AD Banker SIE #2

If the 1-year T-bills are currently yielding 4% while growth stocks are yielding 14%, what is the risk adjusted rate of return for investing in growth stocks? A 10% B 0% C 14% D 4%

CA: A The risk adjusted rate of return measures the security's return based on the amount of risk. In this scenario growth stocks are yielding 14% while the risk-free rate of return for investing in T-bills is 4%, this makes the risk adjusted rate of return 10%.

What factors are necessary in determining if an option contract is at-the-money? A Whether the investor is in a long or short position, and if it's a call or put B Strike price and market price C Strike price and premium D Market price and premium

CA: B If the strike price of the option and the market price of the stock are exactly equal, the option is at-the-money.

A broker-dealer is underwriting a new issue and is acting in the capacity of an agent. The type of underwriting involved could be all of the following, EXCEPT: A Best efforts B Firm commitment C Mini-max D All-or-none

CA: B In a firm commitment offering the underwriter acts as a principal; they purchase all of the shares from the issuer and attempt resell them at their own risk. Underwriters act as agents or brokers in best efforts underwritings and their variations, including all-or-none and mini-max offerings. They are paid a commission for any shares sold but have no capital risk for any unsold shares.

Which form of the efficient market hypothesis believes that individuals with inside information can beat the market? A Strong form B Weak form C Super strong form D Semi-strong form

CA: D The EMH believes it is impossible to beat the market, that the market always reflects all relevant information. There are three forms of this theory, the strong form states that all information (private and public) is reflected in stock prices. The semi-strong theory states that only public information is reflected in stock prices, therefore individuals with inside information can beat the market. The weak form believes that in-depth analysis can beat the market.

What are considered advantages to an investor purchasing mutual fund shares rather than individual securities in the market? I High-priced securities are well within the reach of the fund II The fund can attain a broader diversification of its assets III An investor can have his/her full investment working by purchasing full and fractional shares IV With negotiated commission rates, the investor's share of brokerage costs will probably be lower

CA: I II A mutual fund's large pool of money has more advantages than the small portfolio of a single investor.

Which of the following statements concerning a variable annuity's assumed interest rate (AIR) are correct? I The AIR is based on the projected performance of the assets held in the general account II The AIR is based on the projected performance of the assets held in the separate account III The AIR is a guaranteed minimum rate of return IV The AIR is an arbitrary rate of return used to determine the basis for projecting payments in a variable policy

CA: II & IV The AIR is an arbitrary rate of interest used to project the rate of growth in the separate account assets once a variable contract has been annuitized. This rate of growth is not guaranteed. If the separate account outperforms the AIR, annuity payments will increase. If the account underperforms the AIR, annuity payments will fall.

All the following are forms of market manipulation, except: A Painting the tape B Twisting C Matched sales D Wash trades

Excessive trading, often called churning or twisting, is also prohibited but is not a form of market manipulation.

All the following are exempt securities that are not required to register under the Securities Act of 1933, except: A Common carrier issues B Private placement C Municipal issues D U.S. Government agency issues

Exempt securities do not need to be registered with the SEC, since it would not make sense for certain issuers to go through the time and expense of filing the registration statement. Exempt securities include U.S. government and agency issues, municipal issues, money market issues, bank issues, common carrier issues, insurance company issues, and nonprofit or religious organization issues. A private placement is an exempt transaction, not an exempt security.

All the following statements are true regarding the post-registration period, except: A The final prospectus is filed with the SEC B The period begins when the registration statement is filed C Underwriters set the price of the issue D Active marketing and selling of securities begins

The correct answer was B. The post-registration period is the period after the registration statement has become effective. At this point, the company can sell its securities to the public.

All the following are considered money market securities, except: A Commercial paper maturing in 1 year B T-bills C Bankers Acceptances (BAs) D T-note with 1 year or less remaining to maturity

CA: A T-bills have maturities that are 52 week or shorter, and if the T-note or T-bond has one year or less remaining to maturity, they will also be considered money market securities. Bankers Acceptances are used to finance foreign trade. These are very short-term debt securities. Commercial paper that has a maturity of less than 270 days, in denominations of $50,000 and rated in one of the top three highest ratings would be considered a money market security. In this question though, the commercial paper is maturing in 1 year, so it does not meet the requirements.

What is a contract that gives the privilege of investing in a company stock at a predetermined price any time for the next 5 years? A Bond B Right C Warrant D Coupon

CA: B & C Rights and warrants permit the owner to buy stock at a predetermined price in the future. Warrants have long term maturities. Stock rights expire after about 30 days.

What is both a government security and a money market instrument? A Treasury stock B Treasury bond C Treasury bill D Certificate of deposit

CA: C The best answer is T-bills, which are issued by the federal government, short-term, high quality, and safe. A jumbo (negotiable) CD is a money market instrument issued by a bank and is not a government security. Treasury stock is not a money market instrument. It is common stock of the issuer that was purchased from investors by the issuer and typically those shares will be retired.

If a bond is purchased at a discount, which one of the following is true? A Yield to maturity is equal to the nominal yield B Yield to maturity is less than the current yield C Yield to maturity is greater than the nominal yield D Yield to maturity is equal to the current yield

CA: C When a bond is purchased at a discount, that amount of discount needs to be taken into consideration in determining the bonds overall yield. The investor will receive the par value at maturity which will be greater than the purchase price. That along with the coupon payments will push the yield to maturity higher than the current and nominal yields.

All the following regarding options is true except: A A call contract provides the holder the right to BUY a specific stock, and the writer an obligation to SELL the specific stock at the price B A put contract provides the holder the right to SELL a specific stock, and the writer of the contract an obligation to BUY a specific stock at the strike price C An option contract with a premium of $2 would cost a buyer $2,000 D An option contracts expiration date is the last day the option can be exercised and if not, the option is worthless

CA:C Call Contract - Provides the holder the right to BUY a specific stock, and the writer an obligation to SELL the specific stock, at the agreed (strike) price. Put Contract - Provides the holder the right to SELL a specific stock, and the writer of the contract an obligation to BUY a specific stock, at the agreed (strike) price. Expiration Date - The last date the option can be exercised. Most options have a 9-month life. Once this date passes, the option is worthless. Premium - The amount an investor will pay for an option; this number is based on 100 shares of the underlying security. An option with a premium of 2 would cost a buyer $200.

Mutual fund managers are: A Permitted to earn a maximum of 8 1/2% per year B Paid a percentage of the sales charge C Compensated based on a percentage of assets under management D Compensated based on a percentage of profits earned

CA:C Mutual fund managers are compensated based on a percentage of assets under management (the management or investment advisory fee). Mutual fund managers are not permitted to earn a percentage of the "winnings". Mutual fund managers do not earn any part of the sales charge. Under FINRA Rules, 8 1/2% is the maximum sales charge that may be levied on a single mutual fund purchase.

A registered representative has a client with an individual account at the firm. The representative receives a phone call from the spouse of a client, who specifies trade instructions to the representative. What can the registered representative do?

If the customer has provided written power of attorney, giving the spouse trading rights, the representative can follow the order. Unauthorized trading would occur if the representative accepted an order from a third party that is not authorized to trade in the account. Third-party trading rights must be authorized in writing before they are effective.

Which retirement plan was created specifically for self-employed persons and their eligible employees? A 457 B 403(b) C 401(k) D HR-10

Keogh HR-10s (and also SEPs) are for self-employed such as sole proprietorships and partnerships. 401(k)s are for corporations. 457s are for governmental employees. 403(b)s are for schools and nonprofits.

Which of the following statements is true when describing variable annuity charges and expenses? A An annual wrap fee is charged to cover the investment management fees B The mortality and expense risk fees are paid upfront, and the percentage charged is based on mortality tables C A contingent deferred sales charge may be imposed when an investor withdraws money during the accumulation period D The maximum allowable sales charge for a variable annuity is 8.5%

Most annuities impose a contingent deferred sales charge (CDSC) when an investor withdraws money during the accumulations period. A CDSC normally declines, and will eventually be eliminated, the longer the contract is held. Variable annuity sales charges, if applicable, are deducted before the premium is invested into the separate account. There is no specific maximum allowable sales charge set by FINRA. Mortality and Expense Risk are fixed fees the insurance company charges to cover lifetime income and other operating expenses. Management fees are separately charged in each of the subaccounts and are the same as an investment adviser's fee in a mutual fund. These fees will vary depending on the various subaccount options within the annuity.

General Microsystem's 9% bonds mature in 10 years and are trading at 92. What is the approximate yield to maturity? A 9.00% B 9.80% C 10.20% D 10.7%

The YTM (basis) calculation must consider the difference between the purchase price and par value, plus the interest earned during the entire time from purchase to maturity. The bond is trading at 92, or $920 and will mature at par ($1,000). The customer will have an $80 gain over 10 years, which is a gain of $8 per year. The adjusted interest is the $90 annual interest payment plus the $8 per year gain on the bond, a total of $98. The average price is the $1,000 par value, plus the $920 purchase price, divided by 2, or $960. The $98 adjusted interest divided by the $960 average price gives an approximate yield to maturity of 10.2%. 9%x$1000par=$90 $92tradex10y=$920-$1000par=$80/10yr=$8 $920+1000/2=$960 8+90=98adj int div/960=10.20YTM

All the following statements are true, except: A Municipal bonds are subject to federal tax, but exempt from state tax B Corporate bonds are fully taxable C U.S. Government bonds are subject to federal tax, but exempt from state tax D Privatized Government Agency bonds are fully taxable

The correct answer was A. Both corporate bonds and privatized government agency bonds are taxable at the federal and state level. U.S. Government bonds are taxable at the federal level but state tax exempt. Municipal bonds are exempt from federal tax, but subject to state tax UNLESS it is your state of residence in which case, they will be tax exempt at the state level as well.

Insufficiently describing risks and other material facts regarding an investment is considered: A An omission B Discretion C Churning D Unethical

The correct answer was A. Deliberately withholding or omitting a material fact from a client is considered a fraudulent act.

The FINRA 5% Policy requires that consideration be given to all the following when determining markups, except: A Financial profile of the customer B Services provided in connection with doing business C Type of security involved in the transaction D Dollar amount of the transaction

The correct answer was A. FINRA and SEC regulations state that commissions and fees charged to customers must be reasonable. The 5% Markup policy is a guideline and it may be necessary and justified to charge higher amounts in certain circumstances, or 5% may be too high in other circumstances. A customer's ability to pay has no bearing on the amount of commission or mark-up that is charged. The dollar amount of the transaction, level of service provided by the firm, and the type of security involved are all considerations under the 5% Policy when determining a fair and reasonable commission or mark-up.

Tax sheltered annuities refer to which type of plan? A 403(b) plan B HR-10 plan C 457 plan D SEP

The correct answer was A. IRS Code section 403(b) deals with tax sheltered annuities (TSAs) which are for schools and nonprofits. Keogh HR-10s and SEPs are for self-employed groups. 457s are for governmental employees.

What is a bond issuer responsible for paying to investors? A Paying interest on a timely basis B A portion of ownership in the company C Guaranteeing the investor that the company will repay an inflation protected lump sum at bond maturity D Paying dividends quarterly

The correct answer was A. Issuers of bonds are responsible to pay interest on the money borrowed in full and on a timely basis along with repayment of loan principal at maturity.

A registered representative meets the definition of MFP for XYZ municipal securities firm that is acting as a U/W for that municipal issuer. In his spare time the representative is a volunteer to the election campaign of a candidate for mayor of the issuer. The representative attends a reception dinner for the candidate that costs $400 a plate. Which of the following statements is true? A The $400 out of pocket expenses exceed the political contribution limit resulting in the municipal securities firm being banned as a U/W for that issuer for a period of 2 years B The representative is entitled to vote in the election and can make contributions up to $500 C This is permitted because the MFP did not contribute to the campaign, the cost of $400 was for the reception which falls outside the restrictions D The $400 out of pocket expenses are within the allowable amount

The correct answer was A. MSRB Rule G-37 specifically prohibits brokers, dealers, or municipal securities dealers from engaging in municipal securities business with an issuer within two years after any contribution is made to an official of the issuer by either the broker, dealer, municipal securities dealer, or any municipal finance professional (MFP) associated with these firms. There is one exception to this rule, which is considered a de minimis rule. The prohibition would not apply if the only contributions to officials of issuers are made by MFPs entitled to vote for such officials, provided the contributions are not in excess of $250 by each MFP to each official, per election. The $400 out of pocket expense in this question has exceeded the de minimis rule.

A bond paying a 10% coupon rate is trading at a discount. The current yield will be: A Higher than the coupon rate B Lower than the coupon rate C Equal to the coupon rate D Either higher or lower than the coupon rate

The correct answer was A. The current yield (annual income divided by market value) will be higher than the coupon for a bond trading at a discount (at a market value below par value).

The trust indenture is a legal agreement between the: A Issuer and trustee B Trustee and bondholder C Issuer and transfer agent D Bondholder and paying agent

The correct answer was A. The trust indenture is a legal agreement outlining the terms of the loan between the corporation and the bondholders. A trustee is appointed to represent the bondholders and protect their interests. The trust indenture is a contract between the issuer and trustee.

The ABC Fund family charges an 8.5% load on their funds. The fund family must offer which of the following benefits: A Rights of accumulation B Letters of intent C Exchanges D Breakpoints on CDSCs

The correct answer was A. This fund family charges the maximum sales charge allowed by FINRA. Therefore, they must offer breakpoints and rights of accumulation on existing funds. A contingent deferred sales charge declines a set amount each year but that decline is not considered to be a breakpoint. An LOI (letter of intent) as well as exchanges are not required by FINRA, but most funds offer the features in order to remain competitive.

Why would an investor be interested in a zero coupon bond? A They provide a specific dollar amount at a specific future date B They are less risky than other bonds C They provide a tax shelter D They trade at lower prices than other bonds

The correct answer was A. Zero coupon bonds are riskier than other bonds because the total amount owed is paid in a balloon at the end. Investors do not benefit tax-wise with them, because taxes must be paid on imputed interest that has not been paid. They do trade at lower prices, but that is not an incentive to invest. Instead, investors typically use them when they have a need for a specific amount of cash at a specific future date for some purpose such as retirement or education.

This type of order is placed to stop losses that may occur, it can be placed to protect the gains in a long or short position, once the order is triggered, it is executed at the next available price: A Limit B Stop C Market D Stop limit

The correct answer was B.

Which of the following must sign a new account form? I The customer II The introducing registered representative III The Chief Compliance Officer IV A principal of the member firm A I and III B IV C I, II and IV D II and IV

The correct answer was B. According to FINRA Rules, the only signature required on a new account application is that of the approving principal. Industry rules do not require the customer's signature, nor the signature of the registered representative on the new account application.

An heir inherits a substantial sum of money and wants to have the money distributed to her over the rest of her life. Which product offered by the life insurance industry will allow her to accomplish her objective? A Flexible pay out arrangement B An immediate annuity C Deferred distribution arrangement D Systematic installment

The correct answer was B. An immediate annuity involves payment of a single sum to the insured with periodic payments commencing within 1 year of deposit of the sum.

If the credit rating for an issuer has improved since issuing bonds, what impact might that have on the outstanding bonds? A The outstanding bonds may now trade at a discount B The outstanding bonds may now trade at a premium C There will be no effect on the outstanding bonds as they have fixed interest rates D The interest rates will decline on the outstanding bonds

The correct answer was B. Circumstances change for bond issuers; earnings go up and down and assets rise and fall in value. The financial condition of the company may change dramatically over the life of the loan. If a previously strong issuer appears likely to default, the value of its existing bonds may fall. On the other hand, if the credit rating for an issuer has improved since issuing bonds, the outstanding issue may now be trading in the secondary market at a premium.

When are firms allowed to trade in their own accounts based on information that is received from their own underwriting and/or research departments? A Prior to the release of a research report B After the release of a research report C Only with an SEC special exception D Never

The correct answer was B. Firms are not allowed to trade in their own accounts based on information that is received from their own underwriting and/or research departments prior to the release of a research report.

With regard to a security, when the term guaranteed is used, it means: A No risk B Payment of principal, interest, and dividends C Backed by SIPC D Backed by FDIC

The correct answer was B. Guaranteed means a guarantee as to payment of principal, interest, or dividends.

When a corporation buys shares back from existing shareholders these shares are called: A Issued B Treasury C Outstanding D Authorized

The correct answer was B. The corporation may offer to buy back outstanding shares from the existing shareholders. These shares that were previously issued and then repurchased by the company are referred to as treasury stock. Once repurchased by the corporation, treasury stock has no voting rights and is not entitled to receive dividends. Treasury shares can be retired permanently or can be used to fund employee stock plans or be paid to stockholders in the form of a dividend. A company may buy its own stock if they feel it is undervalued or to boost the price of the common stock in the market. If the company earns the same amount of profits, but there are fewer shares outstanding, the reported earnings per share will increase. Shares of stock that are in possession of investors are referred to as outstanding shares.

When dividend payments to common stockholders decrease, but the price of the common stock remains the same, the yield on the common stock will: A Remain the same B Decrease C Increase D Initially increase, then levels off

The correct answer was B. The dividend yield is equal to the annual dividend divided by the current price. The cash dividend is less and the price is the same, so percent yield is lower. The yield would not remain the same because numbers in the formula have changed. It would not increase unless dividend rises and price remains the same.

Regulation S-P does NOT require a broker-dealer to provide a privacy notice to each: A Customer, at the time the relationship is established B Consumer, on an annual basis C Customer, on an annual basis D Consumer, prior to disclosing any information to a nonaffiliated third party

The correct answer was B. Under Regulation S-P, a consumer is an individual (or that individual's legal representative) who obtains or has obtained a financial product or service from a financial institution that is to be used primarily for personal, family, or household purposes. A customer is a consumer who has an ongoing relationship with the financial institution. So, a consumer who obtains products or services from a broker-dealer on a one-off basis is not a customer. Since there is no ongoing relationship with consumers who are not customers, they do not receive an annual privacy notice.

All the following statements regarding VDRNs are correct, except: A They are considered long-term municipal notes B They include a put option allowing the issuer to demand investors to redeem the note C They include a put option allowing the investor to demand repayment of principal and interest on demand D They have an interest rate that is reset frequently

The correct answer was B. Variable rate demand notes are long-term municipal bonds that are created with money market funds and tied to money market rates. They are issued in $100,000 minimums and are only available to large or institutional investors. Municipal governments pay investors based on these short-term rates. The interest is adjusted frequently based on the interest rate environment, which is considered a variable or floating rate. These notes include a put option that allows the investor to demand repayment of principal and interest from the issuer on demand.

Which of the following is false of zero coupon bonds? A They are purchased at a significant discount B They may trade at a discount or premium C The nominal rate is zero D They pay no current income

The correct answer was B. Zero coupon bonds are issued at a deep discount, pay no interest during their life (the nominal rate is zero) and mature at par value of $1,000. They always trade at a discount (never a premium) because the difference between purchase price and par at maturity is the investor's interest.

Which of the following has the greatest liquidity risk? A ADR B Treasury bond C DPP D ETNs

The correct answer was C. Direct Participation Programs (DPPs) are unlisted and very illiquid, making them difficult for the investors to sell. Exchange-Traded Notes are debt securities issued by financial institutions that provide returns linked to an index, have no liquidity risk, and are tax-efficient. ADRs are traded, so they are not subject to liquidity risk.

Which one of the following is most commonly known as a mutual fund? A A unit investment trust company B A closed-end management company C An open-end management company D A face amount certificate company

The correct answer was C. An open-end management company is most commonly known as a mutual fund. It continuously offers to sell and stands ready to redeem its shares every business day during normal trading hours of the exchanges using the forward pricing rule. A closed-end fund has a one-time offering of shares and does not stand ready to redeem its shares.

A broker-dealer is considering registering as an investment adviser. Which of the following activities would mandate that the firm register as an IA under the Uniform Securities Act? I Payment of underwriting fees to the firm by an issuer II Payment of investment advisory fees to the firm by a retail customer III Payment of a wrap fee to the firm by an institutional customer IV Payment of sales charges to the firm on mutual fund sales A I, II, III, and IV B III and IV C II and III D I and II

The correct answer was C. Broker-dealers may collect commissions, sales charges or underwriting fees from issuers and customers. A broker-dealer may not collect advisory or wrap account fees unless it is also registered as an investment adviser.

Which of the following are true in regard to economic policy? I Fiscal policy changes the level of taxation as a way to control economic activity II Monetary policy changes the level of government spending as a way to control economic activity III Fiscal policy changes the level of the money supply as a way to control economic activity IV Monetary policy is dependent on the Federal Reserve Bank's ability to carry out policy decisions A II and III B I and II C I and IV D III and IV

The correct answer was C. Fiscal policy is set by Congress and determines the level of federal taxation and government spending. To spur growth in the economy, fiscal stimulus will normally come in the form of lower taxes and increased government spending. Monetary policy is set by the Federal Reserve Board (FRB), and it sets out to affect the level of the money supply in the U.S. economy. To spur growth in the economy, the FRB will instruct the Federal Reserve Bank to buy U.S. Government securities to add money to the economy in an attempt to reduce interest rates. The FRB has other tools to spur growth, but the method described is the most often used.

Two sisters acquired 1,200 shares as joint tenants with right of survivorship. Each sister's ownership is: A Unequal/undivided B Equal/divided C Equal/undivided D Unequal/divided

The correct answer was C. In a JTWROS situation, each person must have equal ownership. In addition, each shareholder has an undivided interest. This means the sisters cannot say these 600 shares are mine and those 600 shares are yours. Tenants In Common (TIC) arrangements may have unequal interests.

In most states, which of the following statements are true regarding UTMA accounts? I Margin transactions are specifically prohibited II All option transactions are specifically prohibited III The custodian can authorize any transactions that he deems suitable IV The custodian must follow the Uniform Prudent Investors Act when investing the account assets A III and IV B I and II C I and IV D II and III

The correct answer was C. In an UTMA account, a custodian is appointed to handle the investment affairs for the account. As fiduciaries, custodians are required to protect the interests of the child. Most states operate under the Uniform Prudent Investors Act (UPIA) that establishes standards for fiduciaries. Under this Act, the portfolio must be invested in a prudent and diversified manner. The account is looked at as a whole, as opposed to scrutinizing the individual investments. Under UGMA, trading on margin (with borrowed funds) is prohibited, since it would put the child in debt. Certain option transactions, such as protective puts or covered call writing, are used to reduce risk within a portfolio and certainly could be considered prudent investment choices.

Sarah, an RR, has decided to help her cousin sell units of a condominium limited partnership for which she will be compensated. Which of the following is NOT required by FINRA rules? A The transactions must be recorded on the broker-dealer's books B The RR must receive written permission to perform these activities from her employer C The RR must receive FINRA approval to perform these activities D The RR must provide written notification of these activities to her employer

The correct answer was C. Since limited partnership interests are securities, such transactions would be private securities transactions. Under FINRA rules, the actions that must be taken depend on whether the RR is being compensated for the transaction. If the RR will receive compensation, the rep must give her firm written notification of her involvement and receive written permission to participate in the transaction. The transaction must be recorded on the broker-dealer's books and supervised in the usual fashion.

Why would an investor buy a T-STRIP? A To take advantage of its tax deferral feature B To earn an immediate tax deduction upon purchase C To have a guaranteed amount of money at a specified time in the future D To generate immediate income

The correct answer was C. T-STRIPS (Separate Trading of Registered Interest and Principal Securities) are U.S. Treasury zero coupon instruments backed by the U.S. Government. T-STRIPS are issued at a discount and mature at face value with a maturity up to 30 years. Like other zero coupon bonds, T-STRIPS earn phantom or imputed interest. Imputed interest is taxable in the year it is added to the investor's cost basis (accreted) and taxable in the year accreted at ordinary income rates. T-STRIPS are often purchased by investors looking to fund retirement since the interest rate is fixed for a long term and the income in retirement vehicles such as an IRA is tax-deferred until withdrawn.

What is the maximum annual 12b-1 charge that can be charged against the fund's net assets? A 6.25% B 7.25% C 0.75% D 0.25%

The correct answer was C. The maximum allowed is .75%. The most a fund can charge and still call itself a no-load fund is .25%.

The last transaction recorded in DEF 4s 2028 was at 95. This bond is selling at: A Premium B Net Asset Value C Discount D Basis

The correct answer was C. Trading information for corporate bonds may be found in newspapers and financial publications such as The Wall Street Journal. The information includes the issuer, the stated interest rate, maturity, and last trade price. The last transaction in DEF 4s 2028 was at 95. This reads as follows: DEF corporate bonds, with stated interest rate of 4% (4s means "fours" or four % bonds), maturing in 2028, last traded at 95 ($950). 95x10=$950 , $50<$1000par =Discount

Which statement is incorrect regarding a Variable Annuity? A Premiums paid during the accumulation period are invested in a separate account. B Upon annuitization, the accumulation units are converted to annuity units. The income is paid based on the value of the units. C The number of annuity units received and the unit value remain level. D The contract owner bears the investment risk and receives the return actually earned on invested assets, less any charges assessed by the insurer.

The correct answer was C. Under Variable annuities, upon annuitization, the number of units redeemed remains level, but the unit values fluctuate based on the performance of the investment accounts selected.

A municipal security that has interest rates that are reset at Dutch auctions on specific days, usually every 7, 28 or 35days, existing bondholders submit sealed bids on the number of shares willing to purchase or sell, shares are traded in $25,000 denominations and the lowest bid wins is: A Variable-rate demand obligations (VRDOs) B Bridge notes C An auction rate security (ARS) D Floating rate securities

The correct answer was C. Variable rate municipal securities are long-term debt issues with interest rates that are reset at specific intervals or after a specific event has occurred. There are a few different variable rate securities and they have different features. An auction rate security (ARS) has interest rates that are reset at Dutch auctions on specific days, usually every 7, 28 or 35 days. Existing bondholders submit sealed bids on the number of shares willing to purchase or sell. Shares are traded in $25,000 denominations. The lowest bid wins. Floating rate securities have interest rates that are reset periodically based on stated percentage above an index. These can be set to reset daily, weekly, monthly, or annually. Variable-rate demand obligations (VRDOs) are floating rate debt obligations that have a long-term maturity. They also have interest rates that reset automatically on specific dates and can contain a put option allowing the purchaser the ability to cash in early and still earn the face amount and accrued interest.

A customer of a broker-dealer purchases shares of a mutual fund through the broker-dealer. Under what circumstances may credit be extended on the shares? I The shares are purchased through dividend reinvestment II The customer has owned the shares for 30 days or more III The broker-dealer arranges for a private loan IV The broker-dealer gets less than 10% commission A I and IV B II and III C I and III D II

The correct answer was D. Credit may be extended on mutual fund shares held more than 30 days. However, credit may not be extended on the purchase of new mutual fund shares through a broker-dealer, and the broker-dealer may not try to get around the restrictions by arranging for loans by others.

A customer purchases a security in a cash account and does not pay for the purchase within the required time. What can the broker-dealer do? I Liquidate the position and freeze the account under Regulation T II Request an extension from FINRA III Transfer the position to a margin account IV Loan the delinquent amount to the customer A II and III B I and IV C II and IV D I and II

The correct answer was D. In the event the customer cannot pay for their trade within the T+4 time period, the broker-dealer can obtain approval to extend additional time to the customer from FINRA. The customer's account will be frozen for 90 days and the broker-dealer will liquidate the security in question.

Carlos noticed that the ABC Fund historically has done very well following the U.S. economy's emergence from recessions. He believes that the economy is poised to turn for the better and would like to invest in the fund for a three-month period. Carlos has contacted his RR for a recommendation on this idea. Which of the following is true regarding the RR's responsibility in this situation? A The RR cannot make this recommendation because past performance is no indication of future returns B The RR can make the recommendation as he must always follow customer's intuition C The RR can make this recommendation if Carlos' claims about the historical performance of the fund can be substantiated D Due to the short-term nature of the customer's idea, the RR is prohibited from recommending it

The correct answer was D. Mutual funds are long-term investment vehicles. Recommendations relating to funds should be for an investment goal sometime in the future. In this case, the RR needs to explain the fact that investing in a mutual fund for trading purposes is not a good idea and that he cannot endorse such a decision.

Which of the following statements about Rights of Accumulation is false? A Rights of accumulation allow shareholders to combine existing account balances with new purchases to qualify for breakpoints B An investor who owns multiple accounts within the same fund family may combine them for the purpose of reaching a breakpoint C Funds that charge the maximum sales charge must offer rights of accumulation D Rights of accumulation expire one year from the initial purchase date of a mutual fund

The correct answer was D. Rights of accumulation do not expire. All other answers are correct.

A tombstone ad may contain any of the following information about the offering, except: A A brief indication of the type of business the issuer is in B The name of the issuer C The security being offered and the amount D Syndicate members listed in order of increasing participation

The correct answer was D. Syndicate members listed in order of decreasing participation.

Which of the following statements is true regarding the Second Market? A The Second Market is an auction market B Listed securities sell in the Second Market C This is the Market for institutional trading D OTCBB and OTC Markets Group securities are sold in the Second Market

The correct answer was D. The Second Market is trading of unlisted securities over-the-counter. These are OTCBB and OTC Markets Group (formerly called Pink Sheet issues). The First Market is an auction market and institutional trading occurs in the Fourth Market.

Which of the following would be covered under ERISA? I A 401(k) plan for employees of a chocolate factory II A police department's defined benefit plan III A Roth IRA IV An army major's pension

The correct answer was I ERISA covers private sector retirement plans, such as corporate defined benefit plans and 401(k) plans. It does not govern government plans (Choices II and IV) or individual retirement accounts (Choice III).