Quiz Questions 3

Which of the following methods of real estate investing is a flow-through vehicle? A) Common stock in a homebuilding company B) A real estate investment trust (REIT) C) A real estate limited partnership (RELP) D) Purchasing a condominium as a personal residence

C

A member firm must prefile its retail communications if the member has not previously filed with FINRA. it appertains to standardized options prior to the distribution of the ODD. the advertising relates to single stock futures. under an order from FINRA to prefile. A) I, II, III, and IV B) I and IV C) II and IV D) II and III

A

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

A

A registered representative is interviewing a new customer, age 27. The customer wants to list capital appreciation as the primary investment objective for the account and is willing to take a moderate degree of risk at this time in her life. The customer also notes concern about inflation and how it will impact her portfolio over time. Which of the following investments is the most suitable recommendation? A) Equities such as common and preferred stock B) Corporate debt securities C) Municipal debt securities D) Long-term government bonds

A

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

A

Although there are general suitability rules that always apply, FINRA's Rule 2330 on variable annuity suitability specifies that, to be considered suitable, there is a reasonable basis to believe that the customer has been informed—in general terms—of various features of A) deferred variable annuities. B) immediate variable annuities. C) single premium variable annuities. D) deferred annuities of all types.

A

An individual purchases a variable life insurance policy. Under federal law, the individual is entitled to a complete refund of all premiums paid if the request is made within A) 45 days from the execution of the application, or for 10 days from the time the owner receives the policy, whichever is longer. B) 10 days from the execution of the application, or for 45 days from the time the owner receives the policy, whichever is longer. C) the first 30 days after the policy was delivered to the owner. D) the first 24 months after the policy was delivered to the owner.

A

If a fund has a fixed portfolio of municipal bonds with long maturities, how will substantial changes in general interest rates affect the fund's portfolio? A) The current value will fluctuate significantly, but the investment income will remain relatively unchanged. B) The current value will not change, but the investment income will fluctuate significantly. C) Both the income and the current value will remain unchanged. D) Both the income and the current value will fluctuate significantly.

A

In a variable life annuity with 10-year period certain, a contract holder receives A) a minimum of 10 years of variable payments, followed by additional variable payments for life. B) 10 years of variable payments. C) variable payments for 10 years, followed by fixed payments for life. D) fixed payments for 10 years, followed by variable payments for life.

A

In determining a violation of position limits, short calls are aggregated with A) long puts. B) long calls. C) short puts. D) all of these.

A

Lambda Corporation has received a donation of 100,000 shares of its common stock from the spouse of the deceased founder of the company. This would appear on the company's books as A) treasury stock. B) authorized, but unissued stock. C) unissued stock. D) reacquired stock.

A

Market interest rates have been rising, which means the price of bonds traded in the secondary market has A) decreased. B) increased. C) not changed because bond prices are not affected by interest rates. D) not changed because only new bond prices are impacted by changes in interest rates, not the price of bonds already trading in the secondary market

A

One of your clients has appointed his daughter as the trusted contact person per FINRA Rule 2165. She contacts you to explain that her father's cognitive abilities are declining. Because of that, before it gets too late, she wants to know what can be done to give her control over the account. It is likely that the best suggestion would be to have her father sign A) a durable power of attorney. B) the discretionary power authorization. C) a full power of attorney. D) a limited power of attorney.

A

Proponents of which of the following technical theories assume that small investors are usually wrong? A) Odd lot B) Short interest C) Volume of trading D) Breadth of market

A

The price of which of the following securities is determined based on supply and demand? A) Closed-end management investment companies B) Open-end management investment companies C) Unit investment trusts D) Interval funds

A

Which of the following factors does not affect the marketability of a municipal bond? A) Commissions B) Block size C) Call protection D) Rating

A

Which of the following permits the highest annual contributions? A) A SEP IRA B) A Coverdell Education Savings Account C) A traditional spousal IRA for which the contribution has been deducted D) A traditional nondeductible IRA

A

Which of the following securities is an original issue discount obligation? A) 13-week U.S. Treasury bills B) Corporate bonds C) GNMA certificates D) FNMA bonds

A

Which of the following strategies is intended to be profitable with either a significant upside or significant downside move in the underlying stock? A) Long straddle B) Vertical spread C) Horizontal spread D) Short straddle

A

If XYZ common stock has a $4 dividend, a yield of 4.2%, a price-to-earnings (P/E) ratio of 12, and it is trading at $96, its approximate earnings per share (EPS) is A) $8.00. B) $48.00. C) $50.40. D) $4.00.

A - 96/12

Which of the following statements best describes a breakpoint sale? A) Sale of investment company shares in dollar amounts slightly below the point at which the sales charge is reduced on quantity transactions, to make a higher commission B) Sale of investment company shares in anticipation of a distribution scheduled to be paid shortly C) Sale of investment company shares in dollar amounts above the point at which the sales charge is reduced D) Compensation generated by commissions from a client who has reached another breakpoint, paid to the registered representative after he no longer works for the member

A - A breakpoint sale is a violation of the Conduct Rules. It occurs when a broker permits a client to purchase shares in an amount immediately below the amount that would qualify the client for a discounted sales charge, without informing him of the breakpoint.

You have a customer who bought an XYZ Feb 35 put at 5. The current market value (CMV) of XYZ is $33 and the current option premium is $2. The option is trading A) at parity. B) at time value. C) at-the-money. D) out-of-the-money.

A - An option trades at parity when the premium is equal to the intrinsic value.

There are risks inherent in any investment. One risk that index ETFs have that should be used to guide the investor's selection decision is A) tracking risk. B) tax risk. C) regulatory risk. D) market risk.

A - Any investment that attempts to track an index or other benchmark needs to be evaluated in terms of its tracking error. That is, how close does the performance of the portfolio, in our question the ETF, match up to that of the index? This tracking error or risk will, over the long run, cause the performance of ETFs tracking the same index to have differing results. Because the portfolios are essentially the same, the market risk of all ETFs tracking the same index will be the same. That should be true of the tax and regulatory concerns as well. All things being equal, an investor should want the ETF that has the least tracking error.

Having a five-year-old child, a couple wants to begin saving for her college education. They can currently budget $350 per month toward the goal. They know that college costs 13 years in the future need to be factored, but they are not too comfortable with market risk. Which would best align with their profile? A) 529 prepaid tuition plan B) Variable annuity plan C) Money market mutual fund D) Coverdell Education Savings Account (ESA)

A - Coverdell ESAs and Section 529 plans are the only choices here specifically associated with saving for education. Because the Coverdell ESA can only accept $2,000 per child, per year, and the couple can currently invest more than twice that amount, the 529 plan is the better choice. Additionally, being concerned about inflation and not comfortable with market risk, investing in a 529 prepaid tuition plan enables them to purchase tomorrow's tuition at today's prices.

With regard to a variable annuity, all of the following may vary except A) number of annuity units. B) number of accumulation units. C) value of annuity units. D) value of accumulation units.

A - During the accumulation phase, the number of accumulation units will increase as additional money is invested. When the contract is annuitized, the annuitant is credited with a fixed number of annuity units. Once annuitized, the number of annuity units does not vary. The value of accumulation and annuity units varies with the investment performance of the separate account.

A customer purchases 10 8% Treasury notes at 101-16. What is the dollar amount of this purchase? A) $10,150 B) $10,015 C) $10,812 D) $10,116

A - Explanation Though the denomination of the T-notes purchased is not given, always assume par ($1,000) unless told differently in the question. Remember that government notes and bonds are quoted in 32nds. Therefore, a quote of 101-16 means 101 plus 16/32. 101 + 1/2 = $1,015; $1,015 × 10 bonds = $10,150.

An individual who invests in an undeveloped land limited partnership would be most interested in A) appreciation. B) depletion. C) depreciation. D) operating expense deductions.

A - Investors seek appreciation when investing in undeveloped land limited partnerships.

Which of the following statements regarding the exercise of options contracts are true? The exercise of equity options settles the next business day. The exercise of equity options settles in two business days. The exercise of index options settles the next business day. The exercise of index options settles in two business days. A) II and III B) II and IV C) I and IV D) I and III

A - Listed equity options, if exercised, settle in two business days (regular way settlement for equities). Index options, if exercised, settle on the next business day—and in cash.

All of the following are allowable municipal dealer quotes except A) an unidentified nominal quote. B) requests for offers only. C) bona fide quotes. D) requests for bids only.

A - Municipal Securities Rulemaking Board Rule G-13 requires municipal brokers and dealers to give bona fide bids and offers for municipal securities. (Bona fide quotes are those good for trading.) It also allows for requests for bids (BW = bids wanted) and requests for offers (OW = offers wanted). A nominal quote (those for informational purposes only) is permissible, but only if it is identified as such.

Which of the following investments is the most liquid? A) Money market mutual funds B) Foreign stock mutual funds C) Common stock traded on the New York Stock Exchange D) Variable annuities

A - Mutual funds of any type must comply with federal law requiring them to honor a redemption request at the next computed net asset value per share. Then, those proceeds must be sent within seven days. If the bill collector is at your door or the sale ends today, that's not quickly enough. The same federal law applies to the variable annuity. Listed stock has great liquidity, but in most cases, settlement is T+2 meaning you'll have to wait a couple of days to get the money.

Regulation FD covers A) certifications required of research analysts who make public appearances. B) the selective disclosure of material nonpublic information by issuers. C) standardization of financial reporting to the SEC. D) customer notification requirements regarding a firm's privacy policies.

B

Which of the following would be considered improper by FINRA? A) A member firm awarding a $1,000 cash bonus to any employee who, during the next month, sells at least $100,000 of the company's proprietary mutual fund B) A registered representative giving a $500 wedding gift to her brother who is one of her clients. C) A member firm awarding a $1,000 cash bonus to any employee who, during the next month, sells at least $100,000 of any mutual funds the firm has sales agreements with D) A mutual fund distributor offering a member firm a free training seminar held at the distributor's home office for up to two representatives selected by the member firm.

A - No compensation, especially in the form of a bonus, may be conditioned on the sale of a specific product. This is particularly egregious behavior when the product is proprietary. Paying a $1,000 bonus for reaching a sales goal is fine, as long as no specific product is targeted.

Because municipal bonds do not trade on any exchange, there is frequently a concern about their marketability. According to most industry experts, which of the following bonds would be the most marketable? A) $100,000 of State L general obligation bonds rated AA B) $5,000 of State O general obligation bonds rated Aa C) $10,000 of State N general obligation bonds rated AA D) $50,000 of State M general obligation bonds rated Aa

A - One of the many factors in the marketability of municipal bonds is the size of the block. With the normal block size being $100,000, municipal dealers will have an easier time trading the State L bonds. Note that S&P and Moody's ratings are the same.

Due to the excellent skill of the investment management team, the XYZ Growth Fund has realized significant long-term capital gains in its portfolio. The fund may distribute these gains to its shareholders A) no more than once every 12 months B) as often as biennially C) quarterly along with the dividend payment D) as often as semiannually

A - Section 19 of the Investment Company Act of 1940 states that "it shall be unlawful for any registered investment company to distribute long-term capital gains more often than once every twelve months." Dividends do not have any restriction on frequency.

The term municipal fund security refers to A) a Section 529 savings plan. B) an advance refunded municipal bond. C) a mutual fund whose portfolio is exclusively municipal bonds. D) a municipal bond with a sinking fund.

A - Section 529 plans, used primary for saving for college, are legally considered municipal fund securities.

You have a client who plans to liquidate some CDL stock to help pay for an upcoming family vacation in late August. When checking the account record, you find the following transactions: Jan 4, 100 shares @ $43 Feb 8 100 shares @ $39 May 11, 200 shares @$48 The client needs about $4,000 and the CDL is currently selling for $44 per share on July 31. From a tax standpoint, you should probably recommend that the client A) sell 100 of the shares purchased on May 11. B) sell half of the shares purchased on January 4, and half of the shares bought on February 8. C) sell all of the shares purchased on January 4. D) sell all of the shares purchased on February 8.

A - TAX LOSS IS NEEDED

An investor purchased one unit of a real estate limited partnership. The cost of the unit was $20,000. The investor's allocable share of nonrecourse debt was $50,000. During the first year, the investor received an income distribution of $5,000. What is the investor's current tax basis? A) $65,000 B) $15,000 C) $75,000 D) $25,000

A - The $20,000 purchase price of the unit is basis. Because this is a RELP, nonrecourse debt increases basis. That addition of $50,000 increases the basis to $70,000. Distributions reduce basis, and there was one of $5,000 bringing the basis down to $65,000. Remember, it is only real estate where nonrecourse debt increases basis. Recourse debt increases basis in any DPP.

Performance of the terms of a standardized listed option contract are guaranteed by A) the Options Clearing Corporation. B) FINRA. C) the Securities and Exchange Commission. D) the Chicago Board Options Exchange.

A - The Options Clearing Corporation issues, guarantees, and handles the exercise and assignment of listed options.

The LLAW Manufacturing Company issued a 6.25% debenture 5 years ago. The bond is callable in seven years at 102 and matures in 15 years. The bond's current yield is 4.23%. If one of your customers decided to purchase this bond, they would have to understand they would be A) paying a premium for the bond. B) buying the bond at a price below par. C) required to pay the call price. D) receiving a yield to maturity in excess of 4.23%.

A - The first thing to notice is that the current yield is below the nominal (coupon) rate. That automatically tell us the bond is selling at a premium

An investor opens the following position: Buy 1 COD Jan 40 put at 6.50 Write 1 COD Jan 30 put at 2.10 His maximum loss is A) $440. B) $2,600. C) $2,100. D) $560.

A - The maximum loss on a debit spread is the net debit. Remember CALL UP, PUT DOWN for spreads. This is higher premium on the call side, so we add to the bottom strike.

A customer bought a 10% interest in a real estate limited partnership by investing $100,000. The partnership buys a $4 million property with the funds, making a down payment of $800,000 and financing the balance with a nonrecourse mortgage of $3.2 million. Subsequently, the partnership cannot meet the mortgage payment; the lender forecloses when the remaining mortgage balance is $3 million, auctioning off the property for $1 million. How much of the investment will the customer recover? A) $0 B) $100,000 C) $10,000 D) $32,000

A - There is a lot more information in this question than necessary. Simply put, the deal went bankrupt—the asset was sold for less than the mortgage. That means the investor's $100,000 is totally lost.

Which of the following statements regarding Treasury receipts is not true? A) Interest income is taxed at maturity. B) Treasury receipts are not backed by the faith and credit of the U.S. government. C) Treasury receipts pay interest at maturity. D) Treasury securities held in trust collateralize the receipts.

A - Treasury receipts are indirect obligations of the government. Treasury receipts are issued by investment bankers who buy Treasury securities, place them in trust at a bank, and sell separate receipts against the principal and interest payments. Like most zeroes, interest must be accreted and taxed annually even though it is not received until maturity.

Which of the following statements regarding Section 529 education savings plans are true? Contributions are considered gifts under federal law. Contributions are tax deductible under federal law. Earnings generated are taxable each year. Earnings generated are tax deferred. A) I and IV B) I and III C) II and III D) II and IV

A - Under federal law, contributions made into Section 529 plans are considered gifts and are not deductible at the federal level. Furthermore, earnings generated each year are tax deferred and, on withdrawal, are tax free at the federal level—if used for qualified education expenses.

Your customer in her early 30s has received a modest inheritance from a relative. Listing tax-deferred growth as an objective for retirement income, which of the following investments is most suitable? A) A variable annuity B) Growth mutual funds C) Corporate debt securities D) Tax-free municipal bonds

A - Variable annuities offer tax-deferred growth and are suitable for achieving supplemental retirement income. Ideally, they should be funded with readily available cash rather than using funds liquidated from existing investments. None of the other investments listed here offer tax-deferred growth.

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

A - When an investor takes a long position in an option, it means that the investor has purchased the option. When a put is exercised, the holder must deliver the stock on settlement date. At that time, proceeds representing the strike price ($140) for 100 shares ($14,000) are received.

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

A - When an investor takes a short position in an option, it means the investor has sold, or written the option. As a seller, the investor receives the premium on the settlement date.

A bond has a 7% coupon and an offering price of 108. The bond matures in ten years. An investor purchasing this bond at the offering price would have a yield to maturity closest to A) 5.96% B) 7.22%. C) 7.80%. D) 7.50%.

A - When you pay more, you get less," Anytime a bond is purchased at a premium (a price above par), the yield to maturity (as well as the current yield and yield to call) must be lower than the nominal yield (the coupon rate). If you stop and think for a moment, there can be only one possibly correct answer. With a coupon rate of 7%, the answer must be something less than that. As will likely be the case on the exam, there is only one choice that is less than 7%

An investor purchased an XYZ Oct 50 put for a premium of 4. On the expiration date, XYZ is selling for 42, and the investor closes the position at the option's intrinsic value. For tax purposes, the investor has A) realized a $400 short-term capital gain. B) realized $800 of ordinary income. C) broken even. D) realized an $800 short-term capital gain.

A - With the stock selling at 42, a 50 put has an intrinsic value of 8 points (put-down rule). That would represent sales proceeds of $800 to the owner of the put. Subtracting the $400 cost results in a short-term capital gain of $400.

All of the following trade with accrued interest except A) zero coupon bonds. B) jumbo certificates of deposit. C) convertible bonds. D) Treasury bonds.

A - Zero coupon bonds are issued at a deep discount from face value instead of providing semiannual interest payments. T-bonds, convertible bonds, and CDs all make periodic interest payments; thus, the seller receives any accrued interest from the buyer.

Which of the following statements regarding Treasury receipts is not true? A) Interest income is taxed at maturity. B) Treasury securities held in trust collateralize the receipts. C) Treasury receipts are not backed by the faith and credit of the U.S. government. D) Treasury receipts pay interest at maturity.

A - Zero coupon, interest must be accreted and taxed annually even though it is not received until maturity. NOT A US GOV OBLIGATION, OWNED BY BANKS

Your customer has purchased $40,000 of stock in a new margin account and deposits the required Regulation T amount into the account. At the end of the month, the broker-dealer charges the client interest on the monies borrowed in the amount of $133. At the end of the month, the value of the stock drops to $36,000. The month-end statement for this client will show a debit balance of A) $20,133. B) $18,867. C) $16,133. D) $15,867.

A - decrease in the value of the position will not affect the client's debit balance. The margin call on this account would be the Regulation T requirement of 50% of the purchase price. Any interest charges will be added to the client's debit balance.

An investor purchases $10,000 worth of Treasury bills on November 27 and holds them until they mature on March 30 of the following year. For purposes of taxation, the interest from those Treasury bills is treated as A) ordinary income subject to federal income tax. B) tax-free income. C) partially ordinary income and partially capital gain. D) a short-term gain.

A -Interest on Treasury bills, notes, and bonds is taxable as ordinary income at the federal level. It is exempt from state and local taxation.

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

C

The SEC recognizes all of the following under the Credit Rating Agency Reform Act as being registered with the commission to rate debt instruments. Which of them historically has specialized in ratings for the insurance sector? A) Fitch Ratings B) Moody's C) Standard & Poor's D) A.M. Best

A.M. Best historically has specialized exclusively on the insurance marketplace

A customer buys 100 shares of ABC at 56.50 and writes 1 ABC Aug 60 call at 2. If the call is exercised, the consequences are a cost basis of $56.50 per share. a cost basis of $58.50 per share. sales proceeds of $60 per share. sales proceeds of $62 per share. A) II and III B) I and IV C) II and IV D) I and III

B

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

B

A joint life with last survivor annuity covers more than one person. continues payments as long as one annuitant is alive. continues payments only as long as all annuitants are still alive. guarantees payments for a certain period. A) I and III B) I and II C) III and IV D) II and IV

B

All of the following statements regarding Treasury bills are correct except A) Treasury bills are a direct obligation of the U.S. government. B) most Treasury bill issues are callable. C) Treasury bills trade at a discount to par. D) 4-, 13-, and 26-week maturities are typical with the maximum sometimes changing.

B

An investor begins a periodic payment deferred variable annuity purchase program. One respect in which this differs from purchasing a mutual fund is that A) the variable annuity contract will generally have lower expenses than the mutual fund. B) the investor in the variable annuity contract reports no taxable consequences during the accumulation period. C) the mutual fund will generally have a surrender charge for early withdrawal and variable annuities only charge for surrender when annuitizing. D) there is a minimum guaranteed return with the variable annuity, while there are no guarantees with the mutual fund.

B

Because money market instruments are designed to meet the short-term cash needs of issuing institutions, which of the following is not a money market instrument? A) Municipal construction loan note B) Newly issued Treasury notes issued to meet a specific government funding requirement C) Federal Farm Credit Bank note maturing in one year or less D) Commercial paper issued by the finance corporation of a major automobile manufacturer

B

Due to a sudden drop in earnings, the board of directors of Amalgamated Metal Industries (AMI) has voted to suspend all dividend payments this year. This would have the least effect on holders of AMI's A) callable preferred stock. B) cumulative preferred stock. C) adjustable-rate preferred stock. D) common stock.

B

If a customer wishes to buy 1 XYZ option and sell another XYZ option, but he is not willing to spend more than $300, which of the following orders should be entered? A) Two stop orders B) A spread order C) Two limit orders D) A straddle order

B

Regulation BI calls for broker-dealers and their associated persons to meet a care obligation when making a recommendation to a retail customer. In describing the nature of the care, the rule requires that those making recommendations adhere to all of these except A) reasonable diligence. B) reasonable prudence. C) reasonable skill. D) reasonable care.

B

The XYZ Corporation has issued some 4% callable bonds maturing in 20 years. The bonds are callable at 102 commencing in 10 years. Regarding these bonds, which of the following statements is not correct? A) The call premium generally will not compensate the bondholder for the loss of interest if the bond is called. B) These bonds will appreciate faster in declining interest rate markets than comparable bonds without a call feature. C) XYZ will most probably call these bonds when it can refund the issuer at a lower interest rate. D) The bonds will likely be called in a declining interest rate market, forcing the bondholders to reinvest at lower rates.

B

The terminology guaranteed full faith and credit is most applicable to A) interest and principal on a municipal revenue bond. B) interest and principal on a U.S. government-issued bond. C) interest only on a U.S. government-issued bond. D) interest and principal on a corporate bond.

B

When referring to the U.S. stock market, which of the following statements regarding its beta is not true? A) It is, by definition, equal to 1. B) It provides a measurement of a range that the market may move in any given day. C) It serves as a benchmark for measuring the relative volatility of a stock or portfolio against the movement of the market itself. D) It shows that if a stock's beta is 1.2, and the market moves by 5%, the stock would move by 6%.

B

Which of the following accurately depicts communications with the public designated as correspondence? Review by a principal must occur before use. Review by a principal can occur either before or after use, in accordance with the firm's written procedures. Filing with FINRA is required. Filing with FINRA is not required. A) I and III B) II and IV C) II and III D) I and IV

B

Which of the following debt instruments trades with accrued interest? A) Bankers acceptances B) Negotiable CDs C) Treasury bills D) Zero-coupon issues

B

Which of the following statements concerning international investing is not correct? A) U.S. investors can invest internationally through mutual funds or closed-end funds. B) Global funds avoid currency risk. C) Emerging market funds may concentrate in the securities from a single country. D) Global funds tend to invest in firms with international operations that are located throughout the world including the United States.

B

Which of the following statements regarding the Bond Buyer 20 bond index are true? It includes only GO bonds. It includes both GO bonds and revenue bonds. It is computed weekly. It is computed monthly. A) I and IV B) I and III C) II and IV D) II and III

B

Which of the following activities are disallowed under FINRA rules? Opening an account for a 16-year-old individual Accepting a sale in a joint account from one of the owners and having the check payable in the name of that individual Accepting a sale order from the husband only in a joint account owned by both husband and wife Requiring written discretionary authorization before accepting orders for a discretionary account A) III and IV B) I and II C) II and III D) I and IV

B we cannot open an account for a minor, nor may we make a check payable to only one of the parties in a joint account.

A customer owns a 7.5% ABC convertible bond currently trading at 115. The conversion price is $40. What is the parity price of the common? A) $44.00 B) $46.00 C) $34.00 D) $28.75

B - 1000/40 = 25, 1150/25 = 46

On February 13, your customer buys an 8% Treasury bond maturing in 2019 for settlement on February 14. If the bonds pay interest on January 1 and July 1, how many days of accrued interest are added to the buyer's price? A) 43 B) 44 C) 45 D) 14

B - Accrued interest for government bonds is figured on an actual-days-elapsed basis. The number of days begins with the previous coupon date and continues up to, but not including, the settlement date. The bonds pay interest on January 1. There are 31 days of accrued interest for January. The bonds settle February 14. There are 13 days of accrued interest for February. Do not count the settlement date (31 + 13 = 44 days).

One of your customers is looking for growth with some income. It would not be suitable for you to recommend A) convertible preferred stock. B) warrants with a five-year expiration. C) ADRs. D) common stock.

B - Although warrants can provide growth if the underlying security's prices rises above the exercise price, they never produce any income. Each of the other three choices do. Preferred stock has limited growth possibilities, but this is a convertible preferred where the growth of the underlying common stock influences the price of the preferred. ADRs and common stock can provide income and growth.

Which of the following would not be a valid use of the partnership democracy? A) Removing the general partner B) Deciding which partnership assets should be liquidated to pay creditors C) Consenting to an action of a general partner that is contrary to the agreement of limited partnership D) Consenting to a legal judgment against the partnershipq

B - Deciding which partnership assets should be liquidated to pay creditors involves limited partners in the active management of partnership affairs. This would result in being treated as general partners with respect to liability and possible loss of limited partner status.

Intangible drilling costs would include all of the following except A) land surveys. B) casing. C) fuel. D) wages.

B - Intangible drilling costs are those associated with drilling a well, but do not include the cost of capital equipment (e.g., pumps, casing). They include wages, fuel, repairs, hauling, supplies, surveys, tests, and drilling mud, and they are incidental to and necessary for the drilling activity.

A customer who buys 1 CDE Oct 60 call at 4 and sells 1 CDE Dec 60 call at 6 has created A) a price spread. B) a calendar spread. C) a long straddle. D) a combination. Explanation

B - Long a call and short a call is known as a call spread. If the strike prices are the same, and the expiration months are different (Oct and Dec), it is a calendar spread. Calendar spreads are sometimes called time spreads or horizontal spreads.

Preferred stock comes with many different options. What type of preferred stock would be most advantageous to the investor if the issuing company had strong revenue and earnings that exceeded industry estimates? A) Cumulative B) Participating C) Callable D) Adjustable-rate

B - Participating preferred stock may receive an additional amount paid to shareholders based on superior performance of the issuer. Cumulative refers to unpaid dividends that accrue on a preferred issue.

Which of the following taxes is considered regressive? A) Estate B) Sales C) Inheritance D) Income

B- Sales tax is considered regressive because the rate remains constant irrespective of the amount being taxed. Income taxes, for example, take more from a person with a high income than from a person with a low income.

A customer wishes to diversify an investment portfolio to include real estate. However, the customer is concerned that real estate tends to be illiquid. Which of the following would be a suitable recommendation? A) Government National Mortgage Association securities B) Real estate investment trusts C) Diversified open-end investment companies D) Real estate limited partnership offerings

B - REITs (real estate investment trusts) allow investors the opportunity to invest in real estate and provide a high level of liquidity because they are publicly traded on exchanges and OTC. The real estate DPP does provide an opportunity to invest in real estate, but it is considered illiquid because there is generally no available secondary market. When a mutual fund is a diversified company, it means that it complies with the 75-5-10 rule, not that its portfolio is diversified into real estate. GNMA securities are debt obligations and do not provide the equity diversification this investor is seeking. Please note: As pointed out in the LEM, there has been a growth in the number of nontraded REITs. Obviously, they do not have the liquidity of those that are publicly traded. For exam purposes, unless something in the question indicates that the REIT is nontraded, you can safely assume it is a liquid investment.

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

B - REITs trade in the secondary market and are not redeemable. The real estate portfolio is actively managed, and dividends paid by REITs do not meet the requirements to be taxed as qualified dividends; therefore, they are taxed as ordinary income.

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

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

If a customer buys 300 ABC at 53 and writes 3 ABC Jun 55 calls at 4, and the contracts expire unexercised, the customer's cost basis in ABC stock at expiration is A) $57. B) $53. C) $49. D) $51.

B - The cost basis in the stock remains at the original purchase price

A customer with a moderate income from a secure job is in the 28% tax bracket. She has a small diversified portfolio and has $10,000 she would like to invest in a limited partnership. If she is willing to accept only a moderate amount of risk, which of the following limited partnerships would be the most appropriate recommendation? A) A new-construction real estate limited partnership B) An oil and gas income program C) A raw land real estate limited partnership D) An exploratory oil and gas drilling program

B - The customer is not in a high tax bracket and would not be able to take full advantage of the tax benefits produced by an exploratory oil and gas program or by new-construction real estate limited partnerships. A raw land real estate partnership is usually speculative. Of the answers listed, the income and moderate risk from an oil and gas income program would be of greatest benefit to this investor.

An investor writes an EFG Dec 85 put for 4¾ points. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain = $475; maximum loss = $8,025; breakeven point = $89.25 per share. B) Maximum gain = $475; maximum loss = $8,025; breakeven point = $80.25 per share. C) Maximum gain = $475, maximum loss is unlimited; breakeven point = $80.25 per share. D) Maximum gain = $8,025; maximum loss = $475; breakeven point = $80.25 per share.

B - The maximum loss is the entire difference between the strike price and zero, offset (reduced) by the premium received (strike price minus premium).

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

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

Seventy-five basis points are equal to which of the following? 0.75% 7.5% $7.50 $75.00 A) I and IV B) I and III C) II and III D) II and IV

B - There are 100 basis points in each point. One point represents 1% of a bond's value; therefore, one basis point represents 0.01%, and 75 basis points would represent 0.75%. Because each point is worth $10, 75 basis points represents $7.50.

A client writes 1 Jan 60 put and buys 1 Jan 50 put. This is A) a debit bear spread; the investor breaks even at a price greater than 60. B) a credit bull spread; the investor wants the price to stay above 60. C) a debit bear spread; the investor wants the price fall below 50. D) a credit bull spread; the investor breaks even at a price less than 50.

B - This is a put credit spread, and bulls sell puts. The 60 put is worth more because it has a higher strike price. Long the lower put is bullish; short the lower put is bearish.

One of the primary differences between rights and warrants is A) the exercise of rights will result in a decline in the issuer's earnings per share. B) warrants have a life before expiration that is much longer than rights. C) warrants provide the ability to purchase shares of common stock at a specified price. D) rights may be sold in the secondary market.

B - Warrants have an expiration date that often runs as long as 5 years. In fact, there is no legal maximum, but it is rare to see one with an expiration date longer than 10 years from issuance. On the other hand, most rights expire within 30-45 days and it is rare to see one with a life exceeding 60 days. Both rights and warrants provide the holder with the ability to acquire shares of common stock at a specified price.

Ginnie Mae pass-throughs will pay back both principal and interest A) annually. B) monthly. C) quarterly. D) semiannually.

B -Ginnie Mae securities are called pass-through certificates because the monthly home mortgage payments, which consist of both principal and interest, pass through to the Ginnie Mae investor monthly.

ABC Corporation owns stock in XYZ Corporation. What percentage of dividends paid by XYZ to ABC is taxable to ABC? A) 100% B) 50% C) 70% D) 65%

B -The corporate dividend exclusion permits a corporation receiving dividends from another corporation to exclude 50% of those payments. Therefore, the corporation will only pay tax on the remaining 50%. This exclusion applies only to dividends, not interest. LO 13.g

Interest and principal on a Eurodollar bond issued in Germany are paid A) in German euros. B) in U.S. dollars. C) in European Union euros. D) in German deutsche marks.

B A Eurodollar bond pays in U.S. dollars

An analyst is comparing the yields of U.S. Treasury bonds and AAA-rated corporate bonds with similar maturities. This measurement would indicate an improving economy when A) the yields on the Treasury bonds are lower than those on the corporate bonds. B) the yield spread is widening. C) the yield spread is narrowing. D) the yield spread is remaining stable.

C

If the dollar price of a municipal bond is 101 and, at that price, the basis is 6.10, the nominal yield is A) less than the coupon rate. B) exactly 6.10%. C) greater than 6.10%. D) less than 6.10%.

C

One of the features of variable insurance products is the ability to withdraw money from the policies. Which of the following statements is correct? A) Withdrawals from variable annuities are taxed on a FIFO basis, while those from variable life are taxed on a LIFO basis. B) Withdrawals from both are taxed on a LIFO basis. C) Withdrawals from variable annuities are taxed on a LIFO basis, while those from variable life are taxed on a FIFO basis. D) Withdrawals from both are taxed on a FIFO basis.

C

Payments received by the owner of a 403(b) plan are A) taxable only to extent of earnings. B) not taxable. C) 100% taxable. D) taxable only to extent of the owner's cost basis.

C

Phantom income is a characteristic of A) preferred stock. B) American depositary receipts. C) zero-coupon bonds. D) convertible bonds.

C

Sell orders for equity securities A) do not need to be marked, only executed in accordance with the appropriate rules. B) must be marked only if they are short sales. C) must be marked long or short. D) must be marked only if they are long sales.

C

The Securities Exchange Act of 1934 deals with all of the following except A) marking sales long or short on an order ticket. B) monitoring accounts for insider trading violations. C) filing an updated prospectus. D) filing of financial statements by broker-dealers.

C

The primary asset in a tax-exempt bond fund would be A) common stock. B) short-term money market instruments. C) municipal bonds. D) corporate bonds.

C

Three family members each hold sizable call option positions with the same underlying equity security in their individual accounts. Over the course of three days (Monday through Wednesday), each of the customers calls your broker-dealer and gives instructions to exercise all of their call options in that security. You recognize this as a potential violation of A) front running rules. B) the Code of Procedure. C) Options Clearing Corporation (OCC) exercise limit rules. D) the Uniform Practice Code.

C

Which of the following is not a money market instrument? A) A Federal Farm Credit Bank note maturing in one year B) A municipal construction loan note C) A newly issued Treasury notes issued to meet a specific government funding requirement D) A commercial paper issued by a finance corporation of a major automobile manufacturer

C

Which term describes the following position? Write 1 DOH Jan 30 call Write 1 DOH Jan 40 put A) Short straddle B) Diagonal spread C) Short combination D) Price spread

C

Your client's investment portfolio is 50% growth stocks, 10% foreign stocks, and 40% blue-chip stocks. If the client is interested in further diversification, which mutual fund would best meet that goal? A) Emerging market fund B) Aggressive growth fund C) Bond fund D) Global equity fund

C

Your clients' option position has been adjusted due to a 2-for-1 stock split. Which of the following regarding this 2-for-1 adjustment is true? A) The strike price will increase. B) The strike price will remain unchanged. C) The number of contracts owned will increase. D) The number of shares per contract will increase.

C

Your customer is opening a new options account. Which of the following need not occur to open the account? A) The client must agree that any material change in financial status requires the broker-dealer be notified and the options agreement be amended. B) The registered representative must document that the client has received a current OCC disclosure document. C) The OCC must verify the financial information supplied by the client to ultimately approve the account. D) The background and financial information provided by the client must be verified by the client and returned within 15 days of the time the account was approved.

C

A DMF convertible bond (convertible into 25 shares) has increased 20% above par in market value. Which of the following would you expect the price of the DMF's common stock to be? A) $32 B) $42 C) $48 D) $40

C - $1,000 (par) + 20% = $1,200 / 25 shares = $48. Alternatively, it is ordinarily the 20% increase in the value of the common stock that has caused the bond to increase 20% in value. $1,000 divided by 25 shares equals $40 plus 20% equals $48.

A customer purchases 600 shares of the $100 par ABC 6.5% convertible preferred stock at $80. The conversion price is $20. If the common stock is trading two points below parity, the price of ABC common is A) $12. B) $18. C) $14. D) $16.

C - 100/20 = 5, 80/5 = 16, 16-2 = 14

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

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

Which of the following statements regarding a unit investment trust is not true? A) It is considered an investment company. B) It invests according to stated objectives. C) Overall responsibility for the fund rests with the board of directors. D) It charges no management fee.

C - A unit investment trust (UIT) has no board of directors; rather, it has a board of trustees. A UIT must follow a stated investment objective (as must any investment company) and does not charge a management fee because it is not a managed portfolio.

A working interest in an oil and gas partnership entitles the holder to a portion of the revenue. responsibility for part of the expense of extraction. royalty interest in the revenue. royalty interest in revenue after deducting certain expenses. A) III and IV B) II and IV C) I and II D) I and III

C - A working interest is a right to revenues from production, but it also carries the responsibility for extraction costs. A royalty interest carries no responsibility for extraction costs.

Which of the following statements regarding index options are true? Exercise is settled in cash. Exercise settlement value is based on the value of the index at the time exercise instructions are received. Exercise settlement value is based on the closing index value on the day exercise instructions are tendered. Exercise settlement is T+2. A) II and III B) I and II C) I and III D) II and IV

C - All index option exercises are settled in cash. The amount a writer owes the holder is known as the intrinsic value of the option, and the settlement value is based on the closing index value on the day exercise instructions are tendered. Exercise settlement is the next business day.

One of the goals of target date funds is to help manage A) liquidity risk. B) inflation risk. C) investment risk. D) retirement risk.

C - Although not always successful, target date funds adjust the asset allocation as the investor gets closer to retirement age (or whatever date is selected). In so doing, the goal is to reduce the overall investment risk. As mutual funds, liquidity risk is not a concern. In practice, they actually do not do a great job of managing inflation risk because the portfolio becomes heavily invested in fixed income as the target date approaches. This leaves the investor with little in the way of equities to protect against inflation. Retirement risk is not a term used in the industry.

An important basic characteristic of common stocks that makes them a suitable type of investment for the separate account of variable annuities is A) the yield is always higher than bond yields. B) the safety of the principal invested. C) changes in common stock prices tend to be more closely related to changes in the cost of living than changes in bond prices. D) the yield is always higher than mortgage yields.

C - Because common stocks are not fixed-dollar investments, they have the opportunity to keep pace with inflation.

KLM Company has 10 million convertible bonds outstanding that are convertible at $25. The bonds contain an antidilution feature. If KLM declares a 10% stock dividend, the new conversion price will be A) $50.00. B) $22.50. C) $22.73. D) $45.45.

C - Before the stock dividend, an investor would have received 40 shares of stock for each $1,000 bond ($1,000 / $25). A 10% stock dividend would now give an investor 44 shares on conversion (40 shares + 10% = 4 shares more). $1,000 / 44 shares = $22.73 per share for the new conversion price.

Which of the following statements regarding callable municipal bonds are true? Call premiums tend to increase over time. Call premiums tend to decrease over time. Call prices are stated as a percentage of the principal amount to be called. Call prices are stated as a percentage of the market value of the bonds to be called. A) I and III B) I and IV C) II and III D) II and IV

C - Call premiums tend to decrease over time. The longer a customer has to hold the bond (and receive semiannual interest), the less of a premium an issuer will pay to take away the bond before maturity. Call prices are always stated as a percentage of the principal amount (par) to be called. For example, a call price of 103 means the issuer will pay $1,030 for each bond called.

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

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

Which of the following would protect a short May 50 put? A) Long Apr 45 put B) Long Jun 45 put C) Long Jun 55 put D) Long Apr 55 put

C - For a long put to cover a short put, it must have the same or higher strike price and the same or longer expiration

A sharing arrangement in which only deductible costs are apportioned to the investor, with the sponsor bearing all capitalized costs is called A) a carried interest. B) an overriding royalty arrangement. C) a functional allocation. D) a reversionary sharing arrangement.

C - Functional allocation is a sharing arrangement in which the general partner pays for all tangible drilling costs (capitalized costs), and the limited partners pay for all intangible drilling costs (deductible costs).

All of the following must register as an investment company under the Investment Company Act of 1940 except A) a new stock fund created by GHI Mutual Fund Distributors. B) certificates issued by a face amount certificate company. C) an initial public offering for common shares of Amalgamated Investments, a holding company. D) an initial public offering for shares of a closed-end management company.

C - Holding companies are not included in the definition of investment company under federal law. Amalgamated Investments would register with the SEC, just as any other offering of common stock. Investment companies, such as management companies (open-end or closed-end), unit investment trusts (UITs), and face amount certificate companies (FACs) all register under the Investment Company Act of 1940 as investment companies.

A wealthy client owns a large percentage of a thinly traded common stock. When this client wants to sell a major portion of her securities, she will immediately face A) market risk. B) interest rate risk. C) marketability risk. D) credit risk.

C - It is difficult to sell a large block of securities in a thinly traded stock without a substantial discount to market price. This is known as liquidity or marketability risk. Technically, the terms are not identical, but for test purposes, consider it so.

The holder of a variable annuity receives the largest monthly payments under which of the following payout options? A) Joint and last survivor annuity B) Joint tenants annuity C) Life annuity D) Life annuity with period certain

C - Life annuity has the largest payout because less risk is assumed by the insurance company; there is no beneficiary in the event the annuitant dies.

Corporations issue equity securities. One category of equity is preferred stock. A number of different adjectives can apply to preferred stock issues. All of the following are types of preferred stock except A) participating preferred. B) cumulative preferred. C) straight cumulative preferred. D) convertible preferred.

C = Preferred stock can be noncumulative (straight) or it can be cumulative. It cannot be both

If an investor has an established margin account with a short market value of $24,000 and a credit balance of $30,000, the maintenance call will be for A) $6,000. B) $2,000. C) $1,200. D) $7,200.

C - Minimum maintenance requirement in a short margin account is 30% of the current market value. In this case, 30% of $24,000 is $7,200. The equity in the account is currently $6,000 ($30,000 − $24,000). Therefore, the amount of the maintenance call is $1,200.

Which of the following statements regarding nonqualified deferred compensation plans is not true? A) Benefits payable to employees at retirement are taxable. B) Board members are not eligible for these plans, as they are not considered employees. C) Plans must be nondiscriminatory and cannot favor employees serving in certain capacities. D) Employees have a limited claim to plan benefits if the business fails.

C - Needing no IRS approval, nonqualified deferred compensation plans may be discriminatory and offered only to certain employees such as key executives. A typical deferred compensation plan is an agreement between a company and an employee in which the employee agrees to defer some income until retirement, the benefits payable at retirement would be taxable at that time. Board members are not considered to be employees, and therefore, are not eligible for these plans. Because these plans are rarely funded, business failure places the employee in the role of a general creditor.

The market price of fixed-income securities, especially bonds, is highly sensitive to changes in market interest rates. Based on that knowledge, which of the following bonds will have the greatest price change when market interest rates increase? A) 10-year maturity, 4% coupon B) 20-year maturity, 6% coupon C) 20-year maturity, 4% coupon D) 10-year maturity, 6% coupon

C - The longer the duration, the greater the decrease in price when interest rates go up. The bond with the longest duration will have the longest term to maturity and lowest coupon. Without getting into complicated math, assume that interest rates rose to 8%. Those investors holding a bond with a 4% coupon are going to be earning half of the going rate while those with the 6% coupon are earning 75% of the going rate of 8%

The MSRB defines an associated person of a broker-dealer who is primarily engaged in municipal securities activities other than retail sales to individuals as A) a municipal securities registered representative (Series 52). B) a municipal securities professional (MSP). C) a municipal financial professional (MFP). D) a municipal securities registered principal (Series 53).

C - These MFPs are involved with functions other that retail sales of municipal bonds. The definition is an outgrowth of the "pay to play" rule because these are the individuals covered by that rule.

A dealer in U.S. government securities quotes a 5-year Treasury note at 89.12-89.16. In dollars, that represents a spread of A) $4.00. B) $0.125. C) $1.25. D) $0.04.

C - Treasury notes and bonds are quoted in fractions of 32nds. The spread between the bid and the ask is 4/32nds. In simpler terms, that is 1/8th. Each point is $10.00, so this 1/8th of $10.00 is equal to $1.25.

All of the following are true except A) U.S. Treasury bonds are quoted in 32nds and as a percentage of par. B) corporate bonds are quoted in 1/8ths and as a percentage of par. C) Treasury bills are quoted in 1/8ths and as a percentage of par. D) income bonds are required to pay interest only if it is earne

C - U.S. Treasury bills are issued at a discount and are quoted on an annualized return on a discount basis, the return based on the actual amount paid.

If XYZ Corporation sells an additional 1 million common stock with a par value of $1 for $10 per share, which of the following is true? A) Its liquidity ratio will decrease. B) The current ratio will decrease. C) Its paid-in surplus will increase. D) Its earnings per share will increase.

C - When more shares are sold, paid-in surplus will increase.

An investor purchased 100 shares of ABC common stock at $60 per share on March 2, 2019. With the stock selling at $80 per share on January 2, 2020, the investor purchased an ABC Apr 75 put for a premium of 2. On June 2, 2020, the investor sold the stock for $85 per share. As a result, the tax consequences are A) $2,300 long-term capital gain. B) $2,500 long-term capital gain. C) $2,300 short-term capital gain. D) $2,500 short-term capital gain.

C - the cost is $62 per share ($60 cost of the stock plus $2 for the put). The sale price was $85, the gain is $23 per share, $2,300. Alternatively, the sale price of $85 created a $2,500 gain (85-60) and the put was a $200 loss. That is a net of + $2,300.

A direct participation program (DPP), organized as a limited partnership, must avoid at least two characteristics of a corporation. Which two characteristics are the easiest to avoid? A) Centralized management and continuity of life B) Continuity of life and decentralized management C) Freely transferable interests and centralized management D) Continuity of life and freely transferable interests

D

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

D

A Nasdaq market maker buys 1,000 shares of stock from a customer at its bid to satisfy a customer order. This is an example of A) an agency trade. B) a riskless principal trade. C) a block trade. D) a principal trade.

D

A corporation is likely to call eligible debt when interest rates are A) volatile. B) rising. C) stable. D) declining.

D

A variable annuity's separate account is: used for the investment of funds paid by contract holders. used to escrow late or otherwise delinquent premium payments. required to be located off of the company's premises. regulated under both securities and insurance laws. A) II and IV B) I and III C) II and III D) I and IV

D

A wealthy individual has established a trust and named you as the trustee. If you wish to establish an account that permits the trust to engage in margin transactions, which of the following statements regarding margin trading is true? A) It is permitted if the fiduciary shares in the profits or losses. B) It is not permitted. C) It is permitted if the fiduciary observes the prudent investor rule. D) It is permitted if provided for in the underlying documentation.

D

All of the following actions must be completed not later than the time of a customer entering her first option trade except A) approval by an appropriate qualified options sales supervisor. B) completion of the new account form. C) delivery of an Options Clearing Corporation disclosure booklet. D) returning the signed options account agreement.

D

If a Nasdaq market maker is selling stock to a customer from inventory and the firm has held the shares to be sold for several months, what price should the dealer use as a basis for a markup? A) Broker/dealer's own current offer price B) Price at which it purchased the securities C) Offer price shown in the electronic OTC Pink on the day of the current sale D) Best offering price quoted in the interdealer market

D

In the United Kingdom, they are called gilts. In Germany, they are called Bunds. In France, they are called OATS. To investors, they are known as A) eurobonds. B) stock exchanges. C) commodities. D) sovereign debt.

D

The principal tax benefit of investing in an exploratory oil and gas drilling program is derived from A) capital appreciation. B) depreciation expenses. C) recapture. D) intangible drilling costs (IDCs).

D

Wanting to be clear about an upcoming mutual fund dividend distribution, a shareholder does some research on his own. He comes away with what he thinks are all correct understandings, but one of them is not. Which understanding is not correct? A) An investor can receive dividends in the form of cash or choose to reinvest them in more fund shares. B) Dividend distributions are not guaranteed to occur annually, quarterly, or at any time. C) The dividends are paid from the fund's net investment income. D) An investor is not liable for taxes if he automatically reinvests the distributions.

D

What is the latest date that an IRA participant may make an IRA deposit for the current year? A) July 15 of the following year, if extensions have been filed B) December 31 of the current year C) April 15 of the current year D) April 15 of the following year

D

When an investor purchases Class A shares of a mutual fund in their brokerage account at a FINRA member firm, the sales charge is apportioned to all of the following except A) the member firm underwriting the offering of the shares. B) the broker-dealer holding the account. C) the registered representative making the sale. D) the mutual fund.

D

Which of the following is defined as profits after taxes and interest paid, less preferred dividends, divided by the number of shares of outstanding common stock? A) Cash flow per share B) Book value per share C) Price to earnings D) Earnings per share (EPS)

D

Which of the following statements is true? A) Institutional communications material always requires prior principal approval. B) All retail communications require prior principal approval. C) All retail communications require submission to the FINRA Department of Advertising. D) Institutional communications do not require prior principal review if associated persons receive training in the firm's procedures governing institutional communications.

D

Which of the following statements regarding Ginnie Maes are true? They are quoted in 1/8ths. They are quoted in 1/32nds. They are traded with an accrued interest computed on an actual-day basis. They are traded with an accrued interest computed on a 30/360 basis. A) I and III B) II and III C) I and IV D) II and IV

D

Which of the following statements regarding warrants are true? They pay dividends. They represent ownership in the issuing corporation. They allow for the purchase of common stock at a fixed price. They do not give holders voting rights. A) II and III B) I and II C) II and IV D) III and IV

D

You have a customer who has been following the common stock of the PQR Corporation. In early trading the stock is selling at $57 per share, which is slightly above its previous all-time high. The customer expects the stock to decline somewhat over the next few months. If the customer wishes to buy 100 shares of PQR stock if it declines to $50 or lower, which strategy would you likely approve the representative recommend to the customer? Buy a PQR 50 put. Sell a PQR 50 put. Enter a buy stop order for PQR at 50. Enter a buy limit order for PQR at 50. A) II and III B) I and III C) I and IV D) II and IV

D

f all other factors are equal, an investor would expect which type of preferred stock to pay the highest stated dividend rate? A) Cumulative B) Convertible C) Straight D) Callable

D

A Japanese manufacturer sells recorders to a U.S. retailing firm. The manufacturer is to receive USD$1 million in 90 days. How can he best protect himself against a decline in the dollar? A) Sell yen calls B) Sell yen puts C) Buy yen puts D) Buy yen calls

D - Because he is receiving U.S. dollars, his risk is that the U.S. dollar will go down in value against the Japanese yen. If the dollar goes down against the yen, the yen will rise. Therefore, to protect his risk against a rising yen, he should buy yen calls. The yen calls will increase in value if the yen rises.

Moody's Investment-Grade (MIG) rating would be applicable to A) a New York state university bond. B) a New York state general obligation bond. C) a New York state revenue bond. D) a New York state revenue anticipation note.

D - A MIG rating is provided for short-term municipal debt commonly referred to as notes (revenue anticipation notes).

One of your customers owns five JLO 5s of 2042. The debentures have a conversion price of $15. When the market price of the convertible is 80, the parity price of the stock is A) $5.33. B) $15.00. C) $18.00. D) $12.00.

D - A debenture with a conversion price of $15 is convertible into 66.66 shares ($1,000 ÷ $15). It is always the par value that is used, not the market price. To determine the parity price of the stock, divide the current market price of $800 by 66.66 and the answer rounds off to $12. Some students find it easier to recognize that the bond is 20% below its par value. To be equal (and that is what parity means), the stock must be 20% below the $15 conversion price (or 80% of it). Reducing $15 by 20% is a $3 reduction to $12 or taking 80% of $15 equals $12.

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

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

For a customer who has purchased stock and wants to write a call option, the option ticket would be marked A) closing purchase. B) opening purchase. C) closing sale. D) opening sale.

D - An opening transaction is used when establishing a new option position. It is an opening purchase if your client is buying the option. It is an opening sale if your client is writing the option. Closing is the term used when the client eliminates an existing option position through a trade of the contract.

There is a type of municipal revenue bond known as a special tax bond. Which of the following might be used as backing for a special tax bond? A) Income tax B) Property tax C) Ad valorem tax D) Gasoline tax

D - Common taxes backing special taxes include fuel (gasoline) taxes, sales tax, business license taxes, and tobacco taxes. Ad valorem are property taxes, and those are used to back GO bonds. Income taxes are generally used to back state-issued GO bonds.

If industrial development bonds are called because of condemnation, this would be covered under which of the following clauses in the bond indenture? A) Defeasance B) Refinancing C) Refunding D) Catastrophe

D - Condemnation is considered a catastrophe and only applies to revenue bonds.

Nickelplate Manufacturing Corporation (NMC) is capitalized with 1 million shares of a 6% $50 par callable preferred stock and 10 million shares of $1 par common stock. With the preferred stock currently selling at $75 per share and the common stock at $60 per share, the current yield of the preferred stock is closest to A) 5%. B) 6%. C) 8%. D) 4%.

D - Current yield on any security, stock or bond, is the annual income (dividend on stock, interest on bond) divided by the current market price per share (or per bond). The math in this question is the dividend of $3 (a 6% $50 par preferred stock is paying an annual dividend of 6% of $50, or $3 per share) divided by the current market price of the preferred stock ($75). The quotient is .04 or 4%.

The result of declining inflation on outstanding bonds would be A) higher prices and higher yields. B) lower prices and higher yields. C) lower prices and lower yields. D) higher prices and lower yields.

D - Declining inflation means declining interest rates. If interest rates decline, bond prices rise.

Which of the following is the least suitable mutual fund transaction? A) Encouraging an investor in a high tax bracket with an income objective to invest in a municipal bond fund B) Encouraging a retired 65-year-old investor to invest a small percentage of his savings in a large-cap growth fund C) Encouraging an investor in his early 30s to invest in an emerging markets mutual fund D) Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence

D - Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence is not in the client's best interest, as the client might be subject to substantial additional sales charges.

A customer is long 650 shares of DEF stock trading at $32 per share in a margin account, and the debit balance in the account is $9,200. If DEF pays a 10% stock dividend, what will the effect be on the customer's account? A) The debit balance will be reduced. B) The market value will increase. C) The equity will increase. D) The equity will remain the same.

D - Even though the investor receives more shares, the price per share falls; there is no effect on the market value of the customer's holdings.

Which of the following order types are available to customers for use in NYSE equity markets? Fill or kill (FOK) Immediate or cancel (IOC) All or none (AON) Order cancels other (OCO) A) I and IV B) I and III C) II and III D) II and IV

D - IOC and OCO orders are available to customers for use in the NYSE equity markets. FOK and AON orders are no longer permitted in NYSE equity markets.

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

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

FINRA Rule 2310 defines a direct participation program as "a program which provides for flow-through tax consequences regardless of the structure of the legal entity or vehicle for distribution including, but not limited to, oil and gas programs, real estate programs, agricultural programs, cattle programs, condominium securities, Subchapter S corporate offerings and all other programs of a similar nature, regardless of the industry represented by the program, or any combination thereof." The rule places limits on the overall expenses and amount of broker-dealer compensation considered fair and reasonable. That limit is A) 5% of the gross proceeds. B) 2% of the gross proceeds. C) 10% of the gross proceeds. D) 15% of the gross proceeds.

D - If the organization and offering expenses exceed 15% of the gross proceeds, FINRA considers that too high. The 10% limitation is on the amount of compensation received by a member firm for selling interests in the DPP. The 2% is the maximum charge in a DPP rollup if the firm wishes to solicit votes from the limited partners. The 5% is the FINRA markup policy and that does not apply to DPPs.

Characteristics common to penny stocks would include which of the following? Market price less than $5 per share Market price greater than or equal to $5 per share Nasdaq over-the-counter (OTC) stock Non-Nasdaq OTC stock A) I and III B) II and III C) II and IV D) I and IV

D - Penny stocks are generally defined as those with a market price below $5 per share that are not traded on any exchange or Nasdaq.

The Securities Exchange Act of 1934 deals with all of the following except A) marking sales long or short on an order ticket. B) monitoring accounts for insider trading violations. C) filing of financial statements by broker-dealers. D) filing an updated prospectus.

D - Prospectus filing is a requirement of the Securities Act of 1933.

Mutual funds have several different methods for assessing charges to become shareholders. One of those is the front-end load and is charged when purchasing A) Class C shares. B) Class B shares. C) Class D shares. D) Class A shares.

D - Purchasers of Class A shares pay a sales charge on each investment. Because the sales charge comes off the amount invested, it is called a front-end load. Class B and C shares have back-end loads, although Cs usually drop off after one year. There are shares for almost the entire alphabet, but we are not hearing anything about them−only the A, B, and C.

Filing with FINRA within 10 business days of first use is required for all of the following except A) retail communications concerning collateralized mortgage obligations (CMOs) registered under the Securities Act, B) retail communications concerning public direct participation programs (DPPs), C) retail communications that promote or recommend a specific registered investment company or family of registered investment companies including exchange-traded funds (ETFs). D) retail communications that promote or recommend a specific real estate investment trust (REIT).

D - Real estate investment trusts (REITs) are not included in FINRA's list of retail communications requiring postfiling.

All of the following are subject to the 5% markup policy except A) commissions. B) markdowns. C) markups. D) spreads in new stock offerings.

D - The 5% markup policy applies to markups, markdowns, and commissions. New offerings sold by prospectus are exempt from this rule.

A Treasury bond is quoted in The Wall Street Journal as follows: Bid 100:15 Asked 100:17 Bid Chg. -1 Yield 7.9 From this information, you know that the nominal yield is A) 7.89%. B) 7.90%. C) less than 7.90%. D) greater than 7.90%.

D - The Bid and Asked prices show that the Treasury bond is being quoted at a premium (above par), with a yield to maturity of 7.9%. When bonds are trading at a premium, the nominal yield (coupon rate) is greater than the yield to maturity.

Which of the following statements regarding Treasury bills are true? They are sold in minimum denominations of $10,000. They are offered with maturities ranging up to 52 weeks. Their interest is exempt from taxation at the state level. They are callable by the U.S. Treasury at any time before maturity. A) I and II B) II and IV C) I and III D) II and III

D - Treasury bills are sold in minimum denominations of $100 and are not callable before maturity. T-bills are regularly offered with maturities from four weeks to as long as 52 weeks from issuance and are issued at a discount. Interest on Treasury bills is taxable at the federal level only.

Which of the following statements regarding U.S. government agency obligations are true? They are direct obligations of the U.S. government. They generally have higher yields than direct U.S. obligations. The Federal National Mortgage Association (FNMA) is a publicly traded corporation. Securities issued by the Government National Mortgage Association (GNMA) trade on the NYSE floor. A) II and IV B) I and II C) I and III D) II and III

D - U.S. government agency debt is an obligation of the issuing agency. This obligation causes agency debt to trade at slightly higher yields that reflect this greater risk. FNMA securities and GNMA pass-through certificates trade over the counter. GNMA is the only agency whose securities are direct U.S. government obligations.

If a new customer is preparing to buy his first home within the next year, and his investment objective is aggressive growth, which of the following investments would be most suitable for your customer's portfolio? A) High-yield bond fund B) Growth stocks C) Blue-chip equity fund D) T-bills

D - While his profile indicates aggressive growth, the fact that he will need his funds in a year or less to purchase a home is the major consideration. With such a short time horizon, any equity investment involves too much risk, as does an investment in a high-yield bond fund. Of the choices, T-bills make the most sense.

An investor purchased a corporate bond with a 6% coupon at a net price of 101. The bond had accrued interest for 45 days. Which of the following statements regarding the confirmation of this trade is correct? A) The total amount due on the purchaser's confirmation will appear as $1,025. B) The total amount received on the seller's confirmation will appear as $1,002.50. C) The total amount due on the purchaser's confirmation will appear as $1,010. D) The total amount due on the purchaser's confirmation will appear as $1,017.50.

D -Accrued interest is always added to the price of a bond. When you buy the bond, you pay that accrued interest, and when you sell a bond, you receive that accrued interest. The principal value is 101, or $1,010. Forty-five days of accrued interest is ⅛ of a 360-day year, or ¼ of a 180-day semiannual interest payment. With a 6% coupon, the bond pays $30 every 6 months. One quarter of that is $7.50 so the total cost to the purchaser is the $1,010 plus the $7.50, or $1,017.50.

A corporation has 1 million shares of common stock outstanding. There is also a $100 par 6% cumulative convertible preferred issue with 100,000 shares outstanding. If the corporation wishes to use a rights offering to raise additional capital by selling 500,000 new shares of common, which of the following statements is true? A) Each common share will receive half of a right. B) It will require five rights granted to the preferred stockholders to buy one new share. C) Each preferred share would receive five rights. D) It will require two rights to buy one new share.

D 1,000,000 / 500,000

A county taxes real property at a millage rate of 15. If your customer owns real property in the county and the assessed value is 80% of the current market value of $150,000, the annual tax is A) $2,250. B) $1,200. C) $180. D) $1,800.

D = .0015 150000 x .8 = 120,000 120,000 x .0015 = 1800

Buying municipal bonds would normally not be considered suitable for A) a mutual fund portfolio. B) an individual investor. C) a corporation's investment account. D) a defined benefit plan portfolio.

D- Tax-free municipal bonds would never be considered suitable for a tax-deferred account on the exam.

The IRS will generally consider a direct participation program to be an abusive tax shelter unless the program can show a profit motive. A popular method of measuring the economic viability of a DPP is A) the ratio of gains to losses. B) passive loss analysis. C) income to debt analysis. D) cash flow analysis.

d