Series 7 part two Units (6-8) Prac quiz

Define the Diversified Management company 75-5-10 rule

-At least 75% of fund's total assets must be invested outside of the company affiliates -NO more than 5% (within that 75%) of the fund's assets are invested in any one issuer -NO more than 10% (within that 75%) of voting securities can be owned by a person in the company No restrictions attached to the remaining 25%

A couple's home has assessed valuation of $40,000 and a market value of $100,000 what will the tax be if the rate of 5 mills is used? A. 200 B. 500 C. 2,000 D. 5,000 One mill is equal to __ of tax per year for each _______ of assessed value

A. Taxes on real property are based on the assessed value assigned to the property one mill is equal to $1 of tax per year for each $1000 of assessed value

A calamity (catastrophe) call may be made by a municipal issuer if A) interest rates have fallen. B) a building constructed with revenue bond financing has been condemned. C) the issuer must call outstanding bonds on a predetermined schedule as outlined in the bond contract. D) the issuer has accumulated excess money in its surplus account.

B Explanation A calamity call is also known as a catastrophe call. If a facility built with revenue bond financing is destroyed or condemned, the issuer must call the bonds with the bulk of the funds provided by insurance proceeds.

If a customer buys a municipal bond at 110, maturing in eight years, but sells the bond six years later at 103½, the customer will have A) a $10 per bond loss. B) a $10 per bond gain. C) a $35 per bond gain. D) a $65 per bond loss.

B Explanation Municipal bonds that are purchased at a premium must be amortized. This bond has a premium of $100, which over eight years, amounts to $12.50 per year. The cost basis of the bond at the time of the sale is $1,100 − (6 × $12.50), or $1,025. If the bond is sold for $1,035, the customer has a gain of $10 per bond.

The main advantage of a variable rate muni investment is that A. bond is likely to increase in value B. the bond's price should remain relatively stable C. bond is non-callable D. Bond's interest is exempt from all taxes

B. Interest paid reflects changes in overall interest rates so the price of the bond remains relatively close to it's par value

Define the debt coverage ratio formula Coverage, revenue available and debt service required Ex: 4,000,000 debt & 10,000,000 available revenue

Coverage equals Avaialbe revenue divided by debt service requirement Ex: 10,000,000 divided by 4,000,000 equals 2.5 to 1

A letter of intent for a mutual fund does not contain which of the following provisions? A) The fund will keep some of the initially issued shares in an escrow account to ensure payment of the full sales load. B) The time limit is 13 months. C) The letter can be backdated 90 days to include a previous deposit. D) The fund can halt redemption during the time the letter of intent is in effect.

D Explanation A letter of intent is not binding on the client in any way. Should the client decide to liquidate the account before completing the letter, the company will reduce the redemption by the amount of shares held in escrow.

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) $1,065. B) $1,050. C) $1,000 plus a call premium. D) $1,025.

D 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.

What is the purpose of a sinking fund? How do you establish it?

Purpose: Used to call, redeem at maturity or buy back bonds in the open market; aids in marketability and safety Money to pay off interest and principal obligations Established: Issuer deposits cash in an account with a trustee

total debt & Net direct debt What are their calculations?

Total debt (all bonds issued by muni) MINUS self supporting debt MINUS sinking fund EQUALS Net direct debt Add overlapping debt to get Net total debt

Define Coterminous; it only occurs in _____ taxing situations?

two or more taxing agencies that share the same geographic boundaries and are able to issue debt separately only occur in property taxing

For a 6% bond quoted on a 6.5 basis which is the coupon and which is the YTM? Trading at a discount or premium?

6% coupon 6.5% YTM Trading at a discount

When auction rate securities (ARS) reset the yield to be paid in the upcoming period, the process used is a stop loss system. is a Dutch auction. establishes a clearing rate. guarantees that every bidder will have their order filled. A) II and III B) I and III C) I and IV D) II and IV

A Explanation The process used to reset the interest rate each period for ARS is called a Dutch auction, which is the lowest bid rate at which all of the bonds can be reset—or sold for new issues—at par. This newly established rate is known as the clearing rate, and bidders who bid at or below the clearing rate will now pay that rate. This means that those who bid above the established clearing rate will have their orders go unfilled.

All of the following statements regarding a municipality's debt limit are true except A) that unlimited general obligation bonds may be issued when a community's taxing power is not restricted by statutory provisions. B) that the debt limit is the maximum amount a municipality can borrow in any one year. C) that the purpose of debt limits is to protect taxpayers from excessive taxes. D) that revenue bonds are not affected by statutory limitations.

B Explanation The debt limit is the maximum amount of debt a municipality can have.

Which of the following would have the least market risk? A) AAA corporate debentures B) Fannie Maes C) Revenue anticipation notes D) Corporate or municipal bonds with long-term maturities

C Explanation Anticipation notes are the shortest term, which gives them the least market risk (the risk that price will fluctuate during the time left to maturity).

When an investor in a mutual fund elects to reinvest dividends into additional shares, the price paid is A) the public offering price POP) without a sales charge. B) the net asset value per share (NAV) plus a sales charge. C) the net asset value per share (NAV). D) the public offering price (POP) plus a sales charge.

C Explanation For test purposes, all reinvestments of mutual fund dividends (and capital gains distributions) are at the NAV with no sales charge.

If a customer purchases five newly issued municipal bonds for 101 and holds the bonds to maturity, the tax consequence is A) $50 capital loss. B) not possible to calculate with the information provided. C) $0 gain or loss. D) $50 capital gain.

C Explanation If a new issue municipal bond is bought at a premium, the premium must be amortized over the life of the bond. At maturity, no capital gain or loss would occur because the premium would have been fully amortized.

The public offering price for a mutual fund, as quoted in the financial press, reflects A) the average sales charge for the preceding three months. B) no sales charge because the offering price depends on the quantity purchased. C) the maximum sales charge the fund distributor collects. D) the minimum sales charge the fund distributor collects.

C Explanation The public offering price for a quoted mutual fund includes the maximum sales charge the fund distributor can assess.

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

our customer wishes to lock in a long-term yield with minimal risk and is not interested in regular income. Which of the following securities should you recommend? A) Treasury bond B) Treasury bill C) Corporate A-rated zero-coupon bond D) Treasury STRIPS

D Explanation The Treasury STRIPS is long-term, no-interim income security and has a locked-in yield because it is purchased at a discount from par. The Treasury bill is short term, the Treasury bond provides semiannual interest, and the corporate zero is riskier than the STRIPS.

The dated date on a municipal bond issue is A) the date on which the bonds are delivered to the buyer. B) the trade date. C) the settlement date. D) the date on which the bonds begin accruing interest.

D Explanation The dated date is the date on which newly issued bonds begin to accrue interest.

Municipal bonds are bought and sold in which market? Meaning they are/aren't listed on exchanges

Over the counter which means they're not listed on stock exchanges

Muni bond marketability factors: Rating, maturity, coupon, size of a block bond trade, length of call protection, dollar price

Rating: higher rating = more marketable Maturity: shorter the time till maturity = more marketable Coupon: higher the coupon = more marketable Block: typical is 100,000 the larger amounts = more marketable Call: longer the call protection = more marketable Dollar price: lower the dollar price = more marketable

Your client owns stock in the TXR Fund and has received dividends of $950 this year. The client has taken $450 of this and used it to purchase additional shares of TXR. For tax purposes, your client must report A) $500. B) $450. C) $950. D) $1,400.

C Explanation All of the dividends received must be reported. Reinvesting any or all of the money in TXR shares does not reduce the client's tax liability on dividends received.

A registered representative (RR) has just explained to a customer that to purchase a particular security, the customer would pay the asking price plus a commission, not a sales charge. Which of the following is the RR speaking of? A) Mutual funds B) All open-end funds C) Any closed-end fund D) All management company offerings

C Explanation Closed-end funds are purchased on an exchange or over the counter where buyers pay the asking price plus a commission. The RR could not be speaking of all open-end funds because mutual funds—one classification of open-end funds—are purchased at the public offering price, which includes a sales charge. Management company offerings include both open-end and closed-end funds.

A new municipal bond issue had a dated date of January 1, 2018. The first coupon was due on August 1, 2018. The customer bought for settlement on September 1, 2018. How many months of accrued interest must he pay at settlement? A) Seven months B) Six months C) One month D) Eight months

C Explanation On a new bond issue, the issuer sets the dated date. That is the date from which interest first begins to accrue. It is not unusual for the first interest payment date to be more than six months from the dated date. That is known as a long coupon (longer than six months). Therefore, on August 1, 2018, seven months of interest was paid (January through the end of July). The customer did not purchase the bond until late August and owes interest only from the August 1, 2018, coupon payment date up to, but not including, the September 1 settlement date (one month).

An investor has arranged to receive ½% of the value of her mutual fund account per month. This is an example of what type of plan? A) A fixed-dollar periodic withdrawal B) A periodic payment plan C) A fixed-share periodic withdrawal D) A fixed-percentage periodic withdrawal plan

D Explanation If the investor receives ½% of the fund's value every month, the percentage of the withdrawal is fixed. That makes this a fixed-percentage periodic withdrawal plan. The advantage of this plan is that it is unlikely the client would ever run out of money. A periodic payment plan is putting money in, not taking it out.

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

D 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.

Define Muni anticipation Notes: (issued at, interest and principals paid when, maturities) TANs RANs BANs CLNs

Muni anticipation: Short-term securities that generate funds for muni's that expect other revenues soon. -issued at discount -I and P paid at maturity -Maturity typically less than 12 months (1yr) TANs: (Tax) RANs: (Revenue) BANs: (Bond) CLNs: (House Contruction)

Define double-barreled bonds

Revenue bonds that share characteristics of GOs. Principal paid by facility earnings but also backed by taxing power of the state or muni

Which of the following muni would be least likely to be issued at a discount? A. BABs B. BANs C. CNLs D. RANs

A. Build America Bonds (BABs) issued at Par

The interest from which of the following bonds might be included in the alternative minimum tax calculation? A) Tax anticipation notes B) Industrial development revenue bonds C) Special assessment bonds D) General obligation bonds

B Explanation Industrial revenue bonds, sometimes called industrial development bonds, may be nonpublic purpose bonds, and the proceeds are used to benefit private corporations. As such, the interest income from these bonds is a tax preference item in the alternative minimum tax calculation.

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

B Explanation Section 8 bonds are municipal revenue bonds backed by the U.S. government to help finance low- and moderate-income public housing. They are also known as PHA or NHA bonds.

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

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.

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

A 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.

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 $250 gain. B) a $300 loss. C) a $200 gain. D) a $200 loss.

A 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.

In a new municipal offering, who is responsible for hiring bond counsel? A) The issuer B) Syndicate members C) The syndicate manager D) The Municipal Securities Rulemaking Board

A Explanation The issuer hires a bond attorney to render an opinion on the prospective municipal offering.

All of the following municipal bonds would be defined as revenue bonds except A) new housing authority bonds. B) general obligation bonds. C) special assessment bonds. D) special tax bonds.

B Explanation A general obligation bond (GO) is not a revenue bond because it is backed by something other than a revenue-producing project. In general, the backing for GO bonds is the taxing ability of the issuer. That ability to tax is why they are frequently referred to as "full faith and credit" bonds. Revenue bonds include industrial development revenue bonds, special tax bonds, special assessment bonds, new housing authority bonds, and moral obligation bonds.

An investor looking for an open-end investment company with an objective of providing capital appreciation for its shareholders would most likely choose A) an income fund. B) a growth fund. C) a bond fund. D) a venture capital fund.

B Explanation Growth funds have the goal of producing capital appreciation (growth); that is why they are named as such. This is a case where you "don't look a gift horse in the mouth." Don't venture capital funds also seek growth? Yes, they do, but they are not open-end investment companies.

All of the following might be found in a money market fund's portfolio except A) negotiable CDs. B) T-bills. C) common stock. D) banker's acceptances.

C Explanation A money market mutual fund portfolio will consist of money market instruments, which are short-term, high-quality debt securities. They include treasuries with less than one year to maturity and negotiable CDs. Because common stock is equity, it is not found in money market funds.

All of the following may be used to service special tax bond issues except A) excise taxes. B) business license taxes. C) real estate taxes. D) gasoline taxes.

C Explanation Special tax bonds are sometimes included in the larger and more general category of revenue bonds. Bonds supported from the proceeds of specified income generators, such as gasoline, cigarettes, liquor, and business licenses, are special tax bonds. Ad valorem (real estate) taxes never service special tax bonds.

A client invests $2,200 in an open-end investment company and signs a letter of intent for a $10,000 breakpoint. If he deposits $11,000 six months later, which of the following statements is true? A) He will not receive any reduction in the sales load. B) He will receive a reduced load on $10,000 worth of shares. C) He will receive a reduced load on $8,800 worth of shares. D) He will receive a reduced load on $13,200 worth of shares.

D Explanation An investor signing a letter of intent has 13 months to contribute funds to reach the reduced load. The sales charge in this case, then, will be based on the total investment of $13,200. If at the end of the 13 months the investor had not invested up to the breakpoint, the fund would liquidate enough shares to pay the difference in sales load.

A quotation on a municipal security between dealers is assumed to be A) an indication of interest. B) a nominal quote. C) a workable quote. D) a bona fide quote.

D Explanation Municipal bond quotations between dealers are required to be bona fide, or firm, quotes. They are required to be fair and reasonably related to the current market.

Go vs Revenue bonds -Backed by? -subject to statutory limits; voter approval?

GO: Backed by full faith and taxing powers (Ad valorem tax) -Subject to stat limits and voter approval needed Revenue: backed by revenues generated by the facility or user fees -Not Subject to stat limits and NO voter approval needed

Mutual funds are considered: -What kind of company -meaning it does/does not have a issuing limit -Does it require a prospectus? If so when? -Money invested goes to? -Can issue what kind of securities? -Can buy/sell what kind of securities?

Open-end investment company -No issuing limit, can raise capital by issuing new shares -Requires prospectus prior to or with the sale -Money invested go to issuer -ONLY issue common stock -But can buy/sell preferred stock/bonds

What are the only Muni's backed fully by the US Gov? What are they for?

PHAs (or NHAs) New/Public housing authority bonds -Used to develop/improve low-income housing, backed by rental income but any insufficient payments are covered by the fed gov

For a mutual fund that collects a 12b-1 fee, which of the following statements are true? The fund may use the money to pay for mailing sales literature. Advertising materials must always state that the fund is no load. The fund may use the money to pay for commissions on portfolio transactions. The fund's prospectus must disclose the fee. A) I and IV B) III and IV C) II and III D) I and II

A Explanation 12b-1 fees may be used only to cover promotional and other distribution expenses for funds that are distributors of their own shares; fee amounts must be disclosed in the prospectus. The fund may not use the term no load in any communications with the public if the 12b-1 fee and other service fees exceed 0.25% of average net assets.

What is a possible benefit of purchasing shares of a closed-end investment company in the secondary market? A) Shares are frequently trading at a discount to the NAV. B) Shares may be purchased and sold without any sales or redemption charge. C) Dividends are paid in cash rather than additional shares. D) Redemption takes place on the day of the sale.

A Explanation Closed-end funds compute their NAV, just as do open-end funds. However, by trading in the secondary markets, prices of closed-end funds are determined by the supply and demand for their shares. This can result in a fund selling for less than the value of its assets. We say the fund is trading at a discount to the NAV and, just like anytime we can buy something at a discount, we might be getting a better deal. Of course, this can work the other way if the fund shares were purchased at a premium or NAV and now are sold at a discount. Although there are no sales loads or redemption fees, there are brokerage commissions to pay just like with the purchase of any security in the secondary markets. Most would agree that the ability to reinvest your dividends in additional shares is a bigger benefit than taking the cash. Those additional shares create a compounding effect over time. Closed-end funds do not redeem their shares. When an investor sells the shares, they settle the same T+2 as other securities.

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

A Explanation In recommending a conservative, tax-exempt investment to this customer, the IAR has failed to make a suitable recommendation given the client's objectives. Municipal bonds are better suited for individuals in high tax brackets and offer little upside appreciation potential.

All of the following statements regarding a municipality's collection ratio are true except A) a poor collection ratio might mean the municipality is likely to default on its revenue bonds. B) the collection ratio is calculated as follows: taxes collected divided by taxes assessed. C) the collection ratio measures the municipality's property tax collections. D) a high collection ratio is more favorable than a low collection ratio.

A Explanation The collection ratio measures taxes collected versus taxes assessed. It is a tool used in analyzing general obligation bonds, which are backed by the taxing authority of the issuer. Revenue bonds are backed by user fees, not taxes.

One of your customers has recently celebrated a 58th birthday. The investor began a regular investment program into shares of the KAPCO Growth Fund over twenty years ago. The account is showing a substantial gain. Because retirement is getting closer, you suggest using the exchange privilege offered by the KAPCO fund group. Your recommendation is to place half of the holdings into the KAPCO Balanced Fund. Following this recommendation would result in A) a taxable transaction for those shares exchanged. B) a taxable transaction for those shares exchanged plus a 10% tax penalty for early withdrawal. C) tax deferral of any gains because the money is still in the KAPCO fund group. D) tax deferral of any gains because the investor has not received any proceeds.

A Explanation The exchange or conversion privilege allows the investor to exchange shares of one fund in a family of funds for another at net asset value. The benefit is the saving of sales charge. The IRS treats this exchange as the sale of one security and the purchase of another. Therefore, any gains will be subject to tax. There is no 10% tax penalty. That applies only when there has been deferral of earnings, such as in an IRA.

In most cases, new municipal bond issues are accompanied by a legal opinion. That legal opinion is drafted by bond counsel hired by A) the municipal issuer. B) the managing underwriter. C) the syndicate. D) the MSRB.

A Explanation The legal opinion is written by an independent law firm hired by the municipal issuer. The underwriter or syndicate can also hire counsel, but that is not the official legal opinion attached to the bond.

Which of the following statements describe the conduit theory of taxation? A fund is not taxed on earnings it distributes, provided distributions equal 90% or more of net investment income. Earnings distributed by a regulated investment company are taxed three times. Dividends and interest are passed through to the investor without the fund being taxed. Dividends and interest accumulate tax free to the shareholder. A) I and III B) II and IV C) I and IV D) II and III

A Explanation Under the conduit, or pipeline, theory of taxation, a fund is liable for taxes only on the income retained, provided it distributes at least 90% of its net investment income. The investor benefits because the income is only taxed twice (at the corporate level and at the individual level) and avoids taxation at the fund level. There is no tax-free accumulation for the shareholder.

What are the tax consequences an investor incurs when exercising the conversion privilege within a family of funds? A) The investor treats the exchange as a sale and new purchase. B) There are no tax consequences because the funds are all part of one family. C) There are no tax consequences if completed within 60 days. D) There are no tax consequences, as long as this is done through a Section 1035 exchange.

A Explanation When exchanging one fund for another in the same fund family, the exchange is done at NAV. This avoids any sales charges. The IRS considers this as the sale of the old fund (capital gain or loss applies) and the purchase of the new fund. That begins a new cost basis and holding period. The Section 1035 exchange allowing investors to move from one investment to another without current tax consequences is applicable only to insurance products.

An investor purchases a municipal bond at par for $10,000 on February 15, 1997. On August 15, 1997, if the investor sells the bond for $10,500, for tax purposes, the $500 profit is recognized as A) a short-term capital gain. B) a tax-free capital gain. C) a long-term capital gain. D) interest income.

A Explanation When municipal bonds are purchased at par and subsequently sold at a higher price, the resulting profit is taxed as a capital gain. Only interest income from municipal bonds is exempt from taxation. This gain is not classified as long-term because the investor did not hold the bond for more than one year.

computing accrued interest, from what date? Corp/muni/agencies use __ day months and __ day years? US treasury use __ day months and __ day years? Ex: if a muni bond is traded regular way on Monday, March 5, the number of days of accrued interest is calculated as?

AI: calculated from the last interest payment date up to but not including the settlement date (two business days after the trade date). Corp: 30 day month with 360 day years US: actual day months with 365 day years Ex: Feb has 30 days (muni bond so 30 day months) March 5 trade = 6 days (settles T+2 regular way march 7th) Days of accrued interest 36 days Because the trade settles on March 7, six days of interest accrue for March. It's up to but not including the settlement date

If a registered representative is comparing two mutual funds for a customer, which of the following comparisons would not be permissible? A) Comparing diversified growth funds from two different fund families B) Comparing an equity growth fund to a money market fund, with the intention of convincing an investor to purchase the growth fund C) Comparing a long-term bond fund to a shorter-term bond fund to demonstrate the trade-offs that exist between risk and return. D) Comparing two equity funds with slightly different investment objectives, even if the differences and their consequences are carefully explained

B Explanation A characteristic of money market funds is that they deliberately avoid growth. Thus, for the growth investor, comparing a money market fund to a growth fund is unfair.

Which of the following investment companies is limited to offering investors a single class of common stock representing ownership in the company? A) A unit investment trust B) A mutual fund C) A closed-end management company D) A face amount certificate company

B Explanation A mutual fund is an open-end management company that raises capital solely through the issuance of a single class of common stock. A face amount certificate sells interests in a pool of bonds that all mature on the same date. A unit investment trust is a fixed portfolio of debt or equity securities that sells redeemable units, not shares, to investors. Those units represent the investor's share in the trust's assets. A closed-end management company does a one-time IPO of common stock, after which its shares trade in the secondary market just like any corporate stock. Closed-end companies can also have a preferred stock issue and a bond issue. Please note: The term "single class" of stock is not related to the different classes for sales charge and expense purposes. Those classes merely define the costs the investor will incur to acquire and own the shares.

A retiree contacts an agent to discuss investing his retirement savings of approximately $2.1 million; his investment objective is long-term growth. The representative and customer discuss the advantages and disadvantages of diversifying among five different mutual funds within two fund families, as opposed to purchasing just one fund. Consequently, the agent made the following purchase recommendations: XYZ Emerging Growth Class B: $495,000 XYZ Research Class B: $310,000 XYZ Investors Growth Stock Class B: $495,000 ABC Capital Enterprise Class B: $495,000 ABC Capital Opportunity Class B: $310,000 Total: $2,105,000 These recommendations are A) suitable because the customer fully understands all of the ramifications and is satisfied. B) unsuitable because Class A shares in either (or both) fund family could be purchased for a sales charge breakpoint discount at or near 0%. C) unsuitable because the investments are not equal in amount. D) suitable because they achieve the diversification the customer seeks.

B Explanation All mutual funds with Class B shares also have Class A shares. All Class A shares provide sales charge discounts at stated breakpoints. At a purchase of this quantity, the sales charge is likely 0%. That means that, just like with the Class B shares, all of the money is invested into the funds. The advantages of the Class A shares is that their operating expenses are lower than Class B shares and there is no back-end load to this investor if the funds were needed unexpectedly within a few years. As a practical—but probably not specifically tested—point, Class B shares are not sold in quantities higher than $100,000; Class A shares are invariably the better option.

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) An auction rate security (ARS) C) A variable-rate demand note (VRDN) D) A tax anticipation note (TAN)

B 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.

If a customer transfers his holdings from one fund to another within the same family of funds, what are the tax consequences? A) Losses are deducted, and gains are deferred. B) On the transaction date, any gain or loss is recognized for tax purposes. C) Gains are taxed, and losses are deferred. D) No gain or loss is recognized until redemption.

B Explanation An exchange is a taxable event. The cost basis of the shares in the original account must be compared to their redemption value. Any gain or loss is recognized in the year of the exchange. The exchange privilege allows the investor to avoid paying an additional sales charge. It does not allow the investor to avoid taxes.

Which of the following debt instruments generally present the least amount of default risk? A) Convertible senior debentures B) Municipal general obligation bonds C) High-yield corporate bonds D) Municipal revenue bonds

B Explanation Because the full taxing power of the municipality backs a general obligation municipal bond, it will exhibit the least amount of default risk. A corporate debenture is an unsecured bond with a greater degree of risk, as is a junk or high-yield corporate bond.

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

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

An investor mentions the term level load fund shares to a registered representative. The investor is referring to A) shares of a closed-end fund. B) Class C shares. C) Class B shares. D) Class A shares.

B Explanation Class C shares are referred to as level load because the charges never fluctuate. Shares are purchased at net asset value (no front-end load), and there is a back-end load (CDSC), generally for 12 months. The 12b-1 fees on Class C shares are higher than on Class A shares and remain so until the position is liquidated. Class C shares are most suitable for investors who will not maintain the position for the long term.

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

B Explanation Dividends must be paid from the net investment income.

Which of the following quotes represents a municipal dollar bond quote? A) $850 - $870 B) 85½ C) 0.085 D) 8.20 - 8.00

B Explanation Dollar bond quotes are based on a percentage of face amount (Par $1,000). Therefore, a quote of 85½ is 85.5% of $1,000, or $855.

In a negotiated municipal bond underwriting, all of the following are true except A) the underwriter works with the issuer to establish the offering price. B) the underwriters may also be financial advisors to the municipality and receive both advisory fees and underwriting fees. C) the underwriter works with the issuer to establish the interest rate. D) the municipality appoints an investment banker or broker-dealer to underwrite the offering.

B Explanation In a negotiated underwriting, the municipality appoints an investment banker or broker-dealer to underwrite the offering. The underwriter works with the issuer to establish the interest rate and the offering price in light of the issuer's financial needs and market conditions. Generally, those acting in the capacity of financial advisor to a municipality may not simultaneously act as underwriters. This is true of both negotiated and competitive bid underwritings. While the Municipal Securities Rulemaking Board rules do allow for certain exceptions, the fees collected would be limited to only those already agreed to for the advisory services and would not include any additional fees for performing underwriting functions or services.

An open-end investment company that does not distribute at least 90% of its net income A) is unable to retain all or part of its realized capital gains. B) is liable for federal taxes on its net income. C) continues to qualify as a registered investment company based on interpretations of the IRS. D) does not require a restricted type of management.

B Explanation Investment companies that do not distribute at least 90% of their net investment income become liable for federal income taxes on all the net investment income. Shareholders would also be responsible for taxes on any distributions received. By distributing 90% of investment income, open-end companies can avoid double taxation.

An investor studying the annual report of a registered investment company reads that the net asset value per share has increased from $16.10 to $17.45. He notes that the market price has declined over the period. The investment company must be A) an open-end company. B) a closed-end company. C) a unit investment trust. D) a real estate investment trust.

B Explanation It is the closed-end investment company (CEF) where the market price is determined by supply and demand rather than the NAV. As a result, the trading price can be the same, above, or below the NAV. Although REITs do have a net asset value per share and their prices are also set by supply and demand, they are not registered investment companies.

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

B Explanation There are several steps required to answer this question correctly. The first is to understand that the term open-end investment company always means a mutual fund, at least on the exam. Although most exchange-traded funds (ETFs) are structured as open-end companies, any question about them will always be clear that the subject is an ETF. The second is to recognize that mutual funds use the forward pricing rule to determine purchase or redemption prices. That is, the price is determined after the close of the trading day (4 pm ET). Therefore, this purchase will use the price that appears in the Friday morning financial pages. That purchase price will be the public offering price (POP). The POP is $10.25 per share. Divide the $5,000 purchase by the $10.25 and the result is 487.805 shares. Would you like to know how to do this question in seconds? As long as you realized the forward pricing rule and you know the new POP is higher than the previous one of $10.00 per share, it's a snap. At $10.00 per share, $5,000 buys 500 shares. With a POP above that, the choice must be lower than 500 shares and there is only one choice that is. All of the other choices use the NAV instead of the POP. That is the way the exam does things.

One of your customers is in the 37% federal income tax bracket. The customer prefers purchasing corporate bonds over municipal bonds because the corporation's financials are much easier to understand. On the customer's next purchase, the instructions are to find a corporate bond that will yield the same after-tax return as would be received from a municipal bond with a 3.20 coupon. The bond you suggest must have a coupon of A) 4.38%. B) 5.08%. C) 8.65%. D) 3.20%.

B Explanation This is a tax-equivalent yield question. The interest paid on a corporate bond is taxable, while that of the municipal bond is tax free. The formula is: The coupon of the municipal bond divided by (100% − tax bracket). In our question, that would be 3.20% divided by 63%, or 5.08%

An investor is considering purchasing a bond. He has decided on either a 6% municipal bond offered by the state in which he lives or an 8% corporate bond offered by a company with headquarters in his state. He would like you to help him decide which bond will get him the greatest return for his investment. Which of the following items of information must you obtain before you can make a specific recommendation? A) His net worth B) His tax bracket C) What other securities he owns D) How long he has been a resident of his state

B Explanation To make the recommendation, you must do a tax-equivalent yield or tax-free equivalent yield calculation, for which you need the investor's tax bracket. The other items listed do not have any bearing.

An open-end investment company's net assets are 1 billion. It elected to be treated as a diversifed investment company the company would be in noncompliance with the rules if? A. Invested 50 mill into ABC stock B. Invested 300 mill in ABC stock C. Invested 350 mill in ABC stock D. Purchased 100% if the voting shares of ABC stock

C 250 million can be invested wherever the fund wants, within the diversifed 75%, the fund can own 50 million of a single issuer's stock (5% of the 1 billion) then, the other 25% can purchase 250 million, giving it a total of 300 million in one stock. That 300 million could buy 100% of the voting shares of many publicly traded companoes

A J & J Treasury bond with a 5% coupon due July 1, 2019, is purchased in a cash transaction on February 24. What is the number of days of accrued interest? A) 63 B) 53 C) 54 D) 55

C Explanation A bond begins accruing interest on the prior interest payment date (January 1) and accrues up to, but not including, the settlement date (February 24). Did you notice that this was a cash transaction? That means the settlement date is the same day as the trade (February 24). Normally, Treasury securities settle T+1. If this was a regular-way trade, the accrued interest would be 55 days because settelment would have been February 25. Be careful reading the question; it is easy to skip over critical information. Because accrued interest on government bonds is computed actual days, actual year, 31 days for January plus 23 days for February, it equals 54 days.

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

C Explanation A municipal or corporate bond trading flat is trading without accrued interest. The bond may be an income bond, which normally pays no interest, or it may be a bond currently paying no interest because it is in default.

A legal opinion that has restrictions placed on it by the municipality's bond counsel is called A) a restricted opinion. B) a contingent opinion. C) a qualified opinion. D) an unqualified opinion.

C Explanation A qualified opinion is one where the bond counsel to the municipality places certain legal restrictions (qualifications) on the issue that must be disclosed to purchasers. An unqualified opinion has no restrictions.

The investment adviser of the GEMCO Special Situations Fund would find which of the following companies least attractive for the fund's portfolio? A) GHI Technologies, whose new microchip devices have caught the attention of the largest manufacturer in the field B) JKL Transportation Services, a company preparing to report a profit for the first time in four years C) ABC Corporation, whose shareholders have just reelected the current board of directors D) DEF Pharmaceuticals, whose application for approval of a new disease-fighting drug will likely be approved by the FDA

C Explanation A special situations fund looks for special situations. Those are defined as management changes, turnaround situations (loss to profit), or new developments. A company reelecting the existing board of directors is not sending a message of something special going on.

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) there is no debt limitation on the issue. B) the interest on these bonds is not considered a preference item for the alternative minimum tax. C) the disbursement of principal and interest payments must be approved semiannually by the state public service commission. D) if earnings fall short of the amount needed to make principal and interest payments, the debt service reserve can be used.

C 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.

According to Municipal Securities Rulemaking Board (MSRB) rules, if a municipal securities broker-dealer receives an advisory fee from an issuer, it must notify, in writing, any of its customers purchasing bonds issued by that municipality of A) all of these. B) a negative outlook from Standard & Poor's. C) any advisory relationship existing between itself and the issuing municipality. D) the placement ratio.

C Explanation MSRB rules require that if a broker-dealer has an advisory relationship with a municipality, that relationship must be disclosed to any of the broker-dealer's clients who are buying bonds issued by the municipality.

The trust indenture of a revenue bond will show all of the following except A) the revenue pledge. B) the rate covenant. C) the reoffering yields. D) the application of flow of funds.

C Explanation Reoffering yields are unrelated to trust indentures. However, the trust indenture for a revenue bond issue does include covenants (or promises) between the issuer and the trustee for the bondholders' benefit. Among these covenants are the flow of funds and the rate covenant.

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

C Explanation The beginning of the MSRB's definition of marketability says "the ease or difficulty with which securities can be sold in the market." The amount of commissions charged by a specific broker-dealer has no impact on the ability to sell the security.

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

C 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.

A mutual fund, frequently used as the default option in employer-sponsored retirement plans, that adjusts its portfolio growth orientation to principal conservation as a specified date approaches is A) a hedge fund. B) a balanced fund. C) a target date fund. D) a Section 529 fund.

C Explanation This is exactly what target date funds are designed for. As the investor gets closer to the target retirement age, the portfolio managers shift the concentration from equities to fixed income. That is why a high percentage of corporate retirement plans use those as the investment option when the employee does not make a selection. A balanced fund does adjust between equity and fixed income, but does so based on market conditions, not a specified future date. Investments in Section 529 plans do follow a similar strategy as college nears, but these are never available in retirement plans.

An investor buys a GO bond with a coupon of 3½% that has a basis of 3¾%. If the bond is held until maturity, the investor's actual yield will be A) more than 3¾% . B) 3¾%. C) more than 3½% but less than 3¾%. D) 3½%.

C Explanation This is tricky, so follow along. With a coupon of 3½% and a basis (yield to maturity) of 3¾%, we know the bond was purchased at a discount. GO bonds are municipal bonds, and when a municipal bond is purchased in the secondary market at a discount, the accretion of the discount is taxed as ordinary income. Therefore, a portion of the investor's return will be taxable, making the actual return slightly less than the yield to maturity.

If an investor wants to invest in the electronics industry but does not want to limit his investments to one or two companies, which type of fund would be most suitable? A) Hedge B) Bond C) Money market D) Specialized

D Explanation A specialized or sector fund invests 25% or more of its assets in a particular region or industry.

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

D 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.

If a broker-dealer is acting as a financial advisor to a municipality, which of the following statements is true? Municipal Securities Rulemaking Board (MSRB) rules prohibit the broker-dealer from acting as an underwriter for the issuer unless they meet the criteria of specific allowable exceptions. The broker-dealer can act as both financial advisor and underwriter with no limitations. The broker-dealer may only act in an underwriting capacity if the underwriting agreement was done as a negotiated underwriting. There are some underwriting functions that the broker-dealer, in their advisory capacity, may be allowed to participate in, such as assisting with the preparation of the official statement. A) II and III B) II and IV C) I and III D) I and IV

D Explanation If a broker-dealer has a formal advisory relationship with an issuer, it may not generally act as underwriter for the issuer's bonds. This applies regardless of whether the underwriting is a negotiated or competitive bid underwriting. There are exceptions and some functions associated with underwriting that the MSRB rules do allow, but in those instances, the broker-dealer could only be compensated for the broker-dealer's advisory services and not for any underwriting services or related functions.

According to MSRB rules, a control relationship would exist between a municipal securities firm and an issuer when A) senior officers of the firm live in the municipality. B) the firm has an inventory of the issuer's bonds. C) the firm recently completed a negotiated underwriting for the municipality. D) an officer of the firm is in a position of authority over the issuer.

D Explanation MSRB Rule G-22 deals with control relationships. Their interpretive letters indicate that it is only when the individual has the authority to exercise control that the disclosure rules apply. Here is how they put it: "For example, rule G-22 applies if the associated person is the chairman of an issuing authority and, in that capacity, actually makes the decision on behalf of the issuing authority to issue securities. The rule does not apply if the associated person as chairman does not make that decision and does not have the authority alone to make the decision, or if the decision is made by a governing body of which he is only one of several members."

All of the following are covered by FDIC insurance except A) money market deposit accounts. B) bank savings accounts. C) negotiable CDs. D) money market mutual funds.

D Explanation One of the most important disclosures registered representatives must make to their clients is that a money market mutual fund is not the same as a money market account at a bank. The bank account is insured by the FDIC (up to the stated limits), while the mutual fund has no insurance. Negotiable CDs (the money market instrument) are bank issues insured by the FDIC up to the stated limit, as are bank savings accounts.

A municipal finance professional (MFP) is A) an elected official of a municipality having some decision-making authority regarding new municipal bond issues. B) an employee of the Municipal Securities Rulemaking Board (MSRB) specializing in seeing that broker-dealers adhere to the MSRB rules and regulations regarding the sales of municipal bonds to retail customers. C) employed by a municipality to oversee the issuance of municipal bonds. D) an employee of a broker-dealer engaged in municipal security representative activities other than retail sales or who solicits municipal securities business for the broker-dealer.

D Explanation Per the MSRB, an MFP is an associated person of a broker-dealer who is primarily engaged in municipal securities representative activities other than retail sales to individuals, who solicits municipal securities business for the broker-dealer, or who is in the supervisory chain above MFPs.

Revenue bonds may be called for all of the following reasons except A) interest rates have fallen. B) a provision in a sinking fund agreement is calling for a partial call. C) the facility has been destroyed. D) the issuer has reached a statutory debt limit.

D Explanation Statutory debt limits only apply to general obligation bonds.

A 60-year-old customer who wishes an investment that can provide for retirement needs while adjusting for changes as aging takes place would probably find which of the following investments most suitable? A) An asset allocation fund B) An IRA C) A long-term bond fund D) A target date fund

D Explanation The benefit of a target date fund is that, as the specified date gets closer, the portfolio allocation automatically shifts into more conservative investments. It could be compared to an asset allocation fund on autopilot. An IRA is not an investment vehicle and at age 60 is probably not the best time to get started. The long-term bond fund is going to suffer from inflation risk, as well as interest rate risk.

All of the following statements regarding industrial revenue bonds (IRBs) are true except A) they can be issued by municipalities to build facilities that will be owned by the municipality but leased to a local corporation. 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 provide local industries with funds for expansion. D) the credit rating of the bonds is dependent on the credit rating of the municipality.

D 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.

A municipal finance professional, who is eligible to vote in a municipality that frequently issues debt securities, has made a contribution to the political campaign of one of the issuer's elected officials. More than which amount would disqualify the firm from engaging in certain municipal businesses with that issuer for two years? A) $5,000 B) $1,000 C) $100 D) $250

D Explanation The maximum political contribution allowed under Municipal Securities Rulemaking Board rules for those eligible to vote in the municipality issuing debt on a negotiated basis is $250.

According to investment company rules, open-end investment companies may not distribute long-term capital gains to their shareholders more frequently than A) quarterly. B) monthly. C) semiannually. D) annually.

D Explanation Under the Investment Company Act of 1940, investment companies may not distribute long-term capital gains more frequently than once per year.

All of the following statements regarding Section 529 plans are true except A) the assets in the account are controlled by the account owner, not the child. B) states impose very high overall contribution limits. C) contributions to a 529 plan may be subject to gift taxation. D) the income level of the contributor can affect the annual contribution amount.

D Explanation Unlike Coverdell ESAs, the income level of the contributor will not affect annual contributions under a Section 529 plan.

Gross Revenue Pledge vs. Net Revenue Pledge Payment order of debt service and operations and maintenance

Gross: pays debt first then operations/maintenance Net: pays operations/maintenance first then debt

Muni bonds are usually priced on ______________ basis rather than dollar price Each basis point is ________ % of 1%. So if one point on a bond is equal to $__ (_% of $_____) then 1 basis point would be?

Priced on yield to maturity 1/100th of 1 percent Bond point is $10 (1% of 1000) then 1 basis point is 1/100th of that so $.10 (10 cents)

Define: Quantitative analysis vs Qualitative analysis

Quan: Population, property values, per capita income Qual: Community attitude towards debt/tax, population and property value trends, plans and projects

Muni bond maturities Which is quotes by price vs basis YTM? What are the three? What is most common?

Term: Mature at a single date (price = dollar bonds) Serial: Mature on different dates according to a predetermined schedule (YTM) Balloon: pay off part of a bond's maturity before the final date but the largest portion is paid at maturity Most bonds are issued Serial