Series 7 Practice Exam 1 Mistakes

An investor has an established margin account with a long market value of $6,500 and a debit balance of $3,750, with Regulation T at 50%. A maintenance call would be triggered if the long market value decreased below A) $5,000.00. B) $4,875.00. C) $8,666.67. D) $2,812.50.

A) $5,000.00. To determine long market value at maintenance, divide the debit balance of $3,750 by 75% ($5,000).

An investor establishes the following positions: Long 1 XYZ Apr 45 call at 3.50 Long 1 XYZ Apr 45 put at 2.75 The investor's strategy will realize a gain if XYZ trades above A) $51.25. B) $45.00 C) $47.75. D) $48.50.

A) $51.25. A long straddle is profitable if the stock price moves sharply in either direction. In this example, the investor paid a premium of 6.25 to establish the straddle. To realize a gain, the stock must either fall below the strike price minus the combined premium (45 − 6.25 = 38.75) or rise above the strike price plus the combined premium (45 + 6.25 = 51.25).

The minimum maintenance requirement on short stock selling above $5 is A) 30% of the market value or $5 per share, whichever is greater. B) 50% of the market value or $5 per share, whichever is greater. C) 25% of the market value or $5 per share, whichever is greater. D) the same as the initial margin requirement.

A) 30% of the market value or $5 per share, whichever is greater. The minimum maintenance in a short account is 30% of the market value or $5 per share (whichever is greater) for stocks trading above $5. For stocks trading below $5, the minimum maintenance is $2.50 per share or 100% of market value (whichever is greater).

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

A) 45 days from the execution of the application, or for 10 days from the time the owner receives the policy, whichever is longer. 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.

As a requirement of investing in a particular business investment, your customer has just signed a statement attesting to her annual income, net worth, and affirming that the risks associated with the investment are understood. The signed statement, once submitted with the intended investment amount, will either be approved or disapproved. Approval allows the investor to subscribe to the investment. Which of the following investments would have such a requirement? A) A direct participation program B) A variable annuity C) A special situation fund D) A collateralized mortgage obligation

A) A direct participation program Investors purchasing limited partnership participations or direct participation programs are required to sign a subscription agreement. In part, the investor would be attesting to annual income, net worth and that they understand the risks associated with the type of program they are investing in. While suitability would be a factor for each of the investments listed, they do not require that this type of statement is signed by the customer.

A customer seeks a significant long-term investment in the Ajax Fund, a growth-oriented mutual fund. To take advantage of breakpoints applicable to large investments, the customer should purchase A) Class A shares. B) Class D shares. C) Class C shares. D) Class B shares.

A) Class A shares. For initial purchases, breakpoints are only available if the customer purchases Class A shares, which are sold with a front-end load deducted from the initial investment. A substantial purchase can often reduce the sales charge to zero. Class B and Class C shares are sold with annual 12b-1 fees, as well as a contingent-deferred sales charge. Class D shares are sold with a level sales load plus a redemption fee.

In general, investors pay a commission to purchase and are charged a commission when selling which of the following investment companies? A) Closed-end management investment companies B) Open-end investment company Class A shares C) Open-end investment company Class B shares D) Unit investment trusts

A) Closed-end management investment companies Closed-end funds trade in the secondary markets just like any common stock. Therefore, there is generally a commission charged when purchasing and when selling. Open-end fund Class B shares have no load on the way in, but they will have a back-end load if redeemed before the CDSC period ends. Similarly, Class A shares have a front-end load (always referred to as a sales charge, never a commission) to purchase, but no charge when redeeming. UITs may have a load on the way in and/or may have a redemption charge, but those a not referred to as commissions.

Which of the following types of retirement plans would be most beneficial to a young employee of a corporation? A) Defined contribution pension plan B) Defined benefit pension plan C) Profit-sharing plan D) Keogh plan

A) Defined contribution pension plan The most beneficial corporate pension plan for a younger employee would be the defined contribution plan. The employee has many years in the workforce, so the investments made with the defined contributions will have a maximum amount of time to grow.

A husband and wife wish to open a Roth IRA. She is 49 years old and earns $99,000 per year; he is 51 and earns $49,000 per year. What is the maximum permitted contribution for the married couple, based on age and income? A) Husband $7,000 and wife $6,000 B) Husband $6,000 and wife $0 C) Husband $7,000 and wife $0 D) Husband $6,000 and wife $6,000

A) Husband $7,000 and wife $6,000 The husband may contribute $7,000 and his wife may contribute $6,000. For married couples, an adjusted gross income level of $196,000 (2020) begins to limit the amount of contribution that is permitted into a Roth IRA (although this specific amount is never tested). The married couple has an income level of $148,000, well below that AGI. Therefore, each would be permitted to make the maximum contribution. The wife may contribute a maximum amount of $6,000. Because the husband is 51, he is eligible to contribute an additional $1,000 per year (the catch-up provision applied to those age 50 and older) for a contribution of $7,000.

Which of the following orders on the order book will not be filled if the stock rises? A) Sell stop B) Sell limit C) Buy stop D) Buy stop limit

A) Sell stop Those orders on the book which are above the current market will be executed if the stock rises. Those open orders above the current market are buy stops (including buy stop limits) and sell limits.

When an insured person becomes disabled or unable to work, that person may not be required to continue paying premiums on the contract if the contract included A) a waiver of premium option. B) a low-income provision. C) a freeriding provision. D) a disability rider.

A) a waiver of premium option. A waiver of premium option allows the premiums on an insurance contract to be waived for a person who has become disabled or otherwise unable to work.

If a broker-dealer is assisting in the registration of a stock issue, a registered representative of the firm may A) accept an indication of interest. B) promise a specific number of shares. C) perform a private transaction for a customer. D) accept an order.

A) accept an indication of interest. When an issue is in registration during the cooling-off period, sales may not take place. The registered representative may, however, distribute preliminary prospectuses and accept nonbinding indications of interest.

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) decrease by 25%. C) increase by $2,000. D) increase by $5,000.

A) increase by $2,500. 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).

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

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

The bond resolution includes all covenants between A) the issuer and the trustee acting for the bondholders. B) the issuer and the Municipal Securities Rulemaking Board. C) the bond counsel and the bondholders. D) the issuer and the bond counsel.

A) the issuer and the trustee acting for the bondholders The bond resolution describes not only the characteristics of the proposed offering, but also the obligations the issuer has to its bondholders.

Most mutual funds operate as regulated investment companies. This means that A) they qualify for special tax treatment under Subchapter M of the Internal Revenue Code. B) they register with the SEC under the Investment Company Act of 1940. C) they register with the SEC under the Investment Advisers Act of 1940. D) their principal underwriter (sponsor) is a FINRA member.

A) they qualify for special tax treatment under Subchapter M of the Internal Revenue Code. The term regulated investment company refers to the Internal Revenue Code (IRC) section offering favorable tax treatment to qualifying investment companies. Triple taxation of investment income can be avoided if the mutual fund qualifies under Subchapter M of the IRC. To avoid taxation under Subchapter M, a fund must distribute at least 90% of its net investment income to shareholders. The fund then pays taxes only on the undistributed amount. This rule applies to management companies (open-end and closed-end) and UITs. That means ETFs are also included. Although not investment companies registered under the Investment Company Act of 1940, REITs can also take advantage of Subchapter M's tax benefits. It is true that mutual funds register with the SEC under the Invesment Company Act of 1940 (their portfolio managers register as investment advisers under the Advisers Act) and their principal underwriter is a FINRA member, but those statement have nothing to do with the question.

One of your clients with a margin account is concerned about recent declines in the market price of securities in her portfolio. The current market value of her holdings is $2,100,000, and the debit balance is $900,000. She would like to know how low the value can go before she receives a margin maintenance call. You would reply A) $1,050,000. B) $1,200,000. C) $1,170,000. D) $1,575,000.

B) $1,200,000. The computation for this question is the debit balance ($900,000) divided by 0.75 and that is equal to $1,200,000. At that point, the equity in the account is $300,000, which is equal to 25% of the long market value.

A 38-year-old investor places $25,000 into a single premium deferred variable annuity. Twenty-two years later, with the account valued at $72,000, the investor surrenders the policy. If the investor is in the 25% marginal income tax bracket, the total tax liability is A) $18,000. B) $11,750. C) $25,200. D) $16,450.

B) $11,750. Only the deferred growth is taxable. In this case, it is the difference between the surrender value of $72,000 and the cost basis of $25,000. That $47,000 is taxed at the marginal rate of 25%. Because the investor is older than 59½ (38 + 22 = 60), there is no additional 10% penalty tax. Effectively, this is a 25% tax on $47,000.

A customer is short 100 XYZ shares at 26 and long 1 XYZ 30 call at 1. What is the maximum potential loss on the positions? A) Unlimited B) $500 C) $2,500 D) $400

B) $500 The customer has protected his short stock position from loss by purchasing a call. If the market rises, the call is exercised, allowing the customer to buy his stock at the option strike price of 30 to cover the short position. The most the customer can lose is $400 on the stock position (the difference between the option strike price and the stock price) plus the premium paid for the option ($400 + $100 = $500).

A customer buys XYZ stock at $60 per share. The stock is currently trading at a 10:1 price-to-earnings (P/E) ratio. The firm declares a 3:1 stock split. What will the P/E ratio be after the split if earnings remain unchanged? A) 3:1 B) 10:1 C) 5:1 D) 12:1

B) 10:1 If earnings remain unchanged, the P/E ratio remains the same: 10:1. Earnings are currently $6 per share ($60 / 10). After a 3:1 split, each share will be valued at $20. If earnings are unchanged, the same $6 of earnings is now applicable to three shares, or $2 per share. Price divided by earnings equals P/E ratio ($20 / $2 = 10:1 P/E ratio).

If a customer buys $10,000 worth of stock in a cash account, then sells the shares for $12,000 without first paying for the buy side, and then requests the $2,000 profit, which of the following statements are true? The $2,000 profit cannot be sent to the customer until she pays for the buy side in full. The $2,000 can be sent to the customer, but the account will be frozen for 90 days. If the customer pays for the buy side in full on or before the fourth business day following trade date, status as a frozen account is lifted. Both trades must be switched to the customer's margin account, where buying and selling in this manner are acceptable practices. A) I and III B) II and III C) I and II D) III and IV

B) II and III Selling before paying is called freeriding and is prohibited. The penalty for freeriding in a cash account is that the account will be frozen for 90 days, and orders will not be accepted without cash or securities on deposit in advance. Transactions in margin accounts are subject to the same basic rule.

An investor opens the following positions: Buy 100 shares of SSG @48; write 1 SSG Dec 50 call @3¾. What is the customer's maximum gain, maximum loss, and breakeven point? A) Maximum gain is $4,425; maximum loss is $575; breakeven point is $51.75. B) Maximum gain is $575; maximum loss is $4,425; breakeven point is $44.25. C) Maximum gain is $575; maximum loss is $4,425; breakeven point is $51.75. D) Maximum gain is $4,425; maximum loss is $575; breakeven point is $44.25.

B) Maximum gain is $575; maximum loss is $4,425; breakeven point is $44.25. The first step is to identify the position. This is long stock with a short call (i.e., a covered call position). Breakeven is the customer's net cost. The price of the stock ($48) minus the premium ($3.75) received equals the $44.25 per share breakeven point. The strategy is to generate some income with a little protection against a decline in the price of the SSG stock. The premium income plus the excess of the strike price over the purchase price of the stock is the most this client can make. If the stock's price should rise well above the strike price of $50 per share, the short call will be exercised and the customer will deliver the stock purchased at $48 and receive $50. Regardless of how high the stock price rises, this customer can never make more than the $2 difference plus the 3¾ premium ($5.75 × 100 shares). If the stock's price should decline, the call will expire unexercised. That 3¾-point premium protects the long stock, but only for those 3¾ points. Once the market price falls below $44.25 (the breakeven point), it is all a loss for the customer down to a maximum $4,425 if the price drops to zero. Why doesn't the breakeven follow the "call-up" rule? That rule applies when the only positions are options. Once there is a long or short stock position along with an option position, it is the stock controlling the breakeven.

Which of the following has unlimited risk if it is the only position in an account? A) Long call B) Short call C) Long put D) Short put

B) Short call Uncovered short calls carry unlimited risk.

An investor purchases 100 shares of a bond ETF at a price of $50 per share on September 5, 2019. On November 1, 2019, and February 1, 2020, the fund distributes a $0.50 per share dividend. On May 11, 2020, the investor sells all the shares at $57 per share. What are the 2020 tax consequences of the sale? A) Short-term capital gain of $700, interest income of $50 B) Short-term capital gain of $700 C) Short-term capital gain of $700, dividend income of $50 D) Short-term capital gain of $600

B) Short-term capital gain of $700 Taxation of the sale of an ETF is similar to that of a mutual fund. The question asks about the tax consequences of the sale, so we ignore the dividend distributions. Buying at $50 per share in September and selling at $57 per share the next May is a $700 capital gain over a period of less than one year.

A company's balance sheet dated December 31 shows retained earnings of $100,000. You can deduce from this information that the company A) has at least $100,000 in cash. B) has had $100,000 in undistributed profits since its inception. C) earned a profit of $100,000 for this year. D) has had total net income of $100,000 since its inception.

B) has had $100,000 in undistributed profits since its inception. Retained earnings represent the accumulated total of all earnings that have been retained in the company since its inception. It is quite possible that the company did not earn $100,000 in that particular year and does not have $100,000 in cash.

Among the differences between a real estate investment trust (REIT) and a real estate limited partnership investment (a DPP) is that A) the DPP takes an ownership interest in the property, while the REIT only makes mortgage loans. B) only the DPP is a flow-through vehicle. C) the DPP generally has more investors than the REIT. D) REITs generally trade on the listed exchanges, while DPPs actively trade OTC.

B) only the DPP is a flow-through vehicle. DPPs are the investment vehicle providing flow-through of income and loss. REITs are required to return at least 90% of their net investment income to investors, but losses do not pass through. Both investments can take equity or debt positions. They can also be hybrid and take both. Because DPPs are almost always private placements, the number of investors is usually small. On the other hand, because most REITs are publicly traded, they can have a large number of investors. As private placements, there is no active secondary market for DPPs.

A corporation has an IPO of its $5 par common stock. The public offering price (POP) is $15 per share. The difference between the par value and the POP represents A) retained earnings. B) paid-in surplus. C) net income. D) capitalized profit.

B) paid-in surplus. When a corporation issues new stock at a price in excess of the par value, the excess is listed on the balance sheet as paid-in or capital surplus.

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

B) receives $14,000. When an investor takes a short position in an option, it means the investor has sold, or written the option. When a call option is exercised, the seller is obligated to deliver the stock at the exercise (strike) price. A strike price of $140 for 100 shares results in the seller receiving $14,000 on settlement date.

Many years ago, an investor bought a bond with a 5% coupon. At that time, the yield to maturity of the bond was 6.5%. When the bond matures, the investor will receive A) $1,065. B) $1,000 plus a call premium. C) $1,025. D) $1,050.

C) $1,025. 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.

DWQ declares a quarterly cash dividend of $0.20. After the ex-dividend date, what will be the exercise price of a listed DWQ May 25 call option? A) $24.80 B) $25.25 C) $25.00 D) $24.75

C) $25.00 Because a listed option is not adjusted for a cash dividend, the exercise price of a DWQ May 25 call option remains the same: $25.

An investor has a diversified portfolio of common stock with a market value of $1.7 million and a beta of 1.20. If the OEX (S&P 100) is currently quoted at 680, to protect the portfolio against a decline in value, the investor's best strategy is to buy A) 25 calls. B) 30 calls. C) 30 puts. D) 25 puts.

C) 30 puts. This investor has a broad-based portfolio with a market value of $1.7 million and wants to protect against a possible downturn in the market. First, the investor's most effective strategy to hedge against a possible market downturn would be to buy puts. If the market does turn downward, the loss on the portfolio would be offset by a gain on the puts. Second, you need to determine the number of put contracts the investor needs to purchase in order to cover (hedge) the $1.7 million portfolio. The math is basically the same as if the question had said the investor owns 1,000 shares of a stock and want to buy puts to hedge. With each put hedging 100 shares, you would have to buy 10 puts. In this case, the math is as follows. You are told OEX is trading at 680, therefore each contract has a value of (680 x 100 = 68,000). In order to hedge a $1.7 million portfolio the investor would need to buy 25 OEX contracts ($1.7 million ÷ $68,000). A portfolio with a beta of 1.2, means it is 20% more volatile than the market (S&P 100), so the investor needs 20% more protection. Therefore, because the portfolio has a beta of 1.2 an additional 20% is required (1.2 x 25 puts = 30 puts).

Which of the following would be the least considered factor in determining if a particular type of options trading is suitable for a customer? A) Willingness to assume risk B) Understanding maximum gain or loss potential C) Ability to meet margin calls D) Understanding the strategy being employed

C) Ability to meet margin calls Remember that while most firms require that options trades be done in margin accounts, options purchases are not marginable. Therefore, of the choices listed, the ability to meet margin calls would be the least considered factor regarding suitability.

An investor's portfolio contains the following four bonds: ABC 7% due in 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 as a percentage of its current market price if interest rates jumped by one percentage point? A) DEF 6% due in 2040 B) ABC 7% due in 2040 C) GHI 5% due in 2040 D) JKL 8% due in 2040

C) GHI 5% due in 2040 The longer the duration, the greater the price volatility (price change as a percentage of current value) 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

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

C) I and III 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.

Some limited partnership programs provide potential tax credits to partners. Which of the following typically provide potential tax credits? Rehabilitation of historic properties Equipment leasing Developmental oil and gas programs Government-assisted housing programs A) I and II B) III and IV C) I and IV D) II and III

C) I and IV Historic rehabilitation and government-assisted housing are two programs that offer potential tax credits. Tax credits are no longer available for equipment leasing, and while developmental oil and gas programs offer high intangible drilling costs, these are not investment tax credits.

Which of the following statements regarding communications with the public are correct? Correspondence does not include email. Prior principal approval is required for all correspondence. Correspondence can include communications sent to existing customers. Correspondence can include communications sent to prospective customers. A) II and III B) I and II C) III and IV D) I and IV

C) III and IV Correspondence includes both written and electronic forms of communication—such as email—and communications sent to existing or prospective retail customers. It must be supervised and reviewed by a principal but does not require prior principal approval.

Which of the following orders are not placed on the order display book? Buy stop limit Buy stop Market Not held A) II and III B) I and IV C) III and IV D) I and II

C) III and IV Market orders are executed immediately and are not placed on the order book. Not-held orders are not presented to the order book.

If an investor buys 300 shares of FLB, and one month, later buys 1 FLB Jul 50 put, how does this affect the holding period on his stock? A) It has no impact on the holding period for any of the shares owned by the investor. B) It erases the holding period on 300 shares. C) It erases the holding period on 100 shares. D) It ends the holding period on the put.

C) It erases the holding period on 100 shares. Because the stock has not been held more than 12 months, the put purchase erases the holding period for any shares the put subsequently allows the holder to sell. Because the holder owns one put, this erases the holding period on 100 shares owned. The other 200 shares are unaffected.

An investor opens the following options position: Long 1 KAP Jul 50 call @ 4½ and short 1 KAP Jul 45 call @8¼. What is the investor's maximum gain, maximum loss, and breakeven point? A) Maximum gain = $125; maximum loss = $375; breakeven point = $46.25. B) Maximum gain = $375; maximum loss = $125; breakeven point = $46.25. C) Maximum gain = $375; maximum loss = $125; breakeven point = $48.75. D) Maximum gain = $125; maximum loss = $375; breakeven point = $48.75.

C) Maximum gain = $375; maximum loss = $125; breakeven point = $48.75. The first step is to identify the position. This is a credit call spread. It is a credit spread because the option sold brought in a higher premium than the one purchased. The credit of $375 is the most the investor can make. This is a bear call spread. We know that because the investor purchased the option with the higher strike price and sold the one with the lower strike price. The goal is for the stock's price to decline to the point where neither option is expired. That way, the investor keeps the net credit. If the market does not cooperate and the stock rises above $50 per share, the 45 call will be exercised and the investor will be required to sell the stock for $4,500. However, the stock needed for delivery can be obtained by exercising the long position for $5,000. This results in a loss of $500. When the $375 credit received is taken into consideration, the loss of $500 is reduced by the $375 premium, resulting in a maximum loss of $125. The quick way to do this is to subtract the net premium (the $375 credit) from the difference in strike prices (5 points) and the result is the same $125 loss. Breakeven follows the call-up rule; add the net credit to the lower strike price and that is $3.75 + $45 = $48.75.

The manager of ABC Municipal Securities is interested in bidding on some general obligation bond issues that will be available in the coming months. Where would the manager find information about these forthcoming issues? A) Standard & Poor's Bond Guide B) Electronic Municipal Market Access (EMMA) C) The Bond Buyer D) The Washington Post

C) The Bond Buyer Municipalities publish their official notices of sale soliciting bids from interested parties in The Bond Buyer. The notice gives the details of the bonds put up for bid and how to bid on the issue. The Standard & Poor's Bond Guide gives details of outstanding issues and their ratings. The EMMA is an online site primarily for retail nonprofessional investors.

An inherent risk associated with auction rate securities (ARS) is the potential to have A) a Dutch auction. B) a reset rate. C) a failed auction. D) a clearing rate.

C) a failed auction. An inherent risk associated with ARS is the potential for a failed auction. These can occur due to a lack of demand, resulting in no bids being submitted when it is time to reset the rate. ARS use a Dutch auction method to reset the clearing rate paid in the upcoming period.

FINRA's rule on communications allows member firms to use testimonials in retail communications as long as certain disclosures are made. Among those disclosures is A) indicating that if any compensation is paid for the testimonial, the fact that it is a paid testimonial. B) indicating that if $100 or more in value is paid for the testimonial, the fact that it is a paid testimonial. C) indicating that if more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial. D) indicating that if less than $100 in value is paid for the testimonial, the fact that it is a paid testimonial.

C) indicating that if more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial. Retail communications or correspondence providing any testimonial concerning the investment advice or investment performance of a member or its products must prominently disclose that if more than $100 in value is paid for the testimonial, the fact that it is a paid testimonial. Would the exam ever want you to know that it is more than $100 rather than $100 or more? Yes. ** This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

Broker-to-broker confirmations must be sent no later than A) the end of day on the date of the trade. B) the regular way settlement date. C) the next business day. D) the trade date plus two business days.

C) the next business day. Confirmations between brokers (broker-to-broker confirms) must be sent no later than the next business day following the transaction (T+1).

A customer buys a municipal bond in the secondary market at 96 that has four years to maturity. Two years later, the customer sells the bond at 99. The tax consequences of this investment are A) two points of capital gain and one point of ordinary income. B) three points of ordinary income. C) two points of ordinary income and one point of capital gain. D) three points of capital gain.

C) two points of ordinary income and one point of capital gain. When a municipal bond is purchased in the secondary market at a discount, the annual accretion is taxed as ordinary income. The annual accretion is one point per year (four points divided by four years to maturity). Therefore, when the bond is sold two years later, its cost basis is 98. If the bond is sold at 99, there is a long-term capital gain of one point per bond. Also, there is ordinary income taxation on the accretion of two points.

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) $250 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.

If a customer writes 1 Jul 80 put at 7, and the put is exercised when the market price is at 70, for tax purposes, what is the effective cost basis of the stock put to the seller? A) $80 B) $87 C) $70 D) $73

D) $73 The cost basis is 80 (the price at which the writer must buy) minus 7 (the premium the writer was paid), or $73 per share.

If a customer buys 1 XYZ Aug 50 put at 1 and sells 1 XYZ Aug 65 put at 10 when XYZ is at 58, the maximum potential gain is A) $1,100. B) $600. C) $1,500. D) $900.

D) $900. The maximum gain on any credit spread is the net credit. In this case, $1,000 was received, and $100 was paid out, so the net credit is $900.

Of the following callable bonds, which confirmation must show yield to call? A) 6% municipal, basis 7%, due 2038 B) 6% municipal, par, due 2038 C) 6% municipal, basis 6.5%, due 2028 D) 6% municipal, basis 5.5%, due 2028

D) 6% municipal, basis 5.5%, due 2028 The only bond priced at a premium is 6% municipal, basis 5.5%, due 2028. On a premium bond, the yield to call will be lower than the yield to maturity.

A major risk associated with investing in DPPs is the lack of liquidity. What steps could the program sponsor take that could have the effect of increasing the liquidity of an existing program? A) A DPP dissolution B) A DPP cancellation C) A DPP transfer D) A DPP rollup

D) A DPP rollup A DPP rollup is a transaction involving the combination or reorganization of one or more limited partnerships into securities of a successor corporation. The securities of the successor corporation would likely have greater liquidity. This would have the effect of turning the illiquid DPP into more liquid securities. Disclosure documents must be provided to investors prior to the transaction disclosing risk, the GPs opinion regarding fairness of transaction, and reports and appraisals in connection with the transaction.

Which of the following will not affect special memorandum account (SMA)? A) A deposit of cash into the account by the customer B) A cash dividend on stock held long in the account C) A long sale at a profit D) A stock dividend on stock held long in the account

D) A stock dividend on stock held long in the account The value of the stock dividend received will be offset by the decline in current market value (CMV) of the long position on which the dividend is paid. The account's long CMV will not change; it will just be represented by more shares. There will be no change in the overall CMV, debit balance, or equity, and therefore no change in the SMA. On the other hand, a cash dividend means that new money is coming into the account, which will reduce the debit balance and be credited to SMA so the customer may withdraw the dividend, if desired.

Which of the following debt instruments is unsecured? A) Collateral trust certificates B) Junior lien mortgage bonds C) Equipment trust certificates D) AAA/AAA-rated debentures

D) AAA/AAA-rated debentures Corporate debentures are unsecured bonds backed by the credit of the issuing corporation; they are not secured by underlying collateral. Mortgage bonds are secured with real estate serving as collateral. Collateral trust bonds are secured by securities that a corporation owns in other companies or bonds. Equipment trust certificates are secured by transportation equipment owned by the corporation.

Which of the following characteristics describes a final prospectus? A) Used to solicit indications of interest in a new issue B) Filed with the SEC and not available to the general public C) Filed with the SEC semiannually D) Complies with the full and fair disclosure requirements of the Securities Act of 1933

D) Complies with the full and fair disclosure requirements of the Securities Act of 1933. A prospectus is a disclosure document meant for distribution to the public. It must constitute full and fair disclosure of all material facts about the issuer and the security.

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) Use leveraged index funds (2 or 3×) to maximize gains potential for the small investment amounts. B) Open a long margin account to take advantage of the leverage that margin purchases can create using small amounts of money. C) Invest in both equity and corporate debt mutual funds so that a portfolio of stocks and bonds is established. D) Invest in a money market mutual fund to build up more cash reserves.

D) Invest in a money market mutual fund to build up more cash reserves. 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.

Toby Jensen originally purchased 400 shares of CSC stock on margin at a price of $60 per share. The initial margin requirement is 50%, and the maintenance margin is 25%. CSC stock price has fallen dramatically in recent months, and it closed today with a sharp decline, bringing the closing price to $40 per share. Based on FINRA requirements, will Jensen receive a maintenance margin call? A) Yes, because the account is below the house maintenance requirement. B) No, the account meets the minimum initial margin requirement. C) Yes, the account does not meet the minimum maintenance margin requirement. D) No, the account meets the minimum maintenance margin requirement.

D) No, the account meets the minimum maintenance margin requirement. Minimum maintenance requires equity equal to 25% of the current market value. If the price per share is $40, then the value of the 400 shares is $16,000. That would make the minimum equity requirement $4,000 ($16,000 times 25%). The initial purchase was $24,000 resulting in a debit balance of 50%, or $12,000. If the LMV is $16,000 and the debit balance is $12,000, the account is right at the minimum maintenance level of $4,000. Toby might be below the house maintenance, but because that is not given in the question, there is no way to tell.

When part of an issue of speculative bonds with a 25-year maturity are called, the effect on the remaining bonds will be to A) increase their coupon rate. B) decrease their quality. C) decrease their coupon rate. D) improve their quality.

D) improve their quality. Speculative bonds are those with lower ratings. They are considered to be of lower quality because the risk of timely payment and principal are higher than investment-grade bonds. When a company shows its determination to honor its debt by paying off some of it in advance, the rating associations take note of that and invariably increase the rating. Compare this to your personal credit score. Your score might be relatively low because you have a lot of outstanding debt. As you pay down that debt, your credit score is likely to increase. It is the same logic here.

When recommending the purchase of a DPP to a client, as with all other investments, the recommendation must be suitable. FINRA adds some extras requirements in the case of DPPs. Among those is the requirement that the investor is A) able to emotionally handle the ups and downs of the market. B) in need of a liquid investment. C) an accredited investor. D) in a position to take full advantage of any tax benefits generated by the DPP.

D) in a position to take full advantage of any tax benefits generated by the DPP. FINRA's Rule 2310 lists a few suitability standards necessary for recommending DPPs. Among those is the ability of the investor to make use of any potential tax benefits. Although DPPs are frequently sold as private placements, even then not all of the investors have to be accredited. DPPs are considered illiquid investments, and without a secondary market, there are no "roller coaster" ups and downs.

All of the following statements regarding collateralized mortgage obligations (CMOs) are true except A) CMOs are a derivative security. B) interest payments are distributed pro rata when received. C) principal repayments are applied to earlier tranches first. D) interest is paid semiannually.

D) interest is paid semiannually. CMO holders are paid interest monthly. As payments are received from the underlying mortgages, interest is paid pro rata to all tranches, but principal repayments are paid to the first tranche until it is retired. Subsequent principal repayments are then applied to the second tranche until it is retired and so on. CMOs are a derivative security because the value of each tranche is derived from the timing of principal repayments to that tranche.

The capitalization structure of an open-end investment company can include A) preferred stock, common stock, and bonds. B) only debt issues with no bank borrowing allowed. C) preferred and common stock with no bank borrowing allowed. D) one issue of common stock.

D) one issue of common stock. Open-end investment companies may only issue shares of common stock. Preferred stock, bonds, and other forms of senior securities are not allowed. It is the closed-end investment company that can have a preferred stock and bond offering. Don't confuse what a mutual fund uses to raise money (the common stock it issues) with what it does with that money. The capital raised from the sale of shares may be used to buy whatever securities meet the fund's objectives.