Series 7 practice exam multiple choice

Select from the below metrics the best test of corporate liquidity. A) working capital B) current ratio C) acid test D) book value

C) acid test Answers A, B and C are all very similar, but the quick test, also called the acid test, is the toughest test of liquidity from among these three choices. Book value says nothing about liquidity.

Mr. Poulter is a high risk tolerant high net worth client who enjoys trading options and shorting the market. As such, he places an order to short 1000 shares of Citigroup common at $2.25 per share. His deposit requirement with Reg. T at 50% would be: A) $1,125 B) $2,000 C) $2,250 D) $2,500

D) $2,500 The NYSE and FINRA require that short sales of 'cheap' stocks have substantially higher deposit and maintenance requirements than traditional margin transactions. In this case, the 'cheap stock rule' dictates that a minimum of $2.50 per share is required when shorting stock priced at $2.50 or below. For a 1000 share short sale, the deposit requirement is $2,500.

Miami-Dade County currently has the following four GOs outstanding. All issues possess a call feature and have coupons and maturities as shown below. Assume all issues have similar principal amounts outstanding. In the event interest rates decline, and the County plans to do a refunding of only one of the four outstanding GOs, which issue would most likely be called? A :6.25s31 callable at 100 B 5.50s33 callable at 100½ C 4.65s34 callable at 101 DZr29 callable at 100

A :6.25s31 callable at 100 f you were in charge of finances for the county and you were considering paying off only one of your debts, wouldn't it be the debt that's costing the county the most (the highest interest rate)? In this scenario, the county will retire/call the 6.25% callable bonds because those are costing the county the most every year. Also notice that those bonds have an added advantage - they are callable at 100, which means at Par, meaning there is no call 'premium' required to retire them.

Question 10 Among the most popular features of mutual funds is the availability of reinvestment of dividend and capital gains distributions into full and fractional shares of the fund. None of the following statements about this reinvestment privilege is untrue except: A reinvestment will enable the shareholder to defer taxes on the distributions until such time as the newly acquired shares are liquidated B reinvestment can be done at NAV C reinvested dollars can count towards a breakpoint under the right of accumulation D none of these is untrue

A reinvestment will enable the shareholder to defer taxes on the distributions until such time as the newly acquired shares are liquidated Question 10 Explanation: Reinvesting dividend and capital gains distributions is a wonderful investment practice, but it does not defer taxation.

Mr. Haas goes long 5.5% ABC debentures at 94 with 10 years until maturity. Five years later, due to a change in interest rates, credit quality and approaching maturity, the market value of his bonds has risen to 96. If he were to liquidate his bond position at this price, the most likely tax consequence in the year of sale would be: A) $10 per bond capital loss B) $20 per bond capital gain C) $20 taxable accretion per bond and no capital gain D) No gain, no loss

A) $10 per bond capital loss You must first compute the accretion. He bought the bonds at $940, they mature at $1,000 par value in 10 years, the $60 discount is spread out over 10 years at the rate of $6 per year, called accretion. After 5 years, the accretion is 5 years x $6 = $30. The cost basis of the bonds is now $940 plus $30 = $970. Since he sold the bonds at a market price of only $960, tax law says he has a loss of $10 per bond. Had he sold them for greater than his cost basis of $970, he would have had a taxable capital gain

Mrs. Couples has been referred to you by one of your long-time clients. It seems Mrs. C has an account at another B/D and would like to make a change. After speaking with you, she has decided to do an account transfer. Which of the following most accurately describes the time requirements upon her soon-to-be former firm to complete the transfer process? A) 1 business day in which to validate the transfer request/instructions; 3 business days in which to effect the transfer of the account assets B) 1 business day in which to validate the transfer request/instructions; 5 business days in which to effect the transfer of the account assets C) 3 business days in which to validate the transfer request/instructions; 4 business days in which to effect the transfer of the account assets D) No transfer can be effected until a Clearance Letter has been received from Homeland Security that there is no evidence of money laundering and no Suspicious Activity Report has been filed by her current firm

A) 1 business day in which to validate the transfer request/instructions; 3 business days in which to effect the transfer of the account assets This is the account transfer rule: 1 day to validate; 3 days to transfer.

In presenting an array of debt investments for your customer's consideration, various investment risks are a major part of your presentation. When reinvestment risk is being discussed, which of the below instruments is least exposed to it? A) 15 year zero coupon bond B) 5 year T-note C) 20 year T-bond D) 25 year municipal GO callable in 5 years

A) 15 year zero coupon bond Bonds that have no coupon, no interest payments each year, by definition have no reinvestment risk. Reinvestment risk exists in those debt instruments that have coupon payments. With zeroes, there is nothing to reinvest each year.

Which of the below statements is/are not untrue regarding a Roth IRA? I. the maximum contribution below age 50 is $5,500 II. withdrawals must begin by April 1 of the year after attainment of age 70½ III. anyone with earned income may open a Roth IRA IV. withdrawals after age 59½ are taxable as ordinary income only to the extent they exceed the original principal/cost basis A) I only B) I and III C) III only D) I, II, III and IV

A) I only Warning! Double negatives such as 'not untrue' must be dealt with carefully. Not untrue = not false = true. Which of these Roman numeral answers is true: only I. As for why the other answers are false: age 70½ has no significance in the Roth IRA; persons who have earned income above a Congressionally-set threshold are ineligible for a Roth IRA; post-59½ withdrawals from the Roth IRA are normally tax-free.

Place the following in their proper order in the handling of an order. I. P & S dept. II. Cashier III. Margin dept. IV. Wire room A) IV, I, III, II B) I, IV, III, II C) I, III, II, IV D) IV, III, I, II

A) IV, I, III, II The 'flow of an order' has the Order department, a/k/a the wire room, handling the order first. They pass the executed order ticket to the P&S dept. (purchase & sale), who then passes it along to the Margin dept. The last stop in the flow of the order is the Cashier dept. which handles the money and securities to complete the settlement of the transaction

In anticipation of a weaker dollar, one would expect A) US exports to be more competitive B) foreign exports to increase C) the US trade deficit to grow D) none of the above

A) US exports to be more competitive In simplistic terms, when the US dollar is weak compared to foreign currencies, American goods become cheaper/more competitive/more affordable for foreign businesses, individuals and foreign governments. They buy more US goods, causing US exports to increase, which in turn tends to cause the US trade deficit to decrease.

Research indicates that the stock of BNM Corp. is in an inverted head and shoulders formation. This most likely signals: A) a reversal of a downward trend B) continued bearishness ahead C) the stock is approaching the resistance level D) the company's latest earnings report missed Wall St. expectations

A) a reversal of a downward trend Inverted head and shoulders formation is a diagram which looks like a headstand. It indicates the stock is approaching or is at a bottom and suggests that the stock's downward move is ending, referred to as the reversal of the downward trend. This also suggests it may be time to engage in bullish strategies in the stock.

Your B/D is not a market maker in the stock of LANG Enterprises (ticker symbol: LANG), a NASDAQ listed stock. You receive, and accept, a customer buy order for 500 shares of LANG at the market. To fill this order, your order room purchases the shares from a market maker to fill the customer order. Which term below best describes this situation: A) a simultaneous riskless trade B) a principal transaction C) a 3rd market transaction D) an agency cross

A) a simultaneous riskless trade When a broker-dealer purchases a security from a market maker to fill an already-received customer buy order, this is defined as a simultaneous riskless transaction. Your firm has no risk because you've got the stock already sold.

Uncovered short put exercise results in A) acquisition of shares with a resulting cost basis of strike price less premium B) liquidation of shares with a resulting sales proceeds of strike price less premium C) the potential for unlimited loss D) the potential for a maximum loss of strike price plus premium

A) acquisition of shares with a resulting cost basis of strike price less premium : The writer of a put option is obligated to purchase 100 shares at the strike price if the option is exercised. According to the Internal Revenue Code, if exercised, this investor would now be long 100 shares of stock with a 'net' cost of the strike price minus the premium. This net cost is the cost basis of the newly acquired shares

An option trader who simultaneously goes long an XYZ Oct 40 put and short an XYZ Nov 40 put will profit if: A) both options expire unexercised B) the difference in premiums widens C) the market price of XYZ falls below 40 and remains there D) none of these - this is an uneconomic trade

A) both options expire unexercised This strategy is a calendar spread, a/k/a a time or a horizontal spread. The months are different; the strike prices are the same. The option with the longer duration (more distant expiration month) will have a larger premium, due to its additional time value. This investor sold the November and bought the October. Because the November contract will have a larger premium, this spread is a Credit Spread. Credit spreads profit when both options expire (the investor keeps the credit)

The recommended way to handle a conflict of interest between a member firm and one of its customers in a proposed transaction or set of transactions is to: A) disclose the conflict of interest to the customer. B) let the compliance and/or legal department handle the situation. C) avoid the conflict - don't propose transactions which involve conflicts of interest. D) the member firm should obtain FINRA approval of the proposed transactions.

A) disclose the conflict of interest to the customer The customary practice in the financial services industry is to disclose any potential or actual conflicts of interest at the time of recommending a transaction to a customer. This approach empowers the client to decide if the conflict constitutes a reason to avoid the transaction.

A wrap account is most appropriate: A) for a client who actively trades. B) for a client who is predominantly a buy and hold investor. C) for a client wishing to follow a dollar cost averaging approach. D) for a client nearing retirement who will primarily be withdrawing rather than making new investments.

A) for a client who actively trades. Brokers offering wrap accounts are not charging commissions on each trade. They are charging a fee for managing the customer's assets. This can be a very effective alternative to commission trading for a customer who buys and sells frequently which would ordinarily generate substantial commission charges. Firms are advised by FINRA to do the math to determine which clients would benefit from the fee-based wrap account approach. Firms are advised to not recommend it to clients who would be better off on a commission basis.

A Eurodollar bond has each of the following characteristics except: A) interest payments may be made in either US dollars or the currency of the nation in which the bond was issued. B) its interest payments will be made in US dollars only. C) these bonds are issued by either US or foreign corporations but are not issued in the United States. D) principal is repaid at maturity in US dollars

A) interest payments may be made in either US dollars or the currency of the nation in which the bond was issued. Owners of Eurodollar bonds cannot elect to have their interest payments in foreign currency -- it must be in U.S. dollars.

Registered reps often recommend US T-bonds to their clients looking for stability of income and the safety of government paper. However, T-bonds are not immune from investment risk. To which of the following risks is a T-bond most exposed in the early years of ownership? A) interest rate risk B) liquidity risk C) credit risk D) inflation risk

A) interest rate risk If interest rates rise, long term debt will decline in market value, which is referred to as interest rate risk. Liquidity is normally not a concern, since there are always buyers for US T-bonds. Credit risk is essentially non-existent with United States bonds. Inflation risk can be a factor, but in the early years of owning the bond, inflation normally is a small factor.

One of your customers who is an active trader and is a student of technical analysis has called you to discuss his findings regarding the price action on MMM common. He believes that it is fast approaching its resistance level of 60. If he does not think the stock will break out, which of the below would be most appropriate? A) sell most if not all of his current long position B) place a GTC buy limit order at 61 C) place a GTC sell stop order at 60 D) sell MMM 60 put options with a 3 month expiration

A) sell most if not all of his current long position Active traders take profit off the table when they believe the market is about to turn around. Resistance at 60 tells us that if the stock is currently in the upper 50's, it will not go above 60: it will encounter 'resistance' at that point. Unless the client believes the stock is about the 'break out' to the upside and pierce through the resistance level, the client will sell, taking the profit

In accordance with the latest FINRA rules, under what circumstances may associated persons buy common shares of an IPO on the offering in their own account? A) under no circumstances B) when the purchase is consistent with their normal investment practice and is not disproportionate in size to the overall offering. C )when the purchase is being made in an account held at a brokerage firm other than their own. D) both b. and c.

A) under no circumstances FINRA rules prohibit personnel working in the brokerage industry from purchasing equity IPOs on the offering. There are some extremely narrowly-defined exceptions, however it is unlikely you would find those showing up on a registered rep examination.

You have been approached by a long-time friend who has begun to package Reg. D offerings of real estate developments. His mission is to locate accredited investors and has asked you to provide him leads from your client list. He will pay you a finder's fee for each lead which turns into a sale. If you wish to participate in this arrangement: A) you must get your firm's approval of this arrangement or you will be held in violation of the private securities transactions rules of the FINRA Code of Conduct. B) you do not require your firm's approval, but you do need to notify your firm of your intent to participate. C) you may not participate under any circumstances since this is not a product approved by your firm. D) you would have to resign your license using Form U-5 before participating in your friend's deal.

A) you must get your firm's approval of this arrangement or you will be held in violation of the private securities transactions rules of the FINRA Code of Conduct. A private securities transaction, also called 'selling away,' is the violation that occurs if a registered rep engages in securities transactions 'outside the scope of his or her firm's business.' If your firm reviews these real estate deals and finds them compliant with FINRA and SEC rules and regulations, your firm might add the product to your firm's approved list. In that case, and only in that case, your participation in the deals would NOT be a violation

Stabilizing a new stock issue I. may occur once the S-1 has been filed with the SEC II. may only occur if disclosed in the final prospectus IIII. may not occur at or above the POP IV. if necessary, is normally a function performed by a syndicate manager A I and III B II and IV C III and IV D I, II, III and IV

B II and IV Stabilizing a new issue can only be done once the effective date of the new issue has arrived. It isn't done during the cooling off period, which is prior to the effective date. Stabilizing is normally done by the managing underwriting either at, or just below, the POP (public offering price). It cannot be done above the POP

As a financial advisor, your client has asked which form of business enterprise would provide limited liability and not be subject to internal revenue code taxation. Though you point out to the client that you are neither an attorney nor an accountant, you could inform the client that each of the below generally satisfies those conditions except: A an LLC B a C Corp. C an S Corp. D a DPP

B a C Corp. The regular corporation, called a 'C' Corp., does offer limited liability for its shareholders, however it is considered a taxable entity. The other 3 choices are not taxable entities, and the owners have limited liability.

Mr. and Mrs. Smith, a couple roughly 15 years from retirement, have inquired about the availability of a product you might recommend to them which accommodates their investment objective, which is a hedge against both inflation and deflation. Which of the below would be most suitable? A a Roth IRA B a combination annuity C a variable annuity D an S&P Index Fund

B a combination annuity Question 11 Explanation: A combination annuity involves placing some of one's money into a fixed annuity (hedge against Deflation) while also investing money in a variable annuity (hedge against Inflation).

CPU Industries, Inc. (ticker symbol CPU) has $50,000,000 par value convertible debentures outstanding with a 40 to 1 conversion ratio. If the bonds are currently trading at 110 and are above parity, CPU common must be trading: A at 27.50 B at 27.49 or below C at 27.51 or above D at 44.00

B at 27.49 or below Step 1 is to determine the parity price of the stock. The bond is trading at 110, which is $1,100. The bond is convertible into 40 shares: that's the 40 to 1 conversion ratio given in the question. that at its current price of $1,100, the bond is WORTH MORE THAN the stock. Therefore, the stock can't be AT $27.50, it must be at least 1 penny below $27.50. So 40 shares at $27.49 (or below) is less than $1,100.

Which of the below investments trades on an exchange at a price which is unrelated to its underlying value? A private hedge fund B closed-end investment company shares C open-end investment company shares D forward contracts

B closed-end investment company shares Closed end investment companies have a market price which is determined by supply & demand, in the same way that listed and NASDAQ stock prices are determined by investor supply & demand. Therefore, the price of a closed-end share is not based upon, nor is it related to, the net asset value of the closed end fund. Private hedge funds don't trade on an exchange: open end funds are priced each day AT the 4 pm NAV and don't trade on an exchange: forward contracts are private commodities contracts, and don't trade on an exchange.

In the business of underwriting new issues, the term Western Account is most often associated with: A) undivided liability B) several liability C) joint & several liability D) offerings of technology stocks

B several liabilities Several liability is the legal term used when the members of the syndicate are solely responsible for selling their individual allocations, and have no continuing responsibility for the failed sales efforts of other syndicate members. Joint & several would refer to an Eastern syndicate, in which members have a continuing responsibility for the unsold shares of other members.

For the customer who is seeking to hedge a short stock position, which of these strategies can provide some degree of protection? I. buy limit order II. long call III. short put IV. buy stop order A) I, II, III and IV B) II, III and IV C) II only D) I and IV

B) II, III and IV When shorting stock, loss results from a rise in CMV. A long call locks in the price at which the borrowed stock may be repurchased. A short put provides premium income which provides a partial or limited amount of upside hedge. A buy stop order will close out the short position once the stop order has been triggered by a rise in market price. A buy limit order is placed below CMV and as such, would not be executed in a rising market, and therefore does not provide a hedge against loss in a short sale.

A client of yours with a conservative level of tolerance for systematic risk and a fairly long time horizon has indicated that she would prefer to avoid substantial portfolio turnover. Your suitable recommendation would most likely be: A) a tactical strategy. B) a passive strategy. C) an aggressive strategy. D) a hedged strategy.

B) a passive strategy. A passive strategy is one in which there is infrequent selling of securities in the portfolio, which fits the client's desire for low portfolio turnover

Dealer to dealer good delivery of 580 shares of listed common stock, in accordance with the Uniform Practice Code of FINRA, would include each of the following deliveries except: A) a stock certificate for 500 shares and a certificate for 80 shares B) a stock certificate for 580 shares C) 580 certificates - 1 share each D) 5 certificates for 75 shares each; 9 certificates for 20 shares each; 5 certificates for 5 shares each

B) a stock certificate for 580 shares A single certificate for 580 shares is unacceptable under the good delivery rules because it is a round lot odd lot combination in one certificate. As unusual as answer D appears, here is why it meets the good delivery rule. There are 19 certificates in this delivery. As long as you can combine them into SINGLE 100-share 'piles,' it's good. You take each cert. for 75, you add a cert. for 20, you then add a cert. for 5 and you have a total of 100 shares represented by these 3 certificates. That is considered good delivery. You can make five such 'piles' to make good delivery of 500 of the shares in this order. What you're left with are 4 certificates for 20 shares each...and they represent the odd lot of 80 additional shares, which is good delivery of those 80 share

According to the rules and regulations of the Options Clearing Corporation and the options exchanges, an equity call option may be covered by each of these except: A) 100 shares of the underlying common stock B) cash equal to the aggregate exercise price of the option C) a depository receipt for 100 shares of the underlying common stock D) none of these are exceptions

B) cash equal to the aggregate exercise price of the option Covered call writing requires the writer to own 100 shares of the underlying stock in their brokerage account, or provide their brokerage firm with a receipt from a bank or other depository institution showing that the bank is holding 100 shares of the underlying stock in their vault, stock which belongs to the option writer. Having enough cash on hand to buy 100 shares of the stock is not considered 'covered' under the OCC rules.

The phase of the business cycle preceding the trough is best described as: A) peak B) contraction C) recovery D) expansion

B) contraction The key word in this question is 'preceding.' The phase of the cycle which comes immediately before hitting the trough is contraction

SEC Rule 144 restricts sales of control stock by corporate insiders to which of the following limits? A) control stock may be sold without limit so long as the insider has filed Form 144 with the SEC at the time of the sale and the sale is not based upon material non-public information. B) control stock may be sold over a 90 day period in an amount not to exceed the greater of 1% of the issuer's outstanding shares or the average weekly volume over the 4 week period preceding the sale. C) control stock may be sold over a 90 day period in an amount equal to the lesser of 1% of the issuer's outstanding shares or the average weekly volume over the 4 week period preceding the sale. D) the sale of stock by control persons requires that all sale transactions be effected through a broker/dealer which is a member of the principal exchange on which the stock is traded and the firm may act only in an agency capacity.

B) control stock may be sold over a 90 day period in an amount not to exceed the greater of 1% of the issuer's outstanding shares or the average weekly volume over the 4 week period preceding the sale. The quantity limitations set forth in SEC Rule 144 for sales of control stock are properly described in answer B

The Green Shoe option found in many stock prospectuses: A) enables the company to engage in a shelf offering B) enables the company to sell a limited number of additional shares beyond the amount initially registered with SEC, without filing a new registration statement C) may only be activated when the managing underwriter is engaged in stabilizing the new issue D) is also referred to as the underallotment provision

B) enables the company to sell a limited number of additional shares beyond the amount initially registered with SEC, without filing a new registration statement A company is permitted to sell up to 15% more shares than initially registered without having to file a whole new registration statement. This is the 'overallotment' provision of SEC rules, also called the 'Green Shoe' option.

The most volatile of the money market rates shown below is the: A) prime rate B) fed funds rate C) discount rate D) call loan rate

B) fed funds rate Fed funds loans are overnight loans between commercial banks, normally used to assist them in meeting their FRB reserve requirements. The interest rate on these funds is considered the most sensitive, or volatile, of all the short term money market rates.

A new stock issue may begin trading on NASDAQ A) as early as the completion of the IPO B) following the opening trade on the morning of the effective date C) 30 days after the effective date D) after a 5 business day quiet period

B) following the opening trade on the morning of the effective date There is no waiting period for new shares to begin trading in the secondary market.

Mr. Watney has placed a buy order for 1000 shares of ABC at the market. The execution price was $42 in his cash account on Wednesday, February 4th. If he fails to make payment by Monday, February 9th, the most likely consequence will be: A) an extension of time will be requested on his behalf and if granted, no liquidation will occur. B) no extension of time is necessary under these circumstances: he has two additional business days in which to make payment. C) the purchase will be canceled for non-payment: his account will be frozen for 90 calendar days. D) the firm will do a sell-out, at Mr. Watney's expense, and freeze his account for 90 calendar days.

B) no extension of time is necessary under these circumstances: he has two additional business days in which to make payment. Regulation T states that public customers are given 2 business days beyond regular way settlement to make payment. Therefore, non payment in T+3 does not result in any action.

Stopping stock by a designated market maker on the floor of the NYSE is: A) prohibited. B) permitted so long as it is for a public order. C) permitted whether for a public or a member firm order. D) an order which will be triggered by a trade at or below the stop price if a sell stop order, or at or above the stop price if a buy stop order.

B) permitted so long as it is for a public order. Question 43 Explanation: Stopping stock is a practice performed by an exchange Specialist in which a Floor Broker is given a guarantee of an execution price by the Specialist, so long as it is an order being placed on behalf of a public customer. Specialists are now referred to as DMMs, designated market makers.

One of the most notable risks which must be disclosed to your customer when recommending CMOs is that as interest rates in the US economy fall: A) the liquidation market value of CMO interests will fall. B) refinancing by homeowners may result in pre-payments to CMO holders due to mortgage pay-offs. C) new money investments will slow down. D) default risk will increase.

B) refinancing by homeowners may result in pre-payments to CMO holders due to mortgage pay-offs. Accelerated payment risk, pre-payment risk, or early repayment risk, are the various terms used to describe the risk that an owner of mortgage-backed securities is exposed to if the portfolio experiences an unplanned increase in mortgage pay-offs, primarily due to homeowners refinancing when rates drop. The risk to the investor is that his or her money isn't earning the same high interest rate as it was when he or she first bought the CMO investment.

The State of Wyoming has outstanding $250,000,000 in 5.5% GOs which are callable at par one year out. The financial officials of the state are concerned that today's 4% rates won't be available to the state a year from now when the state will be permitted to call the 5.5% issue. To avail itself of today's 4% rates, the state issues 4% GO bonds today in sufficient quantity to afford the call a year from now, escrowing the proceeds of this new issue in short term government securities for one year, at which time it will use those funds to call in the 5.5% issue. A) this is not permitted - the state must wait until the call date to issue the new bonds B) this is most often referred to as advance refunding C) this is not permitted - it is considered Treasury arbitrage, a violation of the law D) this is permitted only so long as the holders of the 5.5% issue are given a right of first refusal on the new 4% GOs

B) this is most often referred to as advance refunding Selling new bonds in order to raise capital to call in older high interest bonds is called refunding. When the issuer sells the new bonds months or years in advance of the call date, such as in this question, it is called advance refunding

A United States Treasury Note with a $5,000 par value is quoted 106.10 - 106.15. A customer sell order would be executed, disregarding commissions, at which of the following prices assuming no change in the quote? A $ 1,061.00 B $ 1,061.50 C $ 5,315.63 D $ 5,307.50

C $ 5,315.63 Government bonds are quoted in 32nds. Since the client has placed a sell order, the client is selling TO the firm. The firm buys FROM its clients at the bid price, which is 106.10, which is 106 and 10/32nds percent of par which in decimal format is 106.3125% times $5,000 par. This gives us answer C.

When comparing a broker-dealer and an investment advisor, which of these statements is most accurate? A) Advisors are compensated based upon performance, brokers are not. B) Advisors are compensated based upon transactions, brokers are compensated based upon assets under management. C) Advisors are compensated based upon fees for advice, brokers are compensated based upon transactions. D) Both are compensated based upon transactions.

C Advisors are compensated based upon fees for advice, brokers are compensated based upon transactions. Advisers are paid for their advice. Brokers are paid commissions when there are transactions, purchases or sales.

All of the below represent bond sweeteners with the exception of: A a put option B cum-warrants C a call feature D convertibility

C a call feature A sweetener is a feature that is good for investors. Owning a callable bond exposes one to call risk, which is not considered desirable by bond investors. Call risk is the risk of having one's portfolio altered when the issuer chooses to call the bonds. Having a put feature, a conversion feature, or warrants attached to a bond can be desirable and even highly profitable

Which of the portfolio positions described below has the greatest risk exposure? A long stock B short put C short stock/short put D short stock/long call

C short stock/short put In this type of question, you have to evaluate all four answers to determine the maximum potential loss of each one in order to know the one with the greatest risk of loss. Shorting stock has unlimited risk of loss. Even when selling a put option to go with the short sale of stock, the risk of unlimited loss remains in place. Why answer D is not correct is that when one shorts stock, one can buy a call option to provide a hedge which serves to eliminate the risk of unlimited loss.

A 40 year-old customer invested $10,000 in a nonqualified variable annuity. Ten years later she has a financial emergency and wishes to withdraw some of the current account value, which has grown to $18,000. She is concerned about the tax consequences of such a withdrawal. You explain to her that: A) she may withdraw up to $10,000 tax free and without penalty. B) all withdrawn monies will be subject to ordinary income tax plus a 10% penalty. C) the first $8,000 of withdrawal will be taxed as ordinary income plus a 10% tax penalty. D) the first $8,000 of withdrawal will be taxed partly as ordinary income and partly as capital gains, plus a 10% tax penalty for premature withdrawal.

C the first $8,000 of withdrawal will be taxed as ordinary income plus a 10% tax penalty. The key language in this question is the term 'non-qualified.' This VA product is funded by the client with after-tax (already-taxed income) dollars. Withdrawals prior to age 59½ will be on a LIFO basis, meaning the last-in money (the $8,000 of account earnings) is the first money to come out. Because she is 40 and her reason for the withdrawal does not qualify for a waiver of the 10% penalty, the earnings will be penalized 10% under the premature withdrawal rules. After the full $8,000 is withdrawn, she would then be withdrawing her original principal (her cost basis) on which there would be no tax or penalty.

Each member firm must provide firm element continuing education training which is appropriate to the type and size of the member. However, FINRA rules mandate Regulatory Element CE testing on a specific periodic schedule. For an associated person who has just reached his or her 6th anniversary as a registered rep, in how many years will they be required to perform the regulatory element CE testing? A this year B next year C two years from now D three years from now

C two years from now Question 12 Explanation: The day you pass your registered reps test is your anniversary date for the rest of your career. Two years later, you have your first Regulatory Element CE test. Every 3 years thereafter you are required to undergo the Regulatory CE testing. Therefore, your test dates will be your 2nd anniversary, your 5th, your 8th, your 11th, your 14th, etc., until your retire. If you've just celebrated your 6th year in the business, you have 2 more years before your next Regulatory CE test, which is required at your 8th anniversary.

An investment in United States Treasury bonds may be subject to which of the following taxes? I. capital gains II. federal income III. state income IV. ad valorem A) all of the above B) I and III C) I and II D) II only

C) I and II US Treasury securities are subject to Federal Income Tax, but are exempt from State Income Tax. Ad valorem taxes are taxes on property, such as a home or commercial building, not on securities investments. If an investor sells a T-bond in the secondary market at a capital gain, that gain is taxable.

Your firm has hired a new candidate to be a municipal securities registered representative. If her date of hire was March 1st, and she passed the appropriate qualification examination required by the MSRB on March 31st, when is the earliest date on which she may begin to engage in the sale of municipal securities with public customers? A) March 31st B) April 1st C) June 1st D) July 1st

C) June 1st There is a 90 day apprenticeship period for new hires under MSRB rules. It does not matter if recruits have passed the qualification exam during their first 90 days of employment. June 1st is 3 months after the March 1st date of hire.

All member broker-dealers are required to comply with the USA Patriot Act and related protective regulations. At the time of account opening, individuals filling out a new account form must supply certain information which will enable which of the following agencies to verify they are not on the list of known money launderers, terrorists or others deemed ineligible to open an account at a financial institution? A) FINRA B) SEC C) OFAC D) Justice Department

C) OFAC The Office of Financial Asset Control keeps the list referred to in this question.

With the Fed engaging in a policy of tightening the money supply, interest rates are on the rise. The market price of which of the following issues would likely decline the greatest dollar amount? A) T-bill B) T-note C) T-bond D) all of the above would tend to decline at about the same rate

C) T-bond The greatest decline in market price is found in the longer term debt instruments, in this case the T-bonds. Short term instruments will react the quickest, but by very small dollar amounts.

The Van Buren Growth Fund has its first breakpoint at $10,000, and its second breakpoint at $25,000. You have a customer for whom this fund is suitable and has told you he would like to invest $8,000 at this time. Without further discussion, you process the client's purchase order. A) When the client invests additional money into the fund, he will be granted the reduced sales charge on that portion of his investment which exceeds the breakpoint. B) When the client invests additional money into the fund, he will be given a retroactive sales charge reduction once his total investment equals or exceeds the breakpoint. C) You have engaged in a breakpoint sale. D) None of the above.

C) You have engaged in a breakpoint sale. FINRA defines a 'breakpoint sale' as the violation which occurs when a registered rep fails to inform, or remind a mutual fund investor of the availability of reduced sales charges at breakpoints, in particular when that investor is purchasing an amount not far from a breakpoint. In this example, a client prepared to write a check for $8,000 should have been told that for an additional $2,000, they would qualify for a reduced commission on the entire $10,000 investment. By failing to discuss this, the rep has engaged in an unfair and unethical practice known as a 'breakpoint sale.'

The most significant distinction between a selling syndicate member and a selling group member is: A) motivation B) reputation C) commitment D) compensation

C) commitment Selling group members have a 'best efforts commitment' in the underwriting. Syndicate members have a 'firm commitment.

ETNs are: A) equity tradable instruments B) equity traded notes C) exchange traded notes D) government sponsored notes designed to provide liquidity to businesses

C) exchange traded notes ETNs are unsecured debt instruments (notes) traded on an exchange, thus the name 'exchange-traded notes.'

Non-recourse loans used to finance direct participation programs: A) do not increase investor basis under any circumstances B) increase investor basis only if the Subscription Agreement calls for non-recourse loans to be utilized C) increase investor basis in real estate DPPs only D) increase investor basis in all DPPs

C) increase investor basis in real estate DPPs only In DPP/limited partnership securities offerings, reference is made to the types of borrowing in which the General Partner may engage on behalf of the partnership. Non-recourse debt does not put the limited partners at risk, as the lender has no recourse to the limited liability investors (your client) in the event the partnership defaults on the loan. Since the investor is not at risk, this type of lending does not increase your client's tax basis in the program. However, for real estate programs, IRS rules provide a special exception to the 'at risk' rules, resulting in a situation in which investor basis may be increased by the use of non-recourse financing in the program. Non-recourse loans do not increase investor basis in DPPs, except real estate DPPs

Mrs. Ko's portfolio has an aggressive bias towards growth stocks. As such, its beta is 1.4 and she is concerned about downside exposure due to overall market risk over the near term. The S&P 500 Index is currently at 2000.00 and her portfolio has a current market value of $1,000,000. Which of the following recommendations would provide the best hedge? A) short 5 S&P 500 Index calls B) long 5 S&P 500 Index puts C) long 7 S&P 500 Index puts D) long 700 S&P 500 Index puts

C) long 7 S&P 500 Index puts The S&P 500 has a beta of 1.0. Long Index puts provide an effective hedge against downside portfolio risk. But a portfolio with a beta of 1.4, which is 40% higher than 1.0, requires 40% more put options to acquire the appropriate amount of hedging. Each S&P 500 Index option contract with a 2000 strike price provides protection for $200,000 of portfolio value, which is 2000 times the multiplier of 100. A $1,000,000 portfolio would require 5 put options if the portfolio had a beta of 1.0. This portfolio requires 40% more options: 7 long puts.

On December 30th, with no other gains or losses for the year, Mr. Mickelson liquidated 300 shares of Ford common at $10 in which he had a cost basis of $20. Because of his long-term bullish belief in Ford, he acquired 300 shares of Ford at $11 on January 10th. His year-end loss of $3,000 is: A) partially tax deductible in the year of sale B ) fully tax deductible in the year of sale C) not deductible in the year of sale D ) not enough information to determine

C) not deductible in the year of sale The 30-day wash sale rule states that a sale at a loss, though normally permitted to be included on a taxpayer's year-end computation of net gains or losses for that year, will be disallowed from current deductibility if the investor buys that same security or one substantially identical to it within 30 days after, or 30 days before the date of the sale that generated the loss. Buying 300 shares of Ford on January 10th took place within 30 days after the December 30th sale at a loss. As a result of purchasing the Ford stock in early January, the December 30th loss cannot be deducted in the year of sale.

The bid price of a stock is the A) price a market maker can expect to receive from a customer B) price a customer can expect to pay for the stock C) price a market maker will pay a customer for the stock D) equivalent to the net asset value of the stock

C) price a market maker will pay a customer for the stock When a customer sells stock, the customer is paid the highest price that dealers, also called market makers, are bidding for that stock at that moment in time.

The stock of which of the following listed corporations is generally considered the most sensitive to interest rate changes? A) consumer goods B) health care C) public utility D) broker-dealer

C) public utility Public Utility companies tend to be highly leveraged, having a capital structure comprised of a substantial amount of long term debt/bonds. The stocks of these companies are referred to as 'interest rate sensitive' due to the magnified impact interest rate increases have upon these highly leveraged heavily indebted corporations.

According to FINRA rules, the best approach when investigating allegations of churning a customer's account is to focus on: A) the frequency of trades B) the size of the trades C) the investment objectives of the customer D) the amount of time that the customer allowed to elapse between the questionable trades and the filing of the complaint

C) the investment objectives of the customer Though one could argue that any of these answers could provide evidence that a churning violation has occurred, FINRA's interpretation states that #1 on the list of considerations is the investment objective of the customer. Case in point: a day trader would have a very difficult time claiming churning for excessive frequency of trades - constant in and out trading is, by definition, the day trader's investment objective!

Lyon Technology is being quoted by 3 market makers as follows: Market Maker A 42.22 - 42.72 10 by 15 Market Maker B 42.28 - 42.75 15 by 10 Market Maker C 42.20 - 42.68 5 by 5 If a member firm received and accepted a customer sell order for 500 shares of Lyon Tech common, the mark-up or mark-down would be based upon: A 42.68 B 42.75 C 42.20 D 42.28

D 42.28 Question 7 Explanation: The key words in this question are 'customer sell order.' Your client is selling TO your firm. Your firm will give the client the BEST BID price available at this time, then charge a fair reasonable mark-down in accordance with the FINRA 5% policy. The best bid is the HIGHEST of all the bids on the NASDAQ screen, which in this case is $42.28, the bid of Market Maker B.

As an RR, you've determined that investment companies would be a suitable product for several of your customers. In your research, you've located two companies and their NAV and Offer Prices respectively are shown below: Company A: 18.45 − 20.25 Company B: 8.79 − 8.15 Which of these companies could be an open-end management investment company? A Company A only B Company B only C Both A & B D Neither A nor B

D Neither A nor B Question 9 Explanation: The rules regarding mutual funds (open-end investment companies) require that the purchase price be no less than the Net Asset Value. That eliminates Company B whose purchase price/offer price is LESS than the NAV. What is wrong with Company A? The spread between the NAV and the Offer price is so large it violates the maximum sales charge permitted by the regulators, which is set at 8.5% of POP. Company A has a spread of $1.80. Dividing $1.80 by the POP of $20.25 gives us 8.89%. Therefore, Company A cannot be a mutual fund. Neither of these 2 investment companies could be open-end mutual funds. They are most likely closed-end investment companies, listed for trading on a stock exchange, and trading every day at prices based upon supply & demand, not NAV.

When viewing the latest quotes on T-bills, you note that the current quote on the new 3 month Bills, 0.50 − 0.55, is somewhat higher than the quote on new 3 month Bills at the previous auction. A T-bill prices have risen B The yield curve is inverting C The Fed is easing the money supply D T-bill discounts have increased

D T-bill discounts have increased T-bills are not quoted as a percentage of par, whereas notes and bonds are. Bill quotes represent the percentage of Discount from Par Value at which banks and dealers purchase T-bills at the Fed Auction. If you're told that this week's quotes, which are discounts from par, are HIGHER than the discounts from last week, that means T-Bill purchase prices have gotten LOWER -----we all know that when department stores increase the DISCOUNT, the price in dollars gets cheaper. It's the same with T-bills. For any of you who put answer A, it is wrong because it says prices have gone up. When a discount gets higher/bigger, the sale price goes down.

Compute the number of days of accrued interest payable by the purchaser of the J-J1 State of Virginia 4.75s42 bought on Wednesday, February 25th. A) 54 days B) 59 days C) 60 days D) 61 days

D) 61 days These are municipal bonds. The 30/360 rule applies. The issuer pays semi-annual interest each January and July 1st (J-J1 is how you know that). Muni's settle regular way 3 business days after the trade date (T+3). A trade on Wed. 2/25 will settle the following Monday, March 2nd. Accrued interest is computed up to but not including the settlement date. Accrued interest is due for the months of January and February, plus 1 day in March. Therefore, 2 months of interest is 60 days, plus 1 = 61 days of accrued interest

You take note of the dividend payout ratios and earnings growth of a number of listed companies whose stock may be suitable for several of your customers. The data you've gleaned from the Continental Consolidated Corporation (CCC) shows latest reported EPS of $5.00/share with a dividend distribution of $2.50, while the data from the Bergen Fairfield Company (BFC) has EPS of $1.15 and no dividend distribution. Which of the following conclusions might be drawn from these data, in the absence of any other information? A) CCC is defensive; BFC is cyclical B) CCC is cyclical; BFC is defensive C) CCC and BFC are growth D) CCC is defensive; BFC is growth

D) CCC is defensive; BFC is growth Analysts may debate this issue, but as a general rule, defensive industries tend to pay large dividends as a percentage of their earnings. CCC is paying out 50% of earnings in the form of dividends. That's a large dividend payout ratio. CCC would appear to be defensive. On the other hand, in the growth-oriented industries, paying dividends is often deferred for years, even decades, until some level of stability is reached. They tend to plow back whatever earnings they have into research and development, and expansion/growth. BFC pays no dividends, and is most likely a growth company.

Variable annuities are subject to which of the following? I. State blue sky regulations II. SEC regulations III. FINRA rules IV. State insurance regulations A) II and III B) II, III and IV C) I and IV D) I, II, III and IV

D) I, II, III and IV Variable annuities are an insurance product, and are subject to insurance regulations. Variable annuities are also a securities product, regulated by the SEC, the state securities regulators (blue sky rules) and FINRA.

Which of the below instruments trades plus accrued? A) T-bills B) Zero coupon bonds C) STRIPS D) Industrial Development Revenue bonds

D) Industrial Development Revenue bonds Transactions in bonds that have a periodic payment of interest, usually semi-annually, require the buyer to pay accrued to the seller up to, but not including, the settlement date. This is referred to as trading 'plus accrued.' Answers A, B and C are zero coupon securities: they pay no periodic interest. Only answer D pays periodic interest.

A FINRA member firm has become insolvent. A SIPC Trustee has just been appointed by the Court. Liquidation proceedings are imminent. Which of the following statements is inaccurate with regard to SIPC coverage? A) All cash and securities that can be located, identified and attributed to specific customers will be returned to those customers without limit. B) Up to $500,000 in cash and securities insurance coverage is provided to each 'separate customer' of the bankrupt broker/dealer. C) Cash claims in excess of $250,000 are uninsured by SIPC, creating a general creditor status for claimants with claims for cash above that figure. D) Up to $250,000 in cash in separate commodities accounts at the bankrupt B/D is covered by SIPC insurance.

D) Up to $250,000 in cash in separate commodities accounts at the bankrupt B/D is covered by SIPC insurance. Commodities are not covered by the Securities Investor Protection Corporation. Commodities are not securities.

An agent of a broker-dealer may borrow money from all of the below except: A) a corporate affiliate of the agent's member firm. B) a client which is a bank. C) a broker-dealer. D) a mortgage broker.

D) a mortgage broker. A mortgage broker is not a lender of money, but rather is a person who is in the business of arranging for loans. Reps cannot borrow money from clients who are loan 'arrangers,' but can borrow from lenders such as banks, or broker/dealers as in margin account lending, and from their own employer or affiliates thereof.

The breadth of the market is measured by the A) put / call ratio B) price / earnings ratio of the S&P 500 C ) daily volume compared to the average daily volume D) advance / decline ratio

D) advance / decline ratio In securities analysis, the breadth of the market is measured by the ratio of advancing stocks to declining stocks.

The Uniform Practice Code of FINRA sets forth requirements regarding deliveries, eligibility for issuer distributions, and a wide variety of rules pertaining to dealer to dealer day to day activities. When it comes to the determination of ex-dividend dates: A) the ex dividend date for open-end investment company shares is set by the Board or the principal underwriter of the fund. B) the ex dividend date in respect of listed common shares is normally 2 business days prior to the designated record date set by the Board. C) the ex-date for stock dividends 25% or greater is normally 1 business day past the payable date. D) all of the above

D) all of the above All of these statements are correct with respect to ex-dividend dates under FINRA's rules.

At option expiration with CMV at the strike price, which account with no other positions beyond the following option positions will always experience profit? A) long straddle B) vertical spread C) horizontal spread D) short put

D) short put Option writers receive premium income. If the option expires, their profit is the premium. The option will expire if the CMV is equal to the Strike Price at expiration. The problem with the other choices is that with a long straddle, both options will expire and there will be total loss of straddle premium; and in the horizontal spread, there is no way to know if CMV at the Strike price will result in a profit or a loss - it could be either. In the case of the vertical spread, which strike price is the CMV equal to - the lower one or the higher one? The question doesn't say, so you can't know if it's profitable. Short put will always be profitable when the option expires.

In the opening of a new options account, certain procedures must be followed in accordance with CBOE and/or other SRO requirements. Which of the following represents the final step in the options account procedures? A) furnish a copy of the options disclosure document (ODD) B) branch manager approval of account opening C) the client's first options trade D) the special options agreement is signed and in the firm's files

D) the special options agreement is signed and in the firm's files The special option agreement form is required to be reviewed and signed by the new options account customer and returned to the firm within 15 days of account opening. One can actually engage in trading in the account during those 15 days, but if this agreement is not returned to the firm in time, no further opening transactions are permitted until this agreement has been returned to the firm.

Christina Fauntleroy, a 78 year old widow and long time client of yours, wishes to open a joint account with her grand-niece Alison, who is about to enter high school. The purpose of the account is to teach Alison how to invest in the markets while also saving for college which will begin in 4 years. A) you recommend the account be opened as JTWROS B) you recommend the account be opened as TIC C) you recommend the account be opened as joint tenants in their entireties D) you cannot open this joint account

D) you cannot open this joint account The grand-niece is a minor. A minor cannot be a joint account holder. There are alternatives, such as UGMA or UTMA in which there is a Custodianship for the benefit of the minor.

Your customer Mr. Furyk has expressed an interest in adding technology stocks to his portfolio. He informs you that he likes ABC Technology, Inc. and has instructed you to buy it when you think the time and price are right and to buy as much of it as you believe is reasonable when considering his portfolio mix and investment objectives. A) because his instructions are giving you limited discretion as to price and time, you do not require written discretionary power B) you would be required to obtain branch managerial approval before entering this order C) you may place the order as you see fit, however Mr. Furyk retains the right to break the trade if he disagrees with the execution D) you must have written discretionary power in order to do what this client wants

D) you must have written discretionary power in order to do what this client wants Your customer wants to BUY, and he told you the name of the STOCK, but he did not tell you the AMOUNT to buy. Therefore, discretionary authority in writing is required

In the course of opening a new margin account, an individual customer is required to sign a number of documents provided by the member firm. Choose from the below which documents, if any, require the customer's signature. A) loan consent agreement B) Hypothecation agreement C) Credit agreement D) margin agreement E)all of these are required

E)all of these are required Question 13 Explanation: The hypothecation and credit agreements, as well as a margin agreement, all require the customer's signature to open a margin account. The loan consent agreement is not a requirement, though the client does have the option of signing it. Should the client choose to allow the firm to lend out the client's excess margin securities to others who, for example, wish to borrow the shares to engage in short sales, the client would sign the loan consent agreement. The firm cannot force the client to sign the Loan Consent agreement.

When discussing a corporation's capitalization, each of the below would be included except: A: non-voting class B preferred stock B: subordinated debentures rated BB+ by Standard & Poor's C: earned surplus D: plant & equipment

Plant and equipment Capitalization includes Stockholders' Equity and Long-term Debt. Plant & Equipment are Fixed Assets, which are assets purchased with the Capital raised by the business but are not themselves considered Capital

Mr. Palmer, a high risk tolerant high net worth client of yours, has the following position in his margin account: Short 1000 shares XYZ at $50/sh. Cr. Bal. $ 75,000 Two weeks later, XYZ is trading at $40/sh. Assuming Palmer has not yet closed out his short position, his Cr. Bal. will now be: A $ 75,000 B $ 40,000 C $ 35,000 D $ 85,000

A $ 75,000 When CMV changes, either up or down, equity changes, but Credit Balance does not change - it remains constant

Mr. Woods, an existing cash account customer of yours, has spoken with you regarding his travel plans for the upcoming 3 months. He's indicated he does not want to receive the regular monthly customer statements and confirmations of transactions while he's out of town for this extended period of time. As his registered rep, you inform Mr. Woods: A) that your firm is required to send the confirmations, but can hold the monthly statements for up to 3 months if he's traveling abroad. B )that your firm can hold mail for up to 3 months if he's traveling abroad. C) that your firm is required to send both the confirmations and the monthly statements and cannot hold the mail under these circumstances. D)that you will inform your firm's operations department to send the confirms and statements to your home address until Mr. Woods completes his travel.

B )that your firm can hold mail for up to 3 months if he's traveling abroad. The firm may hold mail for 90 days for customers traveling abroad, 60 days if traveling domestically

LMN corporation has 2 million shares authorized, of which 1 million have been issued and there are 100,000 shares of treasury stock on the balance sheet. If the Board declares a dividend of $200,000, the per-share dividend payout would be: A) $ 0.20 B) $ 0.22 C) $ 5.00 D) $ 5.55

B) $ 0.22 Dividends are paid on shares which are outstanding in the hands of investors, not on treasury stock. This company has issued 1 million shares, but has bought back 100,000 of those shares, referred to as treasury stock. There are only 900,000 outstanding shares. The dividend of $200,000 divided by the 900,000 shares outstanding: = 22 cents dividend per share

A margin account customer buys 100 shares of JKS common at 80 and deposits the required Reg. T margin. A week later with JKS at 90, the account has SMA of: A) $ 250 B) $ 500 C) $ 1,000 D) $ 2,000

B) $ 500 : The initial purchase of $8,000 at 50% Reg. T requires a down payment of $4,000 and creates a loan from the broker to the client of $4,000, referred to as the customer's debit balance. With the stock rising to 90, the CMV is now $9,000 while the debit balance does not change

The S&P 500 Index is currently at 1862.42. The S&P 500 Index March 1850 put just traded at 14.40. Pick from the below the answer which correctly states the intrinsic value and the time value of this option. A) insufficient data to compute B) 0.00; 14.40 C) 14.40; 0.00 D) 12.42; 1.98

B) 0.00; 14.40 Put options have intrinsic value when the market value of the underlying instrument is below the option's strike price. In this case, the S&P 500 Index at 1862.42 is NOT below the strike price of the put, which is 1850. This put option has NO intrinsic value. Therefore, the option premium of 14.40 is entirely comprised of time value: 0.00 intrinsic value; 14.40 time value

In financial planning discussions with Mr. Nicklaus, a customer of yours who has experience in real estate investing, he inquires about finding a securities investment through your firm which will provide upside potential from improvement in the real estate market while also providing liquidity in the event a quick exit is necessary. The most suitable investment meeting his criteria is: A) real estate limited partnerships investing in fully-leased office buildings B) real estate investment trusts C) non-traded REITs D) a raw land deal

B) real estate investment trusts REITs are traded at bid and ask prices every day on exchanges, providing liquidity to the investor who may wish to purchase more or to sell out at any point in time. Non-traded REITs don't have that sort of liquidity, and the other investments likewise lack liquidity. Raw land of course provides no cash flow/income and is unsuitable on its face. DPPs provide tax advantages but this client hasn't requested tax sheltered investing.

During normal trading hours, trades in listed stocks must be reported to the appropriate 'tape' A) within 2 seconds B) within 10 seconds C) within 30 seconds D) within 15 minutes

B) within 10 seconds Transactions are reported within 10 seconds of execution to the appropriate reporting medium, a/k/a the 'tape.'

SEC Rule 15c2-1 mandates that the maximum rehypothecation permissible by a member firm is: A 50% of the purchase price in a margin account B 100% of the customer debit balance C 140% of the customer debit balance D 25% of the current market value in a long margin account

C 140% of the customer debit balance The member firm may use margin securities worth up to 140% of the customer's debit balance in order to secure the margin loan to the customer.

Rose McGraw has given 1,000 shares of ABC common to her granddaughter under the UGMA regulations. ABC is currently trading at $14 and Rose's initial cost for the shares nearly a decade ago was $7/share. For taxation purposes, the cost basis and date of acquisition for the granddaughter would be: A) $7 cost basis and the date of acquisition is the date of the gift B) $14 cost basis and the date of acquisition is the date of the gift C) $7 cost basis and the date of acquisition is the donor's date of purchase D) $14 cost basis and the date of acquisition is the date of purchase by the donor

C) $7 cost basis and the date of acquisition is the donor's date of purchase IRS regulations state that the donor's cost and the donor's date of purchase transfer over to the minor when a gift of securities is given under UGMA.

Mr. Daly has contacted you regarding some confusion related to the sudden dramatic drop in the price of his shares of Wells Fargo common. As of his latest monthly statement received a few days ago, he held a 400 share long position and the market price was $30. While checking the market this morning, he noticed the stock was trading at $20, down 33%, thus the reason for his call. You inform him this is the result of the 3 for 2 split, previously announced by the Board, which just went ex. How many additional shares will be showing on his next statement? A) 600 B) 400 C) 200 D) 133.33

C) 200 : A 3 for 2 split will give existing shareholders 1 new share for every 2 shares they currently own, i.e. "you'll own 3 for every 2 you now own." The fraction 3 over 2, 3/2, three-halves, put into percentage terms is 150%. Mr. Daly previously owned 400 shares. After the split, he'll be the owner of 150% of 400, which is 600 shares. But, be careful. The question is not asking how many he'll own after the split: it is asking how many ADDITIONAL shares he'll own, which is 200 additional shares.

The FINRA 5% policy applies to which of the following? A) registered secondary distribution B) IPO C) 3rd market transaction D) municipal bond trades

C) 3rd market transaction The 5% policy applies to retail trades in the secondary market where there is no prospectus in use (new issues). Since the MSRB has its own policy, FINRA's 5% policy does not apply to municipal securities. That leaves 3rd market transaction as the only possible choice. Recall that a 3rd market trade is the purchase or sale of a stock exchange listed security in a marketplace other than the exchange on which the security is listed. Example: purchasing an NYSE listed stock out of the inventory of a broker-dealer rather than on the floor of the NYSE.

Trades appear on Tape A as follows: XYZ 49........XYZ 48.95........XYZ 48.90.......XYZ 49.05 Your customer's 100 share order to sell XYZ at 49 stop, GTC placed prior to the above trade reports would be executed at: A) 49.05 B) 49.00 C) 48.95 D) 48.90

C) 48.95 Sell stop orders are placed below the market. Sell stop orders must first be triggered, also called activated or elected, by a trade at or below the stop price. Once triggered, they become market orders and will be executed at the next available price. The trade at 49 triggers this order. The execution takes place at 48.95.

Compute the taxable or corporate equivalent yield for a 4.5% GO in the portfolio of an investor in the 36% tax bracket. A) 4.5% B) 6.12% C) 7.03% D) 2.88%

C) 7.03% Municipal yield divided by (100% minus investor's tax bracket) = 4.5% divided by (100% minus 36%) = 4.5% divided by 64% = 7.03%

Which of the following mutual funds would be most suitable for the client seeking stability of capital? A) income fund B) growth and income fund C) balanced fund D) government bond fund

C) balanced fund Stability of capital is the stated investment objective of a Balanced Mutual Fund.

Contributions are permitted to be made to an H.R.10 plan, better known as the Keogh Plan, based upon A) full time corporate salary B) part time wages as an employee of a partnership C) compensation earned as a freelance writer D) alimony received as part of a court settlement

C) compensation earned as a freelance writer Self-employed individuals and their Full Time (not part time) employees are eligible for a Keogh Plan. Freelance writing is self-employment

One of the best ways to hedge against loss when long a listed stock is to acquire a long put position. As such, your client who had purchased 100 shares of Alpha Beta common six months ago at 12.40 takes your advice and buys 1 Alpha Beta May 20 put at 3 with the stock trading at 22.40 to protect against erosion of the 10 point unrealized capital gain. Which of the below statements is correct? A) your client will break-even with the stock at 25.40 B) your client will break-even with the stock at 19.40 C) your client's holding period on the stock is erased D) your client's potential profit has been capped by purchasing the option

C) your client's holding period on the stock is erased The Internal Revenue Code states that buying a put option to protect a long stock position showing an unrealized short term capital gain wipes out the holding period that has accumulated to that point in time. In this case, there is a $10 unrealized gain on a stock position held only six months (short term). Buying the put will erase the six month holding period. The holding period on the stock will begin again from scratch once the put has been disposed of or has expired.

Prior to the execution of a short sale of stock, it is the responsibility of the member firm handling the order to obtain an appropriate level of certainty that the shares are available for borrowing and within a time frame which will allow regular way delivery. the regulation which requires this is: A) Regulation T B) Regulation U C) Regulation X D) Regulation SHO

D Regulation SHO Regulation SHO contains the 'locate rule' requiring the order dept. to know the shares being sold short can be borrowed, or at a minimum to have no reason to believe the shares are not readily available for borrowing.

Your firm is the lead underwriter of a $100,000,000 municipal general obligation offering of New York City. One of the key elements in the list of disclosures to prospective investors is the legal opinion. Pick from the below who prepares and issues the legal opinion for this bond issue? A the City Attorney for NYC B the Attorney General for NY State C the lead underwriter's chief counsel D independent bond counsel

D independent bond counsel Question 8 Explanation: No lawyer connected in any way to the issuer or the underwriter can issue the legal opinion on a municipal bond. The law firm rendering the opinion must be 'independent.'

As the result of a client complaint involving accusations of churning, and allegations of unauthorized trades, a duly qualified panel of arbitrators has heard the case and rendered its ruling against the registered rep on all counts, as well as the branch manager and the member firm for failure to supervise. FINRA rules set forth the normal procedure for the filing of an appeal to the adverse ruling with which of the following? A) National Adjudicatory Council B) Board of Governors of FINRA C) District Business Conduct Committee D) none of the above

D none of the above : There is one word in this question that is critical: arbitrators. Arbitrator rulings may NOT be appealed. Arbitration decisions are FINAL and BINDING upon all parties, no appeal is permitted.

Each of the below will have no impact upon the NAV per share of an open-end management investment company with the exception of: A shareholder redemptions B investors purchasing fund shares at the POP C investors reinvesting distributions at the NAV D none of the above

D none of the above Since all purchases and redemptions of mutual fund shares take place based upon the Net Asset Value, purchases and redemptions don't change the NAV per share of the fund. One example of an event that does change NAV per share would be day to day changes in the market prices of the investment securities inside the fund's portfolio

Gamma Medical, a domestic NASDAQ listed company, has each of the below investments in its corporate investment portfolio. Identify the one with the best after-tax yield, assuming a 35% corporate tax bracket. A) 4% State of Ohio GO B) 5% US Treasury Bond C ) 6% IBM debenture D) 5.4% Ford preferred stock

D) 5.4% Ford preferred stock The corporate "70% dividends received exclusion" states that a US corporation investing in the common or preferred stock of another US company only pays corporate taxes on 30% of the annual dividends received from those stock investments. 70% of the dividends received are given tax-free treatment. It is for this reason that the 5.4% preferred stock has the greatest after-tax yield when compared to the other three choices. The 4% Ohio bond is tax free because it is a municipal bond, giving it a 4% after tax yield. The 5% Treasury is taxable at 35%, giving it a 3.25% after tax yield [65% times 5%]. The 6% IBM bond is taxable at 35%, giving it a 3.9% after tax yield [65% times 6%]. Only 30% of the preferred dividend is subject to taxation [30% times 5.4% = 1.62%]. This means that only 1.62% of the dividend will be TAXED... therefore the tax will be 35% times 1.62% = 0.57%. A 5.4% preferred paying tax of 0.57% leaves an after tax return of 4.83%, which is far greater than the other three investments.

A restricted margin account is one in which A) the equity has fallen below the minimum maintenance requirement B) the equity has fallen below the $2,000 minimum equity requirement C) the customer is temporarily prohibited from accessing SMA D) the equity is less than Reg. T

D) the equity is less than Reg. T The definition of a restricted margin account is one in which the equity is less than the Reg. T percentage, which has been unchanged at 50% for decades.

Direct institution to institution securities transactions are considered A) a violation of the Securities & Exchange Act of 1934 B) the secondary market C) the third market D) the fourth market

D) the fourth market The fourth market is direct trading between two institutional investors, with no broker/dealer involved. This is often referred to as trading on Instinet, which is a word combining the two words Institutional Network

The Daily Bond Buyer publishes information about the municipal securities business including the volume of new municipal issues coming to market over the next 30 days. This is referred to as:. A) the Bond Buyer Index B) the new issue calendar C) the placement ratio D) the visible supply

D) the visible supply The Daily Bond Buyer provides data for the municipal bond market, including the new municipal issues expected to come to market in the next 30 days, referred to as the Visible Supply.