Series 7 Benchmark Exam
ABC Securities is launching a new variable annuity product next month and is in the process of finalizing the marketing campaign for the launch. Which of the following product descriptions should ABC use in its public communication regarding this product?
"The ABC Variable Annuity" Communications for this type of product must be clearly identified as to exactly what type of product it is. It must be referred to as a variable annuity or variable life product, as appropriate.
A corporation has $12,000,000 net income after taxes, 5,000,000 common shares outstanding and $10,000,000 of 6% preferred stock ($100 par). What is the corporation's earnings per share?
$2.28 Explanation: Earnings per share is calculated as Net Income / Shares Outstanding. In this question however, the corporation is also paying 6% dividends on its preferred stock. Therefore, the question is nudging to use a more accurate calculation of earnings per share to take into account that the corporation pays dividends. To calculate this company's earnings per share you would need to use the following: (Net Income - Dividends) / Shares Outstanding. ($12,000,000 - $600,000) / 5,000,000 = $2.28
The city of Austin (population 10,000) has just issued $1 million in general obligation bonds and already has an outstanding GO debt of $2 million. The city is located in a municipal county with $1,500,000 in debt outstanding, most of which is funded from ad valorem taxes. Austin makes up 70% of the county. What is the net direct debt per capita of Austin?
$300 Explanation: Net direct debt = Total debt - self-supporting debt - sinking fund accumulations. Total debt = $3,000,000. There are no sinking fund accumulations or self-supporting debt. Net direct debt per capita = $3,000,000/10,000 = $300.
In September, an investor writes 2 ABC Jan 60 puts at 3. If the investor buys the 2 puts back at 4 1/2, the result for tax purposes is a
$300 capital loss. Explanation: Upon opening the position, the investor earns $600 (2 contracts x $300 premium). Upon closing the position, the investor pays $900 (2 contracts x $450 premium). Therefore, the total profit or loss = $600 earned - $900 paid = $300 capital loss for tax purposes.
In September, an investor writes 2 ABC Jan 60 puts at 3. If the investor buys the 2 puts back at 4 1/2, the result for tax purposes is a
$300 capital loss. Upon opening the position, the investor earns $600 (2 contracts x $300 premium). Upon closing the position, the investor pays $900 (2 contracts x $450 premium). Therefore, the total profit or loss = $600 earned - $900 paid = $300 capital loss for tax purposes.
A 52-year-old investor living in California purchases a $50,000 25-year Treasury bond with a 4.5% coupon. The California tax rate is 7% and the investor's marginal tax bracket is 24%. The tax liability on a single year of interest is
$540.00 Explanation: As interest income on Treasury bonds is taxed at the federal level only, the interest income received for one year of $2,250 ($50,000 X 4.5%) is taxed at the rate of 24%, which results in a tax liability of $540.
A 52-year-old investor living in California purchases a $50,000 25-year Treasury bond with a 4.5% coupon. The California tax rate is 7% and the investor's marginal tax bracket is 24%. The tax liability on a single year of interest is
$540.00 As interest income on Treasury bonds is taxed at the federal level only, the interest income received for one year of $2,250 ($50,000 X 4.5%) is taxed at the rate of 24%, which results in a tax liability of $540.
An investor purchased 1000 shares of XYZ on Nov 1 at 18.50 per share and a few days later sold 5 call options on XYZ for a premium of 2.5. On December 15 XYZ is trading at 25.50 and the 5 call options are exercised. The cost basis of the investor's XYZ stock is
18.50. The cost basis of the investor's stock is 18.50, the actual price paid for the shares.
A customer complaint has been resolved. A record of the complaint must be maintained in the files of the broker-dealer for
4 years. Customer complaints must be maintained for 4 years by FINRA member firms.
Mr. Jones is long 100 shares of ABC Corp. at 51. He establishes a short straddle on ABC Corp. with a strike price of 50. The premium on the call is 3.25 and the premium on the put is 2.25. What is Mr. Jones's maximum gain on the position if the call option is exercised?
4.5 Explanation: If the call option is exercised, that means the MV is greater than the SP. This also implies that the put option expires. The writer earned 5.50 in premiums for writing both options. If the MV increases from 50 to 51 he will lose 1 on the call position. However, as it goes up beyond 51, he will gain $1 on the long stock position for every $1 he loses on the short call position. Therefore, his max gain is 5.50 1 (the dollar he loses between 50 & 51) = 4.50.
XYZ Corporation has declared a cash dividend payable to holders of record on September 1. Which of the following events does not occur on the declaration date?
Current assets are reduced On the declaration date, retained earnings are reduced and current liabilities are increased.
Which of the following statements would constitute a valid reason for investing in Eurobonds?
Eurobonds can provide diversification to a portfolio. Eurobonds are debt instruments issued and sold outside of the country of the currency in which it is denominated. For example, Eurodollar bonds are issued and sold outside of the United States, but interest and principal is paid in US Dollars. Euroyen bonds are bonds that are issued and sold outside of Japan, though interest and principle would be paid in yen. Eurobonds are used by investors to diversify a portfolio of domestic securities.
In a margin account, which of the following events will not cause an increase in the SMA position?
Forward stock split of the securities held in the account SMA is not impacted by a stock dividend or split for the securities held in the account, not for a decline in the market value of the securities held in the account.
Which two of the following are spreads? I. Long 1 ABC May 40 call; short 1 ABC May 50 call II. Long 1 ABC May 40 call; long 1 ABC May 50 call III. Long 1 ABC Aug 40 call; short 1 ABC May 40 call IV. Long 1 ABC Aug 40 call; short 1 ABC Aug 50 put
I and III A spread is created when an investor simultaneously buys and sells the same class of option with different series (combination of expiration and strike price). Choice II is not a spread because the investor is purchasing both call options. Choice IV is not a spread because the investor is opening positions in both classes of options rather than either only calls or only puts.
The taxing power of an issuer of a limited-tax bond is limited to a specified I. minimum rate. II. maximum rate. III. tax source. IV. method of taxation.
II and III A limited-tax bond can refer to either the maximum tax rate that the municipality can charge its constituents or the sources from which the municipality can draw revenues to redeem the debt.
State governments receive the least amount of revenue from
property taxes. State governments would receive the least amount of their revenue from property, or ad valorem, taxes. Cities and other localities get most of their funding from property taxes.
With respect to a margin account, which of the following statements is correct?
Interest charges and purchases using SMA will increase the debit balance Payments of cash dividends or interest will reduce the debit balance, while interest charges and additional purchases will increase the debit balance.
Broker-dealer M is serving as a financial advisor to County P. May it serve as an underwriter for the bonds of County P at this time?
No, serving in both roles simultaneously is prohibited by MSRB rules. Explanation: MSRB rules prohibit broker-dealers who are serving as financial advisors from participating in an underwriting of bonds of the same municipality. This is based on the MSRB rule dealing with conflicts of interest.
The XYZ High Yield Fund would be least likely to invest in which of the following bonds?
RST CV, A3 The XYZ High Yield Fund would be least likely to invest in the RST CV, A3. This bond carries an investment grade rating, unlike the other bonds which carry non-investment grade ratings.
A primary investment objective of a client is to save for the education of their newborn child. To help the client achieve this goal, the registered rep handling this account would be most likely to suggest which of the following investment products to this client?
STRIPs For investors who have education saving as a primary investment objective, an appropriate investment choice would be a zero-coupon bond. A STRIP is a zero-coupon security created by using Treasury securities.
Which of the following positions exposes an investor to the greatest risk?
Short 5000 shares of DEF, long 40 DEF call option n this choice, the investor is net short 1,000 shares. This would represent an unlimited potential loss.
A registered rep currently has a client who has held a particular variable annuity for the past four years. The client is unhappy with the performance of the separate account and asks the rep to recommend some alternatives. Which of the following would be the most appropriate course of action?
The rep should examine the suitability of alternative investment vehicles in conjunction with the consequences of switching annuities. Annuities are meant as long-term investment vehicles. As a result, investors face significant charges when switching annuities, including surrender fees and potential tax consequences. When switching annuities, a rep must strongly consider a client's goals along with a consideration of potential switching costs.
Under the Penny Stock Rules, what is required for an investor to be considered an established customer?
Trading at least three penny stocks on three different days with the same firm An investor is considered an establish customer if he has traded three different penny stocks on three different days within the past year.
A client recently purchased 200 shares of ABC at 18 and has since seen the shares increase in value to 21.50. The client
does not have a current tax liability at this time. Since the client has not sold the shares yet, there is no current tax liability at this time. A tax liability is only created when the gain is realized.
When the general partner signs the subscription agreement, this indicates
acceptance of the limited partner as a member of the partnership. Explanation: The subscription agreement is the form signed by both the limited partner and the general partner accepting the specific limited partner as a member of the partnership.
According to MSRB rules, all of the following are required customer account information EXCEPT the
age and birth date. MSRB rules do not require the age or birth date for a new customer account. However, FINRA rules do require this information.
A client invests $4,000 in a mutual fund on December 28, 2022. Shee receives a capital gain distribution of $240 on March 6, 2023. She redeems for $4,300 on June 19, 2023. For tax purposes, these transactions will result in
both A and B. When the client receives the distribution, she has a $240 reportable capital gain. Additionally, when she sells for $4,300 versus cost basis of $4,000, she realizes another capital gain of $300.
A corporate client has an equity portfolio valued at $10,000,000. The portfolio has a beta of 1.4. There are SPX May 2000 options available. To adequately hedge this portfolio, the client should
buy 70 puts. Explanation: To adequately hedge this portfolio, the client should buy 70 puts. We divide the value of the portfolio by the cash value of the strike price (2000 x 100 = $200,000). This gives us a quotient of 50. Since the portfolio has a beta of 1.4, we multiply 50 by the 1.4 beta to arrive at 70 contracts. Put differently, the investor needs $10,000,000 x 1.4 = $14,000,000 worth of protection. This requires 70 SPX 2000 puts.
Jack has built a diversified portfolio for himself over the years, but less than 5% of his assets are in foreign investments. Given Jack's desire to increase his international exposure, you would be least likely to recommend that Jack purchase (a)(an)
commercial paper. Commercial paper would not provide any international exposure to Jack's portfolio. The others offer returns that are linked to a non-U.S. asset category, including equity or debt.
The working capital of ABC will decrease when it
declares a cash dividend. Explanation: The working capital of a corporation will be reduced when it declares a cash dividend. This occurs due to an increase in their current liabilities (dividends payable) with no change to their cash position. Note that current assets will only fall once the cash dividend is actually paid.
The working capital of ABC will decrease when it
declares a cash dividend. The working capital of a corporation will be reduced when it declares a cash dividend. This occurs due to an increase in their current liabilities (dividends payable) with no change to their cash position. Note that current assets will only fall once the cash dividend is actually paid.
All of the following statements regarding dollar cost averaging are true EXCEPT that
dollar cost averaging is not available to large investors. Explanation: Dollar cost averaging is a practice by which the same amount of dollars are invested at regular intervals. It will yield a lower average cost per share, and is available to any investor, large or small.
All of the following statements regarding dollar cost averaging are true EXCEPT that
dollar cost averaging is not available to large investors. Dollar cost averaging is a practice by which the same amount of dollars are invested at regular intervals. It will yield a lower average cost per share, and is available to any investor, large or small.
A qualitative analysis of a general obligation bond that is to be issued would take into consideration all of the following factors EXCEPT the
dollar denominations of the bonds to be issued. The dollar denominations of bonds to be issued is never a factor when analyzing the credit rating or investment quality of the issue.
Zach has sold an XYZ May 65 Put for 7 and an XYZ May 55 Call for 7. When XYZ is trading at 62, Zach closes out the position at its intrinsic value. Zach has a
gain of $400. Zach received $1,400 for selling the combination and pays $1,000 to close out the position ($300 to close the put position; $700 to close the call position). The net gain on the position is $400.
A cash dividend received by a retail investor would be taxed at a preferred rate if the investor
has held the stock for greater than 60 days surrounding the ex-dividend date. A cash dividend would be taxed at a preferred rate if the investor holds the shares for greater than 60 days of the 121-day period surrounding the ex-dividend date. Otherwise, the dividend would be taxed at ordinary income tax rates.
Broker-dealer H has joined the underwriting team as a selling group member for the IPO of Company K. Broker-dealer H
has no financial liability to sell any specified amount of the new issue. Selling group members have no financial responsibility with respect to a new issue of securities.
The money contributed to a SEP vests
immediately. Money contributed to an SEP-IRA vests immediately and becomes the property of the employee.
A mutual fund identified as the "ABC tax-free municipal bond fund" must
invest at least 80% of its assets in tax-free municipal bonds. Explanation: A mutual fund, closed-end fund or UIT with a name that suggests the fund focuses on a particular type of security must invest at least 80% of its assets consistent with that name.
A mutual fund identified as the "ABC tax-free municipal bond fund" must
invest at least 80% of its assets in tax-free municipal bonds. A mutual fund, closed-end fund or UIT with a name that suggests the fund focuses on a particular type of security must invest at least 80% of its assets consistent with that name.
In a variable life contract, the minimum death benefit
is guaranteed and will not change. In a variable life contract, the minimum death benefit is guaranteed and does not change.
Jane has invested $100,000 in the ABC non-qualified variable annuity. The assumed interest rate on this annuity is 1.75%. The contract is structured to annuitize in 20XX. During the accumulation period Jane
is not required to pay taxes on the interest credited to her account. During the accumulation period of a variable annuity, whether qualified or non-qualified, the investor will not incur a tax liability. Applicable taxes will be due at the time any distributions are taken during the annuitization phase of the contract. Distributions will be taxed as ordinary income.
A life-cycle fund would best be characterized as one which
makes automatic adjustments to its portfolio as an investor approaches retirement. A life cycle fund, also known as a target date fund, is one which makes automatic adjustments to its portfolio as investors' approach retirement. The fund would reduce its equity exposure while increasing its focus on fixed income investments.
Two institutions effected a 100,000- share trade in XYZ, a NYSE listed security, at 11:15 am ET. This trade
must be reported to the Consolidated Tape within ten seconds of execution. Trades in NYSE listed securities must be reported to the Consolidated Tape within ten seconds of execution.
A client purchased a variable annuity some years ago and is planning on taking distributions beginning next year. Until distributions from the annuity begin, the tax consequences of the growth in the annuity are
not subject to any income tax. There are no tax consequences to the investor until distributions begin, at which time they will be treated as ordinary income to the investor.
Real-time commentary posted to a broker-dealer social media page by a registered representative must be
retained in firm files for 3 years and are subject to ongoing review by the firm. Interactive communications, which are deemed to be real-time items, are not subject to pre-approval, but are subject to retention requirements.
Your client Barbara has investment objectives of growth and aggressive income. Her portfolio consists of blue-chip stocks, high yield bonds, and treasuries. Barbara has been generally unhappy with the performance of her portfolio and is seeking your advice. You should tell her to
sell the Treasuries and buy more blue-chip stocks paying a steady dividend You should advise Barbara to sell her Treasuries and buy more blue-chip dividend paying stocks. This approach would have the best chance of helping her increase the return of her portfolio.
A client holding an individual account has requested that their spouse be added to the account, thereby enabling the spouse to place trades for the account. The registered representative handling this account
should inform the client that this change will need to be approved by a principal of the firm. Changes to account name or designation must be approved in writing by a registered principal of the firm.
A twenty-eight- year old individual with a high-risk tolerance seeking a strong return from an investment may wish to consider a
small cap stock fund. This individual would be best served by investing in a small cap stock fund.
One of your clients wants to withdraw $30,000 from his traditional IRA. The client is 35 years old and needs the cash for a medical emergency. You should advise your client
that they may be able to do this penalty free but should verify with their tax adviser. There are various exemptions available for early withdrawal (prior to age 59 ½) from an IRA. One such exception is available for excessive unreimbursed medical expenses and disability expenses without an early withdrawal penalty, but withdrawals will be subject to ordinary income taxes. Other exceptions include eligible education expenses, and the first-time purchase of a home.
In order for a person associated with a FINRA member firm to open a securities account at a different FINRA member firm,
the person must receive written consent from their employer prior to opening such account. An associated person of a FINRA member firm must receive prior written approval from their firm in order to open or maintain a securities account at a firm other than their employer.
If a registered representative participates in an internet chat room
the representative may not provide projections of investment performance of any investment strategy. Explanation: When a registered representative participates in an internet chat room, the RR is making a public appearance and must comply with all applicable industry regulations. Amongst these requirements is that the RR may not predict or project the performance of any investment or investment strategy. The RR may present a hypothetical illustration of mathematical principles, provided that no predictions or projections are made.
A registered representative prepares a summary of the preliminary prospectus, which contains no unverified claims or statements. The registered representative can send the summary to customers
under no circumstances. Neither a preliminary prospectus nor a final prospectus can ever be modified, annotated, or summarized in any way.
Horace purchased 2,500 shares of MNO Inc. in March at $18.50 per share. In June he gave half of his position away as a graduation gift to his niece Jill while MNO was trading at $21.75. Jill sold these shares at $24.25 in November. For tax purposes, Jill sold these shares using a cost basis of
$18.5. The cost basis of shares given as a gift is generally the donor's original purchase price, so in this case Jill would be using a cost basis of $18.50.
With an initial margin requirement at 50%, a customer purchased 100 shares of ABC Corp. at $100 per share and deposited $5,000. ABC Corp. then increases in value to $150 per share. What is the excess equity in the account?
$2,500 When the LMV increases to $15,000, Reg T required equity is 50% x $15,000 = $7,500. The equity balance is $10,000, so excess equity = $10,000 - $7,500 = $2,500. This also creates SMA of $2,500 as SMA equals the greater of excess equity or the last SMA balance.
A corporation has $12,000,000 net income after taxes, 5,000,000 common shares outstanding and $10,000,000 of 6% preferred stock ($100 par). What is the corporation's earnings per share?
$2.28 Earnings per share is calculated as Net Income / Shares Outstanding. In this question however, the corporation is also paying 6% dividends on its preferred stock. Therefore, the question is nudging to use a more accurate calculation of earnings per share to take into account that the corporation pays dividends. To calculate this company's earnings per share you would need to use the following: (Net Income - Dividends) / Shares Outstanding. ($12,000,000 - $600,000) / 5,000,000 = $2.28
A customer has a short account with $25,000 short market value, $37,000 credit balance and SMA of $500. What is the maximum short market value for this account before the customer will incur a maintenance call?
$28,462 Maximum SMV before a maintenance hall in a short-market account = CR balance/1.3 = $37,000/1.3 = $28,462
ABC Company currently has earnings of $4 and pays a $.50 quarterly dividend. The market price of ABC is $40. What is the current yield?
5% Current yield = annual dividend/current market price. The annual dividend of ABC is $.50 quarterly dividend x 4 = $2.00. Current yield = $2.00/$40.00 = 5%
A client has recently experienced a surge in her monthly expenses. The registered representative handling this account might suggest which of the following products to this client?
Agency CMO A CMO pays interest monthly, the other choices in this question pay interest less frequently. Of course, the product must be a good match for the client, but from a timing perspective, the CMO may be helpful to the client.
A U.S. manufacturing company is exporting goods to a Canadian retailer. The company will receive Canadian Dollars (CAD) as payment. How would the U.S. company hedge?
Buy CAD puts This U.S. company should buy puts on the Canadian Dollar. They want to lock in a sale price for the currency that they will own.
A client looking to invest in a mortgage-backed instrument and mitigate prepayment risk may wish to consider a(n)
CMO. CMOs are designed to help investors manage pre-payment risk. The cash flows from various mortgage backed securities (GNMA, FNMA, FHLMC) are restructured and serve as the collateral for a typical CMO.
Which of the following would not be considered a defensive industry?
Construction Construction would be considered cyclical rather than defensive. Defensive stocks tend do well regardless of prevailing economic conditions.
Which of the following activities would have a dilutive effect on an investor's position?
Conversion of convertible bonds into common stocks When an investor converts bonds into common stock, there are more outstanding shares, so existing shareholders suffer a dilution of equity. When a stock dividend or stock split occurs, current shareholders maintain the same proportionate ownership in the corporation.
Which of the following best describes the purpose of an underwriting selling group?
Enhance the marketability of a new issue The primary purpose of an underwriting selling group is to increase the marketability of a new issue of securities.
following retirement plans does NOT allow tax deductible contributions?
Roth IRAs Contributions to a Roth IRA are allows after-tax; tax deductible contributions are not permitted.
When the general partner signs the subscription agreement, this indicates
acceptance of the limited partner as a member of the partnership. The subscription agreement is the form signed by both the limited partner and the general partner accepting the specific limited partner as a member of the partnership.
A customer maintains a non-discretionary account at a broker-dealer and leaves a voicemail message for his registered rep to execute a trade, specifics of the order left in the message. The rep may execute this order
upon receiving confirmation from the customer that this order should be executed. A registered rep may not act strictly upon instructions left in a voicemail message. The order must be reconfirmed over the phone with the customer.
An investor might construct a bond ladder if they
were concerned about interest rate risk. By staggering maturities through the creation of a bond ladder, an investor is attempting to minimize interest rate risk. Rather than putting all the investment eggs in one basket, the investor would only need to be concerned with the effect of changing interest rates on a portion of the entire portfolio.
When an investor establishes a debit spread, he has
written and purchased a call, the one purchased having a lower strike price than the one written. This is the definition of a debit spread.
An investor believes that bond prices will fall. This investor should sell
yield based puts. If an investor believes bond prices will fall, he should also believe interest rates will rise. The appropriate strategy in this case is to buy yield-based calls or sell yield based puts both of which are profitable when rates rise. Here, the question asks which option to sell, and the puts will expire worthless when rates increase, and the writer will keep the premium.
The city of Austin (population 10,000) has just issued $1 million in general obligation bonds and already has an outstanding GO debt of $2 million. The city is located in a municipal county with $1,500,000 in debt outstanding, most of which is funded from ad valorem taxes. Austin makes up 70% of the county. What is the net direct debt per capita of Austin?
$300 Net direct debt = Total debt - self-supporting debt - sinking fund accumulations. Total debt = $3,000,000. There are no sinking fund accumulations or self-supporting debt. Net direct debt per capita = $3,000,000/10,000 = $300.
Max Jones writes 1 ABC Jul 50 put at 7. The put is exercised when the market price is 40. For tax purposes, what is the effective cost basis of the stock put to the writer?
$43 When the put is exercised, the stock is put to (sold) to Max Jones at the strike price of 50. However, since he earned the $7 premium per share, the effective purchase price (or cost basis) is actually 50 7 = $43.
Marjorie has purchased 20 XYZ July 50 puts when XYZ is trading at 51.50. She paid 1.75 for each put. Subsequently, XYZ declines to 46.22 and Marjorie decides to exercise 10 of her puts. For tax purposes, her sales proceeds resulting from the exercise of her puts is
$48,250.00 Marjorie will have sales proceeds of $48,250, which results from the sale of 1,000 shares (at the strike price of 50), minus the premium on the 10 puts ($1,750).
A customer's margin account contains the following registered nonexempt securities: 100 shares of EWH, CMV $40 per share 100 shares of XYZ, CMV $50 per share 100 shares of ABC, CMV $80 per share The account has a debit balance of $10,800, and the initial margin requirement is 50%. How much equity is in the account?
$6,200 The customer's Long Market Value in the account is $17,000 ($4,000 in EWH, $5,000 in XYZ, $8,000 in ABC). Of this $17,000 long market value, $10,800 is the debit balance. The remainder, $17,000-$10,800 = $6,200 is the equity, or ownership, in the account
Amy's father purchased 100 shares of ABC stock ten years ago for $40 per share. Amy's father dies when the stock is worth $65 per share and gifts it to Amy in his will. If Amy sells the shares a year later when they are worth $70 per share, her cost basis would be
$65 per share. When a person dies and leaves stock to their beneficiaries, the cost basis for their heir is the market value of the stock at the time of death.
A margin account is showing the following: LMV=30,000; Debit Bal=12,000; Credit Bal=62,000; SMV=38,000. What is the SMA for this account?
$8,000 The SMA for this mixed margin account is $8,000. There is $3,000 SMA for the long account, which is calculated as the difference between the equity balance of $18,000 and the Regulation T requirement of $15,000 (which is 50% of the LMV). There is $5,000 SMA for the short account, calculated as the equity balance of $24,000 and the Regulation T requirement of $19,000 (which is 50% of the SMV).
Please consider the following information to find the dividend yield of ABC Inc. Net income: $100,000,000 Shares Outstanding 200,000,000 Annual Dividend $80,000,000 Stock price $18 The dividend yield of ABC is:
2.2% Dividend yield is found by dividing the annual dividends per share by the price per share. In this question, we must determine the annual dividend per share. To do so, divide the annual dividend by the outstanding shares (80,000,000 / 200,000,000 outstanding shares = .40). We then divide the annual dividend per share by the current stock price (.40 / 18 = 2%).
A Treasury bond is quoted 101.12 - 101.20. If a client asks her RR what the spread is, the RR would respond by saying
2.50. Treasury bonds are quoted in 32nds. 8/32nds is equal to ¼ of a point, and one point is equal to $10, so the spread here is 2.50.
Which of the following investment options would be least appropriate for an investor who is concerned about inflation?
20- year debenture of a highly rated tech company. An investor who is concerned about inflation would not invest in bonds, as these instruments carry purchasing power risk owing to their fixed coupon.
While ABC is trading at 32.50, a client buys an ABC May 35 call at 2.5. Subsequently, ABC is trading at 39.75 and the client exercises the call. In determining the amount of profit, what cost basis per share should the client use?
37.5 The cost basis per share upon the exercise of a call option is the strike price of the call plus the premium paid for the call.
XYZ Corporation has total current assets of $40,000,000, $20,000,000 in inventory, total assets of $110,000,000, current liabilities of $10,000,000 and long-term debts totaling $50,000,000. What is the current ratio for XYZ corporation?
4 to 1 Current ratio = current assets/current liabilities = $40,000,000/$10,000,000 = 4:1
Mr. Jones is long 100 shares of ABC Corp. at 51. He establishes a short straddle on ABC Corp. with a strike price of 50. The premium on the call is 3.25 and the premium on the put is 2.25. What is Mr. Jones's maximum gain on the position if the call option is exercised?
4.5 If the call option is exercised, that means the MV is greater than the SP. This also implies that the put option expires. The writer earned 5.50 in premiums for writing both options. If the MV increases from 50 to 51 he will lose 1 on the call position. However, as it goes up beyond 51, he will gain $1 on the long stock position for every $1 he loses on the short call position. Therefore, his max gain is 5.50 1 (the dollar he loses between 50 & 51) = 4.50.
A corporate bond makes semi-annual interest payments of $25 and is currently trading at 960. What is the current yield of the bond?
5.20% The current yield of a bond is calculated as the annual interest payment divided by the current market price of the bond. The coupon of this bond is 5%, based on the two $25 interest payments the bond makes. $50 divided by the market price of $960 is equal to 5.2%.
Broker-dealer A is distributing a research report, prepared by Broker-dealer B, covering ABC and XYZ companies. ABC and XYZ have been on Broker-dealer A's coverage list for several years, and the ratings issued by the firm have fluctuated during this time. Which of the following items is not required to appear in this research report?
A price target for Company ABC and XYZ. There are many potential disclosures which must be contained in a research report distributed by, or prepared on behalf of, a FINRA member firm. If a recommendation, rating, or price target is included in the research report, there must be a reasonable basis for these items, along with a clear explanation of any valuation method used, and a fair discussion of the risks that may impede the achievement of the recommendation, rating, or price target.
A registered representative sees a posting online concerning one of her customers who, according to the post, has recently passed away. What is the first step the RR should take?
Attempt to verify that the individual has passed away. Any information found online concerning a customer should always be verified for accuracy before any further action is taken.
An investor anticipating that the Federal Reserve Board is likely to increase its target fed funds rate would likely take which of the following actions?
Buy U.S. listed EUR put options When U.S. interest rates rise, the U.S. Dollar is likely to strengthen as investors chase the higher returns offered by U.S. Dollar-denominated investments. As a result, foreign currencies would be expected to weaken against the U.S. Dollar. In the U.S., USD options do not exist, so the only viable choice on this question is to buy EUR puts.
following statements regarding IRAs is NOT true?
Cash-value life insurance is a permissible IRA investment, but term insurance is not. No life insurance products are permissible IRA investments according to the IRS. The minimum distribution date of a traditional IRA is 72 and investors of any age are permitted to contribute to an IRA as long as they have earned income.
A customer has been notified that the limit order placed at the open this morning has been executed. The trade report submitted to FINRA may exclude which of the following items?
Commission charged to the customer Trade reports submitted to FINRA are not required to include the commission, mark-up or mark-down charged to the customer
LBK Retailers Inc. will declare a cash dividend to its shareholders next week. Which of these events will occur?
Current liabilities will increase Upon the declaration of a cash dividend, stockholder's equity will be reduced, current liabilities will be increased, and working capital will be reduced.
If an investor's primary goal is liquidity, which of the following asset categories should be de-emphasized in their portfolio?
Direct participation program (DPP) Direct participation programs are generally not liquid investments and should be avoided if an investor's goal is liquidity.
When a company's preferred dividends are subtracted from its net income and the result is divided by the common shares outstanding, the outcome is the company's
EPS. Earnings per share is found by subtracting the preferred dividend from the net income and then dividing by the number of common shares outstanding.
Your client Susan indicates that she is looking for an income-oriented investment. Which of the following would not be appropriate alternatives for Susan?
Income bond An income bond will not make regular interest payments. The issuer promises to return the face value of the bond, with any coupon payments to be paid only if the issuer has sufficient earnings. Income bonds are a high-risk investment suitable only for investors with high risk appetite.
A client owns various amounts of stock across several different industries but is concerned that a broad market pullback will erode her portfolio. A registered rep might suggest which of the following trading strategies to this client?
Index puts A diversified equity portfolio can be hedged using stock index put options. As the value of the underlying securities in the portfolio declines, the value of the put options will increase.
An investor has a significant position in various money market instruments, comprising a substantial portion of his overall portfolio. Amongst the various risks that investors generally face, which of the following risks may be the most prominent in this investor's portfolio?
Inflation risk Money market securities will offer very low returns, compared to other investment alternatives. These returns may not be able to keep pace with any inflationary pressure that may exist.
Which of the following best describes the Alternative Minimum Tax (AMT)?
It is a process that determines tax liability by including certain tax preference items into adjusted gross income. The AMT recalculates income tax after including certain tax preference items into adjusted gross income. The main purpose of AMT is to ensure that all taxpayers pay a minimum amount of taxes every year.
Which of the following best describes the bond equivalent yield?
It is the annual percentage yield for a bond which does not make annual payments. The bond equivalent yield allows bonds which do not make annual payments to be compared to securities with annual yields. This allows for better comparison amongst bonds with different payout structures.
Ben purchased an XXX index option on Wednesday May 4 and submitted an exercise notice on Friday May 20. The exercise settlement date for this transaction is
Monday May 23 When an index option is exercised, the exercise settlement date is the following business day. This is a different timeline for when an equity option is exercised, in which case the exercise settlement date is two business days later.
Broker-dealer M is serving as a financial advisor to County P. May it serve as an underwriter for the bonds of County P at this time?
No, serving in both roles simultaneously is prohibited by MSRB rules. MSRB rules prohibit broker-dealers who are serving as financial advisors from participating in an underwriting of bonds of the same municipality. This is based on the MSRB rule dealing with conflicts of interest.
An investor seeking a high degree of cash flow predictability while being willing to accept relatively lower yields would be most likely to purchase a
PAC tranche. The Planned Amortization Class (PAC) is a type of CMO structure that provides a high degree of cash-flow certainty, as compared to other CMO structures. In return for these steadier cash flows, investors typically agree to accept a lower return.
A municipal bond issued by the state of New York would not use which of the following items to secure the debt service on the bond?
Property tax State GO bonds are secured by income, excise, and sales taxes. Local GO bonds, such as those issued by cities and counties, are backed by property taxes and license fees.
Which of the following is not a benefit to an investor in a direct participation program?
Recapture Recapture is not a benefit to an investor in a direct participation program. This occurs when an item that was previously claimed as a deduction now needs to be added back to taxable income, thereby eliminating any benefit previously received.
Which of the following factors is the least important to consider when evaluating a direct participation program (DPP)?
Recent tax law changes When evaluating a direct participation program (DPP), attention should be paid to the nature of the program, the economic and financial attributes of the program, the qualifications of the general partner, and the basic objectives of the program. While potentially important, recent tax law changes would not be as significant a factor to review when examining a particular program.
A client opened a new options account today. Which of the following actions must the client take within 15 days of account approval?
Return a signed copy of the Option Agreement to the firm. The client must sign and return the Options Agreement to the broker-dealer within 15 days of account approval. If this is not done, the client will only be able to place closing orders for the account.
Which of the following would not be used as collateral in a collateralized mortgage obligation (CMO)?
SLMA CMOs use various types of mortgage backed securities as collateral. SLMA is the Student Loan Marketing Association, not a type of mortgage backed security.
The VIX index is a measure of market volatility based on the
SPX. The VIX index is based on the S&P 500 Index, or SPX.
A 35-year old investor is considering the purchase of a Z-tranche but does not want to incur a tax liability for interest payments that will not be received until maturity. To help this investor achieve his goal, a registered rep might recommend that this security be carried in a(n)
Similar to a zero-coupon bond, the interest payments from a Z-tranche are taxable as they accrue, even though the investor does not actually receive any cash flows until maturity. To avoid any unwanted tax implications, an investor may choose to carry this type of security in a tax-deferred retirement account, such as an Individual Retirement Account (IRA) or 401(k) plan.
A day order is entered to buy 500 XYZ at 24 3/8. By the close, the firm has 100 shares at 24.25 and 200 at 24.37. The remainder is unfilled. What is the outcome?
The client must accept the execution for 300 shares, and the remainder of the order is canceled after the close. Day orders may be executed in parts, any remaining shares unfilled at the end of the day are cancelled.
Which of the following best states the objective of the Monte Carlo Simulation?
To provide the investor with a range of possible outcomes and the probabilities they will occur based on a set of variables. The Monte Carlo Simulation provides visibility into a range of possible outcomes for a portfolio, by testing the performance of a portfolio across many different economic environments.
Which of the following is considered an accredited investor?
a board member of the company Under Regulation D, accredited investors include officers and directors of the issuer, institutional investors with at least $5 million in assets, and individuals that have a net worth of at least $1 million excluding their primary residence or those that have earned at least $200,000 in each of the past two years ($300,000 for married couples).
In a client's margin account, a dividend of $150 was credited, while during the same period an interest charge of $85 was applied. The effect of these actions is
a reduction of $65 to the debit balance. In a margin account, payments of interest or dividends reduce the debit balance, whereas interest charges increase the debit balance. In this example, the debit balance would be decreased by the net difference, which is $65.
Marsha has established a vertical spread using option contracts on ABC Inc. Marsha will breakeven when the market price of ABC is
above the lower strike price. The breakeven point on a vertical spread will occur between the two strike prices, not necessarily at the midway point. It is correct to say that the breakeven point will be above the lower strike price, or below the higher strike price.
As the result of a series of trades this year, an investor has amassed $7,500 in capital losses. If this investor's ordinary income for the year was $85,000, they would be able to
adjust their income down to $82,000. An individual is permitted to reduce their ordinary income by up to $3,000 in net capital losses each year. Any losses exceeding this limit may be carried forward to the following year.
A measurement of a portfolio manager's performance in relation to the overall market can best be described in terms of
alpha. Alpha is used to measure the return of an investment or portfolio of securities above a given benchmark.
A registered representative (RR) is doing an annual check- in with a client, who indicates they would like to move away from riskier investments and concentrate on safer, more liquid assets. In light of this information, the RR would be least likely to recommend
an exchange traded note. Of these choices, the exchange traded note would be the riskiest and least liquid option. The repayment of the note would be solely dependent on the credit worthiness of the investment bank that issued the note.
A broker-dealer will be sponsoring a virtual "town hall" and one of its registered representatives will be delivering comments that will be based on a periodical that will be distributed to some of the firm's invited clients. This periodical must be
approved by a principal of the firm in advance if it is distributed to more than 25 retail investors within a 30- day period. Any written information distributed or made available to more than 25 retail investors within a 30-day time period is considered retail communication and must be approved by a principal of the firm prior to use.
All of the following would indicate deteriorating credit conditions EXCEPT an increase in
assessed valuations. Increases in bankruptcies, consumer debt and bond defaults all indicate an increasing risk that an issuer will default on its debt obligations. On the other hand, an increase in assessed valuations indicates that more funds will be available to pay debt service and would actually indicate increasing credit quality.
A corporate bond has a coupon of 4% and a YTM of 4.5%. This bond is currently trading
at a discount When the YTM is greater than the nominal yield, a bond is trading at a discount.
The Options Disclosure Document must be provided to customers
at or prior to the approval of a new option account. The Options Disclosure Document must be provided to customers at or prior to the approval of a new option account. Subsequently. The customer must return a signed option agreement with 15 days of account approval.
The following positions are held in a customer account: Long XYZ May 50 call, short 2 XYZ May 60 calls, Long XYZ May 70 call. These options positions would be characterized as a
butterfly spread A butterfly spread is an options strategy composed of four individual options contracts; they all have the same expiration month and there are three different strike prices.
A corporate client has an equity portfolio valued at $10,000,000. The portfolio has a beta of 1.4. There are SPX May 2000 options available. To adequately hedge this portfolio, the client should
buy 70 puts. To adequately hedge this portfolio, the client should buy 70 puts. We divide the value of the portfolio by the cash value of the strike price (2000 x 100 = $200,000). This gives us a quotient of 50. Since the portfolio has a beta of 1.4, we multiply 50 by the 1.4 beta to arrive at 70 contracts. Put differently, the investor needs $10,000,000 x 1.4 = $14,000,000 worth of protection. This requires 70 SPX 2000 puts.
A client wants her account designated by number, not by her name. The registered rep
can open the account with a written statement of ownership from the client. Accounts can be opened with a name or a symbol as long as the owner provides a written statement of ownership. This may be done when the individual wishes to remain anonymous.
When compared to traditional equities, American Depository Receipts (ADR) have
higher levels of political and currency risk ADRs will have higher levels of both political and currency risk when compared to traditional equities.
Quantitative measures for evaluating the credit quality of corporate bonds include all of the following EXCEPT
industry stability. Quantitative measures, by definition, are based on numerical values. Industry stability is opinionated information regarding the state of the industry and does not involve numerical values. Hence, it is a qualitative measure.
The current yield of a municipal bond
is the annual interest divided by the market price. Current yield of a bond is calculated as annual interest dividend by the current market price.
A customer of the firm has recently become married and now wishes to change the name on the account. This change will be accomplished when
it is authorized by the registered principal. Customer name changes, as well as other primary information relating to the account, must be authorized in writing by a registered principal.
A convertible preferred stock issue has a conversion price of 25 and is trading at $90. If the underlying stock is trading at $23,
it would be appropriate to convert into the underlying common stock. To determine if a conversion makes sense, first determine the conversion ratio. Here the ratio is $100 par / 25 conversion price, which is 4 shares. These 4 shares could be sold for $23, for a total of $92, which is better than the $90 price of the convertible security itself.
Joan has purchased a put and a call on the same index, both contracts having the same strike price and expiration month. Joan has created a
long straddle. This is the definition of a long straddle.
A client is the beneficiary of securities from the estate of their brother, who recently passed away. The cost basis of the inherited securities to this client is the
market value of the securities at the time of death. When securities are inherited because of death, the cost basis of the inherited securities is the market value of the securities at the time of death.
XYZ Securities is developing a new structured product which is being built with a "0% floor". In the event the underlying security declines in value post the launch of the structured product, the return of the new product
may return 0%, but not a negative amount. An investment with a "0% floor" may return zero, but not a negative amount.
In a custodial account, taxes are the responsibilities of the
minor In a custodial account, taxes are the responsibilities of the minor
Records prepared by a broker-dealer that do not have a defined period for recordkeeping
must be retained for at least 6 years
A 77-year-old client has historically adopted an aggressive investment attitude, but when the client recently called to place a trade, he seemed very confused. The RR should
notify the trusted contact person on the account. n this situation, the RR should reach out to the trusted contact person on the account.
An investor owns 500 shares of ABC Corporation and has received a 2% stock dividend. This investor
now owns 510 shares with no income tax liability on the 10 new shares. New shares received as the result of a stock split or stock dividend are not taxable events. Investors are required to adjust their cost basis on all shares now held as the result of the split or stock dividend.
Prior to purchasing a new municipal offering, a client is inquiring as to the best resource available to help evaluate the credit quality of the issuer. The RR should direct this client to the
official statement. The official statement is the offering document used in conjunction with a new issue of municipal securities. It discusses the purpose of the issue, how the issue will be repaid, as well as financial and economic information about the issuer.
Carla has an account with you and is travelling this week. Her husband Cliff would like to place a trade for her. When he calls you with his instructions, you should tell him
only Carla may place trades in the account. Carla is the only person who can place trades for her account. Had Carla provided third party trading authority to Cliff, then you would be able to accept his instructions. There is no indication that Carla has provided such authorization on the account.
Tranche A of a CMO offering has an average life of 2.5 years, Tranche B has an average life of 6 years, while Tranche C has an average life of 11 years. This type of CMO structure is characterized as
plain vanilla. The CMO structure that contains tranches that pay off in a defined sequence is known as a "plain vanilla" offering. Each tranche receives regular interest payments, while principal payments received are made to the first tranche only. As this first tranche is retired, principal payments are then applied to the second tranche until it is retired. This process continues until the last tranche is retired.
An institutional investor is making a tender offer for the common stock of ABC. During the period of this offer, this investor may not
purchase a convertible bond of ABC in the secondary market. When a tender offer is being made, the party making the offer may not purchase the same or substantially same security in the secondary market, as this would be considered manipulative activity. If the tender offer is for common stock, the party would not be able to purchase the common stock or convertible bond of the same issuer while the tender offer is in progress.
A client placed an order with his RR to purchase 700 shares of ABC at 21. The trade was executed, and the client received a confirmation indicating the trade was executed at 31. Upon receiving notification of the error from the customer the RR should
report the error to his branch manager or principal immediately. When an error is made, and the client's specific instructions are not followed, the RR should notify his branch manager or principal immediately.
A manufacturing corporation headquartered in Texas has operating locations in Dallas and Houston. It is planning on doing a Rule 147 offering during the next few months. These securities may be purchased by
residents of Texas only A Rule 147 offering may be purchased only by legal residents of the state where the issuer is based.
An investor has created a bull call debit spread. This investor has
sold the contract with the higher strike price and purchased the contract with the lower strike price. In a bull call debit spread, the investor purchases a call option and writes a call option. The call option purchased has a lower strike price than the call option sold, thereby creating a bull call debit spread.
An investor purchased a $10,000 ABC 3% corporate bond, due 20XX. The bond was purchased at 98 and is callable beginning two years from issue date. The investors confirmation for this trade will show
the YTM. The lower of the YTM or YTC will be shown on the confirmation. In this case the bond was purchased at a discount so the YTM would be reflected as it would be the lower of the two yields.
A client has a restricted margin account. To place additional trades in this account,
the client would need to satisfy the appropriate margin requirement for any trades When trading in a restricted account, the client would be required to satisfy the appropriate margin requirement for any trades that are affected in the account.
If a registered representative participates in an internet chat room
the representative may not provide projections of investment performance of any investment strategy When a registered representative participates in an internet chat room, the RR is making a public appearance and must comply with all applicable industry regulations. Amongst these requirements is that the RR may not predict or project the performance of any investment or investment strategy. The RR may present a hypothetical illustration of mathematical principles, provided that no predictions or projections are made.
In November, Bill purchased a Blast Inc. March 30 Call and sold a Blast Inc. December 30 Call. This trade will benefit Bill if
the spread widens. This is a debit spread, as the March call (with 4 months until expiration) will have a higher premium than the December call (with one month until expiration). With a debit spread, Bill would want the spread to widen.
Your client Jim has received a dividend from his real estate investment trust. He asks you if this dividend is treated the same way as the dividend he receives from his XYZ common stock, which he has owned for several years. You should tell Jim that
the tax rate that applies to his XYZ common stock investment does not apply to his REIT. Dividends from REITs are taxed as ordinary income, not at a preferred rate, regardless of the holding period. This is in part because REITs pass through the gains without paying any corporate income tax. Cash dividends from common stock may receive a preferential rate if the investment has been held for at least 61 of the 121 days surrounding the ex-dividend date. These are called qualified cash dividends.
A FINRA member firm may place a temporary hold on a disbursement of funds from a customer's account if
there is a reasonable belief that financial exploitation is occurring within the account. If a FINRA member firm believes that financial exploitation has occurred or is occurring in a customer's account, the firm may place a temporary hold on disbursements of cash or securities from this account. The hold may remain in effect for up to 15 business days.
An investor may begin taking distributions from his qualified retirement plan this year without incurring a penalty. Once distributions begin,
this investor will be responsible for ordinary income taxes on all distributions taken during the year. Distributions from a qualified retirement plan, such as a 401 (k) plan, are subject to ordinary income taxes. A qualified retirement account is one that is funded with pre-tax dollars, effectively making it a tax deduction for that year, up to federal limits. Since no taxes were paid on these funds at the time of their investment, all distributions from these plans are fully taxable as ordinary income.
