Series 7 last week (sharpen prac scores)

There are two accepted measures of the economic viability of a DPP. Those are cash flow analysis and internal rate of return (IRR). which one looks at the debt?

internal rate of return (IRR) looks at the debt Cash flow analysis compares the income to the expenses, not the debt.

Which of the following statements about municipal brokers' brokers is not true? A) They perform trades on a principal basis only. B) They do not perform retail trades with individual investors. C) They perform specialized trades for institutions. D) They do not maintain inventories.

A Explanation A broker's broker does not maintain an inventory of bonds. Therefore, they do not act as principals; they act as agents only in trades between dealers or institutions. They do not do retail business.

From the viewpoint of a fundamental analyst, which of the following has little, if any, significance? A) A company's stock reaching new highs or lows B) A company's CEO resigning C) A company reporting higher or lower earnings D) A company reporting higher or lower sales

A Explanation A fundamental analyst looks at the company's internals. That includes management changes, earnings or sales reports, but not anything to do with the trading of the company's stock. That is the purview of the technical analyst.

The legal opinion is supplied by bond counsel, an attorney specializing in securities law. The opinion states that the municipal bond is legal and binding on the issuer. If the bond's interest is tax-exempt, that opinion is stated as well. Legal opinions are exclusive to municipal securities. A legal opinion evaluates which of the following features of a municipal issue? Marketability Legality Tax-exempt status Economic feasibility A) II and III B) II and IV C) I and IV D) I and III

A Explanation A legal opinion rendered by bond counsel deals with the tax-exempt status of the proposed issue and its legality. The marketability of the new issue of bonds is dealt with by the syndicate. Economic feasibility relates to revenue bond issues and is performed by independent consultants.

Which of the following statements regarding a municipal variable-rate demand obligation are true? Interest payments are tied to the movements of another specified interest rate. Interest payments are tied to the movements of an underlying stock or index. The coupon rate stays the same for the life of the demand obligation, and the price fluctuates. The coupon rate of the bond changes, and the price remains stable. A) I and IV B) II and III C) II and IV D) I and III

A Explanation A municipal variable rate demand obligation has interest payments tied to the movements of a specified interest rate. Because the coupon rate of the bond changes with the market, the price of the demand obligation tends to remain stable.

The ABCD Corporation has a beta coefficient of 1.25. Your client's portfolio contains $20,000 worth of ABCD common stock. After a rise in the overall market of 10%, we would expect the value of this client's ABCD common stock to A) increase by $2,500. B) increase by $2,000. C) increase by $5,000. D) decrease by 25%.

A Explanation A stock with a beta coefficient of 1.25 could be expected to rise in value at a rate 25% greater than the overall market. Because the market has increased by 10%, this stock should increase by 12.5% or $2,500 (10% × 1.25 × $20,000 = $2,500).

An investor has a portfolio containing 60% equities, 5% debt instruments, and 35% options and futures. Which of the following would best describe this investor's investment style? A) Aggressive B) Moderate/Aggressive C) Conservative D) Moderate

A Explanation All facets of the portfolio point toward aggressive. The dominate factor would be that over one-third of the portfolio consists of securities considered speculative in nature. Those would include derivative products such as options and futures, high-yield bonds (i.e., junk bonds), and others. Then note that the equity/debt allocation leans more toward aggressive than moderate and isn't conservative in any way.

A customer purchases five 6.25% U.S. Treasury notes at 98.24. How much will the customer receive on each interest payment date? A) $156.25 B) $154.30 C) $153.50 D) $312.50

A Explanation Although minimum purchase denominations can be less, always use par value ($1,000) for these calculations. A 6.25% bond pays $62.50 annually (6.25% × $1,000 = $62.50). Therefore, a customer purchasing five bonds receives $312.50 each year. Because Treasury notes pay semiannually, each interest payment equals $156.25.

In a discussion with one of your customers, the topic of alternative debt instruments is brought up. It seems that the customer was competing in a duplicate bridge tournament in town and one of the other competitors mentioned that they have been obtaining higher income returns from ELNs. When the customer asks you for the meaning of that abbreviation, you would reply A) equity-linked notes. B) equity-leveraged notes. C) exchange-linked notes. D) exchange-leveraged notes. All of the following are characteristics associated with equity-linked notes (ELNs) except A) they are considered to be nonconventional structured investments. B) they can be exchange traded or traded over-the-counter (OTC). C) they have final payments at maturity linked to the return of an underlying stock or basket of stocks. D) they are equity securities.

A Explanation An ELN is an equity-linked note. That is a strange name for a debt product. The equity refers to the specific stock, a basket of stocks, or an equity index upon which the return is based. Therefore, the return is not fixed and can be higher or lower than anticipated depending on the selected equity's performance. D Explanation Despite their name, ELNs are debt instruments, not equity instruments. They have a partial fixed return, as well as a final payment linked to the performance of a single stock or equity index. Some are exchange traded, while others trade OTC. FINRA, who considers ELNs to be nonconventional structured investments, has expressed concerns that investors might not fully understand ELNs or the risks associated with them.

If the value of securities held in a fund's portfolio increases, and the amount of liabilities stays the same, the fund's net assets A) increase. B) decrease. C) are more liquid. D) stay the same.

A Explanation An appreciation in value of fund assets, without a corresponding increase in liabilities, leads to an increase in the fund's net asset value (total assets minus liabilities equals net assets).

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

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

The common stock of Momentum Growth Industries (MGI) is currently selling at 55 times earnings. Which of the following actions could MGI take that would likely increase the company's earnings per share? Reduce the salaries of C-level officers by 10%. Exercise the call feature on MGI's outstanding preferred stock. Announce a 1:4 stock split. Purchase shares of MGI common stock in the open market. A) I, II, III, and IV B) I, III, and IV C) II and III D) I and IV

A Explanation As is often the case, the question contains irrelevant information. Knowing the price-to-earnings ratio (P/E ratio) has nothing to do with the question. There are two primary ways to increase EPS. The most obvious is to increase the company's earnings. That is accomplished either by increasing revenue or reducing costs. Reducing officer salaries reduces the expenses. Calling in preferred stock removes the obligation for the dividend on that stock. Therefore, income available to common shareholders increases. The second is to reduce the number of outstanding shares. The math behind the EPS formula is net income divided by the total number of common shares outstanding. If the denominator (the number of shares) is reduced, the EPS increases. Sometimes a company wishing to buy back its shares will do so through a tender offer. It does that by inviting shareholders to tender (present) their shares to the company at a specified price (usually at a premium over the current market price). A reverse split, such as 1 for 4, reduces the number of outstanding shares to one quarter of what they were before the split. One of the simplest ways to reduce the number of outstanding shares is to simply buy them back in the open market. They now become treasury stock and are not included in the EPS calculation.

A representative wishes to execute an order for a customer's discretionary account. The municipal dealer has a control relationship with the issuer of the security to be purchased. Under Municipal Securities Rulemaking Board rules, the representative A) must have specific authorization from the customer. B) may not execute the order. C) must wait until the firm terminates the control relationship. D) may refer the customer to a firm that has no control relationship.

A Explanation Even in a discretionary account, a registered representative may not exercise discretion when a control relationship exists between the issuer and the dealer without first receiving the customer's permission.

A fundamental analyst is reviewing GEMCO's financial statements. The company has a current ratio of 4:1, a price-to-earnings (P/E) ratio of 12:1, $10 million in 5% debentures, and net income after preferred dividends of $4 million. If the current market price of GEMCO stock is $60 and the company pays dividends at a rate of $0.75 quarterly, the dividend payout ratio is A) 60%. B) 5%. C) 20%. D) 40%. The dividend payout ratio of common stock is found by dividing the annual dividend per share by A) the book value. B) the earnings per share. C) the capitalization per share. D) the market price.

A Explanation As with many computational problems, there is some unnecessary information given. The current ratio is irrelevant, and so is the information on the debentures. What is needed is the amount available to pay the common so that we can compare that to the amount actually paid. We see that $0.75 in quarterly dividends are paid. That is equal to $3 per year. The next key is determining the earnings. With a market price of $60 per share and a price-to-earnings ratio of 12:1, the earnings per share must be $5. The dividend payout ratio should be thought of as "dividends paid out of earnings made." The dividends paid are $3; the earnings made are $5. That is a 3 to 5 ratio, or, as usually expressed in percentage form, 60%. B Explanation The key to the question is ratio, which in this case is the relationship between dividends per share and their source of earnings per share.

If an investor purchases a bond anticipation note (BAN) that matures in one year, when will the investor collect the interest? A) At maturity B) Quarterly C) Monthly D) Semiannually

A Explanation BANs are short-term money market instruments. Interest is paid at maturity.

Your customer is interested in a leveraged fund and makes the following statements about leveraged funds to you. Which of the statements is not true? A) There are no unusual risks associated with these funds, other than those incurred with any index tracking fund. B) The funds attempt to return a multiple of the return of a benchmark index they are tracking, perhaps two or three times. C) These funds sometimes use derivatives products to achieve their stated goals. D) Some leveraged funds are exchange-traded products.

A Explanation Because the fund objective is to achieve returns that are a multiple of the returns of the benchmark index, the result could be a multiple of any loss incurred by the benchmark index, as well. In addition, because these funds use derivatives products to achieve their stated objectives, they may not be suitable for some people, given the additional risks associated with those products.

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 all of the shares purchased on February 8. C) sell all of the shares purchased on January 4. D) sell half of the shares purchased on January 4, and half of the shares bought on February 8.

A Explanation By using the share identification basis and selling the shares purchased in May at $48 per share, the client realizes a loss of $400. Selling either of the others results in a short-term capital gain, taxed at ordinary income rates (all transactions are less than a 12-month holding period). Don't get hung up on the fact that the investor will receive $400 more than needed (100 shares @ $44 = $4,400); the question is looking for tax considerations.

Six percent XYZ debentures are trading for $1,200. Other similarly rated bonds are offered at 4.5%. What is the current yield on the 6% XYZ debentures? A) 5% B) 7.5% C) 1.5% D) 6%

A Explanation Current yield is defined as the annual income (or coupon rate) from a bond divided by the bond's current market price. Accordingly, $60 / $1,200 = 0.05 × 100 = 5%. The current yield will be lower than the coupon rate when the bond is trading at a premium.

Depletion allowances in oil and gas programs are based on the amount of oil A) sold. B) in reserve. C) lost to shrinkage. D) extracted.

A Explanation Depletion allowances are allowed to compensate for a mineral resource, which is considered accomplished when it is sold.

The cost of the asset is $100,000, and it will be depreciated on a straight-line basis with no salvage value. This means that A) for the next five years, the company will have an operating expense deduction of $20,000. B) at the end of five years, the company will have $100,000 in reserve to put toward the purchase of a replacement. C) for the next five years, the company will issue a check to the depreciation account for $20,000. D) for the next five years, the company will issue a check to the manufacturer for $20,000.

A Explanation Depreciation is not a liability (i.e., a bill to be paid). Depreciation is the annual expense (write-off) representing the loss in value of a fixed asset over a set period. In this question, that period is five years. Straight-line depreciation means equal amounts each year. With a zero salvage value, the entire cost is depreciable. The $100,000 cost divided by five years is $20,000 per year. No "cash" is involved, which is why depreciation is frequently referred to as a noncash expense.

The Profligate Perpetual Growth Fund's prospectus states that the fund meets the Investment Company Act of 1940's qualifications of a diversified management company. If the fund has net assets of $1 billion, A) no more than $300 million can be invested in the voting shares of any single issuer. B) no more than $50 million can be invested in the voting shares of any single issuer. C) no more than $250 million can be invested in the voting shares of any single issuer. D) no more than $100 million can be invested in the voting shares of any single issuer.

A Explanation Diversified management companies must follow the 75-5-10 rule. That means, of 75% of the fund's net assets, no more than 5% of the fund's total assets can be in the voting shares of a single issuer. There are no restrictions on the other 25%; it can be invested as desired. Five percent of the $1 billion total is $50 million. The other 25% of the total assets ($250 million) can be invested in this stock without limitation. That makes the total possible investment into the voting shares of one issuer 30% of the total net assets or $300 million.

An analyst comparing revenues with expenses is most likely analyzing A) cash flow. B) liquidity. C) working capital. D) capitalization.

A Explanation The analyst is most likely measuring the income statement for cash flow (money coming in against money going out). Working capital analysis—not the income statement—would involve examining the balance sheet's current assets and current liability entries. Capitalization analysis involves examination of long-term debt and stock issues. Liquidity analysis involves examining current assets and liabilities from the balance sheet.

The effect of using the first in, first out (FIFO) method for a sale of some of the securities that were purchased separately during a period of rising prices will be A) an increase in the taxable profits of the investor. B) a decrease in the profits of the investor. C) an increase in the cost basis of the securities. D) a decrease in the tax liabilities of the investor.

A Explanation FIFO is an inventory accounting term used to standardize the determination of which items are sold first. In this case, if different purchases are made of the same stock, and the per-share price is higher each time, then if a portion (but not the entire inventory) is sold at one price, the taxable gain will be maximized. If last in, first out were used, the taxable gain would be minimized, and the lower cost basis securities would remain in the portfolio.

In the case of a real estate direct participation limited partnership program, nonrecourse financing will A) increase a limited partner's original cost basis. B) decrease a limited partner's original cost basis. C) be added to a limited partner's sales proceeds at the time the partnership is dissolved. D) have no effect on a limited partner's original cost basis.

A Explanation For real estate limited partnerships, nonrecourse loans are included in the limited partner's cost basis. In this way, the loans increase the partner's original cost basis by the amount of the partner's debt liability for the loan.

KPT, Inc., is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income? Tax rate Cash dividend Allowance for bad debts Retained earnings A) I and III B) I and II C) II and IV D) II and III

A Explanation Higher taxes mean less net income. The allowance for bad debts is an expense item, and increasing it lowers operating income. Dividends are paid out of retained earnings, which have no effect on the net income the company reports.

In a functional allocation oil and gas program, which of the following statements are true? The general partner picks up all tangible drilling costs. The general partner picks up all intangible drilling costs. The limited partners pick up all tangible drilling costs. The limited partners pick up all intangible drilling costs. A) I and IV B) I and II C) II and III D) III and IV

A Explanation In a functional allocation program, the general partner picks up all tangible drilling costs, while the limited partners pick up all intangible drilling costs. As intangible drilling costs are deductible as they are incurred, this type of program benefits the limited partners. Tangible drilling costs, however, are deductible pro rata over the estimated life of the well.

An investor purchases five Mount Vernon Port Authority J & J 1 bonds in a regular way transaction on Wednesday, October 18. How many days of accrued interest are added to the bond's price? A) 109 B) 110 C) 108 D) 114

A Explanation Interest accrues on municipal bonds on a 360-day-year basis, with all months having 30 days. This bond pays interest on January and July 1 (J & J 1). Therefore, July, August, and September each have 30 days of accrued interest, and October has 19 days of accrued interest; this totals 109 days. Settlement date is Friday, October 20. The easiest way to do these accrued interest questions is to set the dates up numerically. That is, the settlement date is 10/20 and the previous interest payment date is 7/01. Do the subtraction: 10/20 -7/01 3/19 3 times 30 = 90 +19 = 109

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) partially ordinary income and partially capital gain. C) a short-term gain. D) tax-free income.

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

Your client invests $20,000 to purchase a 10% interest in a movie production limited partnership. At the time of subscribing, the investor signs on an $800,000 recourse loan to the partnership. After completing the first year of operations, the program shows a loss of $1,200,000. All of the following statements are correct except A) the investor's original basis was $20,000. B) the investor's original basis was $100,000. C) the investor has a passive loss deduction of $100,000. D) the investor's basis is now $0.00.

A Explanation Let's take this step by step. The original check for $20,000 is all cost basis. But, it doesn't stop there. When becoming a limited partner, the investor signed on to the recourse loan. The 10% share of that loan is $80,000, bringing the initial basis up to $100,000. (20,000 + 80,000) When the end-of-year report shows a loss of $1,200,000, it would appear that the investor takes 10% of that ($120,000) as a passive loss. The problem is that IRS rules do not allow a loss greater than the investor's basis (in this case, $100,000). Once that loss is taken, the basis is wiped out. The extra $20,000 may be carried forward. (120,000 loss -100,000 cost basis) Unless the investor contributes more money, or the partnership has earnings, this investor cannot use that $20,000 or any further losses.

According to modern portfolio theory (MPT), an investor can reduce the level of risk through diversification. Adding which of the following securities would tend to reduce the portfolio's overall risk? A) A security with negative correlation B) A security with positive correlation C) A security with equal correlation D) A security with a leveraged correlation

A Explanation MPT states that the lower an asset's correlation to the overall portfolio, the greater the diversification. Greater diversification equals lower risk. Adding a security with a negative correlation offers the lowest risk. Adding a security to the portfolio that has a -1.0 correlation reduces the overall risk due to the greater diversification. The higher the security's positive correlation, the less diversification, leading to greater risk

The MSRB classifies municipal securities into two categories: notes and bonds. They define bonds as any municipal debt security with a maturity of A) 5 years or more. B) 1 year or more. C) 2 years or more. D) 10 years or more.

A Explanation Municipal notes have a maximum maturity of less than five years. Once the municipal security is issued with a maturity of 5 years or longer, it is considered a municipal bond.

An investor with $5,000 to spend could purchase approximately how many shares of a mutual fund with a net asset value per share of $13.00, a sales charge of $1.00 and an underwriter's concession of $0.20? A) 357 shares B) 352 shares C) 378 shares D) 362 shares

A Explanation Mutual funds sell at NAV plus sales charge. In this case, $13.00 plus $1.00 = $14.00 public offering price (POP). Dividing $5,000 by $14 equals 357 shares. What about the underwriter's concession of $0.20? That is part of the $1.00 sales charge. On each sale, the principal underwriter of the fund earns $0.20 and the selling broker-dealer keeps the other $0.80.

What action could a corporation take that would result in the forced conversion of an outstanding convertible debt security? A) Exercise the call feature when the debt security's conversion value exceeds the call price B) Exercise the conversion feature when the debt security's conversion value exceeds the call price C) Reduce the coupon rate below the dividend rate on the common stock D) Reduce the dividends on the common stock to a rate lower than the interest on the debt security

A Explanation One of the investor benefits of a convertible security is that an increase in the market price of the underlying common stock will lead to a comparable increase in the price of the convertible. For example, when the market price of the common stock is $25 per share, a $1,000 convertible debenture with a conversion ratio of 50 shares per bond has a conversion value of $1,250 (50 shares time $25 per share). Because most convertibles are also callable, by calling the bonds at the stated call price (perhaps 102 or 103) the company can force the bond holders to convert the bonds. Using our example, why would investors hold onto the bonds knowing that, within about 30 days, they're going to get a check for $1,020 or so for each bond when they could convert and own shares worth $1,250 per bond. This is known as forced conversion. The coupon rate is fixed, and an investor would not want to convert to the stock just because the dividends on the stock are lower than the interest on the bond.

Which of the following is not considered when trying to diversify a municipal bond portfolio? A) Price B) Maturity C) Geographical location D) Quality

A Explanation One of the purposes of diversifying a municipal bond portfolio is to spread the risk among the portfolio's issues. This can be accomplished by buying bonds of differing maturities, geographical locations, and quality.

Reggie owns a convertible bond that converts into 20 shares of common stock. The current market value of the bond was 118½ at the close on Friday, April 1. A 30-day call is announced before the opening on Monday, April 4, at a price of 102. The stock is trading at $57.75. What should Reggie do? A) Convert the bond into the stock B) Sell the bond C) Hold the bond to maturity D) Redeem the bond at the call price

A Explanation Reggie will not be allowed to hold the bond to maturity because it is being called. The real question is whether he should sell the bond, allow it to be called, or convert it to the underlying stock. Now that the call has been announced, the market value of the bond will fall to meet the call price. This occurs as a result of declining demand. (Who wants to buy a bond that is about to be called at a lower price?) Thus, redeeming the bond at the call price and selling the bond would both yield the same results: $1,000 times 102% equals $1,020. If he converts the bond, he will get the following results: 20 shares times $57.75 equals $1,155. Therefore, it makes the most sense to convert the bond.

One of your customers invests $20,000 in an oil and gas limited partnership program. The Schedule K-1 she receives at year-end from the partnership indicates that operating revenues and operating expenses were exactly the same. In addition, her share of the year's depletion allowance is $6,000. During the year, she received a cash distribution of $8,000. What is her basis as of year-end? A) $6,000 B) $16,000 C) $8,000 D) $12,000

A Explanation She began with a basis of $20,000 (her original investment). During the year, she received a distribution of $8,000. That lowered her basis (the amount of money "at risk") to $12,000. In addition, the depletion represents a nonoperating expense that can be taken as a loss. That brings the basis down to $6,000.

Which of the following would not be examples of overlapping debt? Debt to build a state office building within city limits Debt to maintain a county park district serving a municipality Debt backed by two states cooperating in the construction of a bridge Debt for a high school district within city limits A) I and III B) I and II C) II and IV D) II and III

A Explanation State debt cannot overlap with any other municipal entity.

Which of the following governmental bodies receive the least amount of their revenues from property taxes? A) State governments B) Municipalities C) School districts D) County governments

A Explanation State governments generally do not assess property (ad valorem) taxes. These are assessed by local governments. Generally, state governments receive most of their income from sales and income taxes.

Market interest rates have risen steadily over the past several months. The market price of which two of the following shares would probably reflect the biggest impact of this change? Growth stock Money market mutual fund Preferred stock Public utility stock A) III and IV B) I and IV C) II and III D) I and II

A Explanation Stocks that are interest rate sensitive will reflect the impact of a change to market interest rates more than others. Preferred stock, with its fixed dividend, and utility stocks, with their high degree of debt leverage, are considered interest rate sensitive. The yield of the money market fund will change, but the price is fixed at $1 per share.

A Which of the following regarding the Bond Buyer Revenue Bond Index (Revdex) are true? It includes 30-year bonds. It includes 20 bonds. It is compiled weekly. It is compiled monthly. A) I and III B) II and III C) I and IV D) II and IV

A Explanation The Bond Buyer Revdex is computed weekly just like The Bond Buyer's general obligation (GO) index. Revdex consists of 25 revenue bonds with 30-year maturities. The GO index includes 20 bonds, each with approximately 20 years to maturity.

The function of the Federal National Mortgage Association (FNMA) is to A) purchase FHA-insured, VA-guaranteed, and conventional mortgages. B) guarantee the timely payment of interest and principal on FHA and VA mortgages. C) issue conventional mortgages. D) provide financing for government-assisted housing.

A Explanation The FNMA buys FHA, VA, and conventional mortgages and uses them to back the issuance of debt securities. FNMA currently issues debentures, mortgage-backed securities, and certificates.

The document attesting to the formation of a limited partnership, filed with designated authorities, is called A) the certificate of limited partnership. B) the offering memorandum. C) the registration statement. D) the subscription agreement.

A Explanation The Uniform Limited Partnership Act requires that two or more persons sign and swear to a certificate of limited partnership. It is filed with the state and is a public document available for review.

A municipal revenue issue's flow of funds statement is contained in A) the bond contract. B) the agreement among underwriters. C) the legal opinion. D) the notice of sale.

A Explanation The bond contract describes the nature of the contract and the issuers' duties to bondholders. The bond contract is a more expansive document than a bond resolution. The contract is comprised of the bond resolution (or trust indenture) and other security agreements and laws in force at the time of bond issuance.

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

A Explanation The debt service for IRBs is derived from the lease payments made by the leasing corporation to the issuing municipality. Therefore, the credit rating of the bonds is dependent on the credit worthiness of the leasing corporation, not the issuing municipality.

An investor's portfolio contains the following four bonds: ABC 7% duein 2040 DEF 6% due in 2040 GHI 5% due in 2040 JKL 8% due in2040 Which of these bonds would show the greatest price change if interest rates jumped by one percentage point? A) GHI 5% due in 2040 B) DEF 6% due in 2040 C) ABC 7% due in 2040 D) JKL 8% due in 2040

A Explanation The longer the duration, the greater the price volatility when there is a change to market interest rates. When all bonds have the same (or approximately the same) length of time to maturity, the bond with the lowest coupon rate will have the longest duration. Conversely, the one with the highest coupon rate will have the shortest duration and changes in interest rates will have the least impact on it.

The management fees paid by an investment company are part of A) the operating expense of the fund. B) the custodial fees. C) the sales load. D) the underwriting agreement.

A Explanation The management fees paid by an investment company are part of the operating expenses of the fund. Custodial fees are also part of the operating expenses. A sales load is a selling cost contained within the underwriting agreement.

The Investment Company Act of 1940 describes several different classifications of investment companies. Two of those are the unit investment trust (UIT) and the open-end management investment company. In general, when referring to an open-end company, the subject is a mutual fund. One respect in which a unit investment trust (UIT) differs from a mutual fund is that A) the portfolio is unmanaged. B) UITs do not compute net asset value (NAV). C) investors in mutual funds may redeem their ownership interests. D) the UIT requires initial capitalization of $1 million.

A Explanation The most significant distinguishing characteristic of a UIT compared with other investment companies is the lack of ongoing portfolio management. Once the initial portfolio is assembled, it remains fixed until the termination date. As with other investment companies, the minimum initial capitalization is $100,000. UITs, just as mutual funds, offer redeemable securities, and both types of investment companies compute their NAV.

Most rating services rate which of the following? A) Quality B) Durability C) Reinvestment risk D) Marketability

A Explanation The rating services are concerned with quality, which is defined as the ability of the issuer or guarantor to pay (default risk).

The trust indenture of a revenue bond includes a statement explaining rates will be maintained at a level sufficient to cover the debt service and operating expenses. This statement would be found in that part of the indenture dealing with A) the bond covenants. B) the feasibility study. C) the flow of funds. D) the official statement.

A Explanation The trust indenture of a bond contains the protective bond covenants. Within the bond covenants can be found the rate covenant, which is a statement explaining that rates or user fees will be maintained at a level sufficient to cover the debt service and operating expenses for the bond issue.

Which of the following statements regarding the visible supply in The Bond Buyer is true? A) It is a daily listing of bonds to be offered in the next 30 days. B) It is a weekly listing of bonds sold in the past 30 days. C) It is a daily listing of available bonds. D) It is the total of the bonds offered in the Blue List.

A Explanation The visible supply implies that the supply of bonds will be available for the visible future.

The Bond Buyer's 30-Day visible supply includes issues of notes sold on a competitive basis. issues of bonds sold on a competitive basis. issues of notes sold on a negotiated basis. issues of bonds sold on a negotiated basis. A) II and IV B) III and IV C) I and II D) I and III

A Explanation The visible supply includes only bonds. Notes are not considered because they do not compete directly with the bonds

Which of the following would not be found within the protective covenants for a municipal revenue bond issue? A) The issue's rating B) Additional bonds test C) Flow of funds D) Catastrophe clause

A Explanation There are different sources for bond ratings, but they would not be found within the revenue issue's protective covenants. The municipality agrees to abide by the covenants, and a trustee appointed in the bond indenture supervises the issuer's compliance with them. Some common covenants include rate or fee (promise to maintain user fees high enough to pay expense and debt service) maintenance, insurance, additional bonds test, sinking fund, catastrophe, flow of funds, books and records, and call or put features.

If a registered representative receives a call from a custodian wishing to buy shares of a new issue security, she should A) discuss and review suitability. B) accept the order only if it is placed in a margin account. C) refuse to accept an order. D) talk the investor into buying another stock.

A Explanation There are no restrictions that specifically apply to the purchase of new issues in a custodial account, provided the registered representative has discussed and reviewed the suitability of the investment.

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) $32,000 C) $100,000 D) $10,000

A Explanation 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.

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

A Explanation This question refers to the three specific obligations under Rule 2111. Those three are reasonable-basis suitability, customer-specific suitability, and quantitative suitability

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

A Explanation Under most circumstances, the annual contribution to a SEP IRA will be higher than those allowed for education savings accounts or traditional or Roth IRAs.

Which of the following may be affected when a company declares a cash dividend? Shareholders' equity Total assets Total liabilities Current assets A) I and III B) II and IV C) III and IV D) I and II

A Explanation When a company declares a cash dividend, it will reduce retained earnings (part of shareholders' equity) and increase current liabilities (dividends payable), which will increase total liabilities. Assets are not affected until the cash is paid out several weeks later.

If a municipal bond rated BBB is prerefunded, all of the following statements are true except A) the marketability of the issue will decrease. B) the rating of the issue will increase. C) funds required to meet debt servicing have been set aside in escrow. D) the issue is now backed by U.S. government securities.

A Explanation When funds are escrowed to call in a bond at a predetermined call date, the bond is said to be prerefunded. The money set aside is invested in government securities, which makes the issue very safe and highly marketable. The rating of prerefunded bonds is AAA, as they are now backed by U.S. government securities.

Many life insurance companies offer variable products. Determining benefits usually depends on the actual performance of the selected separate account subaccount(s) compare to an assumed interest rate (AIR). Which of the following statements reflects that determination? Actual performance compared to the AIR affects the cash value of a variable life insurance policy Actual performance compared to the AIR affects the death benefit of a variable life insurance policy Actual performance compared to the AIR affects the value of an accumulation unit of a variable annuity Actual performance compared to the AIR affects the value of an annuity unit of a variable annuity A) II and IV B) I and III C) I and IV D) II and III

A Explanation When the actual performance of the separate account exceeds the AIR, the death benefit of a variable life insurance policy will increase. When the performance is less than the AIR, the death benefit reduces, but never below the guaranteed minimum. There is no assumed interest rate for the cash value. That is, the insurance company makes no projections as to its growth. With variable annuities, it is the annuity unit where the performance versus the AIR is important. In order to set up lifetime payments, the insurance company makes certain assumptions about returns. If the returns are higher, the value of the annuity (payout) unit increases and vice-versa. During the accumulation period, there are no assumptions; the insurance company never projects how much the money will grow.

Two bonds currently quoted at a 5.50 basis mature in exactly 15 years. Their coupons are 6% and 7%, respectively. Which bond would experience the greatest appreciation in value if the yields dropped to a 5.20 basis? A) The 7% bond B) Neither because both would decline in value C) Both would appreciate the same amount D) The 6% bond

A When interest rates are falling, bonds with higher coupon rates are going to appreciate in price at a greater rate than bonds with lower coupon rates. Conversely, when interest rates are rising, those bonds with higher coupons will decrease in price at a slower rate than bonds with lower coupons. In our specific question, the 7% bond will have a greater price increase than the 6% bond. If, however, our question showed the bond selling at a discount, e.g., the basis (YTM) is 8%, the 7% bond would be selling closer to par value than the 6% bond.

A corporation has a net income of $5.2 million after taxes. If 4 million shares of common stock are outstanding, the earnings per share (EPS) is A) $1.78. B) $1.30. C) $5.20. D) $0.80.

B Earnings per share equals net income (less preferred dividends) divided by the number of common shares outstanding. In this case, $5.2 million divided by 4 million equals an EPS of $1.30.

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

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

The basis of a bond with a 5% nominal yield maturing in twenty years and selling at 115 is approximately A) 4.35%. B) 3.95%. C) 5.75%. D) 4.65%.

B Explanation A bond's basis is its yield to maturity (YTM). It is not necessary to do the YTM calculation because it could only be one choice. We can easily compute the current yield by dividing the $50 annual interest by the $1,150 current market price. That is about 4.35%. The YTM must be lower than that because it includes the eventual loss realized when the bond matures at par. (premium so the CY is higher than the YTM) There is only one selection that is lower than 4.35%.

The basis of a bond with a 5% nominal yield maturing in twenty years and selling at 85 is approximately A) 4.59%. B) 6.22%. C) 5.88%. D) 5.75%.

B Explanation A bond's basis is its yield to maturity (YTM). It is not necessary to do the YTM calculation because it could only be one choice. We can easily compute the current yield by dividing the $50 annual interest by the $850 current market price. That is about 5.88%. The YTM must be higher than that because it includes the eventual profit realized when the bond matures at par. There is only one selection that is higher than 5.88%.

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) $12.00. C) $18.00. D) $15.00.

B Explanation 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.

The financial statements of the Acme Manufacturing Corporation contain the following information: Current assets: $20 million Fixed assets: $52 million (of which, $8 million represents the book value of a mechanical lathe) Current liabilities: $6 million Long-term debt: $19 million of 5% debentures due 2049, callable at 102 Common stock: $18 million (1.8 million shares of $10 par) Paid-in capital: $7 million Retained earnings: $22 million Due to obsolescence, Acme sells the lathe for $6 million. The impact of this sale on the company's financials would be that A) long-term debt would increase. B) retained earnings would decrease. C) paid-in capital would decrease. D) working capital would decrease. All of the following will affect the working capital of a corporation except A) declaration of a cash dividend. B) an increase in assets. C) a decrease in liabilities. D) payment of a cash dividend. Which of the following describes additional paid-in capital? A) Total of all residual claims that stockholders have against the corporation's assets B) May also be called earned surplus C) Total of all earnings since a corporation was formed, less dividends D) The difference between the total dollar amount received from the issuance of common stock and the stock's aggregate par value

B Explanation Acme's net worth is currently $47 million. Net worth is total assets ($72 million minus total liabilities of $25 million equals $47 million. Or, add together the stock and surplus ($18 + $7 + $22 = $47 million). When the lathe is sold for $2 million less than its value on the books, total assets drop to $70 million, causing a $2 million decrease to net worth. Nothing has changed with the stock, so it is the retained earnings that, so to speak, take the hit. Working capital goes up because we have replaced a fixed asset with cash (the $6 million proceeds from the sale). D Explanation Working capital is defined as current assets minus current liabilities. Payment of a cash dividend will reduce current assets (cash) and current liabilities (dividend payable) by the same amount, leaving working capital unchanged. D Explanation Additional paid-in capital is the difference between the dollar amount received from the sale of stock and the stock's aggregate par value. Earned surplus is another name for retained earnings.

An insured municipal bond is purchased by your client in the secondary market. After the sale, Municipal Securities Rulemaking Board rules would require you to A) include a copy of the insurance policy with delivery of the certificates. B) make delivery of the certificates accompanied by evidence of insurance, either on the face of the certificates or in a separate document. C) indicate that the bonds are insured on the confirmation because this is the only requirement. D) send a copy of the official statement.

B Explanation Although it is likely that the confirmation would include a statement that the bonds are insured, it is also necessary to provide the client with some proof of that insurance, either on the bond itself or, in the case of book entry delivery, as a separate document.

During a period of sustained low interest rates, many investors, particularly institutions, look to increase their return through alternative debt investments. Examples of those would include all of the following except A) equity-linked notes. B) leveraged ETFs. C) exchange-traded notes. D) private placement debt.

B Explanation Although leveraged ETFs (exchange-traded funds) are certainly an alternative investment, they represent an equity investment rather than debt. Despite the misleading name, equity-linked notes are, in fact, debt instruments.

Which of the following retirement plans must be ERISA compliant? A) Nonqualified plans B) 401(k) plans C) Roth IRAs D) Traditional IRAs

B Explanation For exam purposes, if it is a private employer (nongovernmental) qualified retirement plan, it must be ERISA compliant. The most widely used of those today is the 401(k) plan. The "E" in ERISA stands for employee. IRAs are individual retirement accounts; there is no employer-employee relationship. Nonqualified plans are retirement plans that do not have to follow ERISA regulations. These non-qualified plans include deferred compensation plans, individual annuities, and some payroll deduction plans.

A municipal securities dealer informed XYZ municipal bond fund that it was the leading retailer of XYZ shares and that, in return, XYZ should employ the dealer in effecting more transactions for the fund's portfolio. Which of the following statements regarding the request is true? A) It is not permissible because municipal securities dealers are not allowed to execute trades for the portfolios they underwrite. B) It is not permissible because it violates the MSRB anti-reciprocal rule. C) It is permissible because MSRB rules do not cover municipal bond issuers or funds. D) It is permissible because it suggests a more reciprocal arrangement between the two parties.

B Explanation An investment company must select a dealer to execute its portfolio transactions based on services provided. It is a violation of the anti-reciprocal rule (Municipal Securities Rulemaking Board Rule G-31) for an investment company to choose a firm to trade its portfolio based solely on sales of units or shares of the fund.

On September 1, an investor sold 100 shares of KLP Corporation common stock for a loss of $1 per share. On September 15, he purchased a KLP convertible bond with a conversion price of $40. How much of the original loss may he now declare for tax purposes? A) $40 B) $75 C) None D) $100

B Explanation Because he purchased the convertible bond less than 30 days after realizing the loss, the sale of the stock falls under the wash sale rule. Investors who sell a security at a loss, and repurchase it, including its equivalent (e.g., convertible bond, warrant, or call option), 30 days before or after the sale will have the loss disallowed by the IRS. With a conversion price of $40, the bond could be converted into 25 shares (1,000 / 40) of KLP common stock. Hence, the investor has "bought back" the equivalent of 25 shares and may only declare a $75 loss, as the remaining $25 loss will be disallowed. Look at this question as if it said, "On September 15, he purchased 25 shares of KLP stock." That washes out $25 of the loss, but the rest is okay.

The analytical tool used to measure the variability between a particular stock's (or portfolio's) movement and that of the market in general is A) standard deviation. B) beta. C) alpha. D) the correlation coefficient. Which of the following best describes alpha for an investor's portfolio? A) It is a measure of performance that adjusts for risk, relative to a known benchmark. B) It is the prediction of performance aligning with the risk of a known benchmark. C) It is a measure of each portfolio asset's risk to arrive at the risk associated with the entire portfolio. D) It is a measure of risk that adjusts in accordance with the performance of a known benchmark. In a declining market, which of the following is most volatile? A) A stock with a beta of 0.5 B) A stock with a beta of 2.0 C) A stock with an alpha of +0.5 D) A stock with an alpha of +2.0

B Explanation Beta measures the systematic risk of a stock by comparing the variability between a particular stock's (or portfolio's) movement and that of the market in general. It only measures systematic risk not total risk. The beta coefficient of the market is set at 1.0. If the beta of the stock (or portfolio) is higher than 1.0, it is more volatile than the market. If it is less than 1.0, it is less volatile than the market. Alpha is the tool used to measure how a stock (or an asset manager) performed compared with the investment's expected rate of return based on its beta. Standard deviation measures the total risk of an investment (systematic risk + unsystematic risk). The correlation coefficient measures how two investments move in correlation with each other. A high correlation means they move in step with each other. A negative correlation means they move in opposite directions. A Explanation Alpha is a measure of performance that adjusts for risk, relative to a known benchmark. The alpha for any investment type, a particular asset, or portfolio is the abnormal rate of return on the investment in relation to what would normally be predicted by the benchmark. B Explanation Beta is a measure of a stock's volatility relative to the overall market, as measured by the S&P 500. A stock with a beta of 2.0 will move twice as fast as the overall market, while a stock with a beta of 0.5 will move half as fast as the overall market.

When an outstanding bond issue is the subject of a refunding, the holders of those bonds have their claim on any pledged assets terminated. This is known as A) default. B) defeasance. C) termination. D) replacement. Which of the following insures general obligation bonds? A) National Public Finance Guarantee Corp. and AMBAC B) Syndicate manager C) Securities Investors Protection Corporation (SIPC) D) Federal Deposit Insurance Corporation (FDIC)

B Explanation Defeasance occurs when an outstanding bond issue is paid off prior to maturity through a refunding. Once the creditors (the bondholders) have received their funds, any liens on assets or revenues are terminated. A Explanation Outstanding municipal general obligation bonds have been insured by the National Public Finance Guarantee Corp. and AMBAC. Insured bonds are typically AAA-implied rated. SIPC protects customer accounts against broker-dealer failure. The FDIC protects customer deposits against bank failure.

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

B Explanation Dividends paid and received by the fund directly affect NAV. Changes in the portfolio value affect NAV because the securities are marked to market daily. Although share redemption will reduce total NAV, the number of shares outstanding decreases in proportion, so the NAV per share stays the same.

An investor places $100,000 into an oil and gas limited partnership program. To comply with FINRA rules, what is the minimum amount of the investment that must be received by the business? A) $95,000 B) $85,000 C) $98,000 D) $90,000

B Explanation Each of these choices uses a percentage that has some logic. Under FINRA Rule 2310, the maximum in total offering expenses is 15%. Therefore, at least 85%, or $85,000, must actually be put to work in the program. There is a maximum compensation of 10% to the member firm selling the program, and that is the largest part of the 15% total. The 5% policy does not apply to DPPs, and if this question were about a DPP roll-up, then there is 2% maximum to the member if recommending the client vote in favor of the roll-up.

All of the following statements about SEP IRAs are true except A) SEP IRAs allow employers to make contributions. B) there are no minimum earning requirements to be an eligible participant. C) the retirement account is usually set up at a bank or other financial institution. D) SEP IRAs are established for small-business owners and their employees.

B Explanation Eligibility to participate in a SEP IRA is limited to employees who have earned a minimum of $600 for the year in question.

The effect of using the first in, first out (FIFO) method for a sale of some of the securities that were purchased separately during a period of rising prices will be A) a decrease in the profits of the investor. B) an increase in the taxable profits of the investor. C) a decrease in the tax liabilities of the investor. D) an increase in the cost basis of the securities.

B Explanation FIFO. In this case, if different purchases are made of the same stock, and the per-share price is higher each time, then if a portion is sold at one price, the taxable gain will be maximized. If LIFO were used, the taxable gain would be minimized, and the lower cost basis securities would remain in the portfolio.

Compared to defined contribution plans, defined benefit plans give the highest return to employees who are highly compensated. receive lower compensation. have fewer years until retirement. have many years left until retirement. A) II and IV B) I and III C) I and IV D) II and III

B Explanation Highly compensated employees who have fewer years until retirement will experience advantages over other employees with this type of plan. Their retirement benefits are predefined and generally linked to the compensation level they attained while employed. After a short time with the company, a person may qualify for benefits comparable to those it would have taken many years to attain under a defined contribution plan

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. Your customer's required rate of return on fixed income investments is 8%. The NMC preferred stock would be an appropriate addition to this customer's portfolio only if the stock was not priced in excess of A) $75.00. B) $37.50. C) $66.66. D) $40.00.

B Explanation How does a 6% preferred stock return 8%? Remember the inverse relationship between interest rates and fixed income security prices. As one goes up, the other goes down. An increased return results from a decreased price. The math is basic algebra. We know the annual dividend is $3 per share (6% of $50 = $3); that is fixed. What number results in a payment of $3 providing an 8% return? Divide 3.00 by $8 and the answer is $37.50. You could also do this question by working backwards. Multiply each of the choices by 8% and the one where the product is $3 is correct.

A client purchases 1,000 shares of the XYZ Value Fund when the NAV is $18.75 and the POP is $19.74. Five years later, the client makes a gift to her daughter when NAV is $24.50 and POP is $25.79. The daughter elects to receive all distributions in cash. Two years after the gift, she sells all shares when the NAV is $34.25 and POP is $36.05. What are the tax consequences of this sale? A) Long-term capital gain of $16,310 B) Long-term capital gain of $14.510 C) Long-term capital gain of $17,300 D) Long-term capital gain of $15,500

B Explanation In the case of a gift of securities, the donee acquires the donor's cost basis—$19.74 per share. Sale (redemption) takes place at the NAV ($34.25) for a profit of $14.51 per share (times 1,000 shares = $14,510.00).

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

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

A customer purchases a municipal bond that has been advance refunded. It will be called at 102 four years from now. On the confirmation, the yield that must be stated is the yield to A) maturity or yield to call, whichever is lower. B) the 102 call. C) maturity. D) maturity or yield to call, whichever is higher.

B Explanation Municipal Securities Rulemaking Board rules require that when a call date has been fixed by a prerefunding, the resulting yield to call must be reflected on the confirmation. Because of the prerefunding, this bond issue will be called at the call date. There is no uncertainty surrounding this event; therefore, it is appropriate to price the bond to the call date. The original maturity on the bond has no further significance.

Which of the following terms does not apply to municipal unit investment trusts (UITs)? A) Registered B) Managed C) Regulated D) Redeemable An unmanaged portfolio is a characteristic of A) an open-end investment company. B) a single state municipal bond fund. C) a unit investment trust. D) a closed-end investment company.

B Explanation Municipal UITs buy bonds and hold them until redemption or call. The bonds are not actively traded, so the portfolio is not managed, but rather, overseen by a trustee. C Explanation The most significant distinguishing characteristic of a UIT compared with other investment companies is the lack of ongoing portfolio management. Once the initial portfolio is assembled, it remains fixed until the termination date. Closed-end and open-end companies are classified as management companies because of the ongoing portfolio management responsibilities. Unless something indicates to the contrary, when the exam refers to a fund, it is a mutual fund (open-end investment company).

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

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

An investor purchased a single premium deferred variable annuity 20 years ago. The premium deposit was $50,000. The account is now worth $200,000 and the investor is still working. When does the investor have to begin taking required minimum distributions? A) At age 72 B) Never with a nonqualified annuity C) At age 72 or when no longer working, whichever is later D) At age 59½

B Explanation On the exam, unless stated to the contrary, every annuity is nonqualified. One of the benefits of nonqualified annuities is that there is no age at withdrawals must commence. In general, earnings withdrawn prior to age 59½ are subject to the additional 10% penalty on top of tax at ordinary rates.

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) Its paid-in surplus will increase. C) The current ratio will decrease. D) Its earnings per share will increase.

B Explanation Paid-in surplus is a balance sheet entry that accounts for money raised from the issuance of stock in excess of par value. When more shares are sold, paid-in surplus will increase.

For tax-reporting purposes, qualified dividends are considered to be what type of income? A) Earned B) Portfolio C) Phantom D) Passive

B Explanation Portfolio income includes dividends, interest, and net capital gains derived from the sale of securities.

The price paid for a listed REIT is most similar to the pricing of A) a real estate limited partnership. B) a closed-end investment management company. C) a collateralized mortgage obligation. D) an open-end investment management company.

B Explanation Pricing of a listed REIT (real estate investment trust) is based on supply and demand. In this respect, they trade similarly to a closed-end investment management company. Open-end investment management companies are mutual funds and their pricing is based on the net asset value as computed daily. On the exam, unless stated otherwise, all real estate limited partnership offerings are offered through private placements. This means that they are not publicly traded and have limited liquidity.

A walk-in customer completes the new account form and includes all of the information required by the customer identification program. However, the customer supplies none of the requested financial data and is unwilling to discuss objectives. Under Regulation BI of the SEC, A) opening this account could place the firm in the position of violating Regulation BI. B) the account may be opened, but no recommendations may be made. C) the account may be opened, but only after receiving SEC approval. D) the account may be opened, but all recommendations must be suitable based on the customer's situation.

B Explanation Regulation BI deals with recommendations from a broker-dealers to its customers. As long as there are no recommendations, the rule does not apply. When the customer refuses to supply the necessary suitability information, the account may be opened, but trading must be limited to unsolicited orders.

A client, age 27, is new to investing. With $20,000 saved thus far and $400 to allocate toward investing monthly, his goal is to purchase a home in three to five years. Which is the most suitable recommendation? A) Invest in both equity and corporate debt mutual funds so that a portfolio of stocks and bonds is established. B) Invest in a money market mutual fund to build up more cash reserves. C) Open a long margin account to take advantage of the leverage that margin purchases can create using small amounts of money. D) Use leveraged index funds (2 or 3×) to maximize gains potential for the small investment amounts.

B Explanation Securities or strategies with longer time horizons than that of the goal to purchase a home should not be used until the client has established more liquid cash reserves. The money market mutual fund would be most appropriate because it is liquid and conservative. The balanced fund is not appropriate for someone with a two- to five-year goal, and margin accounts or leveraged funds entail risk unsuitable for a conservative investor with a short investment time horizon.

The ABC Corporation has a long-standing policy of maintaining a dividend payout ratio of 45%. ABC's net income for the year is $12 million, and there are 8 million shares of common stock outstanding. After a 3:2 stock split, the annual dividend per share is A) $0.675. B) $0.45. C) $1.0125. D) $1.50.

B Explanation Take this systematically. A dividend payout ratio of 45% means ABC will distribute 45% of its net income to its common shareholders. Forty-five percent of $12 million is $5,400,000 in dividends. If there were 8 million shares before the split, there are now 12 million (8 times 3/2 = 24 divided by 2 = 12). Divide the amount available for common ($5.4 million) by the number of shares (12 million) to arrive at a dividend per share of $0.45.

Which of the following may only be accomplished after applying the additional bonds test for a revenue bond? A) Prerefunding an outstanding bond issue B) Issuing new bonds with an equal lien on the project's revenues C) Increasing the project's user charges D) Spending revenues already allocated for project expansion

B Explanation The additional bonds test must be met under the provisions of a revenue bond indenture before additional bonds with an equal lien on project revenues can be issued. The conditions under which additional bonds may be issued are specified in the bond indenture. This is an open-end covenant.

Paying a premium of $10 per bond, Tracey bought 10 municipal bonds with 20 years to maturity. Ten years later, she sold the bonds for 103. For tax purposes, she has A) a $300 loss. B) a $250 gain. C) a $200 gain. D) a $200 loss.

B Explanation The cost per bond is $1,010. The amortization amount each year is 10/20 years, which equals $0.50 per year. $0.50 per year × 10 years = $5 per bond. After 10 years, the adjusted cost basis is $1,005 per bond. She sells the bonds for $1,030 per bond. $1,030 − $1,005 = $25 per bond 25 × 10 = $250 gain.

As a registered representative, you recommend the purchase of the ABC Fund family corporate bond mutual fund to a customer whose objective is current income. The customer agrees to the purchase and you enter the order. What type of securities has the investor purchased? A) Government bonds B) Common stock C) Preferred stock D) Corporate bonds

B Explanation The customer has purchased common stock in the mutual fund because that is the only security an open-end management investment company (mutual fund) can issue. Using the customer's invested funds, the fund manager purchases securities for the fund portfolio that will meet the fund's investment objectives. For a corporate bond fund, the principal purchases for the portfolio would be corporate bonds. Likewise, if the fund were the ABC Preferred Stock Fund, the investment manager would purchase preferred stocks. Please do not confuse how a mutual fund raises capital for the manager to invest (it issues common stock shares in the fund) with what the manager invests in with that money.

A stock pays a $0.50 quarterly dividend. The company had earnings per share last year of $10. The company's dividend retention ratio is A) 20%. B) 80%. C) 10%. D) 5%.

B Explanation The dividend retention ratio is the reciprocal of the dividend payout ratio. If the company pays a $2 dividend on earnings of $10, it pays out 20% of the earnings available to common shareholders in the form of the dividend. That means it retains 80% of the available monies.

A general partner is considered to have a conflict of interest with the business of a limited partnership if she A) acts as agent for the business. B) borrows money from the business. C) manages the business. D) loans money to the business.

B Explanation The general partner manages the business and acts as agent for the business. The general partner may loan money to the partnership at a reasonable rate of interest but may not borrow from the partnership.

Ten municipal bonds were purchased with 9% nominal yield for settlement on February 1, 2015. The maturity date of the bonds is July 1, 2035. What is the number of days of accrued interest on the 10-bond trade? A) 29 B) 30 C) 31 D) 37

B Explanation The maturity month and day will always match one of the two semiannual coupon dates. Because maturity is July 1, the bond pays interest on January 1 and July 1 of each year. With settlement on February 1, the bond accrued interest from January 1 up to, but not including, settlement (30 days).

If stock market indexes, such as the S&P 500 and the Dow Jones Industrial Average, are declining daily, and the number of declining stocks relative to advancing stocks is falling, a technical analyst will conclude that the market is A) overbought. B) oversold. C) becoming volatile. D) unstable.

B Explanation The momentum of the market decline seems to be easing as the number of decliners to advancers is leveling out. It looks like the advance/decline line is moving in a direction away from decliners. A technical analyst would conclude that the market is oversold and approaching a bottom.

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

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

One of your customers calls and asks you about a security with an S&P rating of SP-2. The customer is most likely asking about which of the following? A) A municipal bond B) A municipal note C) Your firm's privacy notice D) Commercial paper

B Explanation The three major rating services each have their own rating system for short-term municipal debt (notes). In the case of Standard and Poor's, the ratings are SP-1, SP-2, and SP-3 in declining order of quality. Regulation S-P (with the hyphen between the S and P) deals with privacy notices. Although it is unlikely to be tested, commercial paper is rated A-1, A-2, A-3, and then into the "Bs."

An investor purchased 200 shares of Hightown National Bank (HNB) common stock at $120.06 per share. Thirteen months later, HNB pays a 15% stock dividend. Three months after that, the investor sells the shares received from the stock dividend at $112.57 per share. The tax consequence to the investor is A) $122.55 short-term capital gain. B) $245.10 long-term capital gain. C) $245.10 short-term capital gain. D) $1,879.10 long-term capital gain.

B Explanation The total value of the initial position is unchanged, remaining at $24,012 (200 times $120.06). After the stock dividend the investor owns 230 shares (200 times 15% = 30 + 200 = 230). Therefore, the adjusted cost basis is $100 per share ($24,012 divided by 230 = $104.40). The question tells us that the investor sells those 30 additional shares at $112.57 per share. That is a difference of $8.17 per share. Multiply that gain by 30 shares and the result is a profit of $245.10. It is a long-term gain because the holding period of shares received from a stock dividend or stock split begins with the initial purchase, not the receipt of the new shares. It is important to remember that anytime there is a distribution resulting in additional shares (stock split, stock dividend), the cost basis per share is reduced while the total account value remains the same.

If an indenture has a closed-end provision, this means A) additional issues have no lien on the revenue stream. B) additional issues will have junior liens. C) the bonds must be called before maturity. D) a sinking or surplus fund must be established.

B Explanation These additional issues are also known as junior lien bonds. Under a closed-end indenture, additional bonds issued against the same stream of revenues have a junior (subordinate) claim to those already outstanding unless the funds are required to complete construction of the facility.

It is generally understood that the least complicated employer-sponsored retirement plan is the Savings Incentive Match Plan for Employees (SIMPLE). These plans tend to have certain restrictions. Among them are the restriction that A) there must be fewer than 100 employees who earned at least $5,000 during the preceding calendar year. B) the business cannot have another retirement plan in place. C) employer matching contributions are made with after-tax funds. D) the catch-up provision for those 50 and older is limited to $1,000.

B Explanation To institute a SIMPLE plan, the business cannot have any other retirement plan in place. The limit is 100 or fewer, not fewer than 100. The catch-up provision is $3,000, and both employee and employer contributions are made with pre-tax funds.

United States Treasury notes are intermediate length securities. Treasury notes are not issued with maturities of A) 5 years. B) 4 years. C) 7 years. D) 2 years.

B Explanation U.S. Treasury notes are issued with maturities of 2, 3, 5, 7, and 10 years.

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) II and III B) I and IV C) I and III D) II and IV

B Explanation 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.

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

B Explanation Unlike Treasury STRIPS, which are issued directly by the U.S. government, 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.

A customer bought a bond that yields 6.5% with a 5% coupon. If the bond matures at this point, the customer will receive A) $1,050. B) $1,025. C) $1,065. D) $1,000 plus a call premium.

B Explanation Upon redemption of a bond, whatever current interest rates may be, the investor receives par ($1,000) plus the final semiannual interest payment ($25 in this case), for a total of $1,025.

A callable municipal bond maturing in 30 years is purchased at 102. The bond is callable at par in 15 years. If the bond is called at the first call date, the effective yield earned on the bond is A) higher than the yield to maturity. B) lower than the yield to maturity. C) the same as the yield to maturity. D) not determinable.

B Explanation When a bond is purchased at a premium ($1,020) and called for redemption, the investor's effective yield is the yield to that call date. That will be lower than the bond's yield to maturity because the premium is lost sooner.

Unit investment trusts differ from mutual funds in which two of the following ways? UITs have an expiration date; mutual funds do not. UITs generally have higher management fees than mutual funds. The portfolio of a UIT is fixed while that of a mutual fund changes as the managers look for investment opportunities. UIT units are not redeemable while shares of mutual funds are. A) II and III B) I and III C) I and IV D) II and IV

B Explanation When a unit investment trust is formed, there is a pre-determined expiration date. In the case of a trust containing debt securities, the trust expires when the securities mature. In the case of an equity trust, the date is fixed. There is no management fee because there is no ongoing management of a fixed portfolio. Both UITs and mutual funds issue redeemable securities.

An accumulation unit in a variable annuity contract is A) none of these. B) an accounting measure used to determine the contract owner's interest in the separate account. C) fixed in value until the holder retires. D) an accounting measure used to determine payments to the owner of the variable annuity.

B Explanation When money is deposited into the annuity, it is purchasing accumulation units.

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) $25,000 B) $65,000 C) $75,000 D) $15,000 A customer wanting to invest in an oil and gas limited partnership wants to know what her cost basis would be for tax purposes. While there can be a number of variables, cost basis for a limited partner (LP) is best defined as A) cash investment made plus recourse debt minus distributions. B) recourse debt minus cash contributions. C) noncash contribution plus nonrecourse debt minus recourse debt. D) cash investment made minus distributions.

B Explanation 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. A Explanation Cost basis for a limited partner is defined as investment made (cash contributions) plus recourse debt (debt the LP is responsible for) minus distributions. Nonrecourse debt would only be included for real estate programs. Real estate programs are the only types where LPs can be responsible for both recourse and nonrecourse debt.

It would be expected that your firm would employ heightened suitability standards when evaluating recommendations for A) nonvoting common stock. B) structured products. C) sovereign debt. D) cumulative preferred stock.

B Explanation The higher the risk of the investment, the greater the need for checking suitability. Structured products, such as equity-linked notes and exchange-traded notes, are considered complex products. In many cases, FINRA has discovered that registered representatives had inadequate understanding of the investment, leading to their making unsuitable recommendations.

Short-term capital gains are taxed as ordinary income at the investor's marginal tax rate. Long-term capital gains are taxed at lower tax rates. An investor establishes a $5,000 position by purchasing 100 shares at $50 per share. She then sells all the shares six months later at $60 per share. Her taxable consequences are A) a $6,000 short-term capital gain. B) a $1,000 long-term capital gain. C) a $1,000 short-term capital gain. D) a $1,000 short-term capital loss.

C

The real value of property within the city limits is $100 million. The city uses a 50% assessment rate. A 10 mill tax rate will provide tax revenues of A) $1,000,000. B) $5,000. C) $500,000. D) $50,000.

C Explanation 1 mill = $0.001. 10 mills = 0.01 (10 × 0.001). $100 million × 50% assessment rate = $50 million. $50,000,000 × 0.01 = $500,000.

A retiree is paid an annual amount equal to 30% of the average of his last three years' salary. Which of the following retirement plans offers this type of payment? A) Defined contribution B) Profit-sharing C) Defined benefit D) Deferred compensation

C Explanation A defined benefit retirement plan establishes, in advance, the payout to be received by the retiree.

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

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

If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as A) a utilities fund. B) a closed-end company. C) a unit investment trust. D) a growth fund.

C Explanation A unit investment trust issues shares that represent units of a particular portfolio; management has no authority—or only limited authority—to change the portfolio. The portfolio is fixed, not traded.

A customer opening a margin account must be supplied with a special margin risk disclosure. Which of the following are specific risks disclosed? Customers are not entitled to choose which securities can be sold if a maintenance call is not met. Customers can lose more money than initially deposited. Customers are not entitled to an extension of time to meet a margin call. Firms can increase their in-house margin requirements without advance notice. A) I, and IV B) II and III C) I, II, III and IV D) II, III and IV

C Explanation All of these are part of the margin risk disclosure document.

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

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

Probably the most significant difference between a business development company (BDC) and any other investment company registered under the Investment Company Act of 1940 is that a BDC A) is required to file annual reports with the SEC. B) qualifies for special tax treatment by distributing at least 90% of its net investment income to owners. C) makes available significant managerial assistance to the investments in their portfolio. D) issues shares that trade actively in the secondary markets.

C Explanation All other registered investment companies are passive investors. That is, they do not take an active role in the management of the companies held in their portfolios. The purpose behind BDCs is just that - help small companies with management issues. BDCs, like most other investment companies, qualify as regulated investment companies by distributing at least 90% of their net investment income. Doing so enables them to avoid tax on the distribution. Like closed-end funds and ETFs, shares of BDCs trade actively in the secondary markets. Many trade on the NYSE and the Nasdaq Stock Market, while others trade OTC. As do all registered investment companies, BDCs file annual reports with the SEC.

A technical analyst would consider which of the following indicators to be bullish? A) A head and shoulders top formation B) A stock reaching its resistance level C) An increase to the short interest D) A stock trading below its 50-day moving average Which of the following would give a bearish sign to a technical analyst? A) A head and shoulders bottom pattern B) An increase in odd-lot purchases C) A stock dropping below its resistance level D) An increase in the short interest An inverted head and shoulders formation would mean which of the following to a chartist? A) A reversal of an uptrend B) A bear market C) A bull market D) A reversal of a downtrend

C Explanation Although it seems counterintuitive, as the number of outstanding shares sold short increases, technical analysts consider that to be a bullish sign. One day, those short positions will have to be covered and that high demand for the stock will push the price up. When a stock reaches its resistance level, it is going to make a retreat (bearish). It is only when there is a breakout above the resistance that the feeling is bullish. A head and shoulders top indicates that the market has reached a top. Which direction does one go from the top? Down (bearish). Trading below a moving average is a bearish indicator. B Explanation Odd lots (less than 100 shares) are bought and sold almost exclusively by unsophisticated investors. Technicians believe them to always be on the wrong side of the market. When the odd lotters are buying, it is time to sell (bearish). High short interest is bullish. A head and shoulders bottom indicates that the stock has bottomed and is on its way back up (bullish). It would be bearish if a stock's price fell below the support level. D Explanation To chartists, head and shoulders formations indicate the reversal of market trends. An inverted formation would forecast the reversal of a downtrend. A head and shoulder's top formation would forecast the reversal of an uptrend.

Which of the following describe a securities exchange? Prices are set by negotiation between interested parties. The highest bid and the lowest offer prevail. Only listed securities can be traded. Minimum prices are established at the beginning of the day. A) II and IV B) I and IV C) II and III D) I and III

C Explanation An exchange is not a negotiated market but an auction market in which securities listed on that exchange are traded. No minimum price is set for securities. Rather, the highest bid and the lowest offer prevail.

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

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

Which of the following could an analyst use to establish the rate of return on a direct participation program (DPP)? Present value Internal rate of return Yield to maturity First-in, first-out A) III and IV B) II and III C) I and II D) I and IV

C Explanation Analysts use both present value and internal rate of return to establish a DPP's rate of return. Both involve assumptions based on future cash flows generated by the program.

Interest income from all of the following are exempt from state and local taxation except A) Treasury bills. B) Treasury bonds. C) FNMA mortgage-backed issues. D) Series EE savings bonds.

C Explanation As a general rule, the interest income from U.S. government and agency securities is subject to federal taxation only; it is generally exempt from state and local taxation. However, the interest income from mortgage-backed securities is fully taxable.

The term high-yield bond would apply to a bond with a Moody's rating of A) BBB. B) BB. C) Ba. D) Baa.

C Explanation High-yield bonds are those whose ratings fall below investment grade. Investment grade is the top four. Using Moody's descriptions, ratings run from Aaa to Aa to A to Baa to Ba to B and then below. The first rating below the top four is Ba. That is equivalent to a BB rating from Standard & Poor's (but the question asks specifically about Moody's).

All of the following are characteristics of a direct participation program (DPP) except A) the most common structure used for a direct participation program is the limited partnership. B) its revenue, deductions, and tax credits are proportionally given to investors. C) it pays federal income taxes. D) its revenue, deductions, and tax credits are reported to the IRS.

C Explanation As long as a direct participation program avoids at least two of the four characteristics of a corporation, it can remain a reporting-only entity to the IRS. That means it does not pay federal income taxes. Revenue, deductions, and tax credits (if any) are reported the IRS on Form 1065 and distributed proportionally to the investors on the Schedule K-1.

XYZ Corporation has a market price of $45 per share and earnings per share (EPS) of $3 when XYZ announces a 3-for-1 split. After the split, the price-to-earnings (P/E) ratio of XYZ will be A) 5. B) 3. C) 15. D) 45.

C Explanation Before the split, the company had a P/E ratio of 15 ($45 per share / $3). After the split, the price per share and the EPS drop in the same proportion, leaving the P/E ratio unchanged (new price = $15, new EPS = $1).

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

C Explanation 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.

When conducting a discussion with a client about the merits of investing in a direct participation program, all of the following could be tax advantages except accelerated depreciation. depletion allowances. recapture of depreciation. tangible drilling expenses. A) II and III B) I and II C) III and IV D) I and IV

C Explanation Depreciation is the deduction against income representing the cost recovery of certain fixed assets. When one of those assets is sold for more than the straight-line depreciated value, the excess is recaptured as ordinary income. Only intangible drilling expenses benefit the limited partner.

The interest from which of the following bonds is subject to federal income tax? State of Nebraska City of Duluth Treasury notes Federal National Mortgage Association (FNMA) A) I and III B) I and II C) III and IV D) II and IV

C Explanation Direct federal debt, such as a Treasury note, is subject to federal income tax but exempt from state tax. FNMA bonds are subject to federal, state, and local taxes. State and city bonds, being municipals, are exempt from federal income tax.

Features of an employee stock purchase program (ESPP) include all of the following except A) participants can sell the stock at any time. B) contributions are a percentage of pre-tax income. C) contributions are made with pre-tax dollars. D) the purchase price is discounted.

C Explanation Employee stock purchase plans (ESPPs) are not qualified plans. That means that the employee purchases the stock with after-tax dollars. For example, an individual has a monthly salary of $5,000 and elects to contribute 10% of gross salary to the plan. The employer will take $500 per month out of the paycheck after subtracting withholding tax and Social Security contributions and any other deductions. Before enrolling in the plan, this employee's monthly take-home pay might have been $3,700. Now it will be $3,200.

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

C Explanation FINRA Rule 2310 limits compensation on the sale of a DPP to 10% of the offering price. That is the largest component of the offering expenses. Those are limited to 15% of the offering. DPPs are not covered by the 5% policy. Therefore, of the $100,000 invested, the business (the equipment leasing program) must receive at least $85,000 ($100,000 minus the maximum offering expenses of $15,000). If this question was about a DPP roll-up, then there is 2% maximum to the member if recommending the client vote in favor of the roll-up.

Which of the following statements regarding the Government National Mortgage Association (GNMA) is true? A) GNMA approves residential mortgages for home buyers. B) GNMA originates loans to home buyers and sells the mortgage-backed securities to private lending institutions. C) Private lending institutions approved by GNMA originate eligible loans and sell the mortgage-backed securities to investors. D) Lending institutions apply to GNMA for funds to lend to residential home buyers.

C Explanation GNMA is a government-owned corporation that approves private lending institutions, such as banks and mortgage companies, to originate eligible loans, pool them into securities, and sell the GNMA mortgage-backed securities to investors. GNMA does not originate loans, and it does not issue or sell securities.

Which of the following best describes a growth investment? A) Both principal and accumulating interest and dividends increase over time. B) Investment appreciation is tax deferred. C) The value of the investment increases over time. D) Only interest and dividends are reinvested. If an investor practices value investing, which of the following stock types is he least likely to purchase? A) A stock that is presently selling for two-thirds of net current assets B) A stock that has exhibited a high dividend yield in the past C) A stock with an above-average price-to-earnings (P/E) ratio D) A stock with a low (P/E) ratio Buying stocks with high price-to-earnings (P/E) ratios normally reflects which of the following investment styles? A) Growth B) Turnaround C) Value D) Special situations Growth companies tend to have all of the following characteristics except A) potential investment return from capital gains rather than income. B) low dividend payout ratios. C) low price-to-earnings (P/E) ratios. D) a high earnings retention ratio.

C Explanation Growth refers to an increase in an investment's value over time. Interest and dividends are income. C Explanation A growth investor looks for stocks with above-average (P/E) ratios. Conversely, a value investor focuses on stocks with low P/E ratios, a low price-to-book value, and historically high dividend yields. A Explanation The purchase of stocks with high P/E ratios represents a growth investment style. Growth-oriented investors will pay for high P/E ratios. Value investment style is associated with the purchase of low P/E stocks or stocks trading below their intrinsic value. C Growth companies have high P/E ratios and a low dividend payout ratio because they retain most, if not all, of their earnings. Investors anticipating fast growth bid up prices, so P/E ratios tend to be high. Growth companies retain most of their earnings to fund future growth. Investors select growth companies for capital gain potential, not for investment income.

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) an initial public offering for shares of a closed-end management company. C) an initial public offering for common shares of Amalgamated Investments, a holding company. D) certificates issued by a face amount certificate company.

C Explanation 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 customer purchases an XYZ municipal bond at 108. It is scheduled to mature in 16 years. After owning the bond for 10 years, she sells the bond at 102. What capital gain or loss must she report for tax purposes at the time of the sale? A) $10 gain B) $20 gain C) $10 loss D) $60 loss

C Explanation If a municipal bond is purchased at a premium, the premium must be amortized over the time until maturity. An $80 premium on a 16-year municipal bond indicates that $5 will be amortized each year ($80 / 16 = $5). Ten years at $5 per year is $50 of amortization. Therefore, after 10 years, the tax basis would be $1,080 minus $50, or $1,030 (103). Because the sale was for 102 ($1,020), the customer has a $10 loss on one bond.

In general, FINRA rules prohibit member firms from improper use of customer funds. One example is intentionally holding up an account transfer. Another is holding on to funds that belong to the customer. One of the features of FINRA Rule 2165 dealing with senior exploitation is the ability of a member firm to place a temporary hold on disbursements from the account of a specified adult. This serves as a safe harbor for funds held in the manner described above. A member relying on this rule must A) place temporary holds on disbursements of funds or securities from the accounts of specified adults whenever there is suspected exploitation. B) segregate customer funds from those of the firm to avoid commingling of assets. C) develop and document training policies or programs reasonably designed to ensure that associated persons comply with the requirements of this rule. D) report all temporary holds to FINRA within 15 days of the end of the month in which the hold took place.

C Explanation In FINRA's eyes, this is all about making sure that associated persons of the firm are adequately (and frequently) trained. Although customer and firm assets must be segregated, that is not part of the senior exploitation rule. The rule permits, but does not require, that these holds be placed on disbursements from the affected accounts−it is voluntary. There is no reporting of this activity, but detailed reports must be made and retained, containing the relevant information leading to the decision to enforce the hold.

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

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

A municipal A & O bond is issued on October 1, 2010, with a 10-year stated maturity. If a trade in this bond settles on April 1, 2020, how many days' worth of accrued interest will be added to the price of the bond? A) 1 B) 180 C) 0 D) 90

C Explanation Interest on a municipal bond begins to accrue on the previous payment date and ends the day before settlement date. Always assume a bond pays interest on the first of the month unless told differently. In this case, interest is payable on April 1 and October 1 each year. Whenever a bond trade settles on a payment date, it trades flat (without accrued interest).

Interest rate risk is intrinsic to all types of fixed-income investments, including debt securities and preferred stock. When interest rates go up, market prices decline. Although not commonly associated with common stock, some common stock investments are subject to interest rate risk. The common stock of which of the following companies would be most affected by interest rate risk? A) Common stock shares of a company that has recently filed for bankruptcy B) Common stock shares of investment company growth funds C) Common stock shares of public utility companies D) Common stock shares of ABC High Tech Company

C Explanation Interest rate risk affects the shares of public utility common stock in two ways. First, for most investors, public utility stocks are attractive because of their dividend yield. Therefore, if market interest rates rise, unless the utility can increases the dividend, the price of the stock will decline. That is where the second part comes into play. Public utilities are known for their highly leveraged capital structures. Put simply, they borrow a lot of money. An increase to market interest rates will likely cause their borrowing expenses to rise. With increased expenses, earnings fall and that can lead to a reduction to the dividend payout. The primary factor affecting the market price of shares of growth companies is the future expectations of earnings growth for these companies. Therefore, their market prices are not correlated with current interest rate changes. In addition, these companies rarely pay much, if any, dividend. As stated in the question, interest rate risk applies to companies paying income. Bankrupt companies do not pay dividends. High tech companies typically have very little debt in their capital structure and rarely pay dividends, so their common stock prices are not interest rate sensitive.

As a registered representative, it is important to be able to distinguish between investment goals and investment objectives. Which of the following would be an investment objective rather than an investment goal? A) Generating ample funds for retirement B) Leaving a financial legacy C) Preserving capital D) Saving for a child's education

C Explanation Just as there are three primary colors, there are three primary investment objectives. Those three are growth, income, and capital preservation. Investors use those objectives to reach their goals. For example, a 40-year-old whose goal is ample funds for retirement will have growth of capital as the primary objective. Someone who is already retired and wishes to have the funds to pay the bills will have income as the investment objective.

In which of the following will a change in interest rates cause the greatest price fluctuation? A) 7% AA-rated one-year municipal note B) Series EE bond C) 7% 30-year U.S. Treasury bond D) 7% AAA-rated corporate bond with eight years until maturity

C Explanation Price fluctuations are the greatest in bonds with the longest terms to maturity. The riskier the instrument, the more price volatility. Long-term bonds have greater risk than short-term bonds.

A limited partner (LP) invests $100,000 in a movie production limited partnership with a nonrecourse note for $300,000. The partnership liquidates, and the LP receives $100,000. His loss, for tax purposes, is A) $300,000. B) $200,000. C) $0. D) $100,000. A customer invests $20,000 in a direct participation program and signs a recourse note for $50,000. During the first year of operation, the customer receives a cash distribution of $15,000 from the partnership. At year's end, the customer receives a K-1 statement reporting his share of partnership losses of $75,000. How much of the loss may the customer deduct from passive income? A) $35,000 B) $0 C) $75,000 D) $55,000

C Explanation LPs are liable for their investments and any shares of recourse debt. They are not liable for nonrecourse debt. Because the LP received the full amount of his original investment at the liquidation of the partnership, he has no loss to declare. D Explanation A limited partner can only deduct partnership losses to the extent of his basis. To determine basis, add the original investment ($20,000) to any recourse debt assumed by the investor ($50,000). Recourse debt adds to basis as the partner is liable for this amount. Cash distributions received reduce basis ($15,000). At year's end, the investor's basis and the amount he can deduct from passive income is $55,000.

A real estate limited partnership is created for $800,000 with 1 general partner and 10 limited partners. Each of the limited partners has an equal 10% share. The proceeds are used to purchase an office building for $2 million. The additional financing is provided by a nonrecourse bank loan. Economic conditions cause the occupancy rate to fall dramatically, and the partnership is dissolved as insolvent. Each limited partner may claim a loss of A) $120,000. B) $80,000. C) $200,000. D) $2,000,000.

C Explanation Losses may only be claimed to the extent of tax basis. The initial $800,000 was divided 10 ways, so each LP had a basis of $80,000. To this was added the share of the financing of $1.2 million. That is another $120,000 basis (10% of $1.2milion) bringing the total to $200,000 ($80,000 + $120,000). That is the maximum loss that can be claimed. It is important to note that nonrecourse financing adds to basis only in RELPs. Because the loan adds to the basis of all LPs equally, you could also solve this by taking the total $2 million investment and dividing it by 10 to arrive at the same $200,000.

A joint account could be opened for any of the following except A) two partners in a limited partnership. B) a corporation. C) a parent and minor child. D) three business associates.

C Explanation Minor children cannot be a party to any account except an UGMA or UTMA.

One of your customers would like to purchase a government agency security for the UTMA account of her daughter. The daughter worked in construction over the summer and would like to use $1,275 of her savings for the purchase. Securities issued by which of these agencies could be purchased for this account? A) Federal Farm Credit System B) Student Loan Marketing Association C) Federal National Mortgage Association D) Federal Home Loan Mortgage Corporation

C Explanation Of this group, the only agency that would be able to sell $1,275 of securities is Fannie Mae. Their securities are available with a minimum denomination of $1,000 and then increments of $1. FHLMC also has the $1,000 initial minimum, but with $1,000 increments. The same numbers apply to the FCS, and Sallie Mae's minimum is $10,000. Another agency that would have met the investor's need is GNMA.

A 38-year-old investor places $25,000 into a single premium deferred variable annuity. Twenty years later, with the account valued at $72,000, the investor withdraws $25,000. If the investor is in the 25% marginal income tax bracket, the total tax liability is A) $6,250. B) $0.00 C) $8,750 D) $17,500.

C Explanation Only the deferred growth is taxable on a LIFO (last-in, first-out) basis. In this case, it is the amount of the withdrawal in excess of the cost of $25,000. Using LIFO, all of the withdrawal is part of the $47,000 in earnings that have been generated. That $25,000 is taxed at the marginal rate of 25%. Furthermore, because the investor is under 59½ (38 + 20 = 58), there is the additional 10% penalty tax. Effectively, this is a 35% tax on $25,000. Remember, all annuities are nonqualified unless stated otherwise in the question.

JJQQ trades in the Nasdaq Stock Market and has announced a tender offer for 10% of the outstanding shares of the company. The tendering price will be set at a 10% premium to the stock's closing price as of Friday, September 1, the cutoff date to tender shares. Investors performing all of these actions would be able to take advantage of the tender offer unless they A) bought JJQQ common stock for cash settlement on September 1. B) tendered JJQQ convertible bonds on Friday, September 1. C) bought call options for regular way settlement on Wednesday, August 30. D) purchased the JJQQ stock on Thursday, August 31, for regular way settlement.

C Explanation Participation in a tender offer (an offer to buy your shares) requires that investors must have engaged in an irrevocable action to acquire the common stock by the time of the cutoff for the tender offer. In this question, that date is September 1. The purchase of JJQQ call options provides the right, but not the obligation, to purchase the stock. In order to participate in the tender offer, the holder of a call option would have to have exercised the option by the cutoff date of the tender offer. The action does not require that the customer's transaction (to acquire the stock or the option) has settled by the tender cutoff date. Similarly, an investor who tendered a convertible bond has also engaged in an action to acquire the JJQQ common stock.

Disregarding commissions, and investor purchasing $10,000 face amount of Treasury notes at a price of 98.12 would expect to pay A) $9,812.00. B) $983.75. C) $9,837.50. D) $981.20.

C Explanation Please note that the purchase is not for $1,000, but for $10,000. Treasury notes (and bonds) are quoted in 32nds. This quote of 98.12 is 98 12/32 or 98 3/8% of $10,000.

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

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

Progressive taxes would include personal income tax. gift taxes. estate taxes. excise taxes. A) II, III, and IV B) I and III C) I, II, and III D) I and II

C Explanation Progressive taxes are those where the rate of taxation increases as the dollars being taxed increase. Personal income tax, while not as progressive as it was before the 1986 reform, is still considered a progressive tax because the highest tax rate is levied against the highest earnings. Gift taxes and estate taxes are highly progressive, but excise taxes, such as fuel tax and transportation tax, are a fixed rate, and therefore, would not be considered progressive.

SEC Regulation 14E requires that tender offers be open for at least A) 30 calendar days. B) 10 business days. C) 20 business days. D) 15 calendar days. Under SEC Rule 10b-13, a company that is the target of a tender offer must provide its shareholders with a statement indicating acceptance or rejection of the offer within how many business days of the announcement? A) 5 B) 20 C) 15 D) 10

C Explanation Regulation 14E requires that tender offers be open for at least 20 business days and remain open for at least 10 business days after any change to the offering price. D Explanation Once a tender offer is announced, the target company, within 10 business days of the announcement, must provide its shareholders with a statement indicating acceptance or rejection of the offer and the reasons for the position taken.

One of your customers has made periodic purchases of shares of the Castel Growth Fund over the past several years. The customer has decided to take a profit and sell some of those shares. When the investor's tax return is prepared for the year in which the sale of those shares occurs, it is necessary to establish a cost basis of the shares sold. Which of the following methods is available for mutual funds, that is not available for determining the cost basis of stock? A) Dollar cost averaging B) FIFO C) Average cost basis D) Share identification For the purpose of reporting sales to the IRS, the method available to investors by the IRS that offers the most flexibility in anticipation of the investor's year-end tax needs is A) none of these. B) share identification. C) first in, first out. D) average cost basis.

C Explanation The Internal Revenue Service allows using the average cost basis to determine the cost basis of redeemed mutual fund shares. Investors cannot use this method when selling shares of any security other than a mutual fund. The other methods of determining cost basis are FIFO and share identification. FIFO is the default method used by the IRS if an investor fails to choose. Share identification can frequently result in a lower tax bill, especially if the security was purchased at different intervals at varying prices. B Explanation Share identification is the most flexible of the three methods. The investor keeps track of the cost of each share purchased and specifies which shares to sell based on his anticipated year-end tax needs. For investors, the idea is to minimize tax liability, if possible, by limiting gains or maximizing loses in anticipation of what one's year-end tax liability might be.

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) the first 30 days after the policy was delivered to the owner. B) the first 24 months after the policy was delivered to the owner. C) 45 days from the execution of the application, or for 10 days from the time the owner receives the policy, whichever is longer. D) 10 days from the execution of the application, or for 45 days from the time the owner receives the policy, whichever is longer.

C Explanation The Investment Company Act of 1940 specifies a free-look period for the purchaser of a variable life insurance policy. That period is the longer of 45 days after the execution of the application or 10 days after the actual policy is delivered to the owner. The 24 months is the minimum time limit for the exchange of the variable policy into another form of permanent insurance.

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

C Explanation 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.

A corporation in the 35% tax bracket reports operating income of $4 million for the year. The firm also received $200,000 in preferred dividends from domestic corporations. Assuming no other items of income or expense, what is the company's tax liability? A) $1,360,000 B) $1,756,000 C) $1,435,000 D) $1,370,200

C Explanation The corporation's $4 million operating income is taxed at a rate of 35%. For tax purposes, corporations can exclude 50% of all dividends received from domestic common and preferred stocks. Thus, 50% of the $200,000 received from preferred dividends is taxed at the 35% tax rate ($200,000 × 50% = $100,000). The $4 million in income plus the $100,000 in taxable dividends equals $4.1 million, and $4,100,000 multiplied by a 35% tax rate equals taxes of $1,435,000.

Fundamental analysts rely heavily on information found in a corporation's financial statements. One of the most often used calculations is that of the current ratio. The analyst calculates the current ratio by? What is it a measurement of? A) subtracting the current liabilities from the current assets. B) dividing the current liabilities by the current assets. C) dividing the current assets by the current liabilities. D) multiplying the current assets times the current liabilities.

C Explanation The current ratio is the currents assets of a company divided by its current liabilities. It is one measurement of the liquidity of a business. A related liquidity measurement is the working capital. The working capital is the current assets minus the current liabilities.

A mutual fund invested in bonds with medium-length maturities. As the bonds matured, the fund reinvested the proceeds and purchased long-term bonds with maturities of up to 20 years. What might have happened to the fund if the reinvestment had occurred during a period when interest rates were rising? Decrease in yield Decrease in income Increase in yield Increase in income A) I and IV B) I and II C) III and IV D) II and III

C Explanation The longer a bond's maturity, the greater the risk to the investor. As a result, long-term bonds generally pay higher interest rates than medium- or short-term bonds. If a fund replaces medium-term bonds with long-term bonds, the bonds would pay higher interest rates, and thus generate more income. Additionally, as interest rates increase, so do yields.

Your broker-dealer acts as a prime broker for ABC Fund. In this arrangement, your broker-dealer is likely providing which of the following services? Execution of all transactions for the fund portfolio Clearing services Lending for trades done on margin Ensuring that all exchange trading rules are complied with A) I and III B) I and IV C) II and III D) II and IV

C Explanation The prime broker would supply clearing services and lending services for a marginable transaction, as well as back-office support such as cash management, account statements, and transaction processing. Actual executions and abiding by all exchange rules when transactions occur is the responsibility of the executing broker-dealers.

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

C Explanation This investor is not concerned about income. This would eliminate the utility and preferred share funds (Fund Z and Fund W). Of the remaining two funds, Fund X and Fund Y both have the same general objective, but the one with the lower turnover ratio would generate less tax liability. The portfolio turnover ratio reflects a fund's holding period of securities being bought and sold by the fund manager. If a fund has a turnover ratio of 100%, the entire portfolio is likely to turn over in a year, and capital gains distributions are likely to be short term and subject to the maximum tax rate. That increases the tax liability, and therefore, is not the best option. By contrast, a 25% turnover ratio means the average holding period of the securities in the portfolio is four years. This would mean that any capital gains distributions are more likely to be long term and subject to a lower tax rate.

Your client has purchased shares of VACL at several different times. A view of the client's account ledger indicates the following: 100 shares @$50 on February 12 100 shares @$52 on April 23 200 shares @$49 on May 12 100 shares @$55 on June 28 The client decides to sell 200 shares of the VACL on November 14 of the same year when the price of the stock is $53 per share. Absent any instructions to the contrary, for tax purposes, the client will report a short-term capital A) gain of $800. B) gain of $300. C) gain of $400. D) loss of $200.

C Explanation Unless the client gives specific instructions, the IRS will always use the FIFO method of determining the shares sold. In this case, it would be the 100 purchased in February at $50 and the 100 purchased in April at $52. That is a $300 profit on the February purchase and a $100 profit on the April one. That totals $400. Because all transactions are in the same year, any gain (or loss) is short-term.

An investor purchased a REIT from her broker-dealer in an SEC-registered public offering. The following year, she asked her registered representative for a quote. When told there is no current quote available, you would gather that this is A) a hybrid REIT. B) an OTC traded REIT. C) an untraded REIT. D) an unregistered REIT.

C Explanation Untraded or unlisted REITs are those not traded in the secondary markets (exchanges or OTC). Therefore, there is limited to no liquidity. As described in the question, this security is registered with the SEC, so it is not a private placement. Hybrid REITs are those that take equity and debt positions. With this lack of liquidity, you can expect suitability standards to be higher, and the trades would be subject to increased regulatory review.

If a customer of your firm receives stock from the estate of her mother, the stock's cost basis in the hands of the customer is A) the original cost of the stock adjusted for any estate taxes paid. B) the market value at date of distribution to the customer. C) the market value at date of death. D) the original cost of the stock.

C Explanation When securities are inherited, the heir receives a cost basis calculated as of the deceased party's date of death.

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) $34.00 C) $28.75 D) $46.00

D 1000 divided by 40 = 25 Parity: 1150MV divided by 25Shares = $46

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) $42 B) $40 C) $32 D) $48

D Explanation $1,000 (par) + 20% = $1,200 / 25 shares = $48

The current yield on a bond with a coupon rate of 7.5% currently selling at 105½ is approximately A) 6.5%. B) 7.5%. C) 8%. D) 7.1%.

D Explanation A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 / $1,055 = 7.109% or approximately 7.1%.

A May and November Treasury bond is traded the regular way on Wednesday, June 8. The number of days of accrued interest is A) 38. B) 45. C) 44. D) 39.

D Explanation Accrued interest on government bonds is based on actual days in a year. Settlement occurs on the next business day. This bond pays interest in May and November, with the most recent payment on May 1. Interest has accrued on this bond for 31 days in May and 8 days in June, for a total of 39 days. The settlement date is Thursday, June 9.

Your new customer lists tax-free income as an investment objective but notes that he will need access to $50,000 within the next four to six months for a down payment on a vacation home he is purchasing. To meet the objective of tax-free income, a registered representative considers municipal securities for the $50,000. Which of the following municipal securities recommendations would be the least suitable? A) A bond anticipation note (BAN) B) A tax anticipation note (TAN) C) A variable-rate demand note (VRDN) D) An auction rate security (ARS)

D Explanation An ARS is a long-term instrument tied to short-term interest rates, and therefore, would not be suitable for someone with a short-term time horizon. Each of the remaining answer choices are short-term notes aligning better with the customer's need to access the funds in the next four to six months.

Which of the following callable municipal bonds trading on a 7% basis is most likely to be called? A) 6.5% coupon, callable at 105 in 2030 B) 6.5% coupon, callable at 100 in 2030 C) 7.5% coupon, callable at 105 in 2030 D) 7.5% coupon, callable at 100 in 2030

D Explanation An issuer will call the higher coupon bonds before calling the lower coupon bonds. Of the two bonds with coupons of 7.5%, the one with the lower call price will likely be called first.

When opening an options account, the customer must be provided with A) the options risk disclosure document. B) the options prospectus. C) the options arbitration agreement. D) the options disclosure document (ODD).

D Explanation Any prospective or new options customer must receive a copy of a booklet titled "Characteristics and Risks of Standardized Options." In every day usage (and on the exam), it is referred to as the options disclosure document (ODD). It serves the purpose of a prospectus and discloses the risks of investing in options. This is another case where you must select the most accurate choice.

An investor in fixed-income debt securities wishing to eliminate interest rate risk could do so by A) limiting purchases to investment-grade debt. B) purchasing a bond fund rather than individual bonds. C) increasing the duration. D) holding the securities until they mature.

D Explanation As we know, when interest rates go up, bond prices go down. Therefore, bondholders are at risk to their principal when interest rates change. However, there is no interest rate risk to the principal if the bond is held to maturity. Regardless of the current market interest rates, the bond pays off at par value. The risk is highest as the duration lengthens. Because bond funds do not have a maturity date, they cannot avoid this risk. The rating (quality) is irrelevant; even Treasury bonds are affected by changes in interest rates.

An example of a taxable bond issued by a municipal government is A) a tax anticipation note (TAN). B) a general obligation bond (GO). C) Series EE bonds. D) a Build America Bond (BAB).

D Explanation BABs are municipal issues created under the Economic Recovery and Reinvestment Act of 2009 to assist in reducing the cost of issuing municipalities and to stimulate the economy. Bonds to fund municipal projects have traditionally been sold in the tax-exempt arena, but BABs are taxable obligations.

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) $45.45. D) $22.73.

D Explanation 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.

With bonds subject to a gross revenue pledge, the first priority will be to pay A) the first lien on the property. B) operation and maintenance. C) the sinking or surplus fund. D) bond interest and principal.

D Explanation Bonds subject to a gross revenue pledge (gross lien revenue bonds) are backed by the gross revenues of the facility (meaning revenues before expenses). In this case, the first money disbursed is for payment of interest and principal. However, most revenue bonds only pledge net revenues to pay off revenue bonds. In the more common net revenue pledge, the first priority is operation and maintenance; the second priority is interest and principal.

Your client has purchased shares of VACL at several different times. A view of the client's account ledger indicates the following: 100 shares @$50 on February 12 100 shares @$52 on April 23 200 shares @$49 on May 12 100 shares @$55 on June 28 The client decides to sell 200 shares of the VACL on November 14 of the same year when the price of the stock is $53 per share. Tax consequences would be minimized if the investor A) used the LIFO method. B) used the FIFO method. C) used the average cost basis. D) sold the shares purchased in June at $55 and the shares purchased in April at $52.

D Explanation By using the identified cost method, the investor would sell the highest cost purchases. This would result in the lowest taxable gain (or perhaps even a loss). Average cost is only available for mutual funds.

All of the following statements regarding 529 plans are true except A) anyone can make a contribution on behalf of a beneficiary. B) earnings accumulate tax free if the money is used for qualified educational purposes. C) a beneficiary of a 529 plan may also be the beneficiary of a Coverdell Education Savings Account. D) contributions are made with pretax dollars at the federal level.

D Explanation Contributions are made with after-tax dollars. Withdrawals are tax free at the federal level if used for qualified higher education expenses.

Which of the following secures an industrial revenue bond (IDR)? A) State taxes B) Trustee guarantees C) Municipal taxes D) Corporate net lease payments

D Explanation Corporate net leases back up IDRs, which means the credit of the bond is as good as the credit of the corporation that signs the net lease.

All of the following are true regarding nonqualified deferred compensation plans except A) the plans need not be offered to all employees. B) IRS approval is not needed for deferred compensation plans. C) income taxes on compensation are not due until constructive receipt. D) employees may use accumulated funds as collateral for a bank loan.

D Explanation Deferred compensation is a promise made by an employer to defer a certain amount of an employee's salary upon retirement. The employee has no right to the money until retirement, death, or disability, and thus cannot use it as collateral.

Which of the following risks would benefit most from portfolio diversification? A) Purchasing power risk B) Market risk C) Interest rate risk D) Default risk

D Explanation Diversification works best with nonsystematic (unsystematic) risks. Default risk, the possibility of losing money when a specific company cannot pay off its debts, is a common case where spreading the risk around (diversifying) reduces risk. The other choices are all systematic risk, and diversification is not very useful for them.

A customer is interested in an exchange-traded fund (ETF). With regard to the trading of ETFs, the customer should be aware that ETFs can be purchased throughout the trading day. ETFs use forward pricing, the same as mutual funds. real-time quotes are available for ETFs. the net asset value (NAV) calculated at the end of the day, plus a sales charge, will equal the trading price A) I and IV B) II and III C) II and IV D) I and III

D Explanation ETFs can be traded throughout the trading day. Changing price quotes are available in real time as investors buy and sell. Although ETFs have a NAV that is calculated on the basis of the portfolio holdings, the trading price is determined by supply and demand in the open market, with customers paying commissions.

A sharing arrangement in which only deductible costs are apportioned to the investor, with the sponsor bearing all capitalized costs is called A) a reversionary sharing arrangement. B) an overriding royalty arrangement. C) a carried interest. D) a functional allocation. The ___________ partners receive the immediate tax write-offs from the intangible drilling costs, whereas the ____________ partners receive continued write-offs from the tangible costs over the course of several years.

D Explanation 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). The LPs receive the immediate tax write-offs from the intangible drilling costs, whereas the GPs receive continued write-offs from the tangible costs over the course of several years.

An investor desiring a limited partnership investment with capital gains potential would most likely select one investing in A) shopping centers. B) equipment leasing. C) oil and gas. D) raw land.

D Explanation Historically, raw land has been a source of appreciation. Shopping centers might appreciate in value but are oriented more toward current income. Equipment leasing offers income, and the asset ultimately depreciates. Oil and gas provide income as well, and the asset ultimately depletes.

Convertible debentures offer which of the following benefits to investors? A) Highest priority in the event of dissolution B) A higher coupon rate than comparable non-convertible debt C) Forced conversion when the underlying stock price increases D) The upside potential of a common stockholder with less downside risk

D Explanation If the price of the underlying stock increases, the holder of the debenture can exercise the conversion privilege and capture that growth. Unlike the stock, as a debt security, the regular periodic interest payments tend to provide a floor below which the price of the debenture will not fall. In exchange for this benefit, the coupon rate is lower than a comparable non-convertible security. Many of these convertibles have a call feature. If the price of the stock rises, the issuer may decide to call it in and the investor's best option is to convert. This is known as forced conversion and forces the investor in a debt security to own an equity security. Debentures have a lower priority in dissolution than secured bonds.

A term used to define certain alternative forms of debt financing, such as equity-linked notes (ELNs) and exchange-traded notes (ETNs), is? A) combination products. B) high-risk investments. C) principal protected products. D) structured products.

D Explanation In Notice to Members 05-59, FINRA defined a structured product as "securities derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance and/or a foreign currency." The most important thing for you to know for the exam is that these generally carry higher risk than other debt securities. These should be recommended only when the registered representative has a thorough understanding of the product and believes it is suitable for the specific investor. Yes, these are high-risk investments, but that is not the term used to describe them.

A margin account may not be used A) when opening a fee-based account. B) to purchase corporate bonds. C) to purchase listed stocks. D) for retirement accounts.

D Explanation Investors cannot open a margin account for retirement plans. There are other restrictions on margin accounts, including accounts for minors. Listed and many OTC stocks and corporate bonds can be purchased on margin.

Rank the following from safest to most risky. AAA-rated corporate bonds Blue-chip stocks U.S. government securities Tech stocks A) III, II, I, IV B) II, III, IV, I C) I, III, IV, II D) III, I, II, IV

D Explanation It should be obvious that U.S. government securities would be first and tech stocks last. As for options II and III, stocks will fluctuate more in price than highly rated corporate bonds.

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) I and IV C) II and III D) II and IV

D Explanation Like governments, Ginnie Maes are quoted in 1/32nds, but, like corporates, Ginnie Maes compute accrued interest on a 30/360-day basis.

One of your customers owns a limited partnership interest in an oil and gas drilling program. The program was successful in finding oil and is expected to operate at a loss for the next year. The loss flowing through to the limited partner is generated by all of these except A) interest payments on partnership debt. B) accelerated depreciation taken on the drilling equipment. C) depletion on the sale of oil removed from the ground. D) principal repayment on partnership debt.

D Explanation Losses occur when expenses exceed revenues. Principal repayments are not an expense. Interest on debt is a deductible expense. Natural resources deplete and the depletion allowance is an expense similar in concept to depreciation, another expense. From a personal standpoint, compare this to your home mortgage−the interest is a deductible expense, but the portion representing payment of principal is not.

A corporation with an outstanding convertible debenture issue could force conversion by A) decreasing the coupon rate on the debenture to a level where the dividend on the common stock provides a higher return. B) issuing new debentures with a higher coupon rate. C) soliciting proxies from the common shareholders asking them to vote for mandatory conversion. D) publishing an announcement that the debenture holders have thirty days to tender their bonds at the call price.

D Explanation Most convertible debt securities are callable, usually at a price slightly above the par value. When the price of the underlying common stock rises to a point where the converted value of the bond is worth more than the par value, issuers will frequently exercise their call privilege. Because the call price is usually significantly less than the converted value, it is only common sense that the debenture holders will exercise their conversion privilege. For example, when the market price of the common stock is $25 per share, a $1,000 convertible debenture with a conversion ratio of 50 shares per bond, has a conversion value of $1,250 (50 shares time $25 per share). By calling the bonds at the stated call price, perhaps 102 or 103, the company can force the bond holders to convert the bonds. Using our example, why would investors hold on to the bonds knowing that, within about 30 days, they're going to get a check for $1,020 or so for each bond when they could convert and own shares worth $1,250 per bond.

Which of the following statements regarding municipal securities quotations are true? A quotation can be an indication of interest. A quotation cannot be an indication of interest. A quotation can be a one-sided request for a bid or offer (bids wanted and offers wanted). A quotation cannot be a one-sided request for a bid or offer (bids wanted and offers wanted). A) II and IV B) II and III C) I and IV D) I and III

D Explanation Municipal Securities Rulemaking Board rules pertaining to quotations cover all bona fide bids and offers, including one-sided requests for bids wanted and offers wanted, which are considered indications of interest.

When a mutual fund registers with the SEC under the Investment Company Act of 1940, it has the option to elect to be A) open-end or closed-end. B) open-end or unit investment trust. C) diversified or nondiversified. D) an ETF.

D Explanation Mutual funds can be registered as diversified or nondiversified. The term mutual fund will always mean an open-end investment company. A closed-end company may be called a closed-end fund, but not a mutual fund. Although most ETFs are open-end investment companies, they are not mutual funds.

An investor with a large salary, as well as unearned investment income, is two years from retirement. If she wants to shelter a portion of her income, which of the following programs would provide her with substantial initial write-offs? A) Existing housing B) Raw land C) An oil and gas income program D) An oil and gas drilling program

D Explanation Oil and gas drilling programs pass through intangible drillings costs, which the partners may use to reduce passive income.

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 both are taxed on a FIFO basis. D) Withdrawals from variable annuities are taxed on a LIFO basis, while those from variable life are taxed on a FIFO basis.

D Explanation One advantage to withdrawing cash value from a variable life insurance policy is that it receives FIFO treatment. That means there is no tax until the withdrawal reaches the cost basis (premiums paid) of the policy. With annuities, the taxation is LIFO. Therefore, the first money withdrawn is taxable. In addition, if the policyowner is not yet 59, the 10% penalty applies.

All of the following are true of real estate investment trusts (REITs) except A) they must, to qualify under Subchapter M, distribute at least 90% of their net investment income. B) shares are publicly traded. C) they must invest at least 75% of their assets in real estate-related activities. D) they must pass along losses to shareholders.

D Explanation REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their net investment income to their shareholders. While they can pass through income, they cannot pass through any losses; they are not direct participation programs.

Once individuals have passed the Series 7 exam and are now registered as general securities registered representatives, compliance with Regulation BI would allow including which of these on their business card following their name? A) Investment adviser representative B) Financial adviser C) Financial advisor D) Registered representative

D Explanation Regulation BI limits the use of the words adviser or advisor to those who are registered as investment advisers or representatives of those who are. Passing the Series 7 exam allows one to use the term registered representative. Most of our Series 7 students go on to pass the Series 66 exam and become IARs. In that case, investment adviser representative is permitted.

Which of the following would be considered in analyzing the credit worthiness of a revenue bond issuer? Per capita debt Debt service coverage Management Debt to assessed valuation A) I and IV B) I and II C) III and IV D) II and III

D Explanation Revenue bonds are paid out of revenues from a particular project or facility, not from tax revenue. Therefore, debt service coverage and the personnel in charge of managing the facility are important. Overall debt of the issuer would be important in analyzing a general obligation bond backed by the issuer's full faith and credit.

State and local government securities (SLGS) are purchased by A) commercial banks. B) accredited investors. C) institutions. D) state and local governments.

D Explanation SLGS securities are purchased by municipal issuers that are subject to IRS yield restrictions when they invest the proceeds of a prerefunding. The monies placed in escrow are invested in SLGS, which are government securities whose interest rates are arranged to comply with IRS restrictions.

Each of the following are generally used to service state general obligation bond issues except A) motor vehicle license fees. B) sales taxes. C) income taxes. D) real estate taxes.

D Explanation State-issued municipals are backed by state revenues, including sales and income taxes, as well as fees for state-issued licenses and permits. States do not normally levy property (real estate) taxes. Real estate taxes—known as ad valorem taxes—are typically levied by local municipalities such as cities and counties.

Which of the following securities would have a Moody's MIG rating? A) GOs B) T-bills C) BAs D) TANs

D Explanation TANs are tax anticipation notes. These are short-term municipal securities and that is what Moody's MIG ratings represent. MIG stands for Municipal Investment Grade. GOs are rated with the normal letter ratings and BAs (bankers' acceptances) and T-bills are not municipal securities.

Treasury Inflation Protection Securities (TIPS) offer which of the following benefits to an investor? Semiannual adjustments to principal based on the Consumer Price Index (CPI) A guarantee of profit upon sale Interest payments that keep pace with inflation Provide investors with an income they can't outlive A) I and II B) III and IV C) II and III D) I and III

D Explanation TIPS are issued by the government and designed to offer investors inflation protection by adjusting the principal of the TIPS semiannually based on the CPI. In times of inflation, the interest payments increase, and they decrease during times of deflation. No security guarantees a profit upon sale, and only an annuity can guarantee an income for life.

Term bonds are often called dollar bonds because they are quoted in a dollar price. That price is a percentage of par. Serial bonds are quoted on their basis (yield to maturity). A purchaser is going to be quoted based on the dealer's ask price (the bid price is when the customer is selling). The 3s of 2050 means that the coupon is 3% and the maturity date is 2050. An institutional investor is seeking a quote on $2 million of term bonds issued by the City Water Authority. These are the 3s of 2050 and would be quoted A) by yield to maturity. B) using the dealer's bid price. C) by current yield. D) in dollars as a percentage of par.

D Explanation Term bonds are often called dollar bonds because they are quoted in a dollar price. That price is a percentage of par. Serial bonds are quoted on their basis (yield to maturity). A purchaser is going to be quoted based on the dealer's ask price (the bid price is when the customer is selling). The 3s of 2050 means that the coupon is 3% and the maturity date is 2050.

The Bond Buyer's 20-Bond Index reflects A) the average yield of 20 high-quality municipal bonds. B) the average yield of 20 high-quality revenue bonds. C) the average maturity of 20 high-quality municipal bonds. D) the average yield of 20 high-quality general obligation bonds. Information found in The Bond Buyer would include all of the following except A) secondary market volume. B) the 30-day visible supply. C) the placement ratio. D) Revdex. Which of the following is an automated system of delivering information relating to the market for municipal securities? A) INSTINET B) The Blue List C) Thomson's Muni News or Muni Market Monitor (Munifacts) D) The Bond Buyer

D Explanation The Bond Buyer 20-Bond Index is defined as the average yield of 20 general obligation bonds having a rating of A or better and a maturity of 20 years. Bonds that have a rating of AAA and AA are included in the 11-Bond Index. Revenue bond yields are reported in the Revdex 25. Although all but the Revdex include bonds with a 20-year maturity (Revdex is 30 years), it is the yields that are reported, not the average maturities. A Explanation The Bond Buyer is a source of information for new (primary market) municipal bond issues. It contains Revdex, an index for revenue bonds, as well as general obligation bond indexes. Additionally, it includes the 30-day visible supply and the placement ratio. C Explanation Thomson's Muni News or Muni Market Monitor (formerly Munifacts) supplies up-to-the-minute information to its subscribers.

In which of the following investment strategies would it be illegal for a mutual fund's portfolio manager to engage? A) Liquidating a position in shares of a small-cap company B) Taking a long position in shares of a large-cap company C) Going long U.S. Treasury bonds D) Taking a short position in shares of a mid-cap company

D Explanation The Investment Company Act of 1940 prohibits mutual funds from engaging in short selling. The fund's objective will affect the type of securities to be held in the portfolio, but they can only be long positions.

Which of the following is not a correct statement in respect to the at-risk provisions when investing in a direct participation program (DPP)? A) Losses disallowed by the at-risk provisions in any one year may be carried over to following taxable years. B) Qualified nonrecourse financing is excluded from tax basis except in the real estate programs. C) Deductions or losses are limited to the investors' invested capital plus their percentage of partnership liabilities for which they are personally liable. D) The at-risk provisions do not apply to oil and gas exploration programs. A customer buys a real estate limited partnership interest by contributing $20,000 and signing a nonrecourse note for $50,000. The customer's beginning basis is A) $70,000. B) $50,000. C) $30,000. D) $20,000.

D Explanation The at-risk provisions (you can only deduct what you can lose) apply to all DPPs. Real estate has one unique feature in that nonrecourse financing is part of the investor's tax basis. A Explanation Generally, nonrecourse debt does not add to basis because the limited partner is not responsible (at risk) for the repayment of the debt. However, in real estate partnerships, the at-risk rules do not apply, and therefore, add to basis in this type of partnership.

All of the following information is included in a municipal bond resolution except A) an authorization to sell the securities. B) any call provisions that allow the issuer to redeem the bonds before their scheduled maturity. C) restrictive covenants that are binding on the issuer. D) compensation paid to the underwriters.

D Explanation The bond resolution is the document in which the issuer authorizes the issuance of municipal securities. Among other things, the resolution describes the characteristics of the proposed issue and the issuer's duties to the bondholders. Compensation paid to the underwriters would be found in the official statement.

A convertible bond has a conversion price of $40 per share. If the market value of the bond rises to a 12.5-point premium over par, which of the following are true? Conversion ratio is 25:1 Conversion ratio is 28:1 Parity price of the common stock is $42 Parity price of the common stock is $45 A) II and IV B) I and III C) II and III D) I and IV

D Explanation The conversion ratio is computed by dividing par value by the conversion price ($1,000 par / $40 = 25). Parity price of the common stock is computed by dividing the market price of the convertible bond by the conversion ratio ($1,125 / 25 = $45).

The ELLA Distributing Company issued a bond with a nominal yield of 5%. The bond matures in 12 years and is currently trading at 94. The bond's yield to maturity is closest to A) 5.32%. B) 5.00%. C) 4.64%. D) 5.67%.

D Explanation The first point to notice is that the bond is trading at a discount. When bonds trade at a discount, our yield chart and example tells us that the yields, in ascending order, are nominal yield, current yield, yield to maturity, and yield to call. That last one is of no relevance to this question because a call feature is not mentioned anywhere. Therefore, we know that the yield to maturity must be greater than the nominal (coupon) yield of 5%. There are only two choices that are, so if you are running out of time or do not remember how to do this, at least you have a 50% chance. However, 50% doesn't pass the exam, so let's make that 100%. The yield to maturity computation is tricky, but current yield is not. It is simply the coupon divided by the current market price. In our question, that is 5% divided by 94 equals 5.32% (or $50 divided by $940). We know the yield to maturity for a bond selling at a discount is higher than its current yield. That means the correct answer must be greater than 5.32%. If you have a question like this on the actual exam, there will be only one choice higher than the current yield. As shown in the LEM, the YTM calculation goes like this: [annual interest + (discount divided by the number of years to maturity)] divided by the average price of the bond Plugging in the numbers, we get a numerator of $50 + ($60 divided by 12 years) = $50 + $5 = $55. The denominator is ($940 + $1,000) divided by 2 = $1,940 divided by 2 = $970. Solve by dividing $55 by $970 and the answer is 5.67%.

Which of the following investment vehicles has the highest credit risk? A) General obligation bonds B) Ginnie Mae pass-through certificates C) New Housing Authority bonds D) Industrial revenue bonds

D Explanation The industrial revenue bonds would have the highest risk because debt service is the responsibility of the corporation leasing the facility rather than the issuing municipality.

If interest rates increase, the interest payable on outstanding corporate bonds will A) decrease. B) change according to the inverse payout theory. C) increase. D) remain unchanged.

D Explanation The interest payable is the nominal yield, which is stated on the face of the bond. It is the percentage of face value the bond will pay each year, regardless of the prevailing interest rates in the market. It is the market price of bonds—not the interest payable—that responds inversely to changes in interest rates.

A customer is choosing a payout option for a variable annuity. Maximizing monthly income for the rest of his life is the customer's key objective. This annuitant has no living relatives, so beneficiaries are not a concern. Which of the following options available would best meet the needs of this annuitant? A) A life with a 5-year period certain payout option B) A life with a 20-year period certain payout option C) Take random withdrawals from the contract D) A straight life payout option

D Explanation The largest monthly check an annuitant can receive for the rest of his life is generated by a straight life (life income or life only) payout option. Though there is no beneficiary designation during the annuitization, this is not an issue for this annuitant. Life with period certain will produce a smaller check for life because the insurance company will guarantee payments to a beneficiary for a certain time designated in the contract, should the annuitant die within that period. But again, the need to designate beneficiaries is not an issue for this annuitant. Random withdrawals do not guarantee how long the money will last because large withdrawals can deplete the funds before the annuitant dies.

A client invests $100,000 in a tax shelter as a limited partner, giving him a 10% interest in the program. However, the general partners cannot meet the program's expenses. A mortgage balance of $3 million remains, and the property of the program is liquidated for $1 million. How much does the investor get back from his original investment? A) $33,000 B) $10,000 C) $100,000 D) $0

D Explanation The limited partner will not receive any return of his investment. In a failed program, the partnership's creditors are paid first with any sale proceeds—before the limited partners receive any money. Because the limited partners had not signed a recourse agreement, even though the partnership still owes $2 million on the mortgage, the limited partners are not liable for any money beyond their original investments.

Ten municipal bonds were purchased with 9% nominal yield for settlement on February 1, 2015. The maturity date of the bonds is July 1, 2035. What is the number of days of accrued interest on the 10-bond trade? A) 31 B) 29 C) 37 D) 30

D Explanation The maturity month and day will always match one of the two semiannual coupon dates. Because maturity is July 1, the bond pays interest on January 1 and July 1 of each year. With settlement on February 1, the bond accrued interest from January 1 up to, but not including, settlement (30 days).

If stock market indexes, such as the S&P 500 and the Dow Jones Industrial Average, are advancing daily, and the number of advancing stocks relative to declining stocks is falling, a technical analyst will conclude that the market is A) unstable. B) becoming volatile. C) oversold. D) overbought.

D Explanation The momentum of the market advance seems to be easing as the number of advancers to decliners is leveling out. It looks like the decline/advance line is moving in a direction away from advancers. A technical analyst would conclude that the market is overbought and approaching a top.

The CAST Corporation's first mortgage bond has a 5% coupon and a yield to maturity of 7%. The bond is callable in 10 years at 103. The bond is trading at A) a premium. B) the call price. C) par. D) a discount.

D Explanation The only way a bond with a nominal (coupon) rate of 5% can have a yield higher than 5% is by having a price below the par value. This is an example of the inverse relationship between bond prices and their yields. If the yield is above the coupon, the price is below par (a discount). If the yield is below the coupon, the price is above par (a premium). As we say in the LEM, "if you pay more, you get less" and "if you pay less, you get more."

The placement ratio, as shown in The Bond Buyer, represents the dollar value of A) bonds offered divided by bonds placed. B) bonds offered divided by bonds unsold. C) bonds placed divided by bonds unsold. D) bonds placed divided by bonds offered. The placement ratio in The Bond Buyer indicates the relationship for a particular week between the number of bonds sold and the number of bonds A) sold in negotiated underwritings that week. B) sold by competitive bid that week. C) offered for sale in the market that week. D) to be offered in the next 30 days. 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) II and III B) I and IV C) I and III D) II and IV Information found in The Bond Buyer would include all of the following except A) the placement ratio. B) Revdex. C) the 30-day visible supply. D) secondary market volume.

D Explanation The placement ratio is a measure of investor demand for new issue municipal bonds. It is computed by dividing the dollar amount of bonds placed (sold) each week by the dollar amount offered that week. A high ratio indicates a strong demand, while a low ratio reveals the opposite. Although not tested, historically, there have been weeks (rare) where the placement ratio has been 0%. Fortunately for the underwriters, it is not unusual to see a ratio of 100%. C Explanation The placement ratio shows the relationship between the number of bonds placed (sold) and the total number offered for sale. The ratio can range from 0% to 100%. C Explanation The Bond Buyer 20 bond index measures secondary market yields of GO bonds. It consists of 20 GO bonds, A-rated or better, and each with approximately 20 years to maturity. The index is updated each week. D Explanation The Bond Buyer is a source of information for new (primary market) municipal bond issues. It contains Revdex, an index for revenue bonds, as well as general obligation bond indexes. Additionally, it includes the 30-day visible supply and the placement ratio.

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

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

FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. Which of the following is not one of those three? A) Reasonable-basis suitability B) Customer-specific suitability C) Quantitative suitability D) Qualitative-basis suitability

D Explanation The rule does not refer to qualitative-basis suitability. It does say that a recommendation may be suitable if at least some investors would benefit from it (reasonable-basis suitability). The recommendation should also take the specific customer's profile into consideration (customer-specific suitability). Finally, although a specific recommendation may be suitable, when looking at the quantity of trading, there could be a churning violation (quantitative suitability).

The working capital of a corporation includes all of the following except A) accounts receivable. B) cash. C) marketable securities of other companies. D) convertible bonds.

D Explanation The working capital of a corporation is equal to its current assets minus its current liabilities. A current liability is payable within 12 months. Because convertible bonds are long-term (not short-term) liabilities, they are not included as working capital.

An investor purchased 100 shares of a stock three years ago at $38 per share. Disappointed with the stock's performance, the investor sells it for $35 per share. Two weeks later, after the company announced higher-than-expected earnings, the investor purchased 100 shares at $44 per share. When this investor decides to sell the newly purchased shares, the cost basis will be A) $38 per share. B) $41 per share. C) $44 per share. D) $47 per share.

D Explanation This is a wash sale situation. Selling a stock at a loss and repurchasing it within 30 days "washes" out the loss for current tax purposes. The loss, in this case $3 per share, is added to the cost of the repurchased stock. Thus, $44 plus $3 equals a new cost basis of $47 per share.

An investor purchases a zero coupon bond at a price of 64. The bond matures in nine years. Five years later, the investor sells the bond at a price of 80. This would result in A) a long-term capital gain of $160. B) a long-term capital loss of $200. C) a long-term capital loss of $40. D) no gain and no loss.

D Explanation This question deals with accretion of the discount. The discount here is $360 (the difference between the $640 paid and the $1,000 maturity value). With nine years until maturity, the annual accretion is $360 divided by nine, or $40 per year. After five years, the bond's basis has increased by $200 ($40 times 5 years) to $840. The sale at $800 represents a long-term loss of $40.

An investor purchases a newly issued convertible bond at par. The bond is convertible at $25. Three years later, the underlying common stock is trading at $33 per share. If the investor sells the bond at the parity price, A) there is a long-term capital loss of $175. B) there is a long-term capital gain of $8 per share. C) the investor has no gain and no loss. D) there is a long-term capital gain of $320.

D Explanation This question involves several steps. The first is to determine the conversion ratio in shares. A bond convertible at $25 per share has a share conversion rate of 40 shares ($1,000 ÷ $25). The second step is to compute the parity price. That is, what are those 40 shares worth? Multiply 40 shares by $33 per share and that equals $1,320. When the bondholder sells the bonds at parity, that $1,320 is received. The $320 profit over the $1,000 initial cost is a long-term capital gain. An alternative that might be easier for some is to look at the appreciation of the stock. It is $8 per share higher than the conversion price of $25. That represents an increase of 32% (8 ÷ 25). If the bond is at parity with the stock, its price must be 32% higher and that brings us again to the $1,320 price.

What type of account allows for the irrevocable transfer of almost any kind of asset, including works of art and real estate, for the benefit of a minor? A) Coverdell ESA B) UGMA C) Tenants in common D) UTMA.

D Explanation UTMA expanded the types of property that are transferable into a custodial account. One of the main differences between an UTMA and UGMA is the types of assets they can hold. Assets within an UGMA are limited to cash (bank deposits), stocks, bonds, mutual funds, and other securities and insurance policies. UTMAs allow almost any kind of asset, including works of art and real estate. As with other assets, the title is registered in the name of a custodian for the benefit of the minor. Although there are a few states that allow the custodial property to remain in an UTMA account until the minor reaches age 25, more than half of the states set the age of majority for UTMA at 21 instead of 18

All of the following are characteristics of 529 plans except A) the assets can be transferred to a family member if not used by the original beneficiary. B) an official statement (OS) must be provided to any prospective purchaser. C) there is no age limit on the beneficiary. D) donor income limits apply.

D Explanation Unlike the Coverdell ESA, there are no donor income limits with a 529 plan. All of the other statements are true as to 529 plans.

ABC Corporation has issued a convertible preferred stock with a par value of $100. The stock is convertible at $40. The current market price of the stock is $80. It would be correct to state that the conversion ratio is? What is the Parity price? A) 4:10. B) 4:5. C) 2:1. D) 2.5:1.

D Explanation When a $100 par preferred has a conversion price of $40, the stockholder can convert into 2.5 shares. That is a 2.5:1 ratio. The current market price of the stock is only relevant if the question asks about the parity price (which is $32).

A callable municipal bond maturing in 30 years is purchased at 102. The bond is callable at par in 15 years. If the bond is called at the first call date, the effective yield earned on the bond is A) not determinable. B) higher than the yield to maturity. C) the same as the yield to maturity. D) lower than the yield to maturity.

D Explanation When a bond is purchased at a premium ($1,020) and called for redemption, the investor's effective yield is the yield to that call date. That will be lower than the bond's yield to maturity because the premium is lost sooner.

A municipal bond, issued with a covenant that states, "If revenue collections are not sufficient to meet debt service requirements, the issue will be backed by the full faith and credit of the municipality," is known as A) a Section 8 bond. B) a moral obligation bond. C) a contingent liability bond. D) a double-barreled bond.

D Explanation When a municipal bond is backed by both a source of revenue and the taxing ability of the issuer, this is referred to as a double-barreled bond.

The longer the duration, the greater the price volatility when there is a change to market interest rates. When all bonds have the same (or approximately the same) length of time to maturity, the bond with the lowest coupon rate will have the longest duration. Conversely, the one with the highest coupon rate will have the shortest duration and changes in interest rates will have the least impact on it. An investor's portfolio contains the following four bonds: ABC 7% duein 2040 DEF 6% due in 2040 GHI 5% due in 2040 JKL 8% due in2040 Which of these bonds would show the greatest price change if interest rates jumped by one percentage point? A) JKL 8% due in 2040 B) DEF 6% due in 2040 C) ABC 7% due in 2040 D) GHI 5% due in 2040

D GHI 5% due in 2040

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.