order preapproved by a principal and then purchase the stock

b. purchase the stock no later than EOB This is a nondiscretionary account and, therefore, no shares may be purchased unless the customer gives the broker-dealer an order to purchase the security. In some cases, a registered representative may accept the customer's verbal authorization to make certain decisions without it being considered discretionary. If a customer (1) selects the specific security, (2) decides whether to buy or sell the security, and (3) specifies the number of shares, leaving discretion only as to time and/or price, it would not be considered a discretionary order and written authorization would not be required. The customer mentioned all three of these details. This time and price discretion concerning the order is limited to the trading day on the day the order was placed, and must be noted on the order ticket. The client is permitted to give her RR written instructions for a longer period. There is no requirement to have the order preapproved by a principal.

The purchase of a new issue prior to settlement with the issuer can BEST be described as a: a. Subject or workout transaction b. When-issued transaction c. Seller's option contract d. Violation of the Securities Act of 1933

b. when-issued transactions The term when-issued covers the period of a new issue of municipal securities from the original date of sale by the issuer to the delivery of securities to the underwriter. The purchase or sale of new issue securities prior to registration may be a violation of the 1933 Act.

A woman will be retiring in 2020. She is interested in income and having her principal available at retirement. Of the following municipal bonds, you would recommend a(n): a. Aaa-rated 8.5% G.O. maturing in 2017 b. Aa-rated 10% G.O. maturing in 2039 which is callable in 2018 at 105 c. Aa-rated 8.5% G.O. maturing in 2020 d. Ba-rated revenue bond maturing in 2023

c. Since the woman wants her principal available at retirement, a bond maturing in 2020 (the year of her retirement), regardless of the yield, would be the best choice

A customer has purchased 10 ABC January 50 calls, paying a $2 premium and 10 ABC January 50 puts, paying a $2 premium. The market price of ABC stock is $50 per share. The buyer of these 10 straddles will need to deposit: a. $1,000 b. $2,000 c. $4,000 d. $10,000

c. $4,000 When buying options, 100% of the purchase price (the premium) must be deposited. The customer paid a $2 ($200) premium for the call and a $2 ($200) premium for the put (a $4 premium for one straddle). The customer purchased 10 straddles and paid $400 per straddle for a total of $4,000. (10 straddles x $400 = $4,000.)

A corporation has pretax income of $2,000,000. In addition, it received dividends of $100,000 from the common stock of a corporation in which it had a 10% interest. If the corporation pays a 34% tax rate, what is its total tax liability? a. $680,000 b. $686,800 c. $690,200 d. $714,000

c. $690,200 - If a corporation owns less than 20% of the distributing company, the corporation is required to pay tax on 30% of the dividends it receives on stock that it owns (70% is excluded). - The company will have to add $30,000 (30% of $100,000) to its taxable income. The total taxable income will, therefore, be $2,030,000. The tax liability will be $690,200 ($2,030,000 times 34% tax rate). - If the corporation owned at least 20% of the distributing company, only 20% of the dividends would be taxable.

A customer sells short 1,000 shares of stock. A few weeks later the company declares a 5% stock dividend. When the customer covers the short sale, the customer will be required to deliver: a. 50 shares b. 1,000 shares c. 1,050 shares d. 950 shares

c. 1050 shares When a customer sells short, the brokerage firm borrows stock to deliver it to the buyer. All cash and stock dividends declared are the responsibility of the customer who sold the stock short. In this example, the company declared a 5% stock dividend. Therefore, a customer who sold short 1,000 shares would be required to deliver 1,050 shares (1,000 shares x 5% = 50 additional shares) when covering the short sale.

A double-barreled municipal bond is backed by the: a. Revenues of a project b. Taxes of a municipality c. Revenues of a project and taxes of a municipality d. Revenues of the U.S. government

c. A double-barreled municipal bond is backed by two sources of income, which would be the revenues of a project and the taxes of a municipality.

Which of the following statements is NOT TRUE regarding a SEP-IRA? a. An employer makes contributions to an employee's IRA b. An employer is not required to make annual contributions c. Employees are permitted to make contributions to the account d. Employees are immediately vested for any contributions made to the account

c. A simplified employee pension plan (SEP-IRA) does not allow the employee to make contributions. SEPs are funded by employer contributions only. This is different than for Keogh plans, which do allow for employees to make nondeductible contributions to their own account.

MSRB rules require that a municipal securities principal must approve all of the following choices, EXCEPT: a. All municipal transactions b. Municipal advertising c. An official statement sent to customers d. A new account form

c. An official statement sent to customers A municipal securities principal does not need to approve an official statement (OS). An OS is prepared by an issuer of municipal securities and issuers are not subject to MSRB rules.

Which TWO of the following securities will MOST likely be subject to a withholding tax? I. A bond issued by a U.S. company but sold to U.S. investors II. A bond issued by a foreign company but sold to U.S. investors III. Stock issued by a foreign company but sold to U.S. investors IV. Stock issued by a U.S. company but sold to U.S. investors a. I and III b. I and IV c. II and III d. II and IV

c. Choice (II) is an example of a Yankee bond and choice (III) is an example of an ADR

The recommendation to purchase a private activity bond would NOT be appropriate for a: a. Husband and wife, both of whom have recently retired b. High-net-worth client who has an advisory account c. Client who is subject to the alternative minimum tax d. Client with a large portfolio of municipal bonds

c. Client who is subject to the AMT A private activity bond is a type of municipal bond in which the funds being raised will be used to benefit a non-public (private) company (e.g., an airport terminal for an airline). If the person receiving the bond's interest payment is subject to the alternative minimum tax (AMT), the interest is taxable at the federal level. For this reason, these bonds are the least suitable for a client who is subject to the AMT.

The tax treatment of a business development company is similar to which TWO of the following securities? I. A municipal bond II. A real estate investment trust III. A closed-end investment company IV. A variable annuity a. I and III b. I and IV c. II and III d. II and IV

c. II and III A business development company (BDC) raises capital by selling securities to investors and is similar in structure to a closed-end investment company. - A BDC will use the money it raises to invest in private companies, small and developing businesses, and financially troubled companies that have difficulty raising capital in public markets. The objective is to help these companies by providing funding when they may not be able to raise capital for themselves. - Most BDCs trade on an exchange and, therefore, provide an investor with liquidity and, since they are structured as regulated investment companies, they are not taxed if they distribute at least 90% of their income to investors. For tax purposes, they are regulated similar to investment companies (mutual funds and closed-end funds) and to REITs that also must distribute a minimum of 90% of their income. Most have an investment objective of providing current income and capital appreciation, and will invest their funds in both debt (e.g., loans, subordinated and mezzanine financing) and equity of private small and middle-market companies. Since some of the funds are invested in the equity of nonpublic companies, a customer purchase of a BDC is similar to buying a publicly traded investment in a private equity firm.

A buyer of a call option is subject to which TWO of the following choices? I. Unlimited risk II. Protection for a short position III. A position that provides leverage IV. An obligation to buy stock a. I and II b. I and III c. II and III d. II and IV

c. II and III Buying a call option provides leverage because the buyer controls 100 shares of stock for a relatively small cost (the premium). The risk is limited to the premium since that is the maximum potential loss. If an investor is short stock, he risks a loss if the market price of the stock increases. Buying a call provides protection against this situation since he could buy stock at a set price by exercising the call. A buyer of a call option has a right to buy stock, not an obligation.

A fidelity bond is: a. A noncallable municipal bond b. A nonconvertible corporate bond c. Insurance purchased by broker-dealers to protect them against fraud d. Insurance protecting customers in the event of a broker-dealer bankruptcy

c. Insurance purchased by BD to protect against fraud Every broker-dealer is required to have a fidelity bond, which provides insurance in the event of a fraud judgement against the broker-dealer.

Which of the following formulae is used to determine the total equity in a combined margin account? a. LMV + DR - CR - SMV b. LMV - DR + SMV - CR c. LMV + CR - DR - SMV d. LMV - CR - DR + SMV

c. LMV + CR - DR - SMV To determine the equity in a combined margin account, take the long market value (LMV) plus the credit balance (CR), then subtract the debit balance (DR) and the short market value (SMV).

In a rights offering, an underwriter offers to purchase all the shares the issuing corporation may not be able to sell. This is known as a(n): a. Firm-commitment underwriting b. Best-efforts underwriting c. Standby underwriting d. All-or-none underwriting

c. Standby underwriting A type of underwriting in which the underwriter agrees to buy all the shares not subscribed to in a rights offering is a standby underwriting. The issuing corporation realizes that many shareholders will not participate in the rights offering. This may amount to a large number of the shares being offered. The corporation will not receive the money for the shares that are not subscribed to. The underwriter that is standing by to buy all the unsubscribed shares will either buy them at a discount or will receive a fee. This type of an arrangement assures the issuing corporation it will be able to raise the amount of capital it requires.

A Web site is being designed for a registered representative of a member firm. Which TWO of the following statements are TRUE regarding the design of this Web site? I. The FINRA logo must be displayed II. The registered representative's firm name must be displayed III. A reference to FINRA membership is permitted IV. Links to other Web sites are not permitted a. I and II b. I and III c. II and III d. II and IV

c. The name of the member firm with whom the registered representative is associated must be displayed. While the use of the FINRA logo is NOT permitted, the registered representative's association with a FINRA member firm is allowed. However, when a reference to FINRA membership is used, the Web site must provide a hyperlink to FINRA's home page. Links to other Web sites are allowed but care should be taken that these sites do not provide fraudulent or misleading information.

The State of North Carolina is offering $100,000,000 of general obligation bonds with serial maturities. The bonds maturing in 2029 have an interest rate of 5 1/2% and a yield to maturity of 5.60%. This means the bonds are being offered: a. At par b. At a premium c. At a discount d. To yield 5 1/2%

c. at a discount Since the bonds have a yield to maturity of 5.60% (that is greater than the 5 1/2% coupon rate), the bonds are being offered at less than their face (par) value. These bonds were, therefore, issued at a discount.

Which of the following short positions violates SEC rules? a. A customer short stock that he borrowed from the brokerage firm b. A customer short and long the same stock at the same time c. A customer borrowing stock in order to profit from a tender offer d. A customer short stock while owning bonds convertible into that stock

c. borrowing stock to profit from a tender offer A tender offer takes place when an entity offers to buy a corporation's shares at a premium to the current market price. It is normally done for the purpose of acquiring control of the company. According to SEC rules, a customer may not tender short (borrowed) shares.

Which of the following choices does NOT require additional documentation to transfer stock? a. A partnership account signed by a general partner b. A corporate account signed by an authorized officer c. A custodial account signed by the custodian d. An executor signing for an estate

c. custodial a/c signed by the custodian The only authorized signature for a custodial account is that of the custodian. There is no further documentation required. In each of the other choices, the transfer agent requires additional documentation showing that the person signing the certificate is authorized to do so.

A CMO would be suitable for an investor seeking: a. Monthly tax-free income, assuming he does need the principal returned at maturity b. Quarterly income, assuming he does not need the principal returned at maturity c. Monthly income, assuming he needs the entire principal returned at maturity d. Monthly income, assuming he does not need the entire principal returned at maturity

d. CMOs pay monthly income made up of - interest, which is taxable, and - principal, which is a tax-free return of capital - Due to the structure of a CMO, a fluctuating amount of principal is returned monthly, not at maturity, which makes CMOs different from most other fixed-income securities.

A variable life insurance policy has an AIR of 5%. The separate account recently performed at a 4% rate of return. Which of the following statements BEST describes the effect of this rate of return on the death benefit of the policy? a. The death benefit will increase as long as the rate of return is positive b. The death benefit will decrease to a determined level c. The death benefit will decrease, but not below the guaranteed minimum d. The rate of return of the separate account affects only the cash value, not the death benefit

c. death bene will decrease, not below the guaranteed min. If the return of the separate account exceeds the AIR, the death benefit will increase. If the return of the separate account is less than the AIR, the death benefit will decrease. However, the death benefit may not decrease below the initial face value of the policy.

Buyers of municipal bonds would normally NOT include: a. Insurance companies b. Banks c. Defined benefit plans d. Mutual funds

c. defined benefit plan - which is a type of pension fund. Pension funds and other tax-deferred accounts would not benefit from the tax exemption provided by municipal bonds. - As a result, unless the bonds are taxable and offer yields equivalent to other taxable bonds, pension funds would not include municipal bonds in their portfolio. The exception would be Build America Bonds (BABs), which are taxable municipal bonds.

Relative to stock index options, which of the following statements is NOT TRUE? a. There are options expiring each month b. If traded, settlement is the next business day c. If exercised, settlement is in cash in three business days d. The settlement amount is based on the closing index price on the day of exercise

c. if exercised, settlement is in cash in 3 business days When exercised, a stock index option settles in cash on the next business day. (Equity options, if exercised, would settle in three business days.) The settlement amount is determined by the difference in strike price and the closing value of the index on the day of exercise. Index options expire each month. Option trades settle on the next business day.

Under industry rules, the final approval to open a new account is given by a(n): a. Registered representative b. Operations manager c. Partner or principal d. Supervisor

c. partners or principal Final approval must be given by a partner or principal of the firm. Not every supervisor is a principal and only a principal can approve a customer account.

To diversify a corporate bond portfolio, which of the following factors is NOT a concern? a. Coupon b. Maturity c. Price d. Geographic location

c. price A corporate bond portfolio may be diversified with different issuers, coupons, maturities, and geographic locations. The price of the bonds does not help to diversify.

A type of order that becomes a market order when a round-lot trades at or through a particular price is called a: a. Market order b. Limit order c. Stop order d. Stop-limit order

c. stop order A type of order that becomes a market order when a round-lot trades at or through a particular price is called a stop order. A variation of a stop order is a stop-limit order, which is activated when a round-lot trades at or through a particular price, along with the requirement that the limit price be satisfied.

A broker-dealer owns 100 shares of ABCO stock, which it purchased at 28. If the stock is sold to a customer, the broker-dealer will base a markup on: a. The inventory cost of 28 b. The highest bid on the Nasdaq system c. The lowest offer on the Nasdaq system d. A price that is fair and reasonable

c. the lowest offer on the Nasdaq When selling stock to a customer, a markup should be based on the lowest offer on the Nasdaq system, not the price the dealer paid to purchase the stock (dealer's inventory cost).

A mutual fund buys stock from the portfolio of an insurance company. This is a trade executed in the: a. Over-the-counter market b. Exchange market c. Third market d. Fourth market

d. Fourth market When an institutional investor such as a mutual fund buys stock from the portfolio of an insurance company (another institution), it is considered a trade executed in the fourth market. This is the name given to the so-called market where institutions trade with other institutions.

When pricing a bond, what information is NOT required? a. The coupon rate b. The maturity date c. The settlement date d. The number of bond years

d. # of bond years When pricing a bond (determining the yield when price is known or determining the price when yield is known), the coupon, settlement date, and maturity are required. The number of bond years is used to determine the net interest cost when an underwriter is bidding on a new issue of municipal bonds.

The net asset value (NAV) of an open-end investment company is $22.20. The sales charge is 8%. What would be the asked price? a. $20.42 b. $22.20 c. $23.98 d. $24.13

d. $24.13 POP = NAV / (100% - sales charge) $22.20 / (100% - 8%) $22.20 / 92% $22.20 / .92 $24.13

The prospectus for a limited partnership states that the subscription price for each unit is $20,000. According to industry rules, the maximum allowable underwriting compensation for this public offering is: a.$50 per unit b. Subject to the interpretations of the 5% markup policy c. Not subject to any limit but must be fair and reasonable d. 10% of the gross proceeds of the offering

d. 10% of gross proceeds in a LP - This includes all items of compensation including trailing commissions.

A tombstone ad states that the McGee Oil Company is offering $200,000,000 of 8 1/2% bonds due July 1, 2038 at 99 1/2% of par value. The yield to maturity on the bonds is: a. 8% b. Less than 8 1/2% c. 8 1/2% d. Greater than 8 1/2%

d. > 8 1/2% The 8 1/2% bonds are being offered at a discount at 99 1/2% of their $1,000 par value. An investor who purchased the bonds at the offering (at $995) and held the bonds to maturity will receive the par value of $1,000. The investor will, therefore, have a yield to maturity that is greater than the coupon rate (nominal yield) of 8 1/2%.

A municipal bond will be accepted for delivery without a legal opinion if it is identified as: a. In default d. Registered c. Mutilated d. Ex-legal

d. A municipal bond is expected to be delivered with a legal opinion unless the bond is identified as ex-legal at the time of the purchase.

An increase in which of the following factors does NOT indicate credit conditions are deteriorating for a municipality? a. Bankruptcies b. Consumer debt c. Bond defaults d. Assessed valuations

d. Assessed valuations All of the items mentioned would indicate credit conditions are deteriorating for a municipality except an increase in assessed valuations. This is the value placed on property by the municipality for purposes of taxation. An increase in assessed valuations would indicate that homes within the municipality are increasing in value, which will improve the municipality's credit.

A registered options principal (ROP) must review: I. Retail communication concerning options II. General options prospecting letters III. Option seminar transcripts IV. Allocation of exercise notices a. I, II, and III only b. II, III, and IV only c. I, II, and IV only d. I, II, III, and IV

d. all of the above The registered options principal (ROP) is specifically responsible for the firm's compliance program with respect to its options activities

Which TWO of the following taxes would best describe income taxes and estate taxes? I. Flat taxes II. Graduated taxes III. Regressive taxes IV. Progressive taxes a. I and III b. I and IV c. II and III d. II and IV

d. II and IV A progressive tax is graduated (the tax rate increases as the taxable amount increases). Income taxes, estate taxes, and gift taxes are progressive. A flat tax is a situation where the tax rate remains constant regardless of the taxable amount. Flat taxes tend to be regressive in nature, which means that they have a greater effect on lower wage earners. Therefore, flat taxes are often categorized as regressive. Examples of regressive taxes are sales taxes and gasoline taxes.

Which TWO of the following statements concerning convertible bonds are TRUE? I. Coupon rates are usually higher than nonconvertible bonds of the same issuer II. Convertible bondholders are considered creditors of the corporation III. Convertible bonds are usually issued by companies with strong credit ratings IV. It is possible that a convertible bond will sell at a price based solely on its inherent value as a bond a. I and III b. I and IV c. II and III d. II and IV

d. II and IV Convertible bondholders are considered creditors of a corporation and provide investors with the ability to convert their bonds into shares of common stock of the same issuer at a set price (conversion price). This feature links these types of bonds to the equity markets and the price of a convertible bond is affected by the price of the underlying stock. However, if the price of the underlying stock declines to the point where there is no advantage to the conversion feature, the bond may sell at a price based on its inherent value as a bond, disregarding the convertible feature. Moreover, convertible bonds are issued by companies with weaker credit ratings and allow the issuer to sell debt at a lower cost. Since the conversion feature is a benefit to the bondholder, convertible bonds will have a lower coupon than similar nonconvertible bonds.

Bud Jones purchased 100 shares of DEF at 20 on June 16 and passed away on July 27 when the market value of DEF was 25. If the 100 shares of DEF are inherited by Mr. Jones's daughter Mary, what are the tax implications? I. Mary assumes a cost basis of 20 II. Mary assumes a cost basis of 25 III. The holding period for the stock is short-term IV. The holding period for the stock is long-term a. I and III only b. I and IV only c. II and III only d. II and IV only

d. II and IV When securities are inherited, the recipient's cost basis is the market value of the securities at the time of the deceased's death. The recipient's holding period for the stock will be long-term, regardless of the deceased's actual holding period.

If convertible bondholders convert their bonds into the common stock of a corporation, the effect on the balance sheet of the corporation will be: I. An increase in current assets II. A decrease in total liabilities III. A decrease in stockholders' equity IV. An increase in stockholders' equity a. I and III only b. I and IV only c. II and III only d. II and IV only

d. II and IV The conversion of bonds to common stock reduces the total debt of the corporation while increasing stockholders' equity (additional shares of common stock). The answer, therefore, will be a decrease in the total liabilities and an increase in stockholders' equity.

A registered representative receives an order from the president of XYZ Corporation to sell unregistered XYZ shares. The client purchased the shares in a private placement 90 days ago. This order: a. Will require the filing of Form 144 with the SEC b. May be executed without any restrictions c. Must be approved by a principal prior to execution d. Is a violation of Rule 144 if executed

d. Is a violation of Rule 144 if executed According to Rule 144, an affiliated person (e.g., the president of a company) must hold unregistered (restricted) stock for at least six months before it may be sold. Since the president of XYZ Corporation owned the stock for only 90 days, the order to sell violates Rule 144, if executed.

A municipal tombstone ad shows bonds maturing serially from 2012 through 2030. The 2030 maturity is a 6.00% bond offered at a 6.75 basis. The bonds maturing in 2020 and thereafter are callable beginning in 2018 @ 102, at 101 in 2019, and at par on any interest date after 2019. The bonds maturing in 2030 should be priced to the: a. 2018 call date b. 2019 call date c. 2020 call date d. Maturity date

d. Maturity date The bonds are being offered at a discount since the yield to maturity (6.75%) is greater than the coupon rate (6.00%). A discount bond is always priced to maturity.

A broker-dealer has failed because it has a net capital deficiency. Which of the following parties is NOT covered by SIPC? a. A margin account with $300,000 of securities being held in street name b. A customer account with a $70,000 cash balance c. An IRA with securities valued at $400,000 and $100,000 of cash d. A creditor of the broker-dealer who is owed $40,000

d. creditors SIPC provides protection for customer accounts in the event of a broker-dealer's failure. Each account is covered for up to $500,000, of which $250,000 may be cash. SIPC does not insure creditors of the broker-dealer or the failed firm's own inventory account.

All of the following statements are TRUE concerning private activity bonds, EXCEPT: a. The interest on these bonds might not be tax-exempt for some investors b. The interest on these bonds might be subject to the alternative minimum tax c. The possibility that the bonds might be subject to taxation would be reflected in the yield at which the bond trades d. These types of municipal bonds are generally GOs

d. These types of muni bonds are generally GO's Private activity bonds are issued to finance the construction of a facility that will be used by a private corporation. Interest earned on such bonds is often subject to the Alternative Minimum Tax (AMT). The AMT is a second method of calculating federal income tax liability. Taxpayers must pay the larger of the AMT or the result of the regular (Form 1040) income tax calculation. In theory, this is true for all taxpayers but, in reality, the AMT is only an issue for higher income taxpayers or those with special tax preference items on their returns. When calculating the alternative minimum tax, certain items may need to be included in taxable income that normally are not. One of these items is the interest on many private activity bonds. Therefore, a taxpayer subject to the AMT may lose the tax exemption on these bonds. Since this is a disadvantage, these bonds generally trade with higher yields than regular municipal bonds to reflect that the interest received might be taxable. Choice (d) is correct because private activity bonds are generally revenue bonds, not general obligation bonds.

T-bills purchased at the weekly auction will have a settlement date on the: a. Next business day b. Fifth business day c. Monday following the auction d. Thursday following the auction

d. Thursday following the auction The auction for 13- and 26-week T-bills is held each Monday. Settlement is on Thursday of the same week.

A put option may be written in a cash account if the investor: a. Is long the underlying security in the account b. Is short the underlying security in the account c. Has an escrow receipt for the underlying security d. Has a cash balance in the account equal to the total exercise value of the contract

d. To write a covered put option in a cash account, the customer must have cash in the account equal to the total exercise value of the contract. - If the writer is short the underlying stock, the put is considered covered for margin purposes, but this transaction may not be written in a cash account, only in a margin account.

Which of the following positions exposes an investor to the most risk? a. A bullish call spread b. A bullish put spread c. Owning put options d. A short straddle

d. a A short straddle - consists of a short call and a short put, on the same underlying stock, with the same strike price and expiration month. - The investor has an unlimited loss potential on the short call leg of the straddle. Spread positions limit the potential loss to the investor. - For debit spreads (i.e., bullish call spreads and bearish put spreads), the loss is limited to the difference between the premiums. For credit spreads (i.e., bearish call spreads and bullish put spreads), the loss is limited to the difference between the strike prices minus the credit. The owner of a put option is only at risk for the premium paid to purchase the option.

Which of the following documents is NOT needed to open a corporate margin account? a. A corporate charter and resolution b. A new account form c. An hypothecation agreement d. A trust agreement

d. a trust agreement When a corporation opens a margin account, all of the documents listed are needed except a trust agreement. A trust agreement is needed when opening an account for a retirement plan or trust account.

A municipal securities principal must review and approve municipal transactions made with: I. Individuals II. Trust departments III. Commercial bank portfolios IV. Casualty insurance companies a. I only b. I and IV only c. I, II, and III only d. I, II, III, and IV

d. all of the above MSRB rules require a municipal securities principal to approve all transactions in municipal securities.

When making a presentation on 529 plans, what information is NOT required? a. Discussing the risks and costs involved with the different types of plans b. A disclaimer stating that, prior to investing in a plan, you should read the official statement c. A disclaimer that the client should check with her home state to learn if it offers tax benefits to those clients who invest in its plan d. The name and contact information for the municipal securities principal who will approve the customer's investment in the plan

d. name/contact info of muni principal Under MSRB rules, an RR is required to disclose certain information when promoting 529 plans. - The RR must discuss the risks and costs involved with the different types of plans, - must provide a disclaimer stating that, prior to investing in a plan, - the customer should read the official statement, - and must provide a disclaimer that the client should check with her home state to learn if it offers tax benefits to those who invest in its plan. - There is no requirement to provide the name and contact information for the municipal securities principal who will approve the customer's investment in the plan.

A customer purchases 1,000 shares of an OTC equity in a cash account through an online brokerage firm on Wednesday, March 11th. The transaction will settle: a. By the close of business on March 11th b. On March 14th c. On March 18th d. On March 16th

d. on march 16th Regular way settlement of corporate securities is THREE BUSINESS DAYS.