Series 7 (S7TO) Final # 7 Missed Q's

Long Margin Account Market Value: $200,000 Debit Balance: $80,000 If the customer buys $20,000 of listed stocks and sells $16,000 of listed stocks on the same day, the customer must deposit: A. 0 B. $1,000 C. $2,000 D. $4,000 Customer Accounts: Long Margin Accounts

The best answer is A. Margin is computed on net purchases for the day. The customer purchased $20,000 of stock and sold $16,000 of stock, for a net purchase of $4,000. To buy $4,000 of stock, the customer must deposit $2,000 of cash. Since the customer has $20,000 of SMA available, no cash need be deposited in this account. The SMA is computed as follows: The customer can borrow 50% of the $200,000 securities position = $100,000 that can be borrowed. Since the customer has already borrowed $80,000, another $20,000 is available to be borrowed from SMA.

Which of the following create a straddle? I Short 1 ABC Jan 50 Call Short 1 ABC Jan 50 Put II Short 1 ABC Apr 50 Call Short 1 ABC Oct 50 Put III Short 1 ABC Jan 50 Call Long 1 ABC Jan 50 Put IV Long 1 ABC Jan 50 Call Long 1 ABC Jan 60 Put A. I only B. I and III C. II and IV D. III and IV Options: Straddles

The best answer is A. A straddle is the purchase of a call and a put; or the sale of a call and a put; on the same underlying security with the same strike price and expiration.

Which of the following statements are TRUE regarding Brokered CDs? I Any call features could affect the maturity of the instrument II How the instrument is titled can determine whether FDIC insurance covers the investment III There may be a penalty for early withdrawal of principal IV The principal amount will remain stable over the life of the instrument A. I and II B. III and IV C. I and IV D. II and III Debt: Money Market Debt / Structured Products

The best answer is A. Brokered CDs, which can have lives of up to 5 years, can be callable. If interest rates drop after issuance, then the issuer can call in the CD, forcing the investor to reinvest the refunded monies at lower current market interest rates. Brokered CDs are sold by brokerage firms that are representing issuing banks. FDIC insurance of $250,000 maximum covers bank deposits - but only if the deposit is titled in the customer's name. If the CD is titled in the brokerage firm's name, then the insurance coverage would not apply! There is no penalty for early withdrawal of funds on brokered CDs - however the amount of interest earned will be pro-rated over the shorter life of the deposit. If interest rates rise after issuance, the value of the CD in the secondary market will fall (though not by much, since this is a short maturity).

The primary reason for a customer to make a tax shelter investment is the: A. economic viability of the project B. immediate deductions generated by the project C. immediate tax credits generated by the project D. future capital gains generated by the project Taxes & Tax Shelters: Tax Advantaged Investments

The best answer is A. In considering a tax sheltered investment, economic viability comes first; tax benefits come second.

In 2019, a self-employed person earning $100,000, who also has $100,000 of investment income, wishes to open a Keogh Plan. Their maximum permitted contribution is: A. $20,000 B. $40,000 C. $56,000 D. $66,000 Retirement Plans: Retirement Plans

The best answer is A. Keogh (HR10) contributions are based only on personal service income - not investment income. $100,000 of personal service income x 20% effective contribution rate = $20,000. Note that this is less than the maximum contribution allowed of $56,000 in 2019.

The portfolio management technique that uses a performance benchmark such as a market index that any investments must match is called: A. passive management B. active management C. fundamental management D. technical management _Chapter: Section_ Suitability: Portfolio Construction

The best answer is A. Passive portfolio management relies on the belief that market pricing is efficient and that stock prices are always properly valued. Thus, finding "bargains" is impossible and index funds are appropriate investments for each asset class. Active asset managers believe that specific stocks can be undervalued in the market, and that by selecting these investments in a given asset class, investment performance can be improved.

An assessment of an existing client's financial status shows the following: Name: Mack McCool Age: 41 Marital Status: Single Income: $160,000 per year Retirement Plan: Yes - 401(k) and IRA Life Insurance: No Risk Tolerance: High Home Ownership: No - Currently rents at $3,000 per month Client Balance Sheet: _Assets_ Cash on Hand: $20,000 Marketable Securities: $220,000 ($10,000 in Money Market Fund; $40,000 in Treasury Notes; $70,000 in Blue Chips; $100,000 in Growth Stocks) Retirement Plans: $158,000 (Invested in Equity Mutual Funds) Auto: $58,000 Home Ownership: None _Liabilities_ Credit Cards Payable: $10,000 Auto Loan: $50,000 Net Worth: $396,000 The customer has decided to purchase a home instead of renting. The price of the home is $750,000 and the customer intends to put down 20% and obtain a mortgage for the balance. The customer explains that he will need the $150,000 down payment in 30 days. The best recommendation to the customer is to liquidate his: A. growth stocks and blue chip stocks immediately in the amount of $150,000 to obtain the necessary cash down payment B. growth stocks and blue chip stocks in 30 days in the amount of $150,000 to obtain the necessary cash down payment C. retirement accounts in the amount of $150,000 to obtain the necessary cash down payment D. Net Worth in the amount of $150,000 to obtain the necessary cash down payment Suitability: In-depth Suitability Scenarios

The best answer is A. Since this customer needs $150,000 in cash within 30 days for the down payment on the house, the best thing to do is to liquidate his stock positions now (not in 30 days) to get the funds for the down payment. If the customer waited 30 days, these stock positions could suffer a market loss, making it hard to fund the down payment. Liquidation of the pension assets makes no sense, since the customer is 41 years old and must pay regular income tax plus a 10% penalty tax on the liquidation. Net Worth cannot be "liquidated" - it is simply the value left over when all assets are subtracted from all liabilities.

The designated Registered Options Principal (designated ROP) is responsible for the approval of options: I advertising II correspondence III sales literature IV account Regulations: CBOE Rules

The best answer is A. The designated Registered Options Principal (ROP) is responsible for ensuring the firm's overall compliance with options regulations and for approving all options advertising and options sales literature prior to use. Basically, the designated ROP is a main office compliance ROP. The BOM is the options branch manager who approves new options accounts and orders in options accounts. The BOM also approves registered representative correspondence with customers.

The expense ratio of a mutual fund is: A. Fund Operating Expenses / Total Net Assets B. Fund Operating Expenses / Annual Fund Sales C. Fund Operating Expenses / Fund Annual Net Income D. Fund Portfolio Expenses / Fund Annual Net Income

The best answer is A. The expense ratio of a mutual fund measures the proportion of investment return on assets that is consumed by expenses. The lower the ratio, the more "efficient" the fund is.

A tombstone announcement shows a corporate offering of $10,000,000 of common stock at $1 par. The price per share is $50. The tombstone shows the: A. gross proceeds to the issuer B. net proceeds to the issuer C. syndicate members' percentage participations D. whether the syndicate account is Eastern or Western New Issues: Corporate Underwritings

The best answer is A. A tombstone announcement shows the gross proceeds of a new issue offering. It does not show the net amount received by the issuer (that is, the gross proceeds reduced by the underwriter's spread). It does not show the syndicate member participations, though it does show syndicate member names. It does not indicate whether the syndicate account is Eastern or Western. These items are found in the syndicate agreement.

Timing is the important factor in which portfolio management strategy? A. Strategic allocation B. Tactical allocation C. Rebalancing D. Indexing Suitability: Portfolio Construction / Asset Allocation

The best answer is B. Strategic portfolio management is the determination of the percentage allocation to be given to each asset class - for example a portfolio might be strategically allocated as follows: Money Market Instruments 10% Corporate Bonds 30% Large Cap Equities 50% Small Cap Equities 10% Tactical asset management is the permitted variance within each allocation percentage. For example, Large Cap equities are allocated 50%, but the manager may be tactically allowed to lower this percentage to, say, 40% or raise it to 60%. Thus, if the manager believes that Large Cap equities will underperform the market, he or she can lower the allocation to 40%; and if the manager believes that they will outperform the market, he or she can raise the allocation to 60%. This gives the manager some ability to "time the market" when conditions are overbought or oversold.

A corporate investor may exclude from taxation, part of: I cash dividends received from common stock investments II cash dividends received from preferred stock investments III interest received from convertible bond investments IV interest received from non-convertible bond investments Taxes & Tax Shelters: Other Tax Rules

The best answer is B. Corporate investors may exclude 50% of dividends received (both common and preferred) from taxation. Interest income received is 100% taxable (unless it is tax free municipal interest income).

A customer holds a large portfolio of corporate bonds. The customer is worried about capital risk. Which diversification strategy would be least effective to minimize capital risk for this customer? A. Diversification among differing issuers in differing states B. Diversification among differing denominations C. Diversification among differing industries D. Diversification among differing maturities Suitability: Portfolio Construction / Asset Allocation

The best answer is B. Effective methods of diversifying away the unsystematic risk of a portfolio would be to diversify among different issuers, different states, and different industries. Thus, if one issuer, industry or economic region has problems, this would only affect a small portion of the portfolio. Diversification among differing maturities also provides a measure of risk management. If market interest rates rise, short term maturities (under 1 year) will decline in price by a minimal amount compared with longer maturities. Thus, a mix of maturities helps to minimize capital risk. Bond denominations have no bearing on diversification.

A simultaneous trade is performed on the OTC market. Under FINRA rules, the transaction is: A. prohibited B. allowed and must conform to the 5% Policy C. allowed if a commission or mark-up is only charged on one side of the transaction D. allowed if the combined mark-up does not exceed 8 1/2% Trading Markets: Customer Disclosures & Settlement Rules

The best answer is B. In a riskless or simultaneous trade, a dealer gets an order from a customer to buy a security, and then the dealer buys the stock into his inventory to sell to the customer. The dealer has no risk and in this case the mark-up must be disclosed to the customer. Of course, the amount of the mark-up must conform with the 5% Policy.

Which of the following statements are TRUE regarding new municipal offerings? I School district municipal bond issues are usually offered through competitive bids II School district municipal bond issues are usually offered through negotiated underwritings III Authority municipal bond issues are usually offered through competitive bids IV Authority municipal bond issues are usually offered through negotiated underwritings New Issues: Municipal Underwritings

The best answer is B. Most general obligation issues are sold through competitive bid while revenue bond issues are typically sold through negotiated offerings. School district bond issues are general obligation bonds. Authority bond issues, such as a turnpike authority or a bridge authority, are revenue bonds.

Which of the following are characteristics of Defined Contribution Plans? I Annual contribution amounts are fixed II Annual contribution amounts will vary III The benefit amount to be received is fixed IV The benefit amount to be received will vary Retirement Plans: Defined Contribution Plan

The best answer is B. Under a defined contribution plan, a fixed percentage or dollar amount is contributed annually for each year that the employee is included in the plan. The longer an employee is in the plan, the greater the benefit that he or she will receive at retirement.

Who would be MOST likely to invest in a BDC? A. Low risk investor seeking preservation of capital B. Moderate risk investor seeking higher returns C. High net worth investor seeking dividends D. Sophisticated investor seeking a tax shelter Investment Companies: Fixed UITs / REITs / BDCs

The best answer is C. A BDC (Business Development Company) is a type of investment company that makes private equity investments in small, privately-held start up companies. These are higher risk investments that pay the private equity investors high dividend payments (remember, these are small private companies that cannot access the public markets, so they must pay a higher return to their investors). The BDC shares are listed and trade like any other stock. As a corporate security, they are not a tax sheltered investment, making Choice D incorrect.

Under O.C.C. rules, all of the following would "cover" a short put EXCEPT a(n): A. long put on the same stock with the same strike price or higher with the same expiration or later B. bank guarantee letter C. long stock position in the underlying security D. escrow receipt for cash equal to the exercise price held in a bank vault Options: Equity (Stock) Options

The best answer is C. A long stock position will not "cover" a short put. If the market goes down, the short put is exercised, obligating the customer to come up with the cash to buy the stock. Having a long stock position is of no help here, since the customer has increasing loss on the stock position in a falling market, in addition to the loss experienced on the short put. The O.C.C. accepts as "cover" a long put with the same strike price or higher (thus creating a long put spread), a bank guarantee letter (where the bank assumes responsibility for loss), or an escrow receipt for cash sufficient to pay for the stock should the put be exercised. A short stock position also covers a short put, since the credit from the sale of the stock is available to "pay" for the purchase of the stock should the short put be exercised.

The main risk of investing in an ETN is: A. marketability risk B. liquidity risk C. credit risk D. market risk Customer Accounts: Account Basics

The best answer is C. ETNs are "Exchange Traded Notes." They are an equity index linked structured product, that is listed and trades on an exchange. Because they trade, the liquidity risk aspect of structured products is eliminated. What is not eliminated, however, is credit risk. These products are only as good as the guarantee of the issuing bank. They typically have a 7 year life - and a lot can go wrong in 7 years.

A customer buys a NASDAQ stock in a principal transaction at $79 plus a $1 mark-up. Which statements are TRUE? I The cost basis for tax purposes is $79 per share II The cost basis for tax purposes is $80 per share III The trade will be reported to the tape at $79 per share IV The trade will be reported to the tape at $80 per share A. I and III B. I and IV C. II and III D. II and IV Taxes & Tax Shelters: Taxation of Govt & Corporate Securities

The best answer is C. For tax purposes, any commissions or mark-ups charged to buy stock are considered to be part of the cost basis (therefore, they are not deductible). The cost basis is $79 plus $1 mark-up = $80 per share. The trade is reported to the tape exclusive of commissions or mark-ups, which are added well after the trade occurs. Remember, all trades are reported within 10 seconds, and the trade is reported at $79 per share.

A customer has a fully paid options position and is long marginable stock. Subsequently he receives a margin call on his long stock position. Which of the following statements are TRUE? I The customer can borrow against long options contracts to satisfy a portion of the margin call II The customer cannot borrow against the long options contracts to satisfy the margin call III Long option contracts have a loan value of 0% IV Long option contracts have a loan value of 50% Customer Accounts: Margin on Options

The best answer is C. Fully paid long option contracts have a loan value of "0" - they cannot be borrowed against because they will expire in the near future. If a customer has a fully paid options position, he or she cannot borrow against it to satisfy a margin call.

If interest rates decline, which of the following is likely to happen? I Issuers will call outstanding bonds with low interest rates II Issuers will call outstanding bonds with high interest rates III Issuers will sell new issues with longer maturities IV Issuers will sell new issues with shorter maturities Debt: Bond Basics

The best answer is C. If interest rates decline, it is likely that issuers will call in outstanding bonds with high interest rates and refund (refinance) these issues at the lower current interest rates. When rates are low, issuers attempt to lock-in the low rate for the longest period of time by issuing long-term bonds. When rates are high, issuers sell shorter term debt, hoping that rates will drop so that they can refund the debt at maturity at lower rates.

During a period of falling interest rates, which investment would be most profitable? A. 2X (Leveraged) S&P 500 Index ETF B. Inverse (Short) S&P 500 Index ETF C. 2X (Leveraged) 20+ Year Treasury ETF D. Inverse (Short) 20+ Year Treasury ETF Investment Companies: Management Companies

The best answer is C. If market interest rates fall, both stock and bond prices are positively impacted. However, fixed income security prices rise more than stock prices. Furthermore, the longer maturity and lower coupon issues rise the fastest as market interest rates fall. A bond ETF profits when prices rise. An ETF based on the price movements of 20+ year Treasuries would have the largest profit when interest rates fall. This type of ETF is long 20+ year Treasuries in the hopes that prices will rise, and because it is a 2X leveraged ETF, it has margined the bond positions so that as interest rates fall, the price should rise at 2 times the normal rate of increase of a similar maturity unleveraged bond portfolio.

A customer buys 100 shares of PDQ at $28 as the initial transaction in a new margin account. Subsequently, PDQ rises to $38 per share in the market. What is account's equity after the change in market value? A. $1,900 B. $2,000 C. $3,000 D. $4,000 Customer Accounts: Long Margin Accounts

The best answer is C. Initial margin to buy stock is 50% - in this case 50% of $2,800 = $1,400 initial margin requirement. However, since this is the initial transaction in a new account, the account must meet the FINRA minimum dollar equity requirement of $2,000. Thus, $2,000 is the initial margin requirement, not $1,400. The account sets up as: Long Market Value - Debit = Equity $2,800 $800 $2,000 If the market value rises to $38 per share ($3,800 total), there is a 10 point per share gain on the stock. Thus, equity is increased by $1,000 to $3,000. The account now shows: Long Market Value - Debit = Equity $3,800 $800 $3,000

Which of the following statements are TRUE regarding restricted securities being sold under Rule 144? I The securities must be sold on a dealer basis II The securities must be sold on an agency basis III The firm is prohibited from soliciting orders to buy 144 shares IV The firm can solicit potential customers to buy 144 shares A. I and III B. I and IV C. II and III D. II and IV Regulations: Securities Act of 1933

The best answer is C. Rule 144 requires that restricted securities be sold on an agency basis only. Your firm cannot act as a market maker in "144" shares. Solicitation of orders to buy "144" shares is prohibited (to stop you from soliciting potential customers to buy 144 shares, which would tend to push up the stock price). However you are allowed to recontact individuals expressing buying interest in "144" transactions within the past 10 days. Since 144 shares are being sold in the open market, the issuer must comply with SEC issuer reporting rules to maintain the public market in the securities.

Which of the following statements is TRUE regarding a customer who wishes to write a put in a cash account? A. A customer cannot write a put in a cash account B. 50% of the strike price must be deposited C. 100% of the strike price must be deposited D. 100% of the strike price plus 100% of the premium must be deposited Customer Accounts: Margin on Options

The best answer is C. Since the maximum loss when writing a put is limited to buying the stock at the strike price, short puts can be written in a cash account if 100% of the potential loss (that is, the strike price) is deposited. Note that short calls cannot be covered with cash, since the potential loss is unlimited on these positions.

The provisions of the Investment Company Act of 1940 include: which of the following? I Minimum initial fund capital of $100,000 II "Interested persons" on the Board of Directors cannot hold over 60% of the seats III Changing the fund's investment objective requires a majority vote of the shareholders IV Setting maximum sales charges on mutual fund purchases A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV Investment Companies: Management Companies

The best answer is C. The Investment Company Act of 1940 requires that the minimum capital to start a fund is $100,000; that no more than 60% of the Board of Directors be "interested parties" - that is, they are affiliated with the sponsor, custodian, transfer agent, or firms in the selling group; and that the fund have a stated investment objective that can only be changed by majority vote of the shareholders. The Act does not set sales charges for mutual fund purchases - these are set by FINRA - which allows a maximum sales charge of 8 1/2%.

A corporation publishes a Notice of Redemption for the purpose of retiring an entire debt issue at par by calling it at the first call date. The corporation plans to refund the debt by issuing new bonds at lower current interest rates. Which action could be taken by a holder of the outstanding bonds? The holder could: A. retain the old bonds and continue to receive the higher interest rate B. retain the old bonds and receive the lower interest rate of the new refunding bonds C. sell the bonds at the current market price D. exchange the old bonds for the new refunding bonds Debt: Corporate Debt

The best answer is C. The bondholder can either sell the bonds at the current market price or can tender the bonds and receive the call price. When bonds are called, interest payments cease, so Choices A and B are incorrect. Regarding Choice D, an investor would not be allowed to exchange the old bond for a new one. If an investor wanted one of the new bonds, he or she would have to buy it in the market.

Selling short against the box: A. turns a short term gain into a long term gain B. defers taxation of a gain to the next year C. locks in a gain and is taxable that year D. eliminates taxation of a gain Taxes & Tax Shelters: Other Tax Rules

The best answer is C. When an individual sells stock short which he owns, this is termed "short against the box." This locks in a capital gain, however, under 1997 tax law revisions, any gain is taxable at this point. Thus this strategy generally cannot be used to defer taxation of a gain.

Which of the following is an indicator of "market sentiment"? A. Daily trading volume B. Daily trading price range C. Number of bullish investors versus number of bearish investors D. Number of new listings on the New York Stock Exchange versus number of delistings Analysis: Technical Analysis

The best answer is C. T he principal "Market Sentiment" (that is, market direction) indicators are the advance / decline ratio and the put / call ratio. Both of these indicators measure the relative number of bullish investors (as indicated by advancing prices or call purchases) relative to the number of bearish investors (as indicated by declining prices or put purchases). Trading volumes and price ranges do not indicate market direction; nor do the number of new listings versus the number of delistings.

The interest received from older "tax free" Industrial Development Bond (IDBs) issues is taxable if the holder of these bonds is: A. a customer B. a broker/dealer C. the corporate lessee D. a bank Debt: Municipal Debt

The best answer is C. The interest income earned from Industrial Development Bond Issues that were issued prior to 1986 was generally tax exempt. The lease payments made by the corporation are used to fund the interest payments made on the outstanding debt. These lease payments are tax deductible to the corporate lessee. If the corporation were to buy the outstanding bond issue, it would receive interest payments on the bonds that are tax free. Effectively, the corporation has taken a tax deduction for the lease payments; and has converted these payments into tax free interest income. The IRS does not allow this. If the purchaser of the bonds is a "substantial user" of the facility being leased, then the interest income received becomes taxable to the corporate lessee.

An elderly customer seeking extra income who has $100,000 to invest could be recommended which of the following? I The $100,000 purchase of a variable annuity II The $100,000 purchase of dividend paying blue chip stocks in a cash account against which calls are sold III The $200,000 purchase of dividend paying blue chip stocks at 50% margin in a margin account IV The $100,000 purchase of Treasury bonds A. I and III B. I and IV C. II and III D. II and IV Suitability: Portfolio Construction / Asset Allocation

The best answer is D. The purchase of a variable annuity is not suitable for an elderly customer. The whole concept behind a variable annuity is that the product has time to build value on a tax deferred basis in the separate account prior to annuitization. An elderly customer needs the income now. Covered call writing is the most popular retail income strategy in a flat market, and is appropriate for conservative investors that are looking for extra income. The customer sells calls against stock that is already owned, getting premium income. This would be suitable. The margining of blue chip stock positions to "double up" on the amount of stock owned (since Regulation T margin is 50%) is not suitable because this does not come for free! The customer is borrowing the extra money to buy the new shareholding, using his existing stock as collateral, and he must pay interest on the loan. The interest charge will eat up any dividends that the stocks pay - so there goes his income. The purchase of Treasury bonds is suitable, since they provide current income and they are safe as it gets.

John is a registered representative who has discretionary options accounts for 25 of his largest customers. John likes the news coming out of ABCD Corporation and decides to buy ABCD calls for some of his clients. He buys 30,000 ABCD call contracts for 10 out of the 25 discretionary accounts that he manages. The position limit for ABCD is 250,000 contracts on each side of the market. Which statement is TRUE? A. This is not a violation of position limits because the positions were taken in different accounts B. This is not a violation of position limits because of the exemption from position limit violations given to positions taken in 10 or fewer accounts C. This is not a violation of position limits because position limit violations only apply to the down-side of the market D. This is a violation of position limits Options: Equity (Stock) Options

The best answer is D. Any accounts that are under "common control" are aggregated to determine if there is a position limit violation. Control is deemed to exist for: - all owners in a joint account; - each general partner in a partnership account; - accounts with common directors or management; and - an individual with authority to execute transactions in an account. Also considered are: - similar patterns of trading activities for different entities; - the sharing of similar business purposes or interests; and - the degree of contact and communication between the managers of separate accounts. The most common situation where this comes up is a registered representative who exercises discretionary authority over a number of customer accounts - these would be aggregated to see if there is a violation of position limits. In this case, because the registered representative bought 30,000 calls in each of 10 discretionary accounts, the positions in the accounts will be aggregated to see if there is a position limit violation. With a 250,000 position limit (on each side of the market), the positions are aggregated to 300,000 contracts on the up-side of the market and exceed the 250,000 contract limit.

Which of the following statements are TRUE regarding options sales literature that is accompanied or preceded by delivery of the ODD (Options Disclosure Document)? I It must be approved prior to use by the designated Registered Options Principal II It can recommend a specific options contract III The use of recommendations, or of past or projected performance, is permitted IV The illustration of annualized rates of return achieved from various options strategies is permitted A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV Regulations: CBOE Rules

The best answer is D. All options communications with the public must be approved be the designated ROP (main office compliance ROP). Any communication that shows past performance; makes a performance projection; or that makes a recommendation; must be accompanied or preceded by the ODD (Options Disclosure Document). Options sales literature usually falls under these rules.

Under MSRB rules, confirmation disclosure for bonds sold at par must include all of the following EXCEPT: A. whether the securities are callable B. capacity in which the broker-dealer acted C. total dollar amount of the transaction D. the yield at which the transaction was effected and the resulting dollar price Regulations: MSRB Rules

The best answer is D. For municipal bonds that are traded at par, there is no requirement to show the yield at which the transaction was effected, because it will not differ from the stated rate of interest since the bonds were traded at par. All of the other items must be disclosed; whether the securities are callable, with disclosure of "in-whole" call dates; the capacity in which the broker-dealer acted (either as "agent" or "principal"); and the total dollar amount of the transaction.

A customer buys 1 ABC Jan 50 Call @ $4 when the market price of ABC is $51. The stock then moves to $58 and the customer exercises. The tax consequence upon exercise is a: A. capital loss of $400 B. capital gain of $400 C. capital gain of $800 D. cost basis of $5,400 Taxes & Tax Shelters: Taxation of Equity Options

The best answer is D. If a customer exercises a call, he or she is buying the stock. The customer's cost basis is the purchase price of the stock ($50) plus the premium paid ($4) = $54. The premium paid is considered to be part of the acquisition cost of the stock. No taxable event occurs until the stock is sold.

A mutual fund that wishes to change its investment objective: A. is not permitted to do so under the provisions of the Investment Company Act of 1940 B. can do so only with majority vote of the Board of Directors of the fund C. can do so only with majority vote the independent members of the Board of Directors of the fund D. can do so only with majority vote of the shareholders of the fund Investment Companies: Management Companies

The best answer is D. If a fund wishes to change its investment objective, this action requires majority vote the shareholders of the fund.

Which of the following municipal bonds would MOST likely be refunded by the issuer? A. 5% G.O., M '38, callable in 2019 at par B. 6% G.O., M '38, callable in 2019 at 102 C. 7% G.O., M '38, callable in 2019 at 102 D. 8% G.O., M '38, callable in 2019 at par Debt: Municipal Debt (Calls)

The best answer is D. In a refunding, an issuer refinances an outstanding debt by issuing new bonds. The proceeds of the new issue are used to retire the old debt; or are placed in escrow to "pre-refund" an older issue that cannot be immediately repaid. This is either done to reduce interest cost or to remove an onerous restrictive covenant. The bonds most likely to be refunded are those with the highest interest rates (to be replaced by lower interest rate bonds) and low call premiums (so it will not be too expensive to the issuer to call in the debt for refunding).

A customer takes the following marginable bond position: Long 100M City of New York 7% G.O. Bonds - 20 year maturity, @ 120 Under FINRA rules, the minimum maintenance margin requirement for this position is: A. 7% of Face Value B. 7% of Market Value C. 15% of Face Value D. 15% of Market Value Customer Accounts: Margin Rules

The best answer is D. Municipal bonds are exempt securities, so the Federal Reserve cannot set initial margin requirements for their purchase. Margins are set by FINRA. FINRA has set minimum maintenance margin requirements for municipal bonds at the greater of 7% of face value or 15% of market value for both long and short positions. 7% of $100,000 = $7,000. 15% of $120,000 = $18,000. The greater amount is $18,000.

A registered representative receives a written complaint from a customer regarding a purchase of G.O. bonds. The registered representative should: A. send a copy of the complaint to the MSRB B. send a copy of the complaint to the SEC C. submit the complaint for arbitration D. attempt to resolve the complaint with the approval of the municipal principal Regulations: MSRB Rules

The best answer is D. Written customer complaints should be resolved. The MSRB requires that every customer complaint be given to the principal for review and resolution.