Series 7 Retake
The call provisions of a municipal issue would be detailed most completely in A) The Bond Buyer. B) the bond resolution. C) the legal opinion. D) the official notice of sale.
B The bond resolution is the document that authorizes the issuance of a municipal bond. The resolution also describes the proposed issue's features and the issuer's responsibilities to its bondholders.
All of the following are fiduciary accounts except A) trust accounts. B) transfer on death (TOD) accounts. C) estate accounts. D) guardian accounts.
B A TOD account is an individual account in which, upon the death of the account owner, the assets pass to a designated beneficiary.
The market price of a convertible bond depends on all of the following except A) current interest rates. B) the conversion prices of bonds from similar companies. C) the value of the underlying stock into which the bond can be converted. D) the rating of the bond.
B A convertible bond's current market price will be impacted by the value of the underlying stock into which the bond can be converted, current interest rates, and the rating of the bond. Conversion prices are not set in competition; therefore, the conversion prices of similar bonds would be of no concern regarding price.
Which of the following callable municipal bonds trading on a 7% basis is most likely to be called? A) 7.5% coupon, callable at 105 in 2030 B) 7.5% coupon, callable at 100 in 2030 C) 6.5% coupon, callable at 105 in 2030 D) 6.5% coupon, callable at 100 in 2030
B An issuer will call the higher coupon bonds before calling the lower coupon bonds. Of the two bonds with coupons of 7.5%, the one with the lower call price will likely be called first.
Which of the following money market instruments is most often used by those in the import/export business? A) Commercial paper B) Bankers' acceptances C) Variable rate demand notes D) Negotiable CDs
B Bankers' acceptances are loans guaranteed by a commercial bank that are typically used to finance international transactions. Although all of the choices are money market instruments, it is the BAs that are primarily used by those engaged in international business.
Before issuing a revenue bond, an issuer will engage various consultants to prepare a report detailing the need for a particular project. This is generally called A) the consultant's report. B) the feasibility study. C) the economic study. D) the revenue report.
B Because most revenue bonds depend on cash flow from a facility or project, a feasibility study is done to determine its justification.
Investors who are subject to the alternative minimum tax (AMT) will lose the tax benefits normally associated with A) gains associated with variable annuity portfolios. B) tax preference items. C) losses on options positions. D) capital losses.
B Certain items receive favorable tax treatment from the IRS. One example is tax-exempt interest on private-purpose municipal revenue bonds. These types of items are known as tax preference items. For investors who are subject to the AMT, the benefits normally associated with tax preference items are lost because these items must be added back into the investor's taxable income.
Which of the following corporate bonds is backed by other securities? A) Debenture B) Collateral trust bond C) Mortgage bond D) Equipment trust certificate
B Collateral trust bonds are backed by a portfolio of other securities, while mortgage bonds are backed by real estate. Equipment trust certificates are backed by equipment, while debentures are backed only by the company's promise to pay.
Which of the following statements regarding corporate debentures are true? I. They are certificates of indebtedness. II. They give the bondholder ownership in the corporation. III. They are unsecured bonds issued to finance capital expenditures or raise working capital. IV. They are the most senior security a corporation can issue. A) II and IV B) I and III C) I and II D) III and IV
B Debentures are debt securities that represent unsecured loans of the issuer. They are senior to common and preferred stock in claims against an issuer. They are issued to finance capital expenditures or raise working capital.
Under what circumstances will a dilution of equity occur? A) Stock dividend B) The conversion of convertible bonds into common stocks C) Issue of mortgage bonds to replace debentures D) Stock split
B Dilution of equity occurs when stockholders experience a reduction in their percentage ownership of the company. If bonds are converted, more common shares are issued, and the shareholder's equity is diluted. A stock dividend or stock split does not change a stockholder's percentage of ownership. Refunding debts has no effect on stockholders.
Obtaining all of the following complies with the regulations regarding customer identification programs except A) post office box, instead of a physical address, if it is the primary mailing address. B) date of birth. C) taxpayer identification number. D) name.
A A post office box is never acceptable without a physical address.
Which of the following is true with respect to excess capital losses realized by an individual taxpayer? A) They may be carried forward indefinitely until exhausted. B) No more than $3,000 per year may be used against capital gains. C) They may be carried forward with a time limit of five years. D) They may be carried back up to three years and carried forward indefinitely until exhausted.
A Any taxpayer is permitted to reduce capital gains with realized capital losses. If the capital losses exceed the capital gains, up to $3,000 may be deducted against taxable income. Anything in excess of that is carried forward and used against gains, or, if there are no gains, taxable income, again with a $3,000 annual limit. Those losses can be carried forward with no time limit until they are all used against gains or income.
Equipment trust certificates are commonly issued by A) transportation companies. B) the U.S. government. C) utilities. D) political subdivisions.
A Equipment trust certificates are corporate bonds commonly issued by transportation companies such as railroads and airlines. These bonds are backed by equipment (e.g., aircraft) the issuer uses in their business.
A convertible bond has a conversion price of $40 per share. If the market value of the bond rises to a 12.5-point premium over par, which of the following are true? I. Conversion ratio is 25:1 II. Conversion ratio is 28:1 III. Parity price of the common stock is $42 IV. Parity price of the common stock is $45 A) I and IV B) II and III C) I and III D) II and IV
A The conversion ratio is computed by dividing par value by the conversion price ($1,000 par / $40 = 25). Parity price of the common stock is computed by dividing the market price of the convertible bond by the conversion ratio ($1,125 / 25 = $45). Or, 112.5% × $40 = $45.
Regulation BI contains four key component obligations. Which two of them apply to registered representatives? I. Disclosure Obligation II. Care Obligation III. Conflict of Interest Obligation IV. Compliance Obligation A) I and II B) III and IV C) II and III D) I and III
A The obligation to disclose all material information and to exercise reasonable diligence, care, and skill in making any recommendation apply to both the member firm and the registered representative. The Conflict of Interest Obligation and the Compliance Obligation belong to the firm. That does not mean you do not have an obligation to disclose any conflicts of interest. That is part of the disclosure obligation. The specified Conflict of Interest Obligation includes the written supervisory procedures and training the firm must provide. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
Your broker-dealer acts as a prime broker for ABC Fund. In this arrangement, your broker-dealer is likely providing which of the following services? I. Execution of all transactions for the fund portfolio II. Clearing services III. Lending for trades done on margin IV. Ensuring that all exchange trading rules are complied with A) II and III B) I and III C) II and IV D) I and IV
A The prime broker would supply clearing services and lending services for a marginable transaction, as well as back-office support such as cash management, account statements, and transaction processing. Actual executions and abiding by all exchange rules when transactions occur is the responsibility of the executing broker-dealers.
FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. Which of the following is not one of those three? A) Qualitative-basis suitability B)Reasonable-basis suitability C) Quantitative suitability D) Customer-specific suitability
A The rule does not refer to qualitative-basis suitability. It does say that a recommendation may be suitable if at least some investors would benefit from it (reasonable-basis suitability). The recommendation should also take the specific customer's profile into consideration (customer-specific suitability). Finally, although a specific recommendation may be suitable, when looking at the quantity of trading, there could be a churning violation (quantitative suitability).
A married couple has had an account with your FINRA member firm for many years. The account is registered in both names, JTWROS. Upon the advice of their estate-planning attorney, they wish to move the assets in equal proportion to individual accounts. This would require all of the following except A) a statement from the couple's attorney explaining the reason for the change. B) the essential facts relied upon by the person approving the change must be documented in writing and preserved with the customer account records. C) before obtaining approval of the account designation change, a designated principal must be personally informed of the essential facts relative to the change. D) authorization of the change by a qualified registered principal designated by the member.
A There is no FINRA requirement to receive any information from the couple's lawyer. All the other statements are correct.
DJX Corporation's charter has authorized 10,000,000 shares of common stock. It has issued 5,000,000 shares and has 1,000,000 shares in its treasury. How many shares of DJX common stock are authorized but unissued? A) 5,000,000 B) 9,000,000 C) 4,000,000 D) 6,000,000
A This company has 10 million shares of common stock authorized. It has issued 5 million shares. The other 5 million are authorized, but unissued. Treasury stock is authorized and issued stock that is no longer outstanding.
Which of the following would make an employee ineligible to participate in a company's qualified retirement plan? A) He is only 20 years old. B) He is not a member of the company's management team. C) He has been with the company for only two years. D) He works only 1,200 hours a year for the company.
A Under the Employee Retirement Income Security Act, anyone over the age of 21—management or not—who has been with the company for at least one year and who works 1,000 or more hours per year or 500 hours per year for three consecutive years for the company, must be allowed to participate in the company's qualified plan.
When an individual associated with another FINRA member firm wishes to open up an investment account at another member firm, the executing member must A) obtain a copy of the individual's Form U4 to verify registration status. B) provide duplicate statements and confirmations if requested by the employer member. C) receive permission from the employer member before the initial transaction may take place. D) notify the employer member of the associated person's intent to open the account.
B FINRA Rule 3210 requires that an executing member shall, upon written request by an employer member, transmit duplicate copies of confirmations and statements. The associated person is the one who must notify the employer member of the intent to open the account and receive written consent to do so. Furthermore, the associated person is required to give written notice to the executing member that the individual is associated with the employer member.
A new client indicates the desire to invest in a highly speculative venture suitable only for those with significant net worth. The client assures you that he has the financial ability to sustain the loss of the entire investment. You believe it is necessary to verify that is the case. What documentation would help you? A) A note from the client's doctor attesting to his excellent health B) The client's tax returns for the past three years C) A letter from the client's best friend assuring you that the individual is a qualified risk taker D) The client's membership card to an exclusive country club
B There are several acceptable sources of information that can be used to verify an individual's financial capabilities. One of these is copies of tax returns for at least the previous two years. Verification from the client's attorney, bank statements, and brokerage statements not more than 3 months old can also be used.
If a customer who has granted a durable power of attorney to her son dies, which of the following statements regarding the power of attorney is true? A) It remains in effect only if the son is the sole heir to the estate. B) It remains in effect until the son cancels it. C) It is canceled upon the death of either principal. D) It remains in effect until the executor of the estate cancels it.
C When the customer or her son dies, the power of attorney also expires. However, a durable power of attorney will survive a declaration of mental incompetence and is useful in those cases where a parent suffers from dementia.
Which of the following forms of business is preferred when the goal is raising a significant amount of capital? A) LLC B) S corporation C) C corporation D) General partnership
C When there is a need for significant capital, it is the C corporation that is the form to use.
DMF Company has $50 million of convertible bonds (convertible at $50) outstanding. The current market value of DMF's stock is $42. The bond indenture contains a nondilution feature. If DMF declares a 10% stock dividend, the new conversion price will be A) $50. B) higher than $50. C) lower than $50. D) the stock's current market price.
C With an antidilution feature, the issuer will increase the number of shares available upon conversion if the company declares a stock split or stock dividend. This means the bondholder must be able to convert it to more shares, which requires a lower conversion price.
One of your individual customers would like to add some foreign debt securities to their portfolio. When told that the investment would be $2,500, the best suggestion would be to A) contact a broker-dealer in the foreign country of choice and open an account there. B) invest in a mutual fund concentrating in foreign debt securities. C) use one of the overseas branches of your firm to suggest the appropriate issues. D) tell the customer that $2,500 is below the minimum purchase quantity of foreign bonds.
B For small investments, a mutual fund or exchange-traded fund (ETF) is usually going to be the most suitable choice. Most countries do not allow nonresident noncitizens to open local brokerage accounts, and that is a pretty impractical idea anyway. If your firm has an overseas office, it could be a source of information, but when only $2,500 is involved, purchasing individual bonds issued by a foreign nation is usually not reasonable.
Services offered by prime brokers include all of the following except A) supplying clearing services. B) complying with FINRA's advertising rules. C) providing back office support. D) processing transactions.
B Prime brokers provide services primarily to institutional investors. They have nothing to do with that institution's advertising. They do supply clearing services, lending services for marginable transactions, as well as back office support including cash management, account statements and transaction processing.
The 5% policy applies to I. commissions charged when executing customer agency (broker) transactions. II. riskless and simultaneous transactions. III. markups on stock sold from inventory. IV. markdowns on stocks bought for inventory. A) II and III B) I, II, III, and IV C) III and IV D) I and II
B The 5% policy applies to both commission charges on agency transactions and to markups and markdowns on principal transactions, including riskless principal trades.
An incorporated business model that allows flow-through of business income and losses directly to shareholders in order to avoid double taxation is A) a C corporation. B) an S corporation. C) a limited partnership. D) a general partnership.
B The S corporation, the general partnership, and the limited partnership are business models where all income or loss flows through to the owners. This avoids the double taxation on the business level and owner level, as is the case with the C corporation. With C corporations, corporate earnings taxed once at the business level and again when they are paid out to shareholders as dividends. Because the question is asking about the incorporated business model, the correct choice is the S corporation.
Your customer opened a Roth IRA on February 2 and deposited $5,000. In August of the same the year, the value of the account had risen to $6,000, but by December, the value declined to $5,100 and the customer closed the securities positions and withdrew the entire amount. If the customer was age 55 at the time of the withdrawal, what would be the early withdrawal penalty? A) $500 B) $10 C) 0 D) $510
B The customer would have an early withdrawal penalty of $10. A 10% early withdrawal penalty applies to the taxable amount withdrawn for those aged less than 59½.In a Roth IRA, the investment is made with after-tax dollars. Therefore, only the increase above the investment is subject to an early withdrawal penalty. In this case, the earnings of $100 would be taxable and have a 10% penalty equaling $10.
A customer sells securities and uses the proceeds to buy more securities at the same cost. Under the 5% markup policy, the markup is calculated on A) the sell side only. B) the total of both sides. C) the buy side only. D) each side separately.
B The firm must consider the entire transaction (a proceeds transaction) when calculating the markup.
If LMN, Inc., has filed for bankruptcy, in what order would interested parties be paid? I. Holders of secured debt II. Holders of subordinated debentures III. General creditors IV. Preferred stockholders A) IV, I, II, III. B) I, III, II, IV. C) I, II, III, IV. D) III, I, II, IV.
B The liquidation order is as follows: the IRS (and other government agencies), secured debt holders, unsecured debt holders and general creditors, holders of subordinated debt, preferred stockholders, and common stockholders.
Which of the following are governed by the prudent investor rule? I. Trustee II. Executor III. Custodian IV. Registered representative who has been granted discretionary authority A) II and III B) I, II, III, and IV C) III and IV D) I and II
B The prudent investor rule applies to fiduciary accounts, or accounts in which someone is acting on someone else's behalf. With these accounts, the fiduciary must act prudently. A registered representative who has been granted discretionary authority is acting in a fiduciary capacity.
Reasonable-basis suitability, as used in FINRA Rule 2111 means the member or associated person making the recommendation should have a reasonable basis to believe that the recommendation A) has a reasonable basis for believing that the security will outperform others in its industry. B) is suitable for at least some investors. C) has a reasonable basis for meeting the specific customer's needs. D) will result in a lower cost to the investor than comparable issues.
B The reasonable-basis obligation requires a member or associated person to have a reasonable basis to believe, based on reasonable diligence, that the recommendation is suitable for at least some investors.
An investor purchasing an ADR for a company domiciled in South Korea should understand that A) any Korean taxes on dividends will be added to U.S. tax on those dividends. B) the ADR has greater market risk than the stock itself. C) the investor will not be able to receive a stock certificate for that company. D) the investor will be subject to currency risk.
D ADRs facilitate the purchase of foreign stock. This is because everything is in dollars and English. However, because the trading price and value of this security is based on the South Korean won, U.S. investors have currency (exchange) risk. Although not commonly done, investors can request the actual certificate to replace the ADR. There is a withholding tax in Korea, but as with any ADR on the exam, that tax paid may be taken as a credit against the U.S. tax due on the dividend. There is essentially no difference in market risk between the actual stock and the ADR.
An incorporated business model that allows flow-through of business income and losses directly to shareholders in order to avoid double taxation is A) a C corporation. B) a limited partnership. C) a general partnership. D) an S corporation.
D The S corporation, the general partnership, and the limited partnership are business models where all income or loss flows through to the owners. This avoids the double taxation on the business level and owner level, as is the case with the C corporation. With C corporations, corporate earnings taxed once at the business level and again when they are paid out to shareholders as dividends. Because the question is asking about the incorporated business model, the correct choice is the S corporation.
An agent taking which of the following actions would be committing a violation? A) Buying securities in a cash account with the consent of the customer B) Selling securities from a corporate account by using limited power of attorney trading authority for the account C) Buying securities in a joint account at the request of one party only D) Selling securities from a minor's custodial account without the custodian's consent but with the beneficial owner's consent
D The custodian—not the beneficial owner (minor)—is the person who has the authority to make investment decisions for an account. Any tenant in a joint account may give instructions for the account.
In order for an investor to be eligible to receive a previously declared cash dividend, the stock must be purchased A) the day before the record date. B) on the ex-dividend date. C) the day after the ex-dividend date. D) before the ex-dividend date.
D The ex-date (it can be ex-dividend, ex-rights, or ex-split) is the first day on or after which a purchaser is not eligible to receive the dividend (or the rights or the split). With regular way delivery at T+2, one would have to buy the security at least 2 business days before the record date (the day the issuer makes a record of all eligible owners). Therefore, in most cases, the ex-date will be one business day prior to the record date. Buying then or afterwards is going to be too late to get the purchaser's name on the record books.
A customer has a $75,000 bank CD that is about to mature, and she wants some recommendations from the registered representative handling her brokerage account. Which of the following items would be the least important when considering a suitable recommendation? A) The customer's investment goals B) The customer's current portfolio C) The customer's need for liquidity D) The name of the bank issuing the CD
D The name of the bank is of little or no consequence, while the other three points are critical for making a suitable recommendation.
When dealing with suitable recommendations to clients, it is important to distinguish between investment objectives and investment constraints. Which of the following would be an investment objective rather than a constraint? A) Tax considerations B) Need for liquidity C) Time horizon D) Capital appreciation
D The objective is the route you wish to take. The constraints are what might keep you from getting there. The client who has capital appreciation (growth) as an objective needs to consider the potential obstacles (constraints) in the way. The longer the time horizon, the more aggressive the growth investor can be. The same is true when the need to liquidity is low. Taxes are another potential roadblock to overcome.
For individual public investors, dark pools of liquidity A) lessen the transparency of the overall market as volume, quote and price information, and market participant identity is unknown. B) allow them to enter orders that are sent directly to the trading floors of stock exchanges. C) allow them to give an order to their broker-dealer to buy or sell securities while only referencing an account known by a number and not their name. D) prevent them from having their own orders entered on exchanges for execution.
A For individual public investors, dark pools of liquidity lessen the transparency of the overall marketplace. The pools refer to transactions that take place primarily among institutional traders or trading desks in large block transactions away from stock exchange floors, where volume, quote and price information, and participant identity are unknown. Though the existence of dark liquidity pools detracts from market transparency, it does not prevent individual public investors from having their own orders executed on listed exchanges.
For individual public investors, dark pools of liquidity A) lessen the transparency of the overall market as volume, quote and price information, and market participant identity is unknown. B) prevent them from having their own orders entered on exchanges for execution. C) allow them to enter orders that are sent directly to the trading floors of stock exchanges. D) allow them to give an order to their broker-dealer to buy or sell securities while only referencing an account known by a number and not their name.
A For individual public investors, dark pools of liquidity lessen the transparency of the overall marketplace. The pools refer to transactions that take place primarily among institutional traders or trading desks in large block transactions away from stock exchange floors, where volume, quote and price information, and participant identity are unknown. Though the existence of dark liquidity pools detracts from market transparency, it does not prevent individual public investors from having their own orders executed on listed exchanges.
In a 3-for-2 stock split, an investor will A) have 50% more shares at two-thirds the price. B) have two-thirds fewer shares at a 50% higher price. C) have 50% fewer shares at twice the price. D) have 50% more shares at half the price.
A If a stock splits 3 for 2, an investor will receive an additional 50 shares for every 100 shares owned. The price will decline by one-third, but the total value of the position will stay the same. For example, if a shareholder owns 100 shares before the 3 for 2 split, the shareholder will have 150 shares after the split (3/2 × 100 = 150).
A term used to define certain alternative forms of debt financing, such as equity-linked notes (ELNs) and exchange-traded notes (ETNs), is A) structured products. B) principal protected products. C) high-risk investments. D) combination products.
A In Notice to Members 05-59, FINRA defined a structured product as "securities derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance and/or a foreign currency." The most important thing for you to know for the exam is that these generally carry higher risk than other debt securities. These should be recommended only when the registered representative has a thorough understanding of the product and believes it is suitable for the specific investor. Yes, these are high-risk investments, but that is not the term used to describe them.
A corporation coming out of a bankruptcy proceeding would probably find it most attractive to issue A) an income bond. B) a collateral trust certificate. C) a subordinated debenture. D) a promissory note.
A Income (or adjustment) bonds carry the unique characteristic of requiring payment of interest only when the issuer's income is sufficient. They are used primarily for companies undergoing a financial restructuring, usually after a bankruptcy filing. Each of the other choices would require timely payment, and failure to do so could result in the company's failure.
Under the 5% markup policy, which of the following determines the amount of markup in a principal transaction? A) Lowest ask B) Highest bid C) Highest ask D) Lowest bid
A Markups are always based on the inside offer, which is the lowest ask price in a particular security. Markdowns are based on the inside bid, which is the highest bid price for a particular security.
Minimum distributions from a traditional IRA must begin A) by April 1 of the year after the owner turns 72. B) as soon as the owner turns 72. C) a year after the owner turns 59½. D) once the owner retires.
A Minimum distributions from a traditional IRA must begin by April 1 of the year after the owner turns 72.
Minimum distributions from a traditional IRA must begin A) by April 1 of the year after the owner turns 72. B) once the owner retires. C) a year after the owner turns 59½. D) as soon as the owner turns 72.
A Minimum distributions from a traditional IRA must begin by April 1 of the year after the owner turns 72.
For purposes of the SEC Rule 15g-9 dealing with penny stocks, the term established customer does not include a person who has A) both a cash and a margin account with the firm. B) purchased the securities of three different penny stocks on three different days involving three different issuers. C) deposited funds or securities in an account more than one year before the proposed penny stock transaction. D) effected a securities transaction in an account more than one year before the proposed penny stock transaction.
A Rule 15(g)9 deals with sales practices relating to penny stocks. If a member is soliciting new customers to buy penny stocks, the member must prepare a suitability statement showing why the proposed penny stock trade is suitable for that customer. A suitability statement is not required if the member is soliciting an established customer. The type of account or the number of accounts is not part of the definition. An established customer is one who has effected a securities transaction, made a deposit of funds or securities in an account at least 1 year before the proposed penny trade, or made 3 purchases of penny stocks on 3 separate days involving 3 different issuers.
The federal legislation that requires broker-dealers to verify the identity of any person opening an account is A) the USA PATRIOT Act of 2001. B) the Insider Trading Act. C) the Maloney Act. D) the Securities Exchange Act of 1934.
A The USA PATRIOT Act of 2001 requires firms to obtain identifying information on each new customer, verify the identity of each new customer, maintain records relating to identity verification, and determine if any new customer appears on a list of known or suspected terrorist groups compiled by the Office of Foreign Asset Control.
A customer owns a 7.5% ABC convertible bond currently trading at 115. The conversion price is $40. What is the parity price of the common? A) $46.00 B) $34.00 C) $28.75 D) $44.00
A What does parity price mean? Here is what it says in the LEM: Calculating Conversion Parity Parity means that two securities are of equal dollar value (in this case, a convertible bond and the common stock into which it can be converted). The question is looking for the parity price of the common stock. That is the market price per share, where the total value of the stock received upon conversion equals the market price of the bond. There are two ways to do this. The first is generally the easiest to understand. We are told that the bond has a conversion price of $40. That means you can get 25 shares if you wish to convert. That is because the issuer is basically saying, "We owe you $1,000 and will let you spend it on our stock at $40 per share." Now that we know we can get 25 shares, what does each share have to be worth to equal $1,150? If you divide $1,150 by 25 shares, the result is $46. The other method to do this is as follows: The bond is selling at a 15% premium. To be equal to that, the stock must be selling at a 15% premium over the conversion price. $40 times 115% equals $46. If that makes sense to you, it is much faster than the first method.
If a customer wants to place an order for a specific municipal bond and provides the bond's issuer, coupon, maturity date, and CUSIP number, but she has not disclosed her financial objectives or tax status, the representative must A) execute the order and mark it unsolicited. B) recommend a different bond of the same issuer with a higher rating. C) determine whether the transaction is suitable. D) refuse the order.
A When a customer wants to buy a specific municipal bond and possesses all of the bond's material information, Municipal Securities Rulemaking Board Rule G-19 allows the representative to execute the order and mark it unsolicited. The representative may not recommend any municipal bond without first knowing the customer's financial objectives and tax status.
If a customer wishes to open a new account but declines to provide all of the financial information the member firm requests, which of the following statements are true? I. The member firm may open the account and make recommendations without meeting any other criteria. II. The member firm may open the account if it has determined (by other means) that the customer has the financial resources to carry the account and that trading is suitable. III. The member firm may not recommend any transactions unless the representative is able—through the information available—to make a suitability determination. IV. The member firm may not allow trades in the account until the requested information is received. A) I and IV B) II and III C) II and IV D) I and III
B If a customer refuses to provide financial information, the member firm may use whatever information is available to decide whether to open the account. Any recommendation made to a customer must be suitable, taking into account the customer's investment objectives, financial situation, and any other relevant information. If the information is not provided, the account may be opened, but no investment recommendations may be made.
A customer wants to buy ABC bonds, and as his representative, you have advised him that the trade is unsuitable. If he decides to go ahead with the purchase, you must A) execute the trade only if the customer has previous trading experience in similar securities. B) execute the trade specifically as the customer has directed you to do but mark it unsolicited. C) execute the trade if FINRA approves. D) not execute the trade.
B If a customer wishes to purchase a security that the registered representative feels is unsuitable, the trade may be executed if the customer specifically directs it. The ticket should be marked unsolicited.
Convertible debentures offer which of the following benefits to investors? A) A higher coupon rate than comparable non-convertible debt B) The upside potential of a common stockholder with less downside risk C) Forced conversion when the underlying stock price increases D) Highest priority in the event of dissolution
B If the price of the underlying stock increases, the holder of the debenture can exercise the conversion privilege and capture that growth. Unlike the stock, as a debt security, the regular periodic interest payments tend to provide a floor below which the price of the debenture will not fall. In exchange for this benefit, the coupon rate is lower than a comparable non-convertible security. Many of these convertibles have a call feature. If the price of the stock rises, the issuer may decide to call it in and the investor's best option is to convert. This is known as forced conversion and forces the investor in a debt security to own an equity security. Debentures have a lower priority in dissolution than secured bonds.
An investor owns 400 shares of ABC common stock. ABC's board of directors has declared a 5:4 stock split. As a result, the investor will receive how many additional shares? A) 500 shares B) 100 shares C) 40 shares D) 80 shares
B In a 5:4 stock split, the shareholder will own five shares for each four shares currently held. This investor owns 400 shares so, after the split, the account will have 500 shares in it. The difference between 400 and 500 is 100 additional shares. If you chose 500, that is the total number of shares that will be owned, but the question does not ask for that—it asks for the number of additional shares.
Which of the following statements regarding joint accounts/tenants in common (TIC) are true? I. Each party specifies a percentage of interest in the account. II. Each party has an equal interest in the account. III. The interest of a deceased tenant passes to the estate of the decedent. IV. The interest of a deceased tenant passes to the cotenant. A) I and IV B) I and III C) II and IV D) II and III
B In a TIC account, each party must specify a percentage of interest in the account. If one party dies, his percentage of ownership passes to his estate, not to any other party to the account.
You have a client who is about to retire and wants to rearrange his portfolio to have predictable income. Which of the following would not be a good investment vehicle? A) AA-rated debenture B) Income bonds C) U.S. Treasury note D) AA-rated IDB
B Income bonds, also known as adjustment bonds, are issued when a company is reorganizing and coming out of bankruptcy. Income bonds pay interest only if the company has enough income to meet the interest payment. As a result, these bonds normally trade flat without accrued interest. Therefore, they are not suitable for customers seeking income.
As the poet Robert Burns wrote, "The best-laid plans of mice and men often go awry." The same could be said for investment plans. The term used to describe those things that can have an impact on the ability of our plans to reach fulfillment is A) investment decisions. B) investment constraints. C) investment conditions. D) investment goals.
B Investment constraints are those things that stand in the way of having our investment objectives reach their goals. Can bad decisions or unusual conditions do that? Yes, but those are not financial industry terms used on the exam.
Cement Mixer Corporation has 1 million shares of convertible preferred stock and 2 million shares of common outstanding. Each share of preferred can be converted into half a share of common. The preferred stock is selling at $17.50, and the common stock is selling at $35.75. If all preferred shares were converted, how many shares of common stock would be outstanding after conversion? A) 500,000 B) 2,500,000 C) 2,000,000 D) 3,000,000
B One million shares of preferred, each converted to half a share of common, is 500,000 common shares, and 500,000 shares after conversion, added to 2 million shares of common previously outstanding, equals 2.5 million common shares.
Under the Uniform Transfer to Minors Act (UTMA), how can stock subscription rights be handled in a custodial account? A) The rights can be exercised or sold only if the custodian is also the donor. B) The custodian can exercise, sell, or allow the rights to expire as he deems prudent. C) The custodian can exercise or sell the rights as he deems prudent. D) The custodian cannot exercise rights; they can only be sold.
B One thing that is never considered prudent is to let the rights expire. Even if the custodian does not believe adding more of the stock to the account is proper, there is a value to the rights, and the best interest of the minor is served by turning those rights into cash. Custodians in these accounts are able to sell or exercise the right, regardless of any relationship existing between them and the donor.
For which of the following business structures is the income taxed to the business? A) A limited partnership B) A C corporation C) An S corporation D) A general partnership
B Partnerships, limited or general, and S corporations do not pay income tax. Any income earned by the business flows through to the owners. On the other hand, C corporations are taxable entities and must pay tax on their income before they can distribute dividends to shareholders.
FINRA Rule 2111 places three obligations on members when determining if a specific recommendation to a customer is suitable. FINRA's suitability rules would likely find a registered representative is not in violation of complying with those three if A) the recommendation was profitable for the investors. B) the recommendation made would be suitable for at least some customers. C) proper disclosures were made of the representative's compensation received. D) control relationships were disclosed.
B This question refers to the three specific obligations under Rule 2111. Those three are reasonable-basis suitability, customer-specific suitability, and quantitative suitability. Complying with the first of the three means the registered representative has to have a reasonable basis to believe that a recommendation is suitable for at least some investors. Control relationships must always be disclosed, but that is not part of the three obligations. Compensation may have to be disclosed, but, once again, that is not part of the three obligations. Be sure to focus on answering the question being asked.
A callable municipal bond maturing in 30 years is purchased at 102. The bond is callable at par in 15 years. If the bond is called at the first call date, the effective yield earned on the bond is A) the same as the yield to maturity. B) lower than the yield to maturity. C) not determinable. D) higher than the yield to maturity.
B When a bond is purchased at a premium ($1,020) and called for redemption, the investor's effective yield is the yield to that call date. That will be lower than the bond's yield to maturity because the premium is lost sooner.
Investors placing zero-coupon bonds in their portfolios are most likely to be looking to provide I. accumulation of capital. II. current income. III. protection against reinvestment risk. IV. tax deferral. A) II and III only B) I and III only C) II and IV only D) I and IV only
B Zero-coupon bonds are always purchased at a discount because they pay no interest. At maturity, the bondholders receive the maturity value. That represents the initial investment plus interest. Therefore, the investors are receiving more capital than invested (capital accumulation). Zero-coupon securities avoid reinvestment risk because there are no periodic interest payments to be reinvested. When you purchase one of these securities, the quoted yield to maturity is exactly what you will earn if you hold it to the end. With no interest payments, there is no current income. There is no tax deferral with a zero. In fact, unless it is a zero coupon municipal bond, there is phantom income; income not currently received but currently taxable.
A bond has a 7% coupon and an offering price of 108. The bond matures in ten years. An investor purchasing this bond at the offering price would have a yield to maturity closest to A) 7.22%. B) 7.80%. C) 5.96% D) 7.50%.
C "When you pay more, you get less," Anytime a bond is purchased at a premium (a price above par), the yield to maturity (as well as the current yield and yield to call) must be lower than the nominal yield (the coupon rate). If you stop and think for a moment, there can be only one possibly correct answer. With a coupon rate of 7%, the answer must be something less than that. As will likely be the case on the exam, there is only one choice that is less than 7%. If you want to do the computation using our formula, it is: Annual interest - (premium ÷ years to maturity) ÷ average price of the bond. Plugging in the numbers we have: $70 - ($80 ÷ 10) ÷ [($1,080 + $1,000) ÷ 2]. This works out to: $62 ÷ $1,040 = 5.96%. However, as stated above, with only one number below the coupon rate, that has to be it. A variation of this question has two choices below the coupon. If that were the case here, the other choice would be 6.48%. That is the current yield ($70 ÷ $1,080). You need to remember that with a bond selling at a premium, the YTM will always be lower than the CY.
One of your customers owns five JLO 5s of 2042. The debentures have a conversion price of $15. When the market price of the convertible is 80, the parity price of the stock is A) $18.00. B) $5.33. C) $12.00. D) $15.00.
C A debenture with a conversion price of $15 is convertible into 66.66 shares ($1,000 ÷ $15). It is always the par value that is used, not the market price. To determine the parity price of the stock, divide the current market price of $800 by 66.66 and the answer rounds off to $12. Some students find it easier to recognize that the bond is 20% below its par value. To be equal (and that is what parity means), the stock must be 20% below the $15 conversion price (or 80% of it). Reducing $15 by 20% is a $3 reduction to $12 or taking 80% of $15 equals $12.
A customer wishes to open a new account but refuses to provide suitability information. Under FINRA rules, the member A) must not open the account. B) may open the account but must limit recommendations to U.S. government securities. C) may open the account, but any recommendations must be limited to suitability information the firm has on the customer. D) may open the account but must limit recommendations to investment-grade securities.
C A recommendation may be made if the firm has a reasonable basis to believe it is suitable. This can be based on information that the firm knows about the customer. For example, you do know the customer's age and occupation. You do have the customer's home address. In the real world, firms rarely rely solely on this, but for test world purposes, limited recommendations may be made.
Which of the following are characteristics of commercial paper? I. It represents a loan by the holder to the issuer. II. It is a certificate of ownership in the corporation. III. It is commonly issued to raise working capital for a corporation. IV. It is junior in preference to convertible preferred stock. A) II and III B) I and IV C) I and III D) II and IV
C Commercial paper instruments are debt securities; they represent loans to the issuing corporation by the holder. They are commonly issued to raise working capital and, as debt obligation, are senior in preference to preferred stock in claims against an issuer.
Which of the following are characteristics of commercial paper? I. It is registered with the SEC. II. It is a short-term debt instrument. III. It is issued by commercial banks. IV. It is unsecured debt. A) I and III B) I and II C) II and IV D) III and IV
C Commercial paper represents the unsecured debt obligations of corporations needing short-term financing. Because commercial paper is issued with maturities of less than 270 days, it is exempt from SEC registration under the Securities Act of 1933.
Holders of common shares may generally vote on A) whether a cash dividend is to be declared. B) which member of the board of directors should be chairman. C) whether the company should issue additional preferred stock. D) whether an administrative assistant should be promoted to management.
C Common shareholders must vote to approve the issuance of additional preferred stock because additional preferred shares dilute the common shares' residual assets under a liquidation. Common shareholders do not vote to declare dividends. Board members select the chairman of the board. Shareholders do not get involved in the daily operational activity of the corporation.
Someone considering saving for retirement in a Roth IRA could correctly be told that I. contributions are made with pretax dollars. II. earnings accumulate tax free. III. distributions are not taxable if a holding period is satisfied. IV. cost basis is always taxable at the time of distribution. A) I and III B) I and II C) II and III D) II and IV
C Contributions to Roth IRAs are made with after-tax dollars, and distributions are received tax free (both cost basis and earnings) if holding period requirements are met.
Which of the following types of business organizations does not protect owners' personal assets from losses incurred by the business? A) LLC B) S corporation C) Sole proprietorship D) C corporation
C Corporations, whether organized as C or S corporations, and LLCs (limited liability companies), afford their owners limited liability. That means they have protection of their personal assets from losses incurred by the businesses. Sole proprietorships subject their owners to personal liability for losses of the business.
In a proceeds transaction for a customer where the proceeds from the liquidation of one stock are used to purchase another stock, the 5% markup policy is computed on the basis of A) the markdown on the sell side only. B) each side of the transaction separately. C) a combination of both the buy side and the sell side. D) the markup on the buy side only.
C In a proceeds transaction (sell one position; take the proceeds and buy another), the 5% markup is computed by adding the compensation made by the dealer on the sell side to that made by the dealer on the buy side and applying the total to the inside market on the buy side.
An investor has the following tax picture in 2018: Tax loss carryover from 2017: $9,000 Capital gains realized in 2018: $15,000 Capital losses realized in 2018: $2,000 What is the investor's reportable gain or loss for 2018? A) $13,000 net capital gains and a $4,000 loss carryover into 2019 B) $6,000 net capital gains C) $4,000 net capital gains D) $13,000 net capital gains
C In determining an investor's capital gain or loss for the tax year, all gains and losses must be aggregated and offset against each other. In this situation, the prior year's loss carryover of $9,000 is added to the current year's loss of $2,000. The total loss of $11,000 is offset against the total capital gains of $15,000, for a net capital gain of $4,000.
Preferred stock comes with many different options. What type of preferred stock would be most advantageous to the investor if the issuing company had strong revenue and earnings that exceeded industry estimates? A) Adjustable-rate B) Cumulative C) Participating D) Callable
C Participating preferred stock may receive an additional amount paid to shareholders based on superior performance of the issuer. Cumulative refers to unpaid dividends that accrue on a preferred issue. Those must be paid before common stockholders receive a dividend. That could be a benefit if the company had dividends in arrears and these higher earnings made it possible to pay them. However, unless something in the question indicated that these higher earnings followed several years of losses, there is no way to infer that the company is behind on its dividends. As you hear us say many times, do not read something into the question that is not there. Adjustable-rate preferred stocks adjust their dividends based on market interest rates, not on the company's earnings. Although it is possible that higher earnings could encourage the company to call in some of the outstanding callable preferred stock, doing so would be considered a benefit to the issuer rather than the investor.
In which of the following qualified plans might a graduate student teaching two classes daily as a teaching assistant at a state university be able to participate? A) 457(b) B) 401(k) C) 403(b) D) 501(c)(3)
C Students are not eligible to participate in qualified plans. However, if the student is teaching for the public institution and meets the minimum eligibility qualifications, the student is an employee like any other teacher. These plans, also known as tax-sheltered annuities (TSAs), are available for state, municipal, and government employees, as well as employees of nonprofit organizations. Although a teacher at a state university can participate in a 403(b) plan, students who are there solely to attend class are not eligible.
Which of the following is not a benefit gained by using a TOD account? A) Percentage allocations can be changed at any time. B) Beneficiaries can be changed at any time. C) Estate taxes are reduced. D) Probate is avoided.
C The TOD (transfer on death) designation offers many benefits, but reducing estate taxes is not one of them. The assets in the account are included in the decedent's estate. However, the hassles of probate are avoided, and without any legal impediments, the owner of the account can make changes at will.
ABC Corporation has an outstanding 8% convertible bond that is callable at 102. Currently, the bond is trading at 101. The conversion price is $40, and the common stock is currently trading at $39.50. ABC announces a call at 102. To realize the greatest profit, a bondholder should A) continue to hold the bonds. B) convert the bonds into common and sell the converted shares. C) tender the bonds. D) sell the bonds at the current market price.
C The investor would realize the greatest sales proceeds by tendering the bond to the corporation for 102. Selling the bond at its current market value of 101 is not an attractive option. Converting the bond to common stock would result in 25 shares ($1,000 par converted at $40 = 25 shares) sold at $39.50 per share ($39.50 × 25 = $987.50).
A bond issued by a Swiss company, sold outside the United States and the issuer's country, but for which the principal and interest are stated and paid in U.S. dollars, is the definition of a A) Matterhornbond. B) Francodollar bond. C) Eurodollar bond. D) Eurobond.
C The key to a Eurodollar bond is that everything is in U.S. dollars. The issuer is either a non-U.S. corporation or government, and the security is not issued in the United States.
A customer has a $75,000 bank CD that is about to mature, and she wants some recommendations from the registered representative handling her brokerage account. Which of the following items would be the least important when considering a suitable recommendation? A) The customer's current portfolio B) The customer's investment goals C) The name of the bank issuing the CD D) The customer's need for liquidity
C The name of the bank is of little or no consequence, while the other three points are critical for making a suitable recommendation.
Section 408 of the Internal Revenue Code set the minimum age requirement to establish an IRA at A) 21 years. B) the age of majority in the individual's state of residence. C) no minimum. D) 18 years.
C There is no minimum age requirement to establish an IRA. However, to be eligible to make an IRA contribution, you must have earned income such as wages or tips. As with any IRA, that earned income must equal or exceed the amount of your IRA contribution.
PDQ Corporation has a 6.25% $100 par value convertible preferred stock (conversion ratio of 4) outstanding. The stock has an antidilution covenant. If PDQ declares a 10% stock dividend, the antidilution covenant will adjust A) the par to $90. B) the conversion price to approximately $27.50. C) the conversion price to approximately $22.73. D) the par to $110.
C When a $100 par value preferred stock is convertible into four shares of common stock, the conversion price is $25 per share, ($100 ÷ 4 = $25). The antidilution covenant means the investors will have the same conversion rights after a stock split or stock dividend as they had before. After a 10% stock dividend, each share of preferred stock will be convertible into 4.4 shares (4 shares x 110% = 4.4). The par value of the preferred stock does not change. Divide that $100 par value by the new number of shares to get the new conversion price. It looks like this: $100 ÷ 4.4 = 22.73. Alternatively, you can divide the original conversion price of $25 by 110% arrive at the same answer.
A company has reverse split its common stock. The effect on the earnings per share will be A) none of these. B) no effect. C) an increase. D) a decrease.
C When a reverse split takes place, the number of outstanding shares is reduced. Because the split has no effect on earnings of the company, dividing those earnings by fewer shares will cause an increase to the earnings per share.
One of your customers would like to begin an investment program calling for regular monthly contributions of $200. Which of the following would be the best source for determining if this plan is reasonable? A) The investor's balance sheet B) The investor's savings account C) The investor's income statement D) The investor's objectives
C When it comes to the ability to make ongoing contributions to an investment program, the income statement is usually going to be the most reliable tool for verification. It is from the income statement that discretionary income (the amount left over after paying expenses) is determined. The balance sheet indicates any lump sum availability. The savings account is a part of the balance sheet. Objectives are important, but they are not a financial measurement.
Regulation BI established a new standard of conduct under the Securities Exchange Act of 1934 for broker-dealers and associated persons of a broker-dealer when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer. All of the following are examples of account recommendations except A) opening an UTMA account for a grandchild. B) taking a distribution from an employer-sponsored plan and executing a rollover into a self-directed IRA. C) opening a margin account to go along with an existing cash account. D) changing the asset allocation in an existing account.
D Account recommendations include recommendations of securities account types generally (e.g., to open an IRA or margin account), as well as recommendations to roll over or transfer assets from one type of account to another (e.g., a workplace retirement plan account to an IRA). It has nothing to do with changing the strategy in an existing account. Rather, the desired result of an account recommendation is a new account. **This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.
A change in which of the following should be indicated in a customer's file? I. Name II. Educational degrees held III. Investment objectives IV. Professional society memberships A) II and IV B) III and IV C) I and II D) I and III
D All primary information, such as name, address, and Social Security number, and all information that could affect recommendations or a customer's financial situation, must be noted immediately in the file. Educational degrees and society memberships do not affect investment recommendations.
An investor interested in acquiring a convertible bond as part of her investment portfolio would A) be interested in tax advantages available to convertible debt securities. B) want the assurance of a guaranteed dividend on the underlying common stock. C) seek to minimize changes in the bond price during periods of steady interest rates. D) want the safety of a fixed-income investment along with potential capital appreciation.
D An investor who wants the safety of a fixed-income investment with the potential for capital gains would be most interested in purchasing a convertible bond. However, because convertible bonds can be exchanged for common stock, their market price tends to be more volatile during times of steady interest rates than other fixed-income securities.
An investor has received a cash dividend on a stock that they have owned for over 10 years. It is the first dividend the company has paid. The cash dividend would be taxable to the investor as A) a long-term capital gain in the year in which it is received. B) a short-term capital gain in the year in which it is received. C) a return of principal. D) income in the year in which it is received.
D Cash dividends are always treated as income and are taxable to the investor in the tax year in which they are received by the investor. In those cases where the dividend is qualified, it will be taxed at a lower rate than the investor's ordinary income. That does not affect this question because the answer is the same if the dividend is qualified or not. A capital gain occurs when an investor sells an asset for more than its cost basis.
An arrangement in which the registered representative has the authority, or power of attorney, to make trades from funds in the account without prior approval from the investor is known as A) a nonapproval account. B) a stop-loss account. C) a power-of-attorney account. D) a discretionary account.
D Discretionary accounts are arrangements in which the registered representative has the authority, or power of attorney, to make trades from funds in the account without prior approval from the investor.
Under ERISA, a plan trustee wishing to write uncovered calls may do so A) if approved by the IRS in writing. B) if explicitly allowed in the plan document. C) without restriction. D) under no circumstances.
D ERISA prohibits retirement plan trustees from making investments that are excessively speculative; an uncovered call writer has unlimited risk.
The requirements of ERISA apply to pension plans established by A) both public and private sector organizations. B) municipal governments. C) public entities only. D) private sector organizations only.
D ERISA was established to protect the retirement funds of employees working in the private sector only. It does not apply to employees of public sector entities such as city and state governments.
The following is taken from the S&P Bond Guide: FLB Zr 37 87 87½. What is the coupon rate on this bond? A) 8.70% B) 8.75% C) 0.37% D) 0%
D FLB is the issuer, Zr means zero coupon, 37 indicates the year of maturity (2037), 87 is the bid price ($870), and 87½ is the asked price ($875).
Which of the following statements regarding a 2-for-1 stock split are true? I. The share price is reduced by half. II. The total market value of the outstanding stock decreases. III. The total market value of the outstanding stock may increase or decrease as a result of the split. IV. The number of shares doubles. A) II and III B) I and III C) II and IV D) I and IV
D In a 2-for-1 stock split, the number of outstanding shares is doubled, and the price is reduced by half. The total market value (market cap) of the issuer's stock remains the same.
An employee of a FINRA member firm wishes to open an account at another member firm. The employee opening the account must A) notify FINRA, in writing, of the intent to open the account. B) make written notification to the SEC before the account can be opened. C) obtain prior written consent from FINRA before opening the account. D) receive prior written consent from his employer.
D Persons associated with one FINRA member firm may open securities accounts at other member firms, as long as prior written notice was made to, and prior written consent was received from, the employing broker-dealer before the account is opened. Neither notification nor consent is required from FINRA or the SEC.
An investor purchased a new issue corporate zero-coupon bond for $600. The bond has a maturity of 20 years. Six years later, the investor sells the bond for $700. For tax purposes, this would result in A) a capital gain of $20. B) a capital loss of $280. C) a capital gain of $100. D) a capital loss of $20.
D The $400 discount is accreted over the 20 years to maturity. That is an annual accretion of $20. After 6 years, that is $120, making the tax basis of the bond $720. Because the sale at $700 is $20 less than the basis, the investor has a long-term capital loss.
Libby sees a tombstone advertisement for a new issue of Southwest Barge subordinated convertible debentures. The bonds will carry an 11¼% coupon, are convertible into common stock at $10.50, and are being issued to the public at 100. The proceeds of the issue will be used specifically for purchasing new Southwest barges. Libby's concerns about the issue could include which of the following? A) The new barges might sink, and the collateral would be gone. B) She should not be concerned, as the bonds will be first in liquidation. C) The company might demand that she accept common stock for her bond. D) The issue may have a junior claim to another security issue.
D The word subordinated is the key to the question. A subordinated bond has other debt holders ahead of it in the event of liquidation. The barges do not serve as collateral, as the bonds are identified as debentures, and having to convert to common stock is not a threat because she is the one that will, if she desires, exercise the conversion privilege.
Which of the following occurs in a partnership account if one partner dies? A) The surviving partners are considered joint tenants and receive the deceased partner's share. B) The surviving partners receive the deceased partner's share. C) The surviving partners are considered joint tenants. D) The account is frozen until a new or amended partnership agreement is received.
D Upon a partner's death, a partnership account is automatically frozen until a new or amended partnership agreement is received. The deceased partner's share usually goes to an estate, not to the other partners.
All of the following may be used to verify a customer's identity except A) a current drivers license. B) a valid passport. C) a valid military ID card. D) a certified birth certificate.
D Verifying a customer's identity requires presentation of at least one government-issued document with a photograph. Your birth certificate may have had a photo of you as a newborn, but that certainly will not suffice to identify you today.
Which of the following would be the least appropriate investment in a traditional IRA for a 67-year-old client? A) Common stock B) Corporate bonds C) Treasury notes D) Variable annuities
D Why buy a tax-deferred product in a tax-deferred account? A variable annuity will provide no additional tax savings and will likely increase the expense of the IRA. In addition to sales and surrender charges, variable annuities may impose other charges such as mortality and expense risk charges, administrative fees, et cetera. In five years, your client will have to begin making withdrawals, regardless of any surrender charges the annuity may impose.
